Painted Pony Pete Ltd PDPYF

TD on PONY....POSITIVE

[bago]

Action Note

Equity Research

Painted Pony Energy Ltd.

(PONY-T) C$3.04

Q3/17 Beat across All Line Items — Budget Expected Mid- December

Event

Last night, Painted Pony announced Q3/17 results and provided a brief operational update.

Impact: POSITIVE

• Production of 42,353 BOE/d was above our estimate of 41,240 BOE/d and below consensus of 42,891 BOE/d (Bloomberg), while CFPS of $0.18 was ahead of TD at $0.09 and consensus at $0.12. Higher overall cash netbacks were largely driven by higher-than-expected liquids production and lower cash costs across the board.

• The company continues to maintain a 2017 capital program of $314mm to generate average production of 43.5-46.0 mBOE/d. This implies that Q4/17 production should average ~55 mBOE/d, which, in our view, is reasonable given Q3/17 production of 42.3 mBOE/d and a current production level of ~60 mBOE/d.

• Although Painted Pony has previously provided 2018 development plans, the company will release a formal 2018 capital budget in mid-December. We believe that the current 2018 capex plan of $262mm is likely to come under pressure due to a relatively weak outlook for natural gas prices in 2018 (based on current AECO forward prices which have been especially volatile, of-late).

• Painted Pony has historically been more active than its peers from a hedging and market diversification perspective, a strategy that has resulted in premium pricing relative to both AECO and Station 2 pricing hubs. Even through a particularly difficult quarter from an AECO pricing perspective, the company realized an average price of $2.68/mcf (including hedging) relative to AECO of $1.65/mcf. Furthermore, as a result of fixed-price contracts and a diversified marketing strategy, the company expects to have only 8% of total 2018 production exposed to Station 2 pricing.

• 14-year agreement to supply Methanex methanol plant with 10 mmcf/ d (and increasing to 50 mmcf/d) is a creative and practical means of hedging production. Although the terms were not disclosed, we believe that this transaction is beneficial and anticipate further deals of this nature.

  TD Investment Conclusion

  Q3/17 was a meaningful beat relative to TD and Street estimates. Although 2018 guidance was not provided, we anticipate that spending plans will likely be moderated in the context of continued weakness in natural gas futures. Our target price remains unchanged at $7.00, and we reiterate our BUY recommendation.

  Company Profile

  Painted Pony Energy Ltd. is engaged in the exploration, development, and production of petroleum and natural gas resources. The company focuses on Montney natural gas in northeast B.C.

November 9, 2017

Energy Producers - Junior & Intermediate

Juan Jarrah, CFA, P. Eng. Dustin Besaw, CFA, (Associate)

Recommendation: BUY

Risk: HIGH

12-Month Target Price: C$7.00

12-Month Dividend (Est.): C$0.00

12-Month Total Return: 130.3%

Market Data (C$)

Current Price
52-Week Range
Mkt Cap (f.d.) ($mm) Mkt Cap (basic) ($mm) Float Cap ($mm) Current Dividend Dividend Yield
Avg. Daily Trading Vol.

Financial Data (C$)

Fiscal Y-E
Shares O/S (f.d)(mm) Shares O/S (basic) (mm) Float Shares (mm)
Net Debt ($mm)
Net Debt/Total Cap
Net Debt/EBITDA

CFPS (f.d) CFPS (f.d) (old) Oil (b/d)
Gas (MMcf/d) MBOE/d

Q1 Q2 Q3 Q4

0.28 – 825 88.7 15.6

0.10 0.09 0.06 0.03

0.55 – 1,557 129.9 23.2

0.07 0.09 0.13 0.26

6.9x 41.9%

43.22 2.18 0.76 2.49

C$3.04 $2.55 - $10.50 $489.4 $489.4 $421.0 $0.00 0.0% 1,462,184

December 161.0 161.0 138.5 $368.7 26.1% 3.3x

0.80 1.07

0.69 1.03

3,578 4,901 239.5 392.1 43.5 70.3

0.25 0.26 0.13 0.27 0.18 0.25 0.25 0.28

5.1x 3.6x – –

50.00 55.00 2.35 2.40 0.78 0.80 3.00 3.00

Estimates (C$)

Year 2015A 2016A 2017E 2018E

CFPS (f.d) Quarterly Estimates (C$)

Year 2015A 2016A 2017E 2018E

Valuations

Year 2015A 2016A 2017E 2018E

PONY-T: Price

12

EV/DACF 12.4x P/NAV MG –

WTI (US$/bbl) 48.96 AECO (C$/mcf) 2.70 FX (US$/C$) 0.78 H. Hub (US$/mcf) 2.64

All figures in C$, unless otherwise specified

Supplemental Data

Year 2015A 2016A 2017E 2018E

12 10

22 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17

10 88 66 44

Please see the final pages of this document for important disclosure information.

