Painted Pony Announces Strategic Financing, Executive Appointment, Record Production Volumes, and Second Quarter 2017 Financial and Operating Results

08/09/2017

/NOT FOR DISSEMINATION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES/  

CALGARY, Aug. 9, 2017 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) is pleased to announce a financing transaction with a new strategic investor, an executive appointment, record production volumes, and second quarter 2017 financial and operating results.

RECENT HIGHLIGHTS:

Strategic Financing:

  • Entered into an investment agreement with Magnetar Capital ("Magnetar Capital"), pursuant to which Magnetar Capital has agreed to invest CAD$200 million in Painted Pony, consisting of CAD$150 million of senior unsecured notes (the "Notes") and CAD$50 million of subordinated convertible debentures (the "Debentures"), subject to the terms set out therein.

Executive Appointment:

  • Appointed Mr. W. Derek Aylesworth to the position of Senior Vice President and Chief Financial Officer effective August 15, 2017.

Production Volumes:

  • Averaged record daily production volumes in July 2017 of over 270 MMcfe/d (45,000 boe/d) which includes 8% liquids, based on field estimates;

  • Grew average daily production by 144% to 243.4 MMcfe/d (40,574 boe/d) setting a quarterly production record during the second quarter of 2017, compared to 99.8 MMcfe/d (16,634 boe/d) during the second quarter of 2016; and

  • Increased average daily liquids production by 179% for the second quarter of 2017 to 2,779 bbls/d, compared to 996 bbls/d during the second quarter of 2016.

Financial Results:

  • Generated funds flow from operations(2) of $18.0 million ($0.13/share) for the second quarter of 2017, (net of non-recurring transaction costs of $5.5 million ($0.04/share) from the acquisition of UGR Blair Creek Ltd. ("UGR")), an increase of 102%, 44% per share, over the $8.9 million ($0.09/share) during the second quarter of 2016;

  • Generated net income for the second quarter of 2017 of $13.8 million, net of non-recurring costs, compared to a net loss of $33.6 million in the second quarter of 2016; and

  • Realized a natural gas price of $2.64/Mcf which represented a 5% discount to the AECO daily spot price, compared to a 34% discount in the second quarter of 2016;

UGR Acquisition:

  • Closed the acquisition of UGR on May 16, 2017, a strategic acquisition of land, reserves, production and facilities. 

STRATEGIC FINANCING
Painted Pony and Magnetar Capital have entered into an investment agreement in which Magnetar Capital has agreed to invest CAD$200 million in Painted Pony.  This CAD$200 million term debt financing consists of CAD$150 million of Notes and CAD$50 million of Debentures. 

The Notes will be senior unsecured obligations of Painted Pony, bearing interest at 8.5% per year, payable quarterly, with a five-year term to maturity.  The Notes may be redeemed early at the option of Painted Pony pursuant to an optional redemption schedule set forth in the agreement.  The Notes do not contain any financial maintenance covenants. 

The Debentures will be unsecured subordinated obligations of Painted Pony, bearing interest at 6.5% per year, payable quarterly, with a four-year term to maturity.  The Debentures will be convertible at any time, at the option of the holders, into common shares of the Corporation (the "Common Shares").  The Debentures have an initial conversion price equal to the greater of (i) $5.60 per share and (ii) 87.18% of the volume-weighted average trading price (the "VWAP") of the Common Shares on the Toronto Stock Exchange (the "TSX") on August 10 and 11, 2017, priced in accordance with the policies of the TSX.  Beginning in February 2020, Painted Pony will have the right to convert the Debentures into Common Shares at the conversion price where average trading prices exceed 140% of the conversion price.  Painted Pony will also have the right in certain circumstances to repay all or a portion, at the Company's option, of the principal amount owing on maturity of the Debentures in Common Shares at a 5% discount to average trading prices prior to maturity. Magnetar Capital has agreed to not enter into any hedging or short sale transactions related to the Common Shares during the first three years of the term of the Debentures.

Upon the occurrence of certain change of control events, Painted Pony is required to offer to repurchase the Notes and the Debentures. 

The terms of the Notes will be set out in an indenture governing the notes (the "Note Indenture") and the terms of the Debentures will be set out in an indenture governing the Debentures (the "Debenture Indenture").

The combined net proceeds of the issuance of the Notes and the Debentures are expected to be approximately CAD$190 million, which will be used for the non-permanent repayment of indebtedness under Painted Pony's syndicated Credit Agreement initially and then for general corporate purposes.  

