PAINTED PONY
PETROLEUM LTD.
2 0 1 6
A N N U A L
R E P O R T
TSX: PPY
w
Table of Contents
Financial
and Operational
Highlights
To Our
Shareholders
Management’s
Discussion
and Analysis
1
2
6
Management’s
Responsibility
for Consolidated
Financial
Statements
29
Independent
Auditors’ Report
Consolidated
Financial
Statements
Notes to
Consolidated
Financial
Statements
Corporate
Information
30
31
35
57
Corporate Profile
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 “PPY”.
11
Annual General Meeting
Painted Pony Petroleum Ltd. invites shareholders and interested
parties to attend its Annual General Meeting to be held in the Bennett
Room at the Ranchmen's Club, 710 – 13th Avenue SW, Calgary, Alberta,
at 3:00 pm (Calgary time), on May 11, 2017. Shareholders not attending
are encouraged to complete the form of proxy and deliver it in
accordance with the instructions therein at their earliest convenience.
3
3
Cover painting "Bringing them home", oil on canvas by Paul Van Ginkel (www.paulvanginkel.com).
2015 PAINTED PONY PETROLEUM ANNUAL REPORT
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
w
Financial and
Operating Highlights
Year Ended December 31
$ millions, except per share and shares outstanding
Financial
Petroleum and natural gas revenue (1)
Funds flow from operations (2)
Per share – basic (3) and diluted (4)
Net loss
Per share – basic (3) and diluted (4)
Capital expenditures
Working capital (deficiency) (5)
Bank debt
Net debt (6)
Total assets
Shares outstanding (millions)
Basic and fully diluted weighted-average shares (millions)
Operating
Daily production volumes
Natural gas (MMcf/d)
Natural gas liquids (bbls/d)
Total (MMcfe/d)
Total (boe/d)
Realized commodity prices
Natural gas ($/Mcf)
Natural gas liquids ($/bbl)
Total ($/Mcfe)
Operating netbacks ($/Mcfe) (7)
2016
121.6
55.6
0.56
(51.9)
(0.52)
204.4
(73.6)
200.8
228.5
1,337.0
100.2
100.1
129.9
1,557
139.2
23,204
2.04
43.49
2.39
1.73
2015
81.6
28.5
0.29
(5.2)
(0.05)
106.7
(4.6)
63.6
77.4
781.6
100.0
99.8
88.7
826
93.6
15,604
2.10
44.30
2.39
1.23
Change
49%
95%
93%
898%
940%
92%
1,500%
216%
195%
71%
–
–
46%
88%
49%
49%
(3%)
(2%)
–
41%
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, DSU 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 current portion of fair value of risk management
contracts. See “Non-GAAP Measures”.
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”.
7.
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
1
Message
to Shareholders
Ten years ago in May 2007, Painted Pony raised
$12 million in the equity market and became a
public company. We didn’t have any production
but we had 2 farm-in deals in Saskatchewan
and access to 3-D seismic in northeast BC.
Today, we will have, upon closing of the UGR
acquisition, the third-largest natural gas
reserves in Canada of any publicly traded
company on both a Proven (“1P”) and
a Proved plus Probable (“2P”) basis.
When we first introduced the concept of
growing to 40,000 boe/d in the third year of our
initial five-year plan, we believed it to be a very
ambitious but achievable goal. However, when
you carefully plan the development of a world
class asset, and have a great group of dedicated
people, you can accomplish exceptional things.
We did this despite a challenging commodity
price environment. Exiting 2016 with production
volumes at these levels in conjunction with
the commissioning of the AltaGas Townsend
Facility, marked a significant milestone for
Painted Pony. As proud as we are of the
accomplishments in 2016, we strongly believe
the best is yet to come. Our vision is continued
production growth to between one and
two Bcfe per day and hold our production flat
for the following 20 years.
Painted Pony had a
dramatic year of growth
in 2016 and we haven’t
slowed down in 2017.
The production growth we
achieved in 2016 was generated
through drilling on our Montney
sweet spot in northeast BC.
We have the best royalty
structure in North America and
a highly supportive provincial
government. Between the fourth
quarter of 2013 with production
of 9,312 boe/d and our
December 2016 production
volumes of more than
40,000 boe/d, we have organically
grown our production by
330%. We are indeed just
getting started.
2
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Opportunities
“
“
don't happen.
You create them.
-- Chris Grosser
Acquisition of UGR Blair Creek
Before discussing key highlights from 2016, I want to
outline a significant development for Painted Pony.
On March 15, 2017 we announced the acquisition of UGR
Blair Creek Ltd. (“UGR”) in an all-stock transaction of
41 million shares and assumed net debt of $47 million
for total consideration of $277 million. We will be adding
two large, supportive and technically strong shareholders
who each took 100% shares in this transaction as they
believe in the Painted Pony story for growth and increasing
shareholder value. This acquisition is a highly strategic
expansion of our world-class Montney project and one
which we strongly believe is in the best long-term interests
of shareholders. We have long-believed that the UGR
assets are exceptionally synergistic with the Painted Pony
assets. In the UGR acquisition, we are buying:
108 net sections of land in one of the most prolific
parts of the Montney
51 MMcfe/d or 8,500 boe/d of production
99 MMcf/d of owned processing capacity
56 MMcf/d of third-party firm processing capacity
2P reserves of 2.0 Tcfe with a net present value
(discounted 10%) of $1.3 billion
1P reserves of 0.8 Tcfe with a net present value
(discounted 10%) of $568 million
We both have some of the best wells in the North Montney
and we have partnered and been neighbours for 8 years.
In fact, a recent analysis of 1,046 horizontal wells drilled
in the North Montney as of January 1, 2017 showed that
11 of the top 12 most productive wells based on
cumulative natural gas production during their initial
6 month production period are either Painted Pony or
UGR. Of the 35 gross Montney wells drilled on UGR lands
to-date, 20 have been drilled in partnership with us.
Of the 218 gross undeveloped 2P locations on UGR
lands as at December 31, 2016 per McDaniel & Associates
Consultants, UGR’s third-party independent reserves
evaluator, 57 gross drilling locations are located on lands
jointly held with us. The acquisition of UGR includes
197 net 2P drilling locations which will complement
our inventory and are expected to drive our near-term
growth in Proved Developed Producing (“PDP”) reserves.
In addition to those locations booked, our team estimates
over 1,000 additional unbooked drilling locations
on UGR lands.
Total consideration to be paid to UGR shareholders is
$277 million or 41 million Painted Pony shares at a price
of $5.60 per share and the assumption of $47 million
of net debt. The price on this acquisition produced some
of the best acquisition metrics for Montney assets in the
last five years. This makes it extremely attractive value
for Painted Pony shareholders. At closing, we will have
the third-largest 2P and the third-largest 1P natural gas
reserves of any Canadian publicly listed company at
6.4 Tcf and 3.2 Tcf, respectively. That makes both our
2P and our 1P natural gas reserves greater than EnCana,
Birchcliff, Seven Generations, Peyto, ARC Resources, and
Advantage. We are expanding our inventory of drilling
locations and increasing our Montney land position by
52% to 314 net sections (201,009 net acres) at an average
94% working interest. We are acquiring 108 net sections
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
3
Daily Trading
Volume (30 day average)
1.5 million
shares per day
of land in an area where recent transactions indicate a
market price of approximately $2.5 – $3.0 million per
section. In addition to land, we are acquiring 1P reserves
at just $0.36 per Mcfe and 2P reserves at $0.14 per Mcfe,
all within some of the best Montney acreage with the
most compelling economics in the Western Canadian
Sedimentary Basin, and for that matter, North America.
As partners and neighbours, UGR’s assets fit like a glove
with our existing asset base. The acquired unused owned
and third-party processing capacity of approximately 105
MMcf/d and transportation service will facilitate prudent
growth in the near term. Our significantly lower drilling
and completion costs relative to UGR will generate
markedly improved economics as we execute our business
plan on an expanded land base. When we apply our capital
costs to the UGR resource base, future development
capital is expected to be reduced by approximately
$200 million which dramatically increases the net present
value of UGR’s assets upon closing of the acquisition.
We strongly believe the acquisition of UGR provides us
with a significantly expanded and de-risked platform
from which we can accelerate production, cash flow, and
further position Painted Pony as a dominant, full-cycle
and low-cost producer in the Montney. The acquisition of
UGR is consistent with our long-term strategy of cost-
effective, counter-cyclical growth. A shareholder vote on
this acquisition is set for May 11, 2017 at our Annual and
Special Meeting of Shareholders.
Impressive and Continued Reserves Growth
Reserves represent the deep, underlying value of
companies in the oil and gas business. During 2016, we
were very pleased with the increase of our reserves and
reserve value. Our PDP reserves went up by 102% to 0.5
Tcfe (80.7 MMboe) while total 1P reserves increased by
31% to 2.7 Tcfe and 2P reserves increased to more than
4.9 Tcfe. We were able to generate one of the best finding,
development and acquisition PDP recycle ratios in the
industry of 2.0 times and a Proved recycle ratio of 2.6 times
in 2016, inclusive of changes in future development capital.
We believe this key measure is necessary to determine
the health of our business and such a strong result
in 2016 verifies our value-creation strategies.
In addition to reducing the cost of adding new reserves,
due to lower well capital costs in 2016, we reduced
2P future development capital by approximately
$300 million to $2.9 billion. The reduction in future
development capital is more than the capital that was
spent on our entire 2016 capital program. This resulted
in a negative 2P finding and development cost and drove
our 3-year weighted average 2P finding, development
and acquisition recycle ratio to 5.7x which is top decile
performance compared to industry peers.
Production Volumes
Daily production for 2016 averaged 139.2 MMcfe/d
(23,204 boe/d) which was a 49% increase over 2015 annual
average daily production of 93.6 MMcfe/d (15,604 boe/d).
Of note, natural gas liquids production volumes increased
416% to 3,177 bbls/d during the fourth quarter of 2016
compared to 616 bbls/d during the fourth quarter of 2015.