Page 1 of 6

November 98, 2017

Details

Exhibit 1. Q3/17 Summary

Production Q3/17A Q3/17E Variance

Liquids (bbl/d) Natural Gas (mcf/d)

Corporate (BOE/d)

% Liquids

3,826 231,161

42,353

9%

2,770 230,819

41,240

7%

38.1% 0.1%

2.7%

Gross Revenue Hedging Gains (Losses) Royalties Transportation Costs

Netbacks ($/BOE) Q3/17A Q3/17E Variance

12.84 5.94

(0.28) (2.24) (3.56)

11.22 4.85

(0.28) (2.70) (3.66)

14.4% 22.5% 0.3% -16.9% -2.8%

Financial

Operating Costs

Cash Flow ($mm) CFPS (fd)
E&D Capex ($mm) Total Capex ($mm) Net Debt ($mm)

29.7 0.18 85.6 82.2

338.2

14.3 0.09 84.0 84.0

360.9

108.1% 103.4% 1.9% -2.1% -6.3%

Operating Netback

General & Administrative Interest Expense
Cash Taxes/Other

Cash Netback

12.70

(1.18) (3.95) 0.06

7.63

9.43

(1.25) (4.41) 0.00

34.7%

-5.4% -10.5% -

3.76 102.6%

Source: Company reports, TD Securities Inc. estimates

Outlook

We have revised our estimates to reflect the Q3/17 results.

Exhibit 2. Estimate Revisions

Q4/17E 2017E 2018E
Production Revised Previous Variance				Revised Previous Variance			Revised Previous Variance
Liquids (bbl/d) Natural Gas (mcf/d)	4,541 302,752	3,698 308,177 55,061 7% 22.8% -1.8% -0.1%		3,578 239,534	3,100 240,815 43,235 7% 15.4% -0.5% 0.6%		4,901 392,096	4,901 0.0% 392,096 0.0%
Corporate (BOE/d) % Liquids	55,000 8%			43,501 8%			70,250 7%	70,250 0.0% 7%
Financial
Cash Flow ($mm) DACF ($mm) CFPS (fd) E&D Capex ($mm) Total Capex ($mm) Net Debt ($mm) % Undrawn Credit	39.5 55.6 0.25 73.9 73.9 368.7 72%	39.6 -0.3% 57.2 -2.7% 0.25 -0.3% 75.0 -1.5% 75.0 -1.5% 396.3 -7.0% 67%		113.1 169.9 0.80 314.0 531.0 368.7 72%	97.8 157.4 0.69 313.6 533.9 396.3 67% 15.7% 8.0% 14.9% 0.1% -0.5% -7.0%		171.9 250.2 1.07 262.0 262.0 458.7 56%	165.7 3.8% 245.8 1.8% 1.03 3.8% 262.0 0.0% 262.0 0.0% 492.6 -6.9% 51%
Netbacks ($/BOE)
Gross Revenue Hedging Gains (Losses) Royalties Transportation Costs Operating Costs	15.68 2.49 (0.39) (2.25) (3.75)	15.09 3.54 (0.38) (2.70) (3.33) 12.22 (0.94) (3.78) 0.32 7.82 3.9% -29.5% 3.9% -16.7% 12.6% -3.6% -15.7% -8.3% -10.7% -0.2%		16.42 2.04 (0.38) (2.33) (3.82)	15.87 2.09 (0.37) (2.58) (3.72) 11.29 (1.04) (3.88) (0.18) 6.20 3.5% -2.3% 1.2% -9.9% 2.9% 5.8% -6.0% -5.4% -3.3% 15.0%		15.85 1.08 (0.42) (2.79) (3.24)	15.85 0.0% 1.06 2.0% (0.42) 0.0% (2.94) -5.1% (3.24) 0.0%
Operating Netback General & Administrative Interest Expense Cash Taxes/Other	11.78 (0.79) (3.47) 0.29			11.94 (0.98) (3.67) (0.17)			10.48 (0.73) (3.16) 0.11	10.31 1.7% (0.73) 0.0% (3.25) -2.7% 0.13 -10.8%
Cash Netback	7.81			7.12			6.71	6.46 3.8%

Source: Company reports, TD Securities Inc. estimates

Page 2 of 6

Exhibit 3. Relative Valuation

PONY 42% 42%

Montney Peer Group Avg. 118% 88%

Source: Company reports, TD Securities Inc. estimates

Justification of Target Price

5.1x 3.6x

9.9x 7.0x

$19,726 $12,973 3.8x

$50,282 $37,460 8.4x

2.8x 2.7x

6.1x 1.8x

152% 93%

135% 70%

November 98, 2017

Valuation

Painted Pony is currently trading at a 2016 P/NAVMG of 42% and an EV/2018E DACF multiple of 3.6x; these compare with averages of 88% and 7.0x, respectively, for the Montney-focused peer group under coverage.