Pat Ward, Painted Pony's President and CEO, said of the transaction, "This strategic financing will improve Painted Pony's financial liquidity while diversifying our debt capital structure and providing both fixed term and staggered debt maturity schedules.  It marks yet another important milestone for Painted Pony as we continue to grow and evolve as a company. We are very pleased to have Magnetar Capital, a highly experienced global energy investor, as a strategic long-term investor in Painted Pony."

Adam Daley, Head of Magnetar Capital's Houston Office added, "We are excited to partner with Painted Pony, a company with a strong track record of developing its high quality Montney resource in northeast British Columbia and executing upon its long-term business plan.  We look forward to future opportunities to expand our relationship with Painted Pony beyond today's announced investment."

Closing of the term debt financing is anticipated to occur on or about August 23, 2017, subject to the satisfaction of customary closing conditions.  In the event the conversion price determined in accordance with the TSX policies results in a calculated initial conversion price greater than $5.60 per Common Share, Magnetar Capital will have the option to terminate its obligation to purchase the Debentures, in whole or part, on the closing date.  The Note component of the term debt financing is not conditional upon the closing of the Debenture component of the term debt financing. 

Cormark Securities Inc. acted as exclusive financial advisor to Painted Pony on the financing.

EXECUTIVE APPOINTMENT
Painted Pony's Board of Directors is pleased to announce the appointment of Mr. W. Derek Aylesworth to the position of Senior Vice President and Chief Financial Officer effective August 15, 2017.  As previously announced, Mr. John H. Van de Pol will retire on August 15, 2017. 

Mr. Aylesworth joins Painted Pony with over twenty-five years of experience in the oil and gas industry. Mr. Aylesworth previously held the position of Chief Financial Officer for an intermediate oil and gas company for nine years.  In his previous role, he was primarily responsible for capital markets, financial reporting and compliance, financial risk management, tax and treasury functions.  Mr. Aylesworth holds a Bachelor of Commerce degree and is a Chartered Accountant with expertise in taxation and has experience as a tax advisor in both the oil and gas industry and public practice in Calgary.

Mr. Van de Pol has been an integral part of the management team over the past four years during a time of high growth.  Painted Pony, on behalf of staff, the executive team and the Board of Directors, thanks Mr. Van de Pol for his leadership and commitment during his tenure and wish him all the best in his retirement. 

PRODUCTION UPDATE
Based on field estimates, July daily production volumes averaged over 270 MMcfe/d (45,000 boe/d) with 8% liquids.  Painted Pony is ramping up production volumes to fill the additional 48 MMcf/d of available capacity at the 198 MMcf/d AltaGas Townsend Facility (the "Townsend Facility").  The Townsend 2 Expansion, which will add an incremental 99 MMcf/d of processing capacity at the Townsend Facility, bringing total capacity to 297 MMcf/d, is under construction, on schedule, and under budget for an October 2017 start-up.

SECOND QUARTER 2017 FINANCIAL & OPERATING RESULTS

Production
Production volumes for the second quarter of 2017 were 243.4 MMcfe/d (40,574 boe/d), a quarterly production record for Painted Pony and representing an increase of 144% compared to the second quarter of 2016 of 99.8 MMcfe/d (16,634 boe/d).

Liquids production increased 179% to 2,779 bbls/d or 7% of total production volumes during the second quarter compared to 996 bbls/d or 6% of total production volumes during the second quarter of 2016.  Liquids production during the second quarter of 2017 consisted of 50% condensate, 30% butane and 20% propane. 

Funds Flow From Operations(2) and Net Income
Painted Pony's funds flow from operations(2) for the second quarter of 2017 was $18.0 million or $0.13/share (net of non-recurring transaction costs of $5.5 million ($0.04 per share) associated with the UGR acquisition) representing an increase of 102% compared to $8.9 million ($0.09 per share) during the second quarter of 2016.

Increased funds flow from operations was the result of a 144% increase in production volumes and a 129% improvement in realized commodity prices compared to the second quarter of 2016. During the second quarter of 2017, Painted Pony's operating netback, after hedging, increased 26% to $1.81 per Mcfe on revenue of $3.00 per Mcfe, an increase of 26% when compared to the second quarter of 2016.

Net income for the second quarter of 2017 was $13.8 million compared to a net loss of $33.6 million in the second quarter of 2016. Excluding the unrealized gain on commodity risk management contracts and transaction costs, Painted Pony generated income before taxes of $2.4 million during the second quarter of 2017, compared to a $0.8 million loss during the second quarter of 2016.