This increased production was made possible through the
drilling program in our liquids-rich Townsend and Blair
acreage and the early commissioning of the Townsend
Facility. As a result of the increase in production volumes,
we saw dramatically increased funds flow from operations
during the fourth quarter of 2016 by a factor of 10 times
to $26.5 million ($0.26/share) compared to $2.6 million
($0.03/ share) during the fourth quarter of 2015. It is rare
that a company of our size can show this magnitude
of cash flow per share growth year-over-year on growth
from organic drilling.
4
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Daily Production
for 2016 averaged
139.2MMcfe/day
(23,204 boe/d)
Capital Expenditures Below Budget
Summary
We were able to accomplish these operating results with
capital expenditures of $203.5 million which was
$11.5 million below budget. We had a busy year drilling
36 (36.0 net) wells targeting Montney natural gas.
Facilities and equipment spending totaled $43.8 million
and included wellsite facilities costs, pipeline construction
costs and spending on compression and dehydration
facilities. Solid execution of our 2016 capital budget,
including significant growth of PDP reserves to 0.5 Tcfe,
hitting production target milestones, all while spending
less capital than forecasted, is something of which
everyone at Painted Pony is very proud. I would like to
thank an extraordinary team at Painted Pony for exceeding
all expectations of cost reductions while maintaining
an excellent health, safety and environmental record.
Key Transportation Strategies
We believe that a diversified transportation and sales hub
network is vital to an effective risk mitigation strategy.
We currently have access to total firm transportation of
357 MMcf/d by year-end 2017 and 577 MMcf/d by year-
end 2018. In addition, Painted Pony has committed to an
additional 130 MMcf/d of firm transportation to AECO at
Groundbirch via the TCPL Towerbirch Expansion Project,
further diversifying our market exposure. Our long-term
firm natural gas transportation agreements provide for
our growing production base and delivers AECO pricing
on a significant portion of our natural gas production.
During 2016 our natural gas sold at an average of 6% less
than AECO pricing. In addition, we have executed physical
delivery contracts with a number of counter-parties, which
further diversify our pricing exposure. We will continue to
pursue strategies such as these to position us for the best
possible margins on our production volumes.
During 2016, we executed a capital plan that delivered
results for shareholders entirely consistent with our
5 year growth plan, most notably organic production
growth per share of more than 150% exit 2016 over exit
2015. The significant production milestones achieved in
2016 combined with decreasing cash expenses, continued
capital cost reductions, and robust full-cycle economics
highlighted by an exceptional PDP recycle ratio of
2.0 times, positions Painted Pony as an industry leader
in low-cost, full-cycle Montney development. All of this
was achieved in a continually challenging commodity
price environment.
I want to thank everyone at Painted Pony for their
hard work and commitment during 2016 which
produced the results of which we are so proud.
I look forward to many more successful milestones
as we continue to build shareholder value through
the development of our world-class Montney asset.
I would also like to thank our Board of Directors,
shareholders, service suppliers, government
agencies, First Nations groups, staff and all other
stakeholders for their continued support of Painted
Pony. It truly has been a remarkable 10 years.
“signed”
Patrick R. Ward
President and Chief Executive Officer
March 30, 2017
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
5
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”) of the consolidated financial results of Painted
Pony Petroleum Ltd. (“Painted Pony” or the “Corporation”) should be read in conjunction with the consolidated
financial statements and related notes thereto for the years ended December 31, 2016 and December 31, 2015.
This commentary is dated February 27, 2017.
The annual consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”). The financial data presented is in accordance with IFRS in Canadian dollars,
except where indicated otherwise. These documents and additional information about Painted Pony, including the
Annual Information Form (“AIF”) for the year ended December 31, 2015, are available under the Corporation’s
profile on SEDAR at www.sedar.com and on the Corporation’s website at www.paintedpony.ca.
BUSINESS OF THE CORPORATION
Painted Pony is a publicly traded corporation focused on the production of natural gas and natural gas liquids
(“NGLs”) from the Montney formation in northeast British Columbia. The common shares of Painted Pony
(“Common Shares”) trade on the Toronto Stock Exchange (“TSX”) under the symbol “PPY”. The Corporation’s
head office is located at Suite 1800, 736 – 6th Avenue SW, Calgary, Alberta.
NON-GAAP MEASURES
This MD&A contains the terms “funds flow from operations”, “funds flow from operations per share”, “funds flow
from operations per Mcfe”, “working capital deficiency”, “net debt” and “operating netbacks”, which do not have
standardized meanings prescribed by IFRS and therefore may not be comparable with the calculation of similar
measures presented by other issuers.
Management uses “funds flow from operations” to analyze operating performance and considers funds flow from
operations to be a key measure as it demonstrates 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 (“DSU” or “DSUs”)
expense and decommissioning expenditures. “Funds flow from operations per share” is calculated using the basic
and diluted weighted average number of shares for the period. “Funds flow from operations per Mcfe” is
calculated using the average production volumes 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
IFRS as an indicator of the Corporation’s performance. The Corporation reconciles funds flow from operations to
cash flows from operating activities, which is the most directly comparable measure calculated in accordance with
IFRS, as follows:
Cash Flows from Operating Activities and Funds Flow from Operations
($000s, except per share)
Cash flows from operating activities
Changes in non-cash working capital
Deferred share unit expense
Decommissioning expenditures
Funds flow from operations
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
21,859
3,355
1,284
3
26,501
3,024
(420)
(36)
4
2,572
44,658
7,931
2,914
102
55,605
31,705
(3,730)
487
4
28,466
0.29
Funds flow from operations per share ($/share)
0.26
0.03
0.56
Management uses “working capital deficiency” and “net debt” 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 and 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 IFRS. The following table summarizes Painted Pony’s
calculations of working capital deficiency and net debt:
6
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
2
Working Capital Deficiency and Net Debt
($000s)
Current assets
Current liabilities
Working capital deficiency
Current portion of fair value of risk management contracts
Bank debt
Net debt
December 31, 2016
December 31, 2015
30,677
(104,324)
(73,647)
46,020
(200,836)
(228,463)
18,856
(23,485)
(4,629)
(9,106)
(63,626)
(77,361)
The increase in working capital deficiency is impacted by a $55.1 million change in the current portion of the fair
value of risk management contracts.
“Operating netbacks” is used as a supplemental measure of the Corporation’s profitability relative to commodity
prices. Operating netbacks are calculated on a per unit basis as natural gas and NGL revenues, adjusted for
realized gains or losses on commodity risk management, less royalties, operating expenses and transportation
costs. This term should not be considered an alternative to, or more meaningful than net income (loss) and
comprehensive income (loss) as determined in accordance with IFRS. Please refer to “Operating Netbacks” for
the calculation of this measure.
RESULTS OF OPERATIONS - OVERVIEW
Results of operations for 2016 were highlighted by the commencement of commercial operations at the 198
MMcf/d AltaGas Townsend Facility (“Townsend Facility”) in July 2016, approximately one month earlier than
anticipated. Painted Pony exited 2016 having achieved a significant milestone with average daily production
volumes for December of over 240.0 MMcfe/d or 40,000 boe/d. With production at the Townsend Facility ramping
up throughout the third and fourth quarters, average volumes for the year ended December 31, 2016 of 139.2
MMcfe/d or 23,204 boe/d represented a 49% increase over 2015 average production.
With higher volumes and a combined 24% reduction in per unit royalties, operating expenses and transportation
costs during the year, the Corporation nearly doubled its funds flow from operations for 2016 of $55.6 million
($0.56/share), compared to 2015 funds flow from operations of $28.5 million ($0.29/share).
Although commodity prices have recovered in the fourth quarter of 2016, the first nine months of the year were
dominated by continued price depression. Painted Pony’s exposure to low commodity prices in 2016 was
mitigated by risk management contracts that resulted in a $19.9 million realized gain on commodity risk
management contracts for the year. After the impact of realized gains on commodity risk management contracts
of $0.38 per Mcfe, Painted Pony’s operating netback was $1.73 per Mcfe, a 41% improvement over the previous
year operating netback of $1.23 per Mcfe. As pricing improved through the fourth quarter, Painted Pony’s
operating netback for the three months ended December 31, 2016 was $2.09/Mcfe, representing a 118%
improvement over the fourth quarter of 2015 operating netback of $0.96 per Mcfe. For 2017, the Corporation has
executed financial risk management contracts on 192.0 MMcf/d of natural gas and 500 bbl/d of NGL production.
As part of the Corporation’s long term sales point diversification strategy, during the fourth quarter Painted Pony
also began selling 45 MMcf/d of its production volumes directly into the AECO market and 18 MMcf/d of its
production volumes into the SUMAS/Huntingdon market. In addition, during 2016, the Corporation entered into
fixed price contracts for physical delivery of 71.0 MMcf/d priced at AECO less fixed differentials.
The capital program for 2016 was primarily focused on pre-drilling the wells required to supply the Townsend
Facility upon startup, and included 36 (36.0 net) Montney natural gas wells drilled and 38 (38.0 net) Montney
natural gas wells completed, as well as associated facilities infrastructure. The planned 2017 capital program is
$319 million, and includes 61 (61.0 net) Montney wells drilled and completed.
At December 31, 2016, the Corporation’s syndicated credit facilities were $325 million, with the semi-annual
borrowing base review to be completed by April 30, 2017. With an anticipated increase in credit facilities, and
available transportation and processing capacity, Painted Pony is well positioned for continued growth.
3
7
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
CASH FLOWS FROM OPERATING ACTIVITIES, FUNDS FLOW FROM OPERATIONS AND NET LOSS
Increases in both cash flows from operating activities and funds flow from operations for the fourth quarter of 2016
compared to the fourth quarter of 2015, are a result of increased production and decreased operating expenses.
Increases in both cash flows from operating activities and funds flow from operations for year ended December
31, 2016 compared to the year ended December 31, 2015, are a result of increased production, decreased
operating expenses and transportation costs, and a $19.9 million gain on commodity risk management. For the
three months and year ended December 31, 2016, Painted Pony generated funds flow from operations of $26.5
million and $55.6 million, respectively. The compares to $2.6 million and $28.5 million for the three months and
year ended December 31, 2015, respectively.
