- Despite mostly upbeat Q2 results, my stock picks aren’t moving higher.
- Sentiment is still negative in the energy market, capping energy stocks gain.
- Painted Pony and Point Loma are underperforming.
- Prairie Provident and Granite Oil are my two favorite buys right now.
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
|Guidance||2017 Production (boe/d), Liquids Pourcentage||2018 Production (boe/d), Liquids Pourcentage||2017 Leverage (YE Net Debt/CFO)||2018 Leverage (YE Net Debt/CFO)|
|May 2017||48,400 (8%)||84,800 (7%)||1.5||1.2|
|January 2017||48,000 (10%)||72,000 (11%)||1.3||1.2|
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
|Guidance||2017 Capex (C$M)||2018 Capex (C$M)||Total (C$M)||Production Growth (boe/d)||Efficiency (C$/boe/d)|
Source: Corporate presentations
The company is more efficient. The additional leverage was not because of higher capital expenditures.
Painted Pony - Cash Flow From Operations
|Guidance||2017 CFO/Mcf (C$/Mcf)||2018 CFO/Mcf (C$/Mcf)|
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.
- UGR Blair Creek acquisition is accretive as soon as Q2 2018.
- Counter-cyclical price paid is very low.
- Will reduce leverage considerably.
- High quality assets with takeaway capacity so critical in the Montney area.
- Last week’s sell-off was a one time event: Stability in the oil market should return.
- Selling overleveraged and low netbacks oil producers.
- Adding to my favorite Canadian E&Ps.
I am now well positioned for 2017 after another series of move in my portfolio.
- I added to my positions in Painted Pony Petroleum (PPY) and in Gear Energy (GXE) by selling part of my position in MEG Energy (MEG). I am preparing my portfolio for lower oil prices.
- I opened a position in Tidewater Midstream & Infrastructure (TWM).
- I bought back shares in TransGlobe Energy (TGL). TransGlobe’s Canadian transformation is a game changer to me. Plus the acquisition metrics are very good for TransGlobe shareholders.
- I opened a position in Point Loma Resources (PLX).
I made a quick analysis for Point Loma Resources after hearing about the stock on Seeking Alpha. The stock is indeed trading at a very low 6.3X Year-End 2016 FFO. I estimate FFO of C$17.92 per barrel at year-end 2016. Furthermore, the company holds no debt except for convertible debentures and plans to grow production aggressively next year. In other words, the multiple should be higher.
Lower heavy crude from Venezuela will benefit Canadian heavy oil and tighten the price differential of Canadian heavy oil versus WTI.
Finally, the new push for natural gas pipelines in the Northeastern US will force TransCanada to lower its transportation tariffs. Else it will face a severe decrease in its market share in Eastern Canada.
Disclosure: I am long GXE, MEG, PLX, PPY, TGL, TWM. Not for republication on Seeking Alpha.
Here are my trades to start the year:
- I added to my position in Amaya (AYA). Indeed, bad names will stop appearing in bad actor clause negotiations now that both David Baazov and Daniel Sebag are gone. Plus Amaya’s operations are coming out as very strong.
- I bought back shares in Corridor Resources (CDH), as you know. It’s now or never for Corridor to move west and grab assets on the cheap before oil heads substantially higher. I need to go long before reading about the acquisition in a press release.
- I added to my position in MEG Energy (MEG) after the company announced a major refinancing plan.
- I added to my position in Painted Pony Petroleum (PPY). The company is still undervalued despite being up 60% since I bought it nine months ago.
I also went long lithium by buying all the junior exploration companies operating in Quebec: Critical Elements (CRE), Nemaska Lithium (NMX) and Natan Resources (NRL). I’ll let you know shortly how I narrowed it down to those three companies.
Disclosure: I am long AYA, CDH, CRE, MEG, NMX, NRL, PPY. Not for republication on Seeking Alpha.
- Buying two companies in the energy and gold sectors.
- Holding on disappointments such as MEG Energy and Pine Cliff.
- Selling and giving up on bad energy bets.
I sold another third of my position in Bankers Petroleum to buy Painted Pony Petroleum two days ago. I am slowly moving on to other great stocks.
I am still holding on to the last 1/3 of my position. What will be the next big stock?
Disclosure: I am long BNK, PPY. Not for republication on Seeking Alpha.
- Painted Pony will triple its natural gas production in two years.
- Ambitious growth plan means more leverage in a period of price uncertainty.
- The stock will need to double to provide a fair valuation of its 2017 FFO.
As we all know, Bankers Petroleum’s share price won’t move a lot for some time. First, Geo-Jade Petroleum needs to raise capital to fund its acquisition (read: risk), and second we also need to vote on the deal by the end of May as shareholders. We will see the money in the summer.
The acquisition price of C$2.20 per share means the current arbitrage represents a gain of less than 20%. As you know, I am looking to double down on natural gas by buying Painted Pony Petroleum. Let’s take a look at the stock:
As we can see, while Bankers didn’t move, Painted Pony did. For the last week, my Bankers position wasn’t a very good performer compared to my next target. Why didn’t I start buying the stock? The stock had clear selling signs when it went under its 50-day moving average last week. I believed that the stock would test again its support level of C$4 per share. Obviously, this reading was wrong. The stock went bullish even though natural gas price was hitting new lows, both in British Columbia and in Alberta.
The stock powered through and tested today a clear resistance level of C$5 per share. This rally might be due to another good news in the natural gas industry: Chesapeake Energy’s credit facility will stay the same, despite the bearish natural gas market. Bankruptcy for one of North America’s largest natural gas producers is out of the question for now. This is good news indeed for the natural gas market!
The next question is, obviously, will the stock climb higher than its resistance level? I’ll be watching the stock very closely in the coming days.
It is interesting to note that if I did bought shares like I should have done at C$4, the return would already be over 20%, more than the current arbitrage for Bankers’ stock. This mistake won’t happen again.
Of course, this is why we shouldn’t always trust technical analysis and jump in the market instead. Should Painted Pony powers through its resistance level, I’ll sell again part of my Bankers position and start building my position in Painted Pony. If the share price falls back, I’ll be patient… But my patience will be short.
Disclosure: I am long BNK.