Painted Pony Pete Ltd PDPYF

Notes from TD Bank on Painted Pony

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Painted Pony Petroleum Ltd. PPY-T: $9.22; BUY 12-Month Target Price: $13.50

Although we took Painted Pony off the Action List on September 6, 2016 due to strong share price performance, the company continues to be one of our top picks on the basis of unparalleled production growth in the highly economic BC Montney, solid operating cost structure, and prudent hedging program. The company boasts one of the highest growth forecasts under coverage in 2017 (we forecast Q4/16 to Q4/17 average production of 87%) and 2016 was a testament to the company's ability to execute on its growth projections. In our view, the market continues to over emphasize risk associated with the next leg of growth as the company currently trades at a meaningful discount to our Montney peer group on a 2017E EV/DACF basis (5.3x vs. 8.3x). Moreover, Painted Pony has continued to drive costs lower on their core assets Blair/Daiber – which we estimate will improve even further once additional processing capacity is brought online later this year. Finally, in 2016 much had been made regarding pricing pressures at the company's primary natural gas sales point (Station 2). That said, Painted Pony continued to build an aggressive hedging program which currently stands at 63% of our forecasted 2017 total production, providing us with additional comfort that current guidance will come to fruition.