For the quarter ended December 31, 2016, the Corporation generated a net loss of $27.8 million, resulting from
an unrealized loss on commodity risk management contracts of $45.5 million. This compares to net income of
$2.6 million for the quarter ended December 31, 2015, resulting from an unrealized gain on commodity risk
management contracts of $10.0 million. Excluding the unrealized loss on commodity risk management contracts,
income before taxes would be $8.0 million for the quarter ended December 31, 2016, compared to a $6.3 million
loss before taxes for the quarter ended December 31, 2015. For the year ended December 31, 2016, the
Corporation generated a net loss of $51.9 million, primarily due to an unrealized loss on commodity risk
management of $75.7 million. For the year ended December 31, 2015, the Corporation had a net loss of $5.2
million.
AVERAGE DAILY PRODUCTION
Three months ended December 31,
% of
total
% of
total
2015
2016
Years ended December 31,
% of
total
2016
2015
Natural Gas (Mcf/d)
NGLs (bbls/d)
Total (Mcfe/d)
Total (boe/d)
201,111
3,177
220,170
36,695
91
9
100
100
86,561
616
90,258
15,043
4
96 129,881
1,557
100 139,222
100
23,204
93
7
100
100
88,673
826
93,627
15,604
% of
total
95
5
100
100
Fourth quarter production volumes increased 144% compared to the fourth quarter of 2015 to average 220.2
MMcfe/d or 36,695 boe/d. Annual average production volumes increased 49% compared to the year ended
December 31, 2015 to average 139.2 MMcfe/d or 23,204 boe/d. The production volume increase during both the
quarter and year, was driven by the commissioning of the Townsend Facility in July 2016, and the subsequent
increase in production volumes throughout the remainder of the year.
Production volumes for 2017 are expected to average 288.0 MMcfe/d or 48,000 boe/d. This represents a 107%
increase over production volumes for the year ended December 31, 2016. Exit volumes for 2017 are expected to
be approximately 408.0 MMcfe/d or 68,000 boe/d.
PETROLEUM AND NATURAL GAS REVENUE
($000s)
Natural Gas
NGLs
Total
Three months ended December 31,
2015
2016
Years ended December 31,
2015
2016
51,529
13,626
65,155
12,752
2,296
15,048
96,803
24,777
121,580
68,231
13,352
81,583
Petroleum and natural gas revenue totaled $65.2 million for the three months ended December 31, 2016,
representing a 333% increase from the fourth quarter 2015 revenue of $15.0 million. The increase in quarterly
revenue is driven by a 144% increase in production volumes, a 74% increase in realized natural gas prices and a
15% increase in realized NGLs prices.
During the year ended December 31, 2016, petroleum and natural gas revenue increased by 49% to $121.6
million compared to the year ended December 31, 2015, as a result of a 49% increase in average production
volumes for the period, partially offset by a 3% decline in realized natural gas prices and a 2% decline in realized
NGLs prices.
4
8
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Commodity Prices
Average Benchmark Prices:
Natural Gas
- Nymex (US$/mmbtu)
- AECO, daily spot ($/Mcf)
- WTI (US$/bbl)
- Edmonton par – light oil ($/bbl)
Crude Oil
Exchange rate (US$/Cdn$)
Realized Commodity Prices Before Commodity Risk Management:
Natural Gas ($/Mcf)
NGLs ($/bbl)
2.78
46.62
Total ($/Mcfe)
3.22
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
3.18
3.12
49.29
60.99
0.75
2.23
2.48
42.16
52.68
0.75
1.60
40.51
1.81
2.55
2.17
43.48
54.13
0.76
2.04
43.49
2.39
2.63
2.70
48.76
58.43
0.78
2.10
44.30
2.39
Despite the higher heat content of Painted Pony’s natural gas as compared to the benchmark, realized pricing for
both periods are reflective of a discount to AECO daily spot pricing. During the three months and year ended
December 31, 2016, the Corporation realized natural gas prices that represented discounts of 11% and 6%,
respectively, to the AECO daily spot price. This compares to discounts of 35% and 22% to the AECO daily spot
price realized in the three months and year ended December 31, 2015.
As part of the Corporation’s long term sales point diversification strategy, effective October 1, 2016, Painted Pony
began selling 45 MMcf/d of its production volumes directly into the AECO market, and effective November 1,
2016, Painted Pony began selling 18 MMcf/d of its production volumes into the SUMAS/Huntingdon market. In
addition, during 2016, the Corporation entered into fixed price contracts for physical delivery of 71.0 MMcf/d
priced at AECO less fixed differentials.
For the three months ended December 31, 2016, approximately 49% of the Corporation’s NGL volumes were
condensate. For the year ended December 31, 2016, approximately 56% of the Corporation’s NGL volumes were
condensate.
In 2017, the Corporation expects to receive a realized natural gas price that represents a discount to the AECO
daily spot price of 10% to 15%. A large component of the Corporation’s exposure to volatility in commodity pricing
in 2017 has been mitigated by the commodity risk management contracts described below, as well as physical
contracts using AECO-based pricing or SUMAS-based pricing, less a fixed differential, as was done in 2016. The
average prices reported are reflective of month to month price and production volume changes.
Financial Risk Management
The Audit Committee, on behalf of the Board of Directors of the Corporation (the “Board”), has overall
responsibility for the establishment and oversight of the Corporation’s risk management framework. The Audit
Committee has implemented and monitors compliance with risk management policies. The Corporation’s risk
management policies are established to identify and analyze the risks faced by the Corporation, to set appropriate
risk limits and controls, and to monitor risks and adherence to market conditions and the Corporation’s activities.
Painted Pony may be exposed to certain losses in the event that counterparties to derivative financial instruments
are unable to fulfill their obligations under these contracts. The Corporation minimizes these risks by entering into
agreements with investment grade counterparties. Painted Pony’s exposure is limited to those counterparties
holding derivative contracts with net positive fair values at a reporting date. For a further discussion of the
Corporation’s financial risks, see note 13 of the Corporation’s audited consolidated financial statements for the
year ended December 31, 2016.
Painted Pony has a commodity risk management program that currently uses financial instruments on a portion of
its commodity production volumes to manage some of the exposure to commodity price risk and to provide a level
of stability to operating cash flows, which further enables the Corporation to fund its capital development program.
For the three months and year ended December 31, 2016, Painted Pony realized a loss of $1.6 million and a gain
of $19.9 million, respectively, on its commodity risk management contracts, compared to realized gains of $2.0
million and $6.8 million for the three months and year ended December 31, 2015, respectively.
6
9
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
For the three months and year ended December 31, 2016, Painted Pony had unrealized losses on its commodity
risk management contracts of $45.5 million and $75.7 million, respectively, compared to an unrealized gain of
$10.0 million for both the three months and year ended December 31, 2015.
The Corporation’s method of determining the fair values of derivative financial instruments is disclosed in note 14
of the Corporation’s audited consolidated financial statements for the year ended December 31, 2016. The
following is a summary of all commodity risk management contracts in place as at December 31, 2016:
Financial AECO Natural Gas Contracts
Reference
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
Volume
(GJ/d)
90,000
75,000
90,000
145,000
71,000
71,000
50,000
24,000
18,000
18,000
25,000
Term
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q4 2017 – Q4 2019
Weighted Average
Price ($/GJ)
2.87
2.85
2.86
2.89
2.93
2.85
2.81
2.72
2.64
2.64
2.88
Options
Traded
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Call Options
Financial Station 2 Natural Gas Contracts
Volume
(GJ/d)
75,000
90,000
100,000
120,000
105,000
42,000
37,000
37,000
37,000
37,000
25,000
10,000
Reference
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
Financial WTI Crude Oil Contracts
Term
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Weighted Average
Price ($/GJ)
1.82
1.90
1.93
2.07
2.04
2.38
2.36
2.36
2.36
2.36
2.37
2.45
Reference
CDN$ WTI
CDN$ WTI
Volume
(bbl/d)
500
500
Term
Q1 2017 – Q4 2017
Q1 2018 – Q4 2019
Weighted Average
Price ($/bbl)
70.05
70.20
Options
Traded
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Options
Traded
Swaps
Swaps
Subsequent to December 31, 2016, Painted Pony entered into an additional commodity risk management
contract as follows:
Reference
CDN$ AECO
Volume
(GJ/d)
10,000
Term
Q1 2018
Weighted Average
Price ($/GJ)
3.16
Options
Traded
Swaps
10
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
7
ROYALTIES
Royalty expense ($000s)
Per unit ($/Mcfe)
Royalties as a % of Revenue (%)
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
1,382
0.07
2.1
320
0.04
2.1
2,672
0.05
2.2
2,008
0.06
2.5
For the three months ended December 31, 2016, and December 31, 2015, royalties were $1.4 million and $0.3
million, respectively, which represents 2.1% of total revenue for both periods. For the year ended December 31,
2016, and December 31, 2015, royalties were $2.7 million and $2.0 million, respectively, which represents 2.2%
and 2.5% of total revenue, respectively, due to a decrease in commodity prices. The Corporation’s properties are
on the west side of the British Columbia reduced royalty line, and therefore receive significant average royalty
credits of approximately $2.2 million per well.
For 2017, the Corporation anticipates overall royalty rates to be approximately 3.0% of total revenues as a result
of royalty credits. This estimate considers the combined impact of incremental sales volumes from newly drilled
wells that will qualify for royalty holidays, net of royalties paid on wells that have obtained the full benefit of
provincial royalty incentives.
OPERATING EXPENSES
Operating expenses ($000s)
Per unit ($/Mcfe)
Three months ended
December 31,
2015
6,161
2016
12,035
0.59
0.74
Years ended
December 31,
2015
2016
34,535
0.68
31,978
0.94
Operating expenses were reduced by $0.15 per Mcfe or 20% in the fourth quarter of 2016 compared to the fourth
quarter of 2015. On an annual basis, operating expenses decreased by $0.26 per Mcfe or 28%. Per unit operating
expenses for the quarter and year have improved as a result of incremental production volumes positively
impacting fixed cost components. In addition, with the start-up of the Townsend Facility in the third quarter of
2016, the capital fee associated with the facility is classified separately from operating expenses, with the interest
portion of the capital fee included in finance expense.
