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The Pony becomes a pure play

Also: why PrairieSky may have run ahead of itself

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jul 8, 2014

by Max Fawcett

Painted Pony Petroleum (TSE:PPY) might have to change its name. That’s because, once the deal that it announced today closes, it won’t have any petroleum left to speak of in its portfolio of assets. The company sold its Saskatchewan light oil assets – the ones that gave the company its start – for $100 million in cash. The deal will help the company wipe the debt from its balance sheet and drill a few wells, but what it really does is signal to the market – and prospective buyers – that it’s officially a pure play on natural gas.

Analysts are practically over the moon about the deal. FirstEnergy’s Cody Kwong wrote that “the $100 million sale of Painted Pony’s Saskatchewan assets transforms the company into a pure play on the liquids rich Montney and closes the corporate finance gap for the acceleration of its development program there, where operational results continue to impress, which makes its compelling five-year growth plans, to 100,000 boe/d, far more visible today.” He rates the company as a top pick, and put a $20 price target on its shares.
That’s where AltaCorp’s Jeremy McCrea moved his target up to as well, noting that “with a proven management track record, an expected increase in production per share of 75 per cent year-over-year, manageable leverage of 0.8-times debt to cash flow for 2015, top-performing Montney wells that look to still be improving, and 2,000+ locations over 203 Montney sections, there remains few names that compete with Painted Pony on a fundamental (and valuation basis) level.”

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Analysts are decidedly less bullish about PrairieSky (TSE:PSK), the royalty play that Encana (TSE:ECA) spun off a couple of weeks ago. That’s because it’s rallied hard and is now trading ahead of where it probably should based on its valuation metrics. As Tim Shufelt noted in the Globe and Mail yesterday, it’s trading at a forward enterprise value to discounted annual cash flow (DACF) of 22 times versus its peer group average of just eight. “Freehold Royalties, which represents a more direct comparison to PrairieSky, trades at about 13 times EV/DACF,” Shufelt wrote. “Some premium for PrairieSky is warranted, given its superior land holdings, but its stock appears expensive by any measure.”

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