Painted Pony Petroleum Ltd. (TSX:PPY) is small Canadian natural gas company based out of western Canada. The current market cap is at a mere $900 million, but the management team has a long-term focus for growth with a five-year and 30-year plan.
The company currently has a 240-million-cubic-feet-per-day (MMcfe/d) production capacity, which was a 156% increase in production over Q4 2015. The company is focused on extracting natural gas from the Montney Formation in British Columbia. Montney is a western Canadian basin that is rich in natural gas and a fantastic opportunity for long-term growth.
Painted Pony is currently looking into a sweet spot on the Montney Formation that has dolomitic siltstone with a very high-quality reservoir. The reservoir is saturated with natural gas and has no associated or underlying water that can get in the way. The company forecasts a whopping 408 MMcfe/d production volume in 2017, which is a gigantic 70% increase from last year’s production.
The company is spending a lot of money growing production right now but plans to be free cash flow positive starting 2019. When it does become free cash flow positive, we can expect the company to start aggressively paying back its debt while rewarding investors with a dividend. Currently, the balance sheet is quite leveraged, but it is manageable and provides the company with production growth at full-cycle costs. This will provide terrific returns to long-term holders of the stock.
There’s no question that this company is growing production at a ridiculous rate, and if you’re bullish on the price of natural gas, then now may be the perfect time to enter the stock. Natural gas prices are quite low right, now and the stock could easily double if a natural gas price rebound happens while the company grows its production capacity.
Desjardins Securities has a $12 price target for the stock, which represents a very nice 33% gain from current levels. There are very few companies out there that are as well positioned as Painted Pony to grow its natural gas production volume over the next decade. I believe the Montney Formation has a fantastic reservoir that could bring in huge free cash flows over the next decade.
If you’re a long-term investor with a 10-year horizon, then Painted Pony may be your best bet on the TSX right now. Although the company doesn’t pay a dividend, it will enjoy huge capital gains in the next few years. I believe the price of natural gas will slowly climb in the years to come, and this will be another tailwind for Painted Pony to ride on going forward.
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Fool contributor Joey Frenette has no position in any stocks mentioned.