Painted Pony: Making Sense Of The Guidance

Fellow contributor Dutchtender made me realize there is something wrong from the 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

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.

Corridor Resources: The Numbers

Here is what happened since we know that Hydrocarbons Anticosti LP is negotiating with the government.

CDH StockCharts.com April 12

Source: StockCharts.com

Corridor’s stock went from C$0.42 to close at C$0.45/share at 5.5X average volume for total upside of C$2.7M.

PEA StockCharts.com April 12

Source: StockCharts.com

Petrolia’s stock went from C$0.14 to close at C$0.18/share at 7.0X average volume for total upside of C$4.3M.

These gains have evaporated since.

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

Price Differential Of Canadian Bitumen

Knowing the price differential, or how it is calculated, will give you an hedge compared to other investors.

Indeed, Canadian oil is cheaper when sold in the US. It is fairly obvious for anyone invested in Canadian oil and gas companies, especially in the oil sands industry.

WCS Comparison Prices US Feedstock January 11

Source: Oil Sands Magazine

As we can see, the Mexican Mayan sells for $10 extra versus the Western Canada Select, despite both being comparable heavy oil grades. This price differential is also known as the heavy oil discount.

Light sweet crude oil requires less energy to refine and should theoretically sell for a better price. This might have been true in the old days but the logistics of moving the right type of crude to the right customer creates price differentials that go far beyond just quality.

Source: Oil Sands Magazine

The realized sales price is a function of the cost of actually moving the Canadian heavy oil to the refineries.

WCS Shipping Costs January 11

Source: Oil Sands Magazine

We can estimate a minimum heavy oil discount of $10 per barrel. The transportation costs will double depending on the route taken by the oil, say if your oil is moved by train.

Not for republication on Seeking Alpha.

Canadian Oil Sands’ 2016 Guidance Is Too Optimistic

As per the guidance released in early December by Canadian Oil Sands, the Syncrude project will have a gross production of 105 million barrels in 2016. This is a very optimistic guidance according to historical production and operations.

Syncrude - Historical Production

YearProduction (Mbarrels)
2015*90.0
201494.2
201397.4
2012104.8
2011105.3
2010107.0
2009102.3
2008105.6
2007111.6

As we can see, Syncrude has had a rough time in keeping production constant. The production has been declining since the peaks of 107 million barrels in 2010 and 112 million barrels in 2007.

The 2016 production guidance is a bit far-fetched in my opinion. The management team is being too optimistic. Maybe it’s trying to prove that the company can produce free cash flow even in a low price environment. Indeed, free cash flow of C$338M is expected even with WTI oil at $50 per barrel. However, using the 5-year production average of 101,7 million barrels per year, the expected free cash flow decreases to C$260M — C$189M using the 3-year production average (98.8 million barrels).

This isn’t a big margin of safety to say the least.

Potash Corporation Of Saskatchewan’s Dividend Is Risky

The market thinks the dividend of Potash Corporation of Saskatchewan isn’t sustainable. The company had one slide in the Q3 earnings release showing its dividend versus cash flow from operations.

PotashCorp Q3 2015 Release November 11

Source: Corporate Presentation

As of today, the yield is of almost 7.5%, which is really high. It would not be surprising to see this dividend cut in the medium-term.

Maybe the company wanted to offer a strong dividend to compensate for the lack of growth in the coming years, or could it be to lure dividend investors to buy the stock and keep its price high?

However, no matter how high the dividend is, the focus will always come back to the fundamentals, as the recent movement in share price shows.

POT StockCharts.com November 10

Source: StockCharts.com