Debt-Laden Painted Pony Energy Won’t Turnaround Soon


Painted Pony Energy [stock_market_widget type="inline" template="generic" color="default" assets="PONY.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has been reduced to a penny stock this year, with shares of the company falling close to 55% in 2019 despite an impressive end to last year. The reason why investors have bailed out of Painted Pony can be attributed to two reasons: the company’s declining production profile and lower energy prices.

The company’s latest results weren’t enough to lift investor sentiment either, and it looks like Painted Pony might not be able to make a comeback. Let me explain why.

Painted Pony’s Operational Decline Continues

Painted Pony’s second-quarter production averaged 48,978 barrels of oil equivalent per day. This was 19% lower than the prior-year period’s output of just over 60,000 barrels of oil equivalent per day.

The reason why Painted Pony’s output took such a massive hit was because the company had to shut down some of its production in the wake of weak natural gas prices. The company pointed out that it had to take offline 5,300 boe/day of production during the quarter because of the natural gas price weakness. Meanwhile, another 1,900 boe/day of production had to be shut down thanks to maintenance and expansion activity.

Painted Pony had to take these desperate steps as its total realized price during the quarter fell 17% year over year to $2.21/Mcfe. The steep decline in natural gas prices led to a sharp drop in the company’s operating netback as well. Painted Pony reported an operating netback of $1.26/Mcfe during the quarter, down 35% from the year-ago period.

Given this massive erosion in Painted Pony’s returns, the company had no option but to cut back on its capital expenses thanks to a weak balance sheet.

A Weak Balance Sheet Is a Problem

In the first half of the year, Painted Pony has spent $52 million on capital expenditure, which is $4 million lower than the adusted funds flow figure of $56 million clocked by the company during the same period. Painted Pony had clocked a capital expenditure of nearly $96 million in the first half of 2018, so it is not surprising to see the company’s output declining.

Moreover, the massive cut in the capex makes it clear that the company is trying to stay within its means and not try to take on any more debt. The company was sitting on net debt of $344 million during the quarter. Though this was 8% lower than the debt in the year-ago period, investors noticed that Painted Pony’s revenue fell by a third, year over year to just $59 million.

So it is evident that the company’s interest expenses as a percentage of total revenue were higher during the quarter and this ate into Painted Pony’s bottom line. So until and unless there is a turnaround in natural gas prices, expecting a turnaround at Painted Pony is out of the question thanks to its high leverage and weak top line.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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