Painted Pony Petroleum Ltd. (TSX:PPY) is a small-cap natural gas company based out of western Canada which is involved in the exploration, development, and production of natural gas from the Montney formation in northern British Columbia.
There’s no question that natural gas prices are ridiculously low at current levels, but there are signs that point to higher prices in 2017. Many pundits believe that natural gas will hit $4 per million British thermal units (mmBtu) because demand has grown while gas production has declined.
Storage for natural gas reached record highs last year at 4.1 trillion cubic feet. The huge glut of natural gas sharply declined in the latter part of last year thanks to an increase in demand. This glut will eventually be eliminated, and it’s very likely that natural gas prices will soar over the next few years. This rebound in natural gas prices will help launch Painted Pony into the atmosphere as the company continues to increase its production capacity.
The Montney formation is a gigantic opportunity for Painted Pony. The company is currently focusing on a sweet spot in the formation which has a very high-quality reservoir. The reservoir is saturated with natural gas with little or no water to get in the way of extraction. Painted Pony is putting its foot on the gas with its production growth, and the company will be reaping the rewards once natural gas prices climb to $4 and beyond this year.
The company plans to increase its production volume by a whopping 70% to 408 million cubic feet per day. This insane amount of growth is projected to make the company cash flow positive in 2019. If natural gas prices keep climbing at its current rate, we could see Painted Pony in cash flow–positive territory by the latter part of 2018. The result will be a soaring stock that could easily double over the next few years.
Analysts at Desjardins have a price target of $12 on the company, which represents nearly 50% upside from current levels. The stock has been quite volatile recently and has been going up and down by as much as 6% per day. I believe the volatility will continue; you should buy Painted Pony on any dips to the $7 range.
The company is going all-in with production growth, and I believe it will pay off in a few short years. If you’re bullish on natural gas, then look no further than Painted Pony. Make sure you hang on to shares with a long-term mindset. Stay disciplined and reap the long-term rewards from this fantastic company.
Stay smart. Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any stocks mentioned.