P/NAVBD P/NAVMG EV/DACF EV/BOEPD P/CF D/CF Payout % Gas

(TD) (TD) (2017E) (2018E) (2017E) (2018E) (2017E) (2018E) (2018E) (2018E) (2018E)

AAV ARX BIR CR KEL NVA POU PONY VII

119% 112% 8.0x 7.0x

$39,732 $34,883 7.2x 6.3x $57,613 $50,572 9.1x 8.0x $30,934 $25,634 4.7x 4.1x $40,804 $32,199 6.0x 4.7x $66,160 $50,390 11.6x 7.2x $57,375 $45,815 8.3x 6.4x $87,265 $41,640 18.8x 10.0x $19,726 $12,973 3.8x 2.8x $52,925 $43,033 6.4x 5.1x

1.0x 98% 96% 1.2x 130% 68% 1.8x 105% 80% 3.0x 149% 74% 1.4x 125% 54% 1.2x 129% 62% 2.6x 203% 62% 2.7x 152% 93% 1.2x 125% 41%

165% 94% 66% 60% 95% 72%

9.5x 8.6x 6.1x 5.4x 7.7x 6.4x

123% 82% 12.4x 8.1x

168% 130% 149% 85% 42% 42% 138% 119%

8.8x 7.1x 24.2x 11.2x 5.1x 3.6x 7.2x 5.9x

>60% Gas Prod'n Peer Avg.
>60% Oil Prod'n Peer Avg. Balanced (40-60% Gas Prod'n) Avg. Over $1B Mkt. Cap Peer Group Avg. Sub $1B Mkt. Cap Peer Group Avg.

134% 111% 101% 78% 183% 134% 141% 104% 102% 91%

8.5x 6.5x 7.5x 6.7x 16.1x 15.5x 10.2x 8.9x 7.1x 5.6x

$39,004 $55,954 $154,728 $72,769 $37,403

$30,402 6.8x $53,644 6.2x $150,330 15.8x $67,413 9.1x $32,427 5.2x

5.2x 2.2x 5.3x 2.5x 15.3x 0.5x 7.9x 2.0x 4.1x 3.4x

118% 78% 97% 15% 82% 48% 104% 50% 104% 49%

i) EV based on forecast year-end net debt and shares outstanding, ii) Payout = (Capex+Dividend-DRIP)/CF. iii) Payout ratio consists of capex + dividends - DRIP, where applicable.

iv) Our modified growth NAV (NAVMG), assumes free cash flow (i.e. after 2P FDC, interest, G&A and dividends) is reinvested in company specific internal development opportunities for up to a five year period.

Our $7.00 target price is based on a 6.0x 2018 EV/DACF multiple (50% weighting) and 1.0x our NAVMG of $7.26/share (50% weighting).

Key Risks to Target Price

Key risks associated with our target price include business risks of the company and industry, including, but not limited to: loss of key employees; drilling success; volatile commodity prices; operating costs; capital cost overruns; product supply and demand; financing/access to capital; government regulations; legislation; royalties; taxes; exchange rates; interest rates; and environment and weather concerns.

In addition to industry risks, key near-term risks specific to Painted Pony include the following: 1) production and growth are significantly weighted to natural gas prospects; 2) low operating netbacks; and 3) executing on an aggressive growth program.