Capital Expenditures
Capital expenditures for the second quarter of 2017 totaled $57.9 million and included drilling of 11 (11.0 net) wells and completing 10 (10.0 net) wells as part of Painted Pony's capital program to fulfill current commitments at the Townsend Facility and included pre-drilling wells in anticipation of commissioning Townsend Phase 2, expected in late 2017. Facilities spending of $9.6 million included equipping costs, the pre-purchase of tie-in equipment expected for use in the second half of 2017, pipeline construction costs and maintenance spending on facilities.

Favourable field conditions during the quarter, which allowed faster than expected execution of well drilling and completion operations, created the opportunity for Painted Pony to accelerate capital spending. This puts Painted Pony ahead of schedule in our preparation for significant production growth during the second half of 2017. As a result of the acceleration in capital spending, the Corporation ended the second quarter of 2017 with an inventory of 15 drilled but uncompleted wells ("DUCs") and 8 completed wells awaiting flow-back. This inventory of non-producing wells establishes a foundation from which Painted Pony expects significant production growth during the second half of 2017.  The capital pre-spend of approximately $15.0 million during the second quarter of 2017 is expected to provide an equivalent reduction of spending during the second half of 2017.

Pricing
During the second quarter of 2017, Painted Pony realized a natural gas price of $2.64/Mcf, which represented a 5% discount to the AECO daily spot price, compared to $0.94/Mcf, a 34% discount, during the second quarter of 2016.  Painted Pony's realized natural gas pricing was 13% higher than the Station 2 spot price during the second quarter of 2017.

Hedging Update
For the third and fourth quarters of 2017, Painted Pony has a combination of physical and financial risk management contracts on 223 MMcf/d and 252 MMcf/d of natural gas production, respectively.  During the first quarter of 2018, Painted Pony has a combination of physical and financial risk management contracts covering approximately 257 MMcf/d.  These volumes represent approximately 70% of expected natural gas production volumes.

Marketing Strategy
As part of a long term market diversification strategy, Painted Pony has reduced daily Station 2 pricing exposure to 9% for the remainder of 2017.  Diversification away from Station 2 has been achieved by entering into financial and physical commitments, including contracting for transportation outside of the British Columbia market.

UGR ACQUISITION
On May 16, 2017, Painted Pony closed the acquisition of UGR, a strategic consolidation of Painted Pony's Montney development project in NEBC. The Corporation's Montney land position was increased by 52% to a total of 314 net sections (201,009 net acres at an average 94% working interest) in the Montney in British Columbia. 

This strategic acquisition consolidates Painted Pony's footprint in existing operational areas while increasing the Corporation's average working interest from 86% to 94%, thus placing more control over the pace and direction of development directly with Painted Pony. This acquisition also includes 155 MMcf/d of processing capacity, of which 105 MMcf/d is company-owned and unutilized.

ENERCOM CONFERENCE PARTICIPATION
Painted Pony is pleased to announce that it will be participating in EnerCom's "The Oil & Gas Conference" taking place on August 15 and 16, 2017 at The Westin Denver Downtown located at 1672 Lawrence Street in Denver, Colorado. Mr. Pat Ward, President and CEO, will be presenting on Tuesday, August 15, 2017 at 10:55 am (MDT) in Confluence C at The Westin Denver Downtown in Denver, Colorado.

The Corporation will be undertaking a series of presentations to institutional investors while at this conference. Interested parties are invited to view the current Painted Pony investor presentation at: http://paintedpony.ca/investors/dashboard/default.aspx and listen to Mr. Ward's presentation via webcast, at the time indicated above and for 30-days following the presentation, through the following link: http://www.theoilandgasconference.com/togc-webcast/ppy/

FINANCIAL AND OPERATING HIGHLIGHTS




Three months ended
June 30,

        Six months ended
June 30,


2017

2016

Change

2017

2016

Change

Financial ($ millions, except per share and shares outstanding)







Petroleum and natural gas revenue(1)

66.4

11.9

458 %

131.4

28.4

363 %

Cash flows from operating activities

18.2

5.3

243 %

49.9

12.5

299 %


Per share - basic(3) and diluted(4)                                                        

0.13

0.05

160 %

0.42

0.13

223 %

Funds flow from operations(2)

18.0

8.9

102 %

42.8

16.5

159 %


Per share - basic(3) and diluted(4)

0.13

0.09

44 %

0.36

0.16

125 %

Net income (loss)

13.8

(33.6)

N/A

70.7

(35.7)

N/A


Per share - basic(3) and diluted(4)

0.10

(0.34)

N/A

0.59

(0.36)

N/A

Capital expenditures

57.9

35.3

64 %

154.6

102.4

51 %

Working capital deficiency (5)

