Can This Natural Gas Producer Ever Bounce Back?

Painted Pony Energy Ltd. (TSX:PONY) is extremely attractively valued and appears ready to soar.

gas

It has been a tough start to 2018 for natural gas producers. The price of natural gas has tumbled 25% for the year to date, and despite falling inventories, there are signs that an upturn may be some time off. This has driven the price of natural gas producers lower. Driller Painted Pony Energy Ltd. (TSX:PONY) has plummeted 14%, while Canada’s largest natural gas producer by volume, Encana Corp. (TSX:ECA)(NYSE:ECA), saw its stock fall by the same amount.

Nevertheless, there are signs that natural gas will eventually rebound, and the latest dip in Painted Pony’s shares leaves it attractively valued. 

Now what?

Painted Pony is focused the Montney in northern British Columbia, which is rated by many analysts as Canada’s premier natural gas play. The company’s properties have been assessed to have natural gas reserves of 1.1 billion barrels of oil equivalent, which have an after-tax value of $2.6 billion, or just under $16 per share. That valuation was independently determined using an average natural gas price of US$1.73 per million British thermal units (mmBtu) for 2018 and US$2 per mmBtu for 2019, which are both well below the current spot price of US$2.75 per mmBtu.

This highlights just how tremendously undervalued Painted Pony is by the market and the considerable potential upside that is on offer when natural gas rebounds.

Impressively, Painted Pony has been able to significantly grow production.

For 2017, the company’s output almost doubled to 42,882 barrels daily. The driller was able to do this while reducing operating expenses, which, for 2017, were 6% lower year over year. That, along with higher natural gas prices during 2017, saw Painted Pony report a netback of $2.01 per thousand cubic feet (mcf) of natural gas produced, which was 16% higher than a year earlier.

General and administrative expenses for 2017 were also lower, dropping by 14% year over year; that in conjunction with a higher netback, Painted Pony reported a 2017 net profit of $122 million compared to a $52 million net loss in 2016.

Based on Painted Pony’s 2018 guidance, the company’s bottom line should continue to grow. At the bottom end of its guidance, production is forecast to grow by at least 42% year over year, which, coupled with Paint Pony’s ongoing focus on reducing costs and higher natural gas prices, will give its earnings a solid lift.

Remarkably, that growth is expected to be achieved with a significant decrease in capital expenditures because of significantly improving efficiencies associated with drilling and well completions.

So what?

Painted Pony is an attractively valued natural gas producer which offers investors considerable potential gains because of the quality of its assets and the fact that the value of its reserves is significantly higher than its current price. Because of the improved outlook for natural gas, along with Painted Pony’s ability to materially expand production, its cash flow and earnings will grow further in 2018, which should give its shares a healthy boost.

Fool contributor Matt Smith has no position in any stocks mentioned. 

More on Energy Stocks

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

3 All-Weather Stocks Canadians Can Confidently Buy Today

Canadian Natural Resources (TSX:CNQ) stock, Fortis (TSX:FTS) stock and a railroad could do well, whatever happens to the Canadian economy

Read more »

Runner on the start line
Energy Stocks

1 Unstoppable Canadian Energy Stock to Buy Right Here, Right Now

Cenovus Energy (TSX:CVE) stock looks like a great long-term play, even after going parabolic.

Read more »

woman gazes forward out window to future
Dividend Stocks

4 Canadian Stocks Built to Reward Patient Investors in 2026 and Beyond

In a headline-driven 2026, buy-and-hold can win by sticking with businesses that customers and the economy need no matter what.

Read more »

earn passive income by investing in dividend paying stocks
Energy Stocks

The 1 TFSA Stock I’d Set, Forget, and Never Touch Again

If you’re looking for a reliable TFSA stock to hold for decades, this one checks nearly every box.

Read more »

canadian energy oil
Energy Stocks

1 Canadian Energy Stock Quietly Positioning for a Big Year

Here's why Suncor (TSX:SU) looks well-positioned to be a key winner for investor portfolios in 2026 and beyond.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

TFSA Millionaire Goals: Here’s How Much You Should Save Monthly

Here’s how to maximize the potential of your TFSA and find one of the best TSX stocks to help you…

Read more »

oil pump jack under night sky
Energy Stocks

The Oil Shock Is Here: How to Protect Your Investments Now

For investors looking to protect their portfolios from this rampant oil shock, here are three top stocks to consider buying…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Canadian Investors: Here’s the 1 Sector You Want to Own When Oil Surges

These Canadian energy stocks stand out as top-tier picks for long-term investors looking to benefit from oil prices, which are…

Read more »