For 2017, the Corporation anticipates that average per unit operating expenses will be in the range of $0.45 to
$0.55 per Mcfe, assuming normal seasonal weather conditions.
TRANSPORTATION COSTS
Transportation costs ($000s)
Per unit ($/Mcfe)
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
7,653
0.38
2,549
0.31
15,894
0.31
12,149
0.36
Transportation costs for the three months ended December 31, 2016 increased by $0.07 per Mcfe or 23%,
compared to the three months ended December 31, 2015. For the year ended December 31, 2016, transportation
costs decreased by $0.05 per Mcfe or 14% compared to the year ended December 31, 2015.
Transportation costs have increased for the three months ended December 31, 2016 compared to the three
months ended December 31, 2015 due to an increase in NGL volumes, which have higher transportation costs,
and have decreased for the year ended December 31, 2016, as the Corporation successfully negotiated access
to alternate delivery points with improved economics for trucking of NGLs.
8
11
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
For 2017, the Corporation expects average per unit transportation costs to be approximately $0.35 to $0.40 per
Mcfe.
OPERATING NETBACKS
($/Mcfe)
Realized commodity price
Realized gain (loss) on commodity risk management contracts
Royalties
Operating expenses
Transportation costs
Operating netbacks
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
3.22
(0.09)
(0.07)
(0.59)
(0.38)
2.09
1.81
0.24
(0.04)
(0.74)
(0.31)
0.96
2.39
0.38
(0.05)
(0.68)
(0.31)
1.73
2.39
0.20
(0.06)
(0.94)
(0.36)
1.23
For the three months ended December 31, 2016, operating netbacks increased by $1.13 per Mcfe or 118% due to
a reduction of 5% in combined per unit royalties, operating expenses and transportation costs, due to a 78%
increase in commodity prices, and due to higher relative liquid volumes compared to the three months ended
December 31, 2015.
For the year ended December 31, 2016, operating netbacks increased by $0.50 per Mcfe or 41% due to a
reduction of 24% in combined per unit royalties, operating expenses and transportation costs, and due to higher
relative liquid volumes compared to the year ended December 31, 2015.
GENERAL AND ADMINISTRATIVE EXPENSES
($000s, except per Mcfe)
Gross expenses
Capitalized
Capital recoveries
Operating recoveries
Net expenses
Per unit ($/Mcfe)
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
6,963
(2,646)
(668)
(118)
3,531
0.17
7,061
(2,128)
(239)
(103)
4,591
0.55
19,310
(5,937)
(2,343)
(464)
10,566
0.21
17,251
(4,720)
(1,291)
(296)
10,944
0.32
Net general and administrative (“G&A”) expenses per unit decreased by $0.38 per Mcfe or 69% and $0.11 per
Mcfe or 34% for the three months and year ended December 31, 2016, respectively, compared to the three
months and year ended December 31, 2015. The lower per unit expense in both periods was primarily due to
higher volumes, as well as the Corporation’s continued focus on cost control.
The Corporation’s policy of allocating and capitalizing costs associated with new capital projects remained
unchanged for the period ended December 31, 2016. G&A capitalized and operating recoveries are in
accordance with industry practice.
For 2017, the Corporation anticipates that per unit G&A expenses will average approximately $0.10 per Mcfe to
$0.12 per Mcfe.
12
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
9
FINANCE EXPENSE
($000s)
Finance lease expense
Bank finance expense
Accretion of decommissioning obligations
Total
Per unit ($/Mcfe)
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
9,730
2,691
158
12,579
0.68
-
849
120
969
0.12
14,165
8,055
550
22,770
0.48
-
2,868
392
3,260
0.10
Finance lease expense is incurred in connection with the capital fee paid on the Townsend Facility, and is
expected to vary with production volumes processed at the facility. The capital fee associated with the Townsend
Facility includes finance lease expense and any amortization of the outstanding finance lease obligation.
Bank finance expense includes interest expense on bank debt and standby charges on the Corporation’s
syndicated credit facilities.
Per unit finance expense for the three months ended December 31, 2016 was $0.68 per Mcfe compared to $0.12
per Mcfe for the three months ended December 31, 2015. For the years ended December 31, 2016 and
December 31, 2015, per unit finance expense was $0.48 Mcfe and $0.10 per Mcfe, respectively. For the quarter
and year ended December 31, 2016, bank finance expense was higher than the quarter and year ended
December 31, 2015 due to additional bank debt throughout the periods, as well as larger available syndicated
credit facilities on which standby fees are calculated.
Accretion expense on decommissioning obligations increased for the three months ended December 31, 2016,
compared to the three months ended December 31, 2015, as a result of a higher decommissioning obligation
balance on which accretion expense is calculated. At December 31, 2016, the risk-free interest rate related to the
decommissioning obligations was 2.1% compared to 2.2% at December 31, 2015. The Corporation has estimated
the net present value of the decommissioning obligations based on an undiscounted total future liability of $64.2
million at December 31, 2016, compared to $47.5 million at December 31, 2015.
FUNDS FLOW FROM OPERATIONS
($000s)
Petroleum and natural gas revenue
Realized gain (loss) on commodity risk management
Royalties
Operating expenses
Transportation costs
General and administrative expenses
Finance lease expense
Bank finance expense
Funds flow from operations
Per unit ($/Mcfe)
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
65,155
(1,632)
(1,382)
(12,035)
(7,653)
(3,531)
(9,730)
(2,691)
26,501
1.31
15,048
1,994
(320)
(6,161)
(2,549)
(4,591)
-
(849)
121,580
19,912
(2,672)
(34,535)
(15,894)
(10,566)
(14,165)
(8,055)
81,583
6,830
(2,008)
(31,978)
(12,149)
(10,944)
-
(2,868)
2,572
55,605
28,466
0.31
1.09
0.83
10
13
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
SHARE-BASED COMPENSATION EXPENSE
($000s)
Gross expense
Capitalized
Deferred share unit expense
Net expense
Three months ended
December 31,
2015
2016
711
(121)
1,284
1,874
2,114
(391)
(36)
1,687
Years ended
December 31,
2015
5,653
(1,073)
487
5,067
2016
3,484
(620)
2,914
5,778
Gross share-based compensation expense was $0.7 million and $2.1 million for the three months ended
December 31, 2016 and 2015, respectively. The lower expense was driven primarily by stock options having been
granted in the fourth quarter of 2015, and not in the fourth quarter of 2016. Gross share-based compensation
expense for the year ended December 31, 2016 of $3.5 million was 38% lower than gross share-based
compensation expense for the year ended December 31, 2015 of $5.7 million due to fewer stock options granted
throughout the year.
The weighted average fair value of stock options granted during the year using the Black-Scholes model was
$1.86 per stock option during the year ended December 31, 2016, compared to $1.81 per stock option during the
year ended December 31, 2015.
Share-based compensation expense is a non-cash estimate of the cost of granting stock options to purchase
shares, calculated using the Black-Scholes model. The expense does not represent actual cash compensation
realized by the recipients of the stock options upon the eventual exercise of these stock options.
Deferred Share Unit Expense
The Corporation has a DSU plan, whereby DSUs are issued to members of the Board, who are not employees of
the Corporation, and to eligible executive officers, in the Board’s discretion. Each DSU is a notional unit equal in
value to one Common Share, which entitles the holder to a cash payment upon redemption. DSUs vest upon
grant but can only be converted to cash upon the holder ceasing to be a director or executive officer of the
Corporation. As at December 31, 2016 there were 282,342 DSUs outstanding, and 70,347 DSUs accrued but not
granted. At February 27, 2017, there were 299,982 DSUs outstanding, and 52,707 DSUs accrued but not
granted.
The expense associated with the DSU plan is determined based on the 20-day volume weighted average price of
Common Shares at the grant date. The expense is recognized in the statement of operations immediately upon
grant, with a corresponding DSU liability recorded as a current liability in the statement of financial position. At
period end dates, the DSU liability is adjusted based on the 20-day volume weighted average price of Common
Shares.
For the three months ended December 31, 2016, the Corporation recognized DSU expense of $1.3 million
compared to a reduction in the liability of less than $0.1 million for the three months ended December 31, 2015.
For the year ended December 31, 2016, the Corporation recognized DSU expense of $2.9 million compared to
$0.5 million for the year ended December 31, 2015. The increased expense was due to additional DSUs granted
in the period as well as share appreciation, causing the 20-day volume weighted average price of Common
Shares used in DSU calculations to increase.
DEPLETION AND DEPRECIATION EXPENSE
Depletion and depreciation ($000s)
Per unit ($/Mcfe)
Three months ended
December 31,
2015
2016
16,491
0.81
7,109
0.86
Years ended
December 31,
2015
2016
43,329
0.85
39,829
1.17
14
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
11
Depletion and depreciation expense per unit for the three months ended December 31, 2016 decreased by 6% or
$0.05 per Mcfe, as compared to the same period in 2015. The depletion rate was positively impacted by a 7%
increase in total proved and probable reserves since December 31, 2015. The depletion calculation for the three
months ended December 31, 2016 included future development costs associated with the development of the
Corporation’s proved plus probable reserves of $2.9 billion, compared to $3.2 billion for the three months ended
December 31, 2015.
The Corporation’s exploration and evaluation (“E&E”) assets totaling $114.3 million as at December 31, 2016,
compared to $116.1 million as at December 31, 2015, were not subject to depletion.