30.8

36.7

(16) %

30.8

36.7

(16) %

Bank debt

235.5

136.9

72 %

235.5

136.9

72 %

Net debt (6)

283.5

164.5

72 %

283.5

164.5

72 %

Total assets

1,742.8

876.3

99 %

1,742.8

876.3

99 %

Shares outstanding (millions)

161.0

100.1

61 %

161.0

100.1

61 %

Basic weighted-average shares (millions)

139.8

100.0

40 %

120.1

100.0

20 %

Fully diluted weighted-average shares (millions)

139.8

100.1

40 %

120.1

100.1

20 %

Operational







Daily production volumes








Natural gas (MMcf/d)

226.8

93.8

142 %

211.7

94.2

125 %


Natural gas liquids (bbls/d)

2,779

996

179 %

2,963

924

221 %


Total (MMcfe/d)

243.4

99.8

144 %

229.4

99.7

130 %


Total (boe/d)

40,574

16,634

144 %

38,239

16,618

130 %

Realized commodity prices








Natural gas ($/Mcf)

2.64

0.94

181 %

2.75

1.27

117 %


Natural gas liquids ($/bbl)

47.04

41.73

13 %

48.76

39.21

24 %


Total ($/Mcfe)

3.00

1.31

129 %

3.16

1.57

101 %

Operating netbacks ($/Mcfe) (7)

1.81

1.44

26 %

1.94

1.33

46 %

1.

Before royalties.

2.

Funds flow from operations and funds flow from operations per share (basic and diluted) are non-GAAP measures used to represent cash flow from operating activities before the effects of changes in non-cash working capital, deferred share unit expense and decommissioning expenditures.  Funds flow from operations per share is calculated by dividing funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See "Non-GAAP Measures".

3.

Basic per share information is calculated on the basis of the weighted average number of shares outstanding in the period.

4.

Diluted per share information reflects the potential dilutive effect of stock options.

5.

Working capital deficiency is a non-GAAP measure calculated as current assets less current liabilities. See "Non-GAAP Measures".

6.

Net debt is a non-GAAP measure calculated as bank debt and working capital deficiency, adjusted for the net current portion of fair value of risk management contracts. See "Non-GAAP Measures".

7.

Operating netbacks is a non-GAAP measure calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on commodity risk management, less royalties, operating expenses and transportation costs. See "Non-GAAP Measures" and "Operating Netbacks".


 

ADVISORIES

Currency: All amounts referred to in this press release are stated in Canadian dollars unless otherwise specified.

Forward-Looking Information: This press release contains certain forward-looking information within the meaning of Canadian securities laws. Forward-looking information relates to future events or future performance and is based upon the Corporation's current internal expectations, estimates, projections, assumptions and beliefs. All information other than historical fact is forward-looking information. Words such as "plan", "expect", "intend", "believe", "anticipate", "estimate", "may", "will", "potential", "proposed" and other similar words that indicate events or conditions may occur are intended to identify forward-looking information. In particular, this press release contains forward looking information relating to the expected use of proceeds from the Notes and the Debentures; the expected amount drawn down on the Corporation's syndicated credit facility following the anticipated closing of the Notes and the Debentures; the anticipated closing date of the term debt financing; additional capacity expected at the AltaGas Townsend Facility in August 2017; and expected commissioning date and additional processing capacity from the Townsend 2 Expansion.

Forward-looking information is based on certain expectations and assumptions including but not limited to future commodity prices, currency exchange rates interest rates, royalty rates and tax rates; the state of the economy and the exploration and production business; the economic and political environment in which the Corporation operates; the regulatory framework; anticipate timing and results of capital expenditures; the sufficiency of budgeted capital expenditures to carry out planned operations; operating, transportation, marketing and general and administrative costs; drilling success, production rates, future capital expenditures and the availability of labor and services. With respect to future wells, a key assumption is the validity of geological and technical interpretations performed by the Corporation's technical staff, which indicate that commercially economic volumes can be recovered from the Corporation's lands. Estimates as to average annual and exit production assume that no material unexpected outages occur in the infrastructure the Corporation relies upon to produce its wells, that existing wells continue to meet production expectations and that future wells scheduled to come on production in the remainder of 2017 meet timing and production rate expectations.

Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations on which they are based will occur. Although the Corporation's management believes that the expectations in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. As a consequence, actual results may differ materially from those anticipated.