Page 3 of 6

November 98, 2017

Exhibit 4. Summary

Company Overview		Key Valuation Ratios 2015A 2016A 2017E 2018E
Market Capitalization ($mm) $489 Net Debt ($mm) $369 Enterprise Value ($mm) $858 Current Price $3.04 P/CF (x) EV/DACF (x) EV/Production ($000/BOE/d) EV/1P Reserves ($/BOE) EV/2P Reserves ($/BOE) 10.8x 12.4x $24.4 $1.13 $0.50 5.5x 6.9x $23.0 $0.93 $0.46 3.8x 5.1x $19.7 $1.51 $0.75 2.8x 3.6x $12.9 $1.58 $0.79
52 Week Low/High $2.55 $10.50 P/NAV (2P) 42% Current Yield 0.0% P/NAV (Modified Growth) 42%
ROCE -1% -5%
Production 2015A 2016A 2017E 2018E
Crude Oil & NGLs (bbl/d) 825 1,557 3,578 4,901		Leverage 2015A 2016A 2017E 2018E
Heavy Oil (bbl/d) Total Liquids (bbl/d) Natural Gas (mcf/d) Total Production (BOE/d) % Gas Production Hedged (%) 0 0 825 1,557 88,672 129,881 15,604 23,204 95% 93% - - 0 0 3,578 4,901 239,534 392,096 43,501 70,250 92% 93% 22% 43% Bank Debt ($mm) Term Debt ($mm) Net Debt ($mm) Net Debt-CF (x) Credit Facility ($mm) % Drawn $64 $201 $128 $218 $0 $0 $141 $141 $77 $228 $369 $459 2.8x 4.1x 3.3x 2.7x $225 $325 $450 $500 28% 62% 28% 44%
Dividend PoR (%) (Pre-DRIP) 0% 0% 0% 0%
Growth 2015A 2016A 2017E 2018E	Dividend PoR (%) (Post-DRIP) 0% 0% 0% 0%
Y/Y Production Growth 18% 49% 87% 61% Corporate PoR (%) (Pre-DRIP) 380% 367% 278% 152%
Y/Y Production Per Share Growth 8% 48% 34% 41% Corporate PoR (%) (Post-DRIP) 380% 367% 278% 152%
Y/Y DAPPS Growth -3% 24% 15% 18%
		Cash Flow Summary ($mm) 2015A 2016A 2017E 2018E
Pricing Assumptions 2015A 2016A 2017E 2018E	Funds Flow from Operations $28 $56 $113 $172
WTI (US$/bbl) $48.96 $43.22 $50.00 $55.00 Debt-Adjusted Cash Flow $31 $78 $170 $250
Edmonton Par (C$/bbl) $57.65 $52.90 $61.25 $64.50 Investing Activities
WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) $45.52 $2.64 $2.70 $38.94 $2.49 $2.18 $49.00 $3.00 $2.35 $50.75 Exploration and Development $3.00 Acquisitions/Divestitures $2.40 Total Capital Expenditures ($106) ($23) ($130) ($204) $20 ($184) ($314) $17 ($297) ($262) $0 ($262)
Exchange Rate (US$/C$) $0.78 $0.76 $0.78 $0.80 Financing Activities
Net Change in Debt $64 $137 $68 $90
Corporate Netback ($/BOE) 2015A 2016A 2017E 2018E	Dividends $0 $0 $0 $0
Revenue Hedging Royalties $14.32 $1.20 ($0.35) $14.32 $2.34 ($0.31) $16.42 $2.04 ($0.38) $15.85 DRIP $1.08 Other / Share Issue Proceeds ($0.42) EBITDA $0 $0 $0 $0 $4 $2 $110 $0 $36 ($4) $271 $250
Transportation ($2.13) ($1.87) ($2.33) ($2.79)
Operating ($5.61) ($4.07) ($3.82) ($3.24)		CFPS (diluted) 2015A 2016A 2017E 2018E
Operating Netback G&A Interest Expense Cash Taxes and Other Cash Flow Netback $7.42 ($1.92) ($0.50) ($0.09) $4.91 $10.41 ($1.24) ($2.62) ($0.01) $6.54 $11.94 ($0.98) ($3.67) ($0.17) $7.12 $10.48 Q1 ($0.73) Q2 ($3.16) Q3 $0.11 Q4 $6.71 Annual $0.10 $0.07 $0.25 $0.09 $0.09 $0.13 $0.06 $0.13 $0.18 $0.03 $0.26 $0.25 $0.28 $0.55 $0.80 $0.26 $0.27 $0.25 $0.28 $1.07
Per Share Metrics 2015A 2016A 2017E 2018E		Quarterly Production (BOE/d) 2015A 2016A 2017E 2018E
WA Outstanding Shares (diluted) CFPS (diluted) EPS (diluted) 99.8 100.1 141.6 $0.28 $0.55 $0.80 ($0.05) ($0.52) $0.67 161.0 Q1 $1.07 Q2 $0.17 Q3 16,243 16,601 35,878 15,622 16,634 40,574 15,523 22,741 42,353 65,987 69,540 67,969
2P NAV $7.21 Q4 15,043 36,695 55,000 77,403 Modified Growth NAV $7.26 Annual 15,604 23,204 43,501 70,250

Source: Company reports, TD Securities Inc. estimates

Page 4 of 6

Action Note

Equity Research

TD Securities Equity Research Disclosures

Distribution of Research Ratings^

November 9, 2017

REDUCE - 1.8%

HOLD - 39.8%

Definition of Research Ratings

75%

50%

25%

0%

Investment Services Provided*

63.56%

BUY - 58.4%

35.11%

BUY HOLD

1.33%

REDUCE

ACTION LIST BUY: The stock's total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months and it is a top pick in the Analyst's sector.
BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months.
SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material event risk associated with the investment that could result in significant loss.

HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months.
TENDER: Investors are advised to tender their shares to a specific offer for the company's securities or to support a proposed combination reflecting our view that a superior offer is not forthcoming.
REDUCE: The stock’s total return is expected to be negative over the next 12 months.

Overall Risk Rating in order of increasing risk: Low (7.8% of coverage universe), Medium (38.6%), High (44.9%), Speculative (8.7%)

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Action Note

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