CAPITAL EXPENDITURES
($000s)
Drilling and completions
Facilities and equipment
Lease acquisitions and retention
Seismic
Property dispositions
Capitalized G&A
Exploration and development
Head office expenditures
Capital expenditures
Finance lease assets
Share-based compensation
Decommissioning costs
Total
Three months ended
December 31,
2015
2016
Years ended
December 31,
2015
2016
37,081
11,234
138
166
9
2,646
51,274
232
51,506
(4,140)
121
(2,214)
45,273
8,936
3,119
197
79
-
2,128
14,459
108
14,567
-
391
4,013
18,971
152,894
43,767
614
716
(386)
5,937
203,542
849
204,391
360,860
620
7,929
573,800
78,699
22,056
646
153
-
4,720
106,274
380
106,654
-
1,073
6,834
114,561
During the three months and year ended December 31, 2016 the Corporation invested $51.3 million and $203.5
million in exploration and development capital expenditures, respectively, compared to $14.5 million and $106.3
million, respectively, during the three months and year ended December 31, 2015.
Capital expenditures for 2016 included $152.9 million on drilling and completions activity. During 2016, the
Corporation drilled 36 (36.0 net) wells and completed 38 (38.0 net) wells targeting Montney natural gas.
Expenditures on facilities and equipment during the year totaled $43.8 million and included equipment costs and
pipeline construction costs.
On July 27, 2016, Painted Pony announced that it had entered into a non-cash asset exchange agreement, in
respect of acreage, wells and non-operated facility interests, with a large industry partner on jointly held acreage
in the Daiber, Cameron and Blair Creek areas of British Columbia. The asset exchange closed on September 26,
2016, with an effective date of January 1, 2016. Adjustments between the effective and closing dates are included
in property, plant and equipment as property dispositions. Management has performed an assessment of the
exchange and has concluded that the transaction does not meet the criteria of commercial substance as defined
in IAS 16.
The Corporation’s 2017 capital program is currently anticipated to be $319 million. In 2017, the Corporation
intends to drill and complete 61 (61.0 net) Montney horizontal natural gas wells on its 100% working interest lands
in the Townsend and Blair Creek areas.
13
15
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2016, the Corporation had a working capital deficiency of $73.6 million. Management
anticipates that the Corporation will continue to have adequate liquidity to fund working capital requirements and
capital expenditures through a combination of cash flows and available credit facilities. As a result of the current
commodity pricing environment, uncertainty exists in the commodity, credit and capital markets, which the
Corporation continues to monitor in conjunction with its financing alternatives.
As at December 31, 2016, the Corporation’s syndicated credit facilities were $325 million, with the semi-annual
borrowing base review to be completed by April 30, 2017.
The facilities are provided by a syndicate of financial institutions, and include a $275 million extendible revolving
facility and a $50 million operating facility. The facilities revolve for a 2-year period, which is extendible annually,
subject to syndicate approval. The facilities are subject to semi-annual review and re-determination of borrowing
base by April 30 and October 31 of each year, or in the circumstance of a material adverse event. Any re-
determination of the borrowing base is effective immediately, and if the borrowing base is reduced, the
Corporation has 60 days to repay any shortfall. The next review is expected to occur on or before April 30, 2017.
As at December 31, 2016 Painted Pony had $200.0 million in bankers’ acceptances with an effective interest rate
of 4.68% per annum. In addition, as at December 31, 2016 the Corporation had an outstanding letter of credit of
$14.9 million, which reduces the credit available on the operating facility.
The credit facilities bear interest on a matrix system that ranges from the bank’s prime rate plus 1.0% to the
bank’s prime rate plus 3.5% per annum depending on the Corporation’s total debt to EBITDA ratio as defined by
the lenders, ranging from less than 1:1 to greater than 4:1. The credit facilities provide that advances may be
made by way of prime rate loans, U.S. Base Rate loans, London InterBank Offered Rate loans, bankers’
acceptances, letters of credit or letters of guarantee. A standby fee of 0.5% to 1.125% per annum is charged on
the undrawn portion of the credit facilities, also calculated depending on the Corporation’s total debt to EBITDA
ratio, as defined by the lenders.
Security is provided by a floating charge demand debenture in the aggregate amount of $500 million on all of the
Corporation’s assets. The Corporation has provided a negative pledge and an undertaking to provide fixed
charges over major producing petroleum and natural gas reserves in certain circumstances. The syndicated credit
facilities are not subject to financial covenants.
The Corporation’s objective is to maintain a total debt to annualized EBITDA ratio of less than 2.5:1, with a
targeted ratio of 2.0:1. At December 31, 2016 the Corporation’s total debt to EBITDA ratio was 1.96:1. Painted
Pony anticipates that its total debt to EBITDA ratio will be reduced significantly in conjunction with a full year of
operations at the Townsend Facility, as current debt levels are primarily associated with the capital expenditures
that were required in advance of commissioning of the Townsend Facility to ensure that sufficient production
volumes would be available upon start-up.
ALTAGAS STRATEGIC ALLIANCE
On August 18, 2014 the Corporation entered into a series of agreements (collectively the “Strategic Alliance”) with
AltaGas Ltd. (“AltaGas”) relating to the development of processing infrastructure and marketing services for
natural gas and NGLs. The chairman of the board of directors of AltaGas is a director of Painted Pony.
Under the Strategic Alliance, AltaGas committed to building the Townsend Facility and related pipeline
infrastructure, which commenced commercial operations in July 2016. Painted Pony does not acquire any legal
right, title, or interest in the Townsend Facility or pipeline. All construction costs are borne by AltaGas. The
Corporation has the right to a minimum of 150 MMcf/d of firm capacity at this facility effective October 1, 2016,
increasing to 198 MMcf/d of firm capacity by August 1, 2017, in respect of each of which there is a take or pay
obligation on production volumes delivered to the facility of 135 MMcf/d commencing October 1, 2016 and 180
MMcf/d commencing August 1, 2017.
The Townsend Facility and related pipeline infrastructure have been recorded as a finance lease. Painted Pony
has recorded the asset, representing the total estimated construction cost of the Townsend Facility, with a
corresponding obligation on the statement of financial position. Over the course of the 20-year lease, there will be
a capital fee paid to AltaGas, which will include finance costs and the amortization of the obligation. The
associated processing fee will be recorded in operating expenses.
14
16
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
The cost of the Townsend Facility and related pipeline infrastructure is $360.9 million. Total expected payments
based on annual take or pay volumes, including both the principal and financing components, are reflected in the
table below.
($000s)
Processing
Transportation
Total
Principal
Within 1
year
34,437
3,570
38,007
-
After 1 year but no
more than five years
218,669
20,653
239,322
44,515
More than
five years
487,113
83,372
570,485
316,345
Total
740,219
107,595
847,814
360,860
COMMITMENTS
The following is a summary of the estimated costs required to fulfill Painted Pony’s remaining contractual
commitments as at December 31, 2016.
($000s)
Transportation
Processing
Office leases
Total commitments
2017
18,733
3,129
1,447
23,309
2018
40,229
-
1,466
41,695
2019
46,228
-
1,175
47,403
2020
44,618
-
-
44,618
2021 Thereafter
663,935
-
-
41,518
-
-
41,518
663,935
Total
855,261
3,129
4,088
862,478
Transportation commitments include contracts to transport natural gas and NGLs through third-party owned
pipeline systems in British Columbia. Processing commitments include contracts to process natural gas through
third-party owned gas processing facilities in British Columbia. Office leases include the Corporation’s contractual
obligations for office space.
The Corporation has certain lease arrangements that are reflected in the commitments table above, which were
entered into in the normal course of operations. All leases, other than the Townsend Facility finance lease, have
been treated as operating leases whereby the lease payments are included in operating expenses or general and
administrative expenses depending on the nature of the lease.
Subsequent to December 31, 2016, Painted Pony committed to enter into an agreement with AltaGas in respect
of the next phase of the Townsend Facility (“Townsend Phase 2”). AltaGas will be constructing Townsend Phase
2 in two separate gas processing trains, the first of which will be a 99 MMcf/d gas processing facility to be located
on the existing Townsend site. Including the addition of incremental field compression equipment, the estimated
total cost of the first train will be approximately $120 to $140 million. Painted Pony expects to enter into the
agreement to be the sole supplier of natural gas to this first train and associated field compression equipment
during 2017.
OFF BALANCE SHEET ARRANGEMENTS
No off balance sheet arrangements existed as at December 31, 2016 or December 31, 2015.
SHARE CAPITAL
The Corporation has an unlimited number of Common Shares and an unlimited number of Preferred Shares
(“Preferred Shares”) authorized for issuance. As at December 31, 2016 and February 27, 2017, there were
100,158,192 Common Shares issued and outstanding, and nil Preferred Shares issued and outstanding at either
date.
The Corporation has an incentive stock option plan whereby stock options to purchase Common Shares may be
granted to directors, executive officers and employees of the Corporation and are exercisable over a five-year
period. Effective January 1, 2016, new stock options granted vest as to one-third on each of the first, second, and
third anniversaries of the grant date. Stock options granted prior to January 1, 2016 vested as to one-third
immediately, with the balance over two years. As at December 31, 2016, an aggregate of 8,622,517 stock options
were issued and outstanding at a weighted-average price of $7.45 per stock option. As at February 27, 2017, an
aggregate of 8,577,517 stock options were issued and outstanding at a weighted-average price of $7.43 per stock
option.
15
17
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
INCOME TAXES
As at December 31, 2016, the Corporation had a $32.6 million deferred tax asset, which was recognized as cash
flows are expected to be sufficient to realize the deferred tax asset. This compares to $14.7 million as at
December 31, 2015. The Corporation recognized a deferred tax recovery of $17.9 million during the year ended
December 31, 2016, compared to $1.6 million for the year ended December 31, 2015. The deferred tax recovery
resulted primarily from an unrealized loss on commodity risk management of $75.7 million during the year.
The Corporation expects that future taxable income will be available to utilize accumulated tax pools. Painted
Pony’s estimated tax pools at December 31, 2016 were $926.8 million.
DIVIDENDS
The Corporation has not declared or paid any dividends and does not intend to do so in the near future.
PERFORMANCE COMPARED TO EXPECTATIONS
Readers are reminded that forward-looking statements in this MD&A are subject to significant risks and
uncertainties, many of which are beyond Painted Pony’s control and are based on a number of material factors
and assumptions, some or all of which may prove to be incorrect. A comparison of actual performance to the
previously announced expectations of the Corporation is as follows:
• For 2016, the Corporation expected to receive a natural gas price that represented a discount to the
AECO daily spot price. The actual weighted average price received during the year of 2016 represented a
6% discount pricing to the AECO reference price. The realized price for the year does not include a $19.9
million realized gain on commodity risk management contracts, which partially mitigated lower realized
prices.