Forward-looking information necessarily involves both known and unknown risks associated with oil and gas exploration, production, transportation and marketing. There are risks associated with the uncertainty of geological and technical data, operational risks, risks associated with drilling and completions, environmental risks, risks of the change in government regulation of the oil and gas industry, risks associated with competition from others for scarce resources and risks associated with general economic conditions affecting the Corporation's ability to access sufficient capital. Additional information on these and other risk factors that could affect operational or financial results are included in the Corporation's most recent Annual Information Form and in other reports filed with Canadian securities regulatory authorities.

Forward-looking information is based on estimates and opinions of management at the time the information is presented. The Corporation is not under any duty to update the forward-looking information after the date of this press release to revise such information to actual results or to changes in the Corporation's plans or expectations, except as required by applicable securities laws.

Any "financial outlook" contained in this press release, as such term is defined by applicable securities laws, is provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes

Non-GAAP Measures: This press release makes reference to the terms "funds flow from operations", "funds flow from operations per share", "working capital deficiency", "operating netbacks", "netbacks", "cash flow" and "net debt" and "net debt to cash flow", which do not have standardized meanings prescribed by GAAP and therefore may not be comparable with the calculation of similar measures presented by other issuers.

Management uses "funds flow from operations" and "cash flow" to analyze operating performance and considers funds flow from operations and cash flow to be key measures as they demonstrate the Corporation's ability to generate the cash necessary to fund future capital investment and to repay debt. "Funds flow from operations" denotes cash flow from operating activities before the effects of changes in non-cash working capital, deferred share unit expense and decommissioning expenditures. "Cash flow" is determined as gross natural gas and natural gas liquids revenues including realized gains on commodity risk management contracts, less the following: royalties, operating costs, transportation costs, general and administrative costs and finance expenses. "Funds flow from operations per share" is calculated using the basic and diluted weighted average number of shares for the period. These terms should not be considered an alternative to, or more meaningful than, cash flows from operating activities as determined in accordance with GAAP as an indicator of the Corporation's performance.

Management uses "working capital deficiency", "net debt" and "net debt to cash flow" as useful supplemental measures of the liquidity of the Corporation. Working capital deficiency is calculated as current assets less current liabilities. "Net debt" is calculated as bank debt plus working capital deficiency, adjusted for the current portion of fair value of risk management contracts. These terms should not be considered alternatives to, or more meaningful than, current and long-term debt as determined in accordance with GAAP.

"Operating netbacks" or "netbacks" is used as a supplemental measure of the Corporation's profitability relative to commodity prices. Operating netbacks or netbacks are calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on commodity risk management, less royalties, operating expenses and transportation costs. These terms should not be considered alternatives to, or more meaningful than net income (loss) and comprehensive income (loss) as determined in accordance with GAAP.

Management of the Corporation believes these measures are useful supplemental measures of the net position of current assets and current liabilities of the Corporation and the profitability relative to commodity prices. Readers are cautioned, however, that these measures should not be construed as alternatives to other terms such as current and long-term debt or comprehensive income determined in accordance with GAAP as measures of performance. The Corporation's method of calculating these non- GAAP measures may differ from other companies, and accordingly, may not be comparable to similar measures used by other entities.  Please see the "Non-GAAP Measures" section of the Corporation's management's discussion and analysis of the consolidated financial results of the Corporation for the three months ended June 30, 2017 for the reconciliation of non-GAAP measures to GAAP measures.

ABOUT PAINTED PONY

Painted Pony is a publicly-traded natural gas corporation based in Western Canada.  The Corporation is primarily focused on the development of natural gas and natural gas liquids from the Montney formation in northeast British Columbia.  Painted Pony's common shares trade on the Toronto Stock Exchange under the symbol "PONY".

SOURCE Painted Pony Energy Ltd.

Patrick R. Ward, President and CEO, (403) 475-0440; John H. Van de Pol, Senior Vice President and CFO, (403) 475-0440; Jason Fleury, Director, Investor Relations, (403) 776-3261, info@paintedpony.ca, www.paintedpony.ca

Emergency Phone: 1-888-775-0440

PAINTED PONY ENERGY LTD.

Suite 1800, 736 – 6th Avenue SW Calgary, AB T2P 3T7 P: 403 475-0440 F: 403 238-1487 TF: 1-866-975-0440 E: info@paintedpony.ca

24-HOUR EMERGENCY CONTACT

Call 1-888-775-0440 to report concerns regarding any of Painted Pony’s field operations. This is for EMERGENCIES ONLY and does not connect to Painted Pony’s head office.

PAINTED PONY PETROLEUM LTD.

Suite 1800, 736 – 6th Avenue SW Calgary, AB T2P 3T7 P: 403 475-0440 F: 403 238-1487 TF: 1-866-975-0440 E: info@paintedpony.ca