Painted Pony: Making Sense Of The Guidance

Fellow contributor Dutchtender made me realize there is something wrong from Painted Pony Petroleum’s (PONY) guidance of January 2017 and May 2017.

Painted Pony - January 2017 & May 2017 Guidance

Guidance2017 Production (boe/d), Liquids Pourcentage2018 Production (boe/d), Liquids Pourcentage2017 Leverage (YE Net Debt/CFO)2018 Leverage (YE Net Debt/CFO)
May 201748,400 (8%)84,800 (7%)1.51.2
January 201748,000 (10%)72,000 (11%)1.31.2
August 201646,00070,0001.91.4

Source: Corporate presentations

Something is going on. Leverage is increasing considerably despite AECO prices being somewhat stable and despite adding over 60 million new shares. More surprisingly, leverage fell from the August 2016 guidance to the January 2017 guidance, despite lower AECO prices. Let’s find out what is causing this.

Painted Pony - 2017 & 2017 Capital Expenditures

Guidance2017 Capex (C$M)2018 Capex (C$M)Total (C$M)Production Growth (boe/d)Efficiency (C$/boe/d)
May 201734830164961,60010,536
January 201731938570449,00014,367

Source: Corporate presentations

The company is more efficient. The additional leverage was not because of higher capital expenditures.

Painted Pony - Cash Flow From Operations

Guidance2017 CFO/Mcf (C$/Mcf)2018 CFO/Mcf (C$/Mcf)
May 20171.411.55
January 20171.621.85

Source: Corporate presentations

Part of the problem is that less cash will go into Painted Pony’s coffers. The changes are staggering: cash flow per unit decreases 13% in 2017 and 16% in 2018.

Lastly, I think the biggest reason is the new way leverage is calculated in these presentations. In the recent presentations (January and May 2017), leverage is taken as year-end net debt to Q4 CFO annualized. Because Painted Pony’s production growth is achieved primarly at year-end, the cash flow is substantially higher in Q4 than the average in the rest of the year.

As such, the substantial increase in leverage is due to the way leverage is calculated, to 20% higher costs, and, to a lesser extent, slightly lower realized prices and slightly lower liquids production.

Disclosure: I am long PONY. Not for republication on Seeking Alpha.