• The actual royalty rate for the fourth quarter of 2016 was 2.1% of total revenues, compared to Painted
Pony’s third quarter 2016 announced guidance of less than 3.0 % of total revenues. The actual royalty
rate for the year ended 2016 was 2.2% of total revenues, compared to the previous year’s announced
estimate of approximately 3.0% of total revenues. Lower royalty expense in both periods is due to lower
than expected commodity prices.
• Operating expenses for the fourth quarter of 2016 were $0.59 per Mcfe, compared to Painted Pony’s third
quarter 2016 announced guidance of $0.55 to $0.60 per Mcfe. Operating expenses for the year ended
December 31, 2016 were $0.68 per Mcfe, compared to the previous year’s announced estimate of
approximately $0.85 per Mcfe. Lower than anticipated operating expenses for the year are primarily due
to lower than expected processing fees and the early start-up of the Townsend Facility.
• Transportation costs for the fourth quarter of 2016 were $0.38 per Mcfe, compared to Painted Pony’s third
quarter 2016 announced guidance of $0.30 per Mcfe, due to higher transportation tolls commencing in
November 2016. Transportation costs for the year ended December 31, 2016 were $0.31 per Mcfe,
compared to the previous year’s announced estimate of approximately $0.40 per Mcfe, due to lower than
estimated NGL production volumes, which have higher associated trucking costs.
• G&A expenses for the fourth quarter of 2016 were $0.17 per Mcfe, compared to Painted Pony’s third
quarter 2016 announced guidance of $0.20 per Mcfe. G&A expenses for the year ended December 31,
2016 were $0.21 per Mcfe, compared to the previous years announced estimate of approximately $0.25
per Mcfe. Lower G&A expenses in both periods is related to the Corporation’s continued focus on cost
control.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of financial statements requires management to make judgments, estimates and assumptions
that affect the application of IFRS accounting policies, reported amounts of assets and liabilities, and income and
expenses. Accordingly, actual results may differ from these estimates. Estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
Critical Accounting Judgments
The following are critical judgments that management has made in the process of applying accounting policies
and that have the most significant effect on the amounts recognized in the consolidated financial statements.
18
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
16
Cash-Generating Units
The Corporation’s assets are aggregated into cash-generating units (“CGU” or “CGUs”) for the purpose of
assessing impairment. CGUs are based on an assessment of the unit’s ability to generate independent cash
inflows. The determination of these CGUs was based on management’s judgment in regard to shared
infrastructure, geographical proximity, petroleum type and exposure to market risk and materiality. By their nature,
these assumptions are subject to management’s judgment and may impact the carrying value of the Corporation’s
net assets in future periods.
Impairment Indicators
Judgments are required to assess when impairment indicators exist and impairment testing is required. The
Corporation is required to consider information from both external sources (such as negative downturn in
commodity prices, significant adverse changes in the technological, market, economic or legal environment in
which the entity operates) and internal sources (such as downward revisions in reserves, significant adverse
effect on the financial and operational performance of a CGU, evidence of obsolescence or physical damage to
the asset). In determining the recoverable amount of assets, in the absence of quoted market prices, impairment
tests are based on estimates of reserves, production rates, future petroleum and natural gas prices, future costs,
discount rates, market value of land and other relevant assumptions.
The application of the Corporation’s accounting policy for exploration and evaluation assets requires management
to make certain judgments as to future events and circumstances as to whether economic quantities of reserves
have been found.
Deferred Taxes
In determining its deferred tax provisions, the Corporation must apply judgment when interpreting and applying
tax laws and regulations. The determination of the appropriate rules may be uncertain for many periods. The final
outcome could result in amounts different from those initially recorded and could impact tax expense in the
periods where a determination is made. Judgments are also made by management to determine the likelihood of
whether deferred income tax assets at the end of the reporting period will be realized from future taxable income.
Critical Accounting Estimates
The following are key estimates and their assumptions made by management affecting the measurement of
balances and transactions in these consolidated financial statements.
Impact of Reserves
Estimation of recoverable quantities of proved and probable reserves includes estimates and assumptions
regarding future commodity prices, exchange rates, discount rates and production and transportation costs for
future cash flows as well as the interpretation of complex geological and geophysical models and data. Changes
in expected future cash flows in reported reserves can affect the impairment of assets, the decommissioning
obligations, the economic feasibility of E&E assets and the amounts reported for depletion and depreciation of
property, plant and equipment, and the recognition of deferred tax assets. These reserve estimates are prepared
in accordance with the Canadian Oil and Gas Evaluation Handbook and are verified by independent qualified
reserve evaluators, who work with information provided by the Corporation to establish reserve determinations in
accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).
In a business combination, management makes estimates of the fair value of assets acquired and liabilities
assumed, which includes assessing the value of petroleum and natural gas properties based upon the estimation
of recoverable quantities of proved and probable reserves being acquired.
Share-Based Compensation
All equity-settled, share-based awards issued by the Corporation are fair valued using the Black-Scholes option-
pricing model. In assessing the fair value of equity-based compensation, estimates have to be made regarding
the expected volatility in share price, option life, dividend yield, risk-free rate and estimated forfeitures at the initial
grant date.
17
19
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Derivative Financial Instruments
Painted Pony records commodity price contracts at fair value with changes in fair value recognized in the
statements of operations. The Corporation’s estimate of the fair value is determined using observable market data
and external counterparty information, including estimated forward prices and volatility in those prices.
Decommissioning Obligations
The Corporation estimates future remediation costs of production facilities, wells and pipelines at different stages
of development and construction of assets or facilities. In most instances, removal of assets occurs many years
into the future. This requires judgment regarding abandonment date, future environmental and regulatory
legislation, the extent of reclamation activities, the engineering methodology for estimating cost, future removal
technologies in determining the removal cost and liability-specific discount rates to determine the present value of
these cash flows.
Deferred Taxes
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts
recognized in net income or loss both in the period of change, which would include any impact on cumulative
provisions, and in future periods.
Deferred tax assets are recognized only to the extent it is considered probable that those assets will be
recoverable. This involves an assessment of when those deferred tax assets are likely to reverse and a judgment
as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse.
This requires assumptions regarding future profitability and is therefore inherently uncertain. Estimates of future
taxable income are based on forecasted cash flows from operations.
FUTURE ACCOUNTING PRONOUNCEMENTS
A number of new accounting standards, amendments to accounting standards and interpretations are effective for
annual periods beginning on or after January 1, 2017 and have not been applied in preparing the consolidated
financial statements for the year ended December 31, 2016. The standards applicable to the Corporation are as
follows and will be adopted on their respective effective dates:
Liabilities Arising from Financing Activities
As of January 1, 2017, the Corporation will be required to adopt IAS 7 “Statement of Cash Flows”, which requires
disclosures that enable financial statement users to evaluate changes in liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes. The Corporation does not anticipate a
material impact on its consolidated financial statements as a result of adopting IAS 7.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 “Financial Instruments”, which replaces IAS 39 “Financial
Instruments: Recognition and Measurement”. The standard will come into effect for annual periods beginning on
or after January 1, 2018 with earlier adoption permitted.
IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized cost or fair
value and replaces the multiple rules in IAS 39. The approach is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow characteristics of the financial
assets. For financial liabilities, IFRS 9 retains most of the requirements of IAS 39; however, where the fair value
option is applied to financial liabilities, any change in fair value resulting from an entity’s own credit risk is
recorded in OCI rather than the statement of operations, unless this creates an accounting mismatch. Based on
its preliminary assessment, the Corporation does not anticipate these changes to have a material impact on its
consolidated financial statements.
In addition, IFRS 9 introduces a new expected credit loss model for calculating impairment of financial assets,
replacing the incurred loss impairment model required by IAS 39. The new model will result in more timely
recognition of expected credit losses. Painted Pony does not anticipate the new impairment model to have a
material impact on the consolidated financial statements.
20
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
19
IFRS 9 also contains a new model to be applied for hedge accounting, aligning hedge accounting more closely
with risk management. The Corporation does not currently apply hedge accounting to its risk management
contracts and does not currently intend to apply hedge accounting to any of its existing risk management
contracts on adoption of IFRS 9.
Revenue Recognition
As of January 1, 2018, the Corporation will be required to adopt IFRS 15 “Revenue from Contracts with
Customers”, which replaces IAS 18 “Revenue”. The standard provides a single, principles based five-step model
to be applied to all contracts with customers. The standard requires an entity to recognize revenue to reflect the
transfer of goods and services for the amount it expects to receive, when control is transferred to the purchaser.
Disclosure requirements have also been expanded.
The standard is required to be adopted either retrospectively or using a modified retrospective approach for
annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Corporation is in the
process of reviewing its revenue streams and underlying contracts with customers to determine the impact, if any,
that the adoption of IFRS 15 will have on its financial statements and related disclosure.
Leases
In January 2016, the IAS issued IFRS 16 “Leases”, which replaces IAS 17 “Leases”, and provides that a single
recognition and measurement model for leases would apply, with required recognition of assets and liabilities for
most leases. For lessees, IFRS 16 removes the classification of leases as either operating or finance leases,
effectively treating all leases as finance leases. Certain short-term leases (less than 12 months) and leases of
low-value assets are exempt from the requirements, and may continue to be treated as operating leases.
IFRS 16 is effective for years beginning on or after January 1, 2019, with early adoption permitted if IFRS 15
“Revenue from Contracts with Customers” has been adopted. The standard may be applied retrospectively or
using a modified retrospective approach. It is anticipated that the adoption of IFRS 16 will have a material impact
on the Corporation’s consolidated statement of financial position due to material operating lease commitments as
disclosed in note 16.
BUSINESS RISKS
Painted Pony’s production and exploration activities are concentrated in western Canada, where activity is highly
competitive and includes a variety of companies ranging from smaller junior producers to the much larger
integrated producers. Painted Pony is subject to various types of business risks and uncertainties, including but
not limited to:
volatility of natural gas and crude oil prices;
•
• availability of qualified personnel and drilling equipment;
•
• production of petroleum and natural gas in commercial quantities; and
• marketability of petroleum and natural gas production.
finding and developing petroleum and natural gas reserves at economic costs;
In order to reduce exploration risk, the Corporation strives to employ highly qualified and motivated professional
employees and consultants with a demonstrated ability to generate quality proprietary geological and geophysical
prospects. To help maximize drilling success, Painted Pony combines exploration in areas that afford multi-zone
prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high-risk
plays with high-reward opportunities. Painted Pony also explores in areas where the Corporation’s officers and
employees have significant experience.
The Corporation mitigates its risks related to producing hydrocarbons through the utilization of the most
appropriate technology and information systems. Painted Pony seeks operational control of its projects, where
feasible.
20
21
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Oil and gas exploration and production can involve environmental risks such as pollution of the environment and
destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risks,
Painted Pony conducts its operations with high standards and follows safety procedures intended to reduce the
potential for personal injury to employees, contractors and the public at large. The Corporation maintains
insurance coverage to address significant business risks, at market rates and within defined limits and
deductibles. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as
necessary to reflect changing corporate requirements, as well as industry standards and government regulations.
Painted Pony may periodically use financial or physical delivery hedges to reduce its exposure against the
potential adverse impact of commodity price volatility, as governed by formal policies approved by senior
management, subject to controls established by the Board.
Additional information about the Corporation’s business risks is outlined in the advisories section of this MD&A
and is available in Painted Pony’s AIF for the year ended December 31, 2015 that is filed on SEDAR at
www.sedar.com.
LEGAL, ENVIRONMENTAL, REMEDIATION AND OTHER CONTINGENT MATTERS
The Corporation reviews legal, environmental, remediation and other contingent matters to determine whether a
loss is probable based on judgment and interpretation of laws and regulations, and to determine whether the loss
can reasonably be estimated. When the loss is determined, it is charged to income. The Corporation’s
management monitors known and potential contingent matters and makes appropriate provisions by charges to
income when warranted by the circumstances.
Aboriginal peoples have claimed aboriginal title and rights to portions of western Canada, including northeast
British Columbia. On August 8, 2016, the Blueberry River First Nation (BRFN) applied for an interlocutory
injunction in the Supreme Court of British Columbia. This injunction seeks to restrain the Province of British
Columbia from, among other things, permitting new oil and gas activities within a portion of northeast British
Columbia, where a substantial portion of the Corporation’s land is situated. In the highly unlikely event that this
application is successful, it would likely have an adverse impact on the Corporation, its operations and its
production. The interlocutory injunction was heard in early November 2016 and a decision is expected to be
handed down in the first quarter of 2017. The interlocutory injunction is part of an underlying claim against the
Province of British Columbia, filed on March 3, 2015, which seeks relief for alleged breaches of treaty rights in
northeast British Columbia. The Corporation is not a party to either the interlocutory injunction or to the underlying
claim.
DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed, or caused
to be designed under their supervision, disclosure controls and procedures (“DC&P”), as defined in National
Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings (“NI 52-109”) to provide
reasonable assurance that: (i) material information relating to the Corporation is made known to the Corporation’s
CEO and CFO by others, particularly during the period in which the annual and interim filings are being prepared;
and (ii) information required to be disclosed by the Corporation in its annual filings, interim filings or other reports
filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the
time period specified in securities legislation. As at December 31, 2016, the CEO and CFO evaluated the design
and operation of the Corporation’s DC&P. Based on that evaluation, the CEO and CFO concluded that the
Corporation’s DC&P was effective as at December 31, 2016.
The Corporation has established and maintains internal control over financial reporting using the criteria that were
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control –
Integrated Framework (2013). The Corporation’s CEO and CFO have designed, or caused to be designed under
their supervision, internal controls over financial reporting (“ICFR”), as defined in NI 52-109, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS. As at December 31, 2016, the CEO and CFO evaluated the design and
operating effectiveness of the Corporation’s ICFR. Based on that evaluation, the CEO and CFO concluded that
the Corporation’s ICFR was effective as at December 31, 2016.
No material changes in the Corporation’s ICFR were identified during the period beginning on October 1, 2016
and ended on December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the
Corporation’s ICFR. It should be noted that a control system, including the Corporation’s disclosure and internal
controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute assurance
22
22
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
that the objectives of the control system will be met and it should not be expected that the disclosure and internal
controls will prevent all errors or fraud.
SELECTED CONSOLIDATED QUARTERLY INFORMATION
The following tables set forth selected consolidated financial information of the Corporation for the eight most
recently completed quarters ending at the fourth quarter of 2016.
Quarter ended
($000s, except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic
Per share – diluted
March 31,
2016
Sept. 30,
2016
June 30,
2016
Dec. 31,
2016
Net income (loss)
Per share – basic
Per share – diluted
Cash capital expenditures
Working capital deficiency
Bank debt
Net debt
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Average daily production volumes (MMcfe/d)
Realized commodity prices
Natural gas ($/Mcf)
NGLs ($/bbl)
Total ($/Mcfe)
Operating netbacks ($/Mcfe)
(1) Before royalties
Quarter ended
($000s, except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic and diluted
Net income (loss)
Per share – basic and diluted
Cash capital expenditures
Working capital deficiency
Bank debt
Net debt
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Average daily production volumes (MMcfe/d)
Realized commodity prices
Natural gas ($/Mcf)
NGLs ($/bbl)
Total ($/Mcfe)
Operating netbacks ($/Mcfe)
Operating netbacks ($/Mcfe)
(1) Before royalties
(1) Before royalties
65,155
26,501
0.26
0.26
(27,761)
(0.28)
(0.28)
51,506
73,647
200,836
228,463
27,987
12,639
0.13
0.12
11,614
0.12
0.11
50,471
36,626
172,054
202,494
1,336,955 1,290,228
32,015
22,741
136.4
29,857
36,695
220.2
11,863
8,908
0.09
0.09
(33,559)
(0.34)
(0.34)
35,338
36,677
136,897
164,493
876,295
27,321
16,634
99.8
16,575
7,557
0.08
0.08
(2,151)
(0.02)
(0.02)
67,076
26,016
87,559
137,239
857,942
25,738
16,601
99.6
2.78
46.62
3.22
2.09
1.97
41.67
2.23
1.74
0.94
41.73
1.31
1.44
1.60
36.26
1.83
1.21
Dec. 31,
2015
Sept. 30,
2015
June 30,
2015
March 31,
2015
15,048
2,572
0.03
2,550
0.02
14,567
4,629
63,626
77,361
781,574
21,480
15,043
90.3
1.60
40.51
1.81
0.96
0.96
20,180
6,268
0.06
(391)
(0.00)
21,761
16,880
45,929
65,397
759,971
17,351
15,523
93.1
22,801
9,637
0.10
(3,845)
(0.04)
21,917
11,790
38,802
51,562
746,063
16,391
15,622
93.7
2.07
46.68
2.36
1.09
1.09
2.35
48.53
2.67
1.50
1.50
23,554
9,990
0.10
(3,524)
(0.04)
48,409
29,122
7,656
39,516
740,132
18,024
16,243
97.5
2.38
41.35
2.69
1.38
1.38
23
23
SELECTED CONSOLIDATED ANNUAL INFORMATION
SELECTED CONSOLIDATED ANNUAL INFORMATION
The following table sets forth selected consolidated annual financial information of the Corporation for the three
The following table sets forth selected consolidated annual financial information of the Corporation for the three
most recently completed years ending December 31, 2016.
most recently completed years ending December 31, 2016.
Years ended ($000s, except where noted)
Years ended ($000s, except where noted)
Petroleum and natural gas revenue(1)
Petroleum and natural gas revenue(1)
Funds flow from operations
Funds flow from operations
Per share – basic and diluted
Per share – basic and diluted
Net loss
Net loss
Per share – basic and diluted
Per share – basic and diluted
Cash capital expenditures
Cash capital expenditures
Property acquisitions
Property acquisitions
Property dispositions
Property dispositions
Working capital (deficiency)
Working capital (deficiency)
Bank debt
Bank debt
Net debt
Net debt
Total assets
Total assets
Decommissioning obligations
Decommissioning obligations
Average daily production volumes (boe/d)
Average daily production volumes (boe/d)
Average daily production volumes (MMcfe/d)
Average daily production volumes (MMcfe/d)
(1) Before royalties
(1) Before royalties
Dec. 31, 2016 Dec. 31, 2015
Dec. 31, 2016 Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2014
121,580
121,580
55,605
55,605
0.56
0.56
(51,857)
(51,857)
(0.52)
(0.52)
204,391
204,391
-
-
386
386
(73,647)
(73,647)
200,836
200,836
228,463
228,463
1,336,955
1,336,955
29,857
29,857
23,204
23,204
139.2
139.2
81,583
81,583
28,466
28,466
0.29
0.29
(5,210)
(5,210)
(0.05)
(0.05)
106,654
106,654
-
-
-
-
(4,629)
(4,629)
63,626
63,626
77,361
77,361
781,574
781,574
21,480
21,480
15,604
15,604
93.6
93.6
160,545
160,545
87,376
87,376
0.88
0.88
(15,564)
(15,564)
(0.17)
(0.17)
262,932
262,932
1,155
1,155
101,001
101,001
2,835
2,835
-
-
2,295
2,295
737,836
737,836
14,258
14,258
13,192
13,192
79.2
79.2
Significant factors and trends that have affected the Corporation’s results during the above annual and quarterly
Significant factors and trends that have affected the Corporation’s results during the above annual and quarterly
periods include:
periods include:
• Petroleum and natural gas revenues are impacted by both fluctuating commodity prices and production
• Petroleum and natural gas revenues are impacted by both fluctuating commodity prices and production
volumes. The Corporation’s successful capital program and commencement of commercial operations at
volumes. The Corporation’s successful capital program and commencement of commercial operations at
the Townsend Facility in Q3 2016 have generated incremental production volumes. The commodity
the Townsend Facility in Q3 2016 have generated incremental production volumes. The commodity
prices realized by the Corporation have approximated the AECO daily spot gas prices and Edmonton par
prices realized by the Corporation have approximated the AECO daily spot gas prices and Edmonton par
light oil prices with periodic widening of differentials throughout the above periods. The reference price
light oil prices with periodic widening of differentials throughout the above periods. The reference price
fluctuations reflect changes in supply and demand by commodity, both internationally and domestically.
fluctuations reflect changes in supply and demand by commodity, both internationally and domestically.
• Funds flow from operations reflects the impact of fluctuating commodity prices on a growing production
• Funds flow from operations reflects the impact of fluctuating commodity prices on a growing production
base. Operating and transportation cost variations track seasonal weather-related issues combined with
base. Operating and transportation cost variations track seasonal weather-related issues combined with
fixed commitments. Natural gas and crude oil prices strengthened throughout 2014, and declined
fixed commitments. Natural gas and crude oil prices strengthened throughout 2014, and declined
throughout 2015 and through the first half of 2016. Prices started to recover in the third and fourth quarter
throughout 2015 and through the first half of 2016. Prices started to recover in the third and fourth quarter
of 2016. Royalties vary due to commodity prices, production levels and the status of provincial royalty
of 2016. Royalties vary due to commodity prices, production levels and the status of provincial royalty
incentive programs. As the production base matures, incremental royalties occur on wells as the
incentive programs. As the production base matures, incremental royalties occur on wells as the
maximum volumes provided for under provincial incentive programs are attained.
maximum volumes provided for under provincial incentive programs are attained.
• Net income (loss) throughout the periods was primarily influenced by non-cash items including unrealized
• Net income (loss) throughout the periods was primarily influenced by non-cash items including unrealized
gains or losses on commodity risk management.
gains or losses on commodity risk management.
• Fluctuations in capital expenditures have reflected both available capital resources and capital spending
• Fluctuations in capital expenditures have reflected both available capital resources and capital spending
restraints during weaker commodity price cycles.
restraints during weaker commodity price cycles.
• As the Corporation’s focus has shifted from exploration to development, working capital has decreased
• As the Corporation’s focus has shifted from exploration to development, working capital has decreased
and the Corporation has begun utilizing bank debt. As a result of the disposition of the Corporation’s
and the Corporation has begun utilizing bank debt. As a result of the disposition of the Corporation’s
Saskatchewan crude oil assets, and private placement and bought deal financings completed during
Saskatchewan crude oil assets, and private placement and bought deal financings completed during
2014, the Corporation had no bank debt and a positive working capital position as at December 31, 2014.
2014, the Corporation had no bank debt and a positive working capital position as at December 31, 2014.
As the Corporation proceeds with its growth plans, it has resumed utilizing bank debt, which amounted to
As the Corporation proceeds with its growth plans, it has resumed utilizing bank debt, which amounted to
$200.8 million as at December 31, 2016.
$200.8 million as at December 31, 2016.
• Total assets and non-current liabilities have increased as the Corporation’s capital program has been
• Total assets and non-current liabilities have increased as the Corporation’s capital program has been
executed.
executed.
24
24
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Operating netbacks ($/Mcfe)
(1) Before royalties
0.96
1.09
1.50
1.38
SELECTED CONSOLIDATED ANNUAL INFORMATION
The following table sets forth selected consolidated annual financial information of the Corporation for the three
most recently completed years ending December 31, 2016.
Years ended ($000s, except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic and diluted
Net loss
Per share – basic and diluted
Cash capital expenditures
Property acquisitions
Property dispositions
Working capital (deficiency)
Bank debt
Net debt
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Average daily production volumes (MMcfe/d)
(1) Before royalties
Dec. 31, 2016 Dec. 31, 2015
Dec. 31, 2014
121,580
55,605
0.56
(51,857)
(0.52)
204,391
-
386
(73,647)
200,836
228,463
1,336,955
29,857
23,204
139.2
81,583
28,466
0.29
(5,210)
(0.05)
106,654
-
-
(4,629)
63,626
77,361
781,574
21,480
15,604
93.6
160,545
87,376
0.88
(15,564)
(0.17)
262,932
1,155
101,001
2,835
-
2,295
737,836
14,258
13,192
79.2
Significant factors and trends that have affected the Corporation’s results during the above annual and quarterly
periods include:
• Petroleum and natural gas revenues are impacted by both fluctuating commodity prices and production
volumes. The Corporation’s successful capital program and commencement of commercial operations at
the Townsend Facility in Q3 2016 have generated incremental production volumes. The commodity
prices realized by the Corporation have approximated the AECO daily spot gas prices and Edmonton par
light oil prices with periodic widening of differentials throughout the above periods. The reference price
fluctuations reflect changes in supply and demand by commodity, both internationally and domestically.
• Funds flow from operations reflects the impact of fluctuating commodity prices on a growing production
base. Operating and transportation cost variations track seasonal weather-related issues combined with
fixed commitments. Natural gas and crude oil prices strengthened throughout 2014, and declined
throughout 2015 and through the first half of 2016. Prices started to recover in the third and fourth quarter
of 2016. Royalties vary due to commodity prices, production levels and the status of provincial royalty
incentive programs. As the production base matures, incremental royalties occur on wells as the
maximum volumes provided for under provincial incentive programs are attained.
• Net income (loss) throughout the periods was primarily influenced by non-cash items including unrealized
gains or losses on commodity risk management.
• Fluctuations in capital expenditures have reflected both available capital resources and capital spending
restraints during weaker commodity price cycles.
• As the Corporation’s focus has shifted from exploration to development, working capital has decreased
and the Corporation has begun utilizing bank debt. As a result of the disposition of the Corporation’s
Saskatchewan crude oil assets, and private placement and bought deal financings completed during
2014, the Corporation had no bank debt and a positive working capital position as at December 31, 2014.
As the Corporation proceeds with its growth plans, it has resumed utilizing bank debt, which amounted to
$200.8 million as at December 31, 2016.
• Total assets and non-current liabilities have increased as the Corporation’s capital program has been
executed.
24
24
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
ADVISORIES
Forward-looking Statements
Certain statements in this MD&A constitute forward-looking statements and forward-looking information
(collectively, the “forward-looking statements”) within the meaning of applicable Canadian securities laws. Such
forward-looking statements relate to future events, including expectations of future production, components of
cash flow and net income, expected future events, including with respect to the Corporation’s well program,
contractual commitments, capital expenditures, dividend policy and credit facility, and/or financial results that are
forward-looking in nature and subject to substantial risks and uncertainties. All statements other than statements
of historical fact contained in this MD&A may be forward-looking statements. Such statements and information
may be identified by words such as “anticipate”, “will”, “intend”, “could”, “should”, “may”, “might”, “expect”,
“forecast”, “plan”, “potential”, “project”, “assume”, “contemplate”, “believe”, “budget”, “shall”, “continue”,
“milestone”, “target”, “vision”, “forward looking to”, and similar terms or the negatives thereof or other comparable
terminology. The forward-looking statements contained in this MD&A involve known and unknown risks,
uncertainties and other factors that are beyond the Corporation’s control, which may cause actual results or
events to differ materially from those anticipated in such forward-looking statements.
The forward-looking statements contained in this MD&A represent management’s reasonable projections,
expectations and estimates as of the date of this document; however, undue reliance should not be placed upon
them as they are derived from numerous assumptions, certain or all of which may prove to be incorrect. These
assumptions are subject to known and unknown risks and uncertainties, including the business risks discussed in
this MD&A and the risks discussed in the Corporation’s AIF for the year ended December 31, 2015, many of
which are beyond Painted Pony’s control and which may cause actual performance and financial results to differ
materially from any projections of future performance or results expressed or implied by such forward-looking
statements. In addition, forward-looking statements may include statements or information attributable to third-
party industry sources. Additionally, there can be no assurance that the plans, intentions or expectations upon
which such forward-looking statements are based will occur.
In particular, and without limitation, this MD&A contains forward-looking statements pertaining to the following:
• production volumes in 2017 will meet forecasted levels;
•
•
•
•
•
•
•
•
•
the Corporation receiving a natural gas price that is representative of a discount to the AECO daily spot
price of 10% to 15%;
the Corporation’s plans with respect to its drilling program;
the expectation that overall royalties for 2017 will be approximately 3.0% of total revenues;
the expectation that average per unit operating expenses for the 2017 will be approximately $0.45 to
$0.55 per Mcfe assuming normal seasonal weather conditions;
the expectation that average per unit transportation costs for 2017 will be approximately $0.35 to $0.40
per Mcfe;
the expectation that average per unit G&A expenses for 2017 will be approximately $0.10 to $0.12 per
Mcfe;
the expectation that finance lease expense will vary with production volumes processed at the Townsend
Facility;
the expectation as to the timing and availability of the Townsend Phase 2 expansion;
the corporation having adequate liquidity to fund working capital requirements and capital expenditures
through a combination of cash flows and available credit facilities;
• expectations as to timing of the next review of the Corporation’s credit facilities;
• expectations that future cash flows will be sufficient to realize the Corporation’s deferred tax asset and
that future taxable income will be available to utilize accumulated tax pools;
•
•
the expectation that the Corporation’s total debt to EBITDA ratio will be reduced in conjunction with a full
year of operations at the Townsend Facility; and
the expectation that commitments to process and transport natural gas through third-party owned facilities
and pipeline systems will be fulfilled.
26
25
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
With respect to the forward-looking statements contained in this MD&A, assumptions have been made regarding:
•
•
•
•
the utilization of available credit facilities for 2017;
the validity of data used by GLJ Petroleum Consultants Ltd. in their independent reserves evaluation;
the continued adherence to agreements to lease office space; and
the financial position of the applicable entities mitigating the risk of accounts receivable becoming
uncollectible.
Certain or all of the forward-looking statements may prove to be incorