November 8, 2017
Painted Pony Energy
Shares of Painted Pony Energy Ltd (PONY:CA) have started to rise in recent weeks since hitting a 52-week low of $2.55 in late October. The company whose primary business involves the development and production of petroleum and natural gas resources in Western Canada has been out of favor with investors for quite some time. Less than 3 years ago, the shares were worth over $12.00 a share. Today the shares can be picked up for a bargain at just over $3.00.
There is no question many resource stocks have been beaten with the decline in both crude and natural gas prices. As these resources are cyclical and tied to supply and demand chains this can lead to very volatile stock prices.
Today Painted Pony can be picked up at a very cheap valuation. The company trades at a forward price to earnings ratio between 5-6. It also has a market cap below $500 million while having positive equity of over $1 billion on their balance sheet. In May 2017, Painted Pony closed some strategic acquisitions for privately held UGR Blair Creek Ltd. This has led to the company’s best earnings and revenue year to date. Despite these positive indicators investors have not rewarded the company and macroeconomics may be to blame.
As mentioned on the macro front both crude and natural gas prices have been depressed for years. This has been a result of overcapacity and production on a global scale. There has also been bottleneck issues in Western Canada with a lack of infrastructure to move resources to where they are needed. These issues will eventually be resolved as governments and private companies work together to balance the market. Also these few years have seen warmer temperatures on average in which an El Nino effect is to blame. As weather patterns begin to stabilize so should the supply and demand for crude and natural gas.
Looking ahead it is clear a rebound in commodity prices is required to help support higher prices for resource stocks. A stabilization or upward trend in commodity prices could very well exponentially increase the value of Painted Pony given its already cheap valuation. My 12-month price target for Painted Pony Ltd is $7.50.
Disclosure: I currently hold a long position in Painted Pony and may add more to my position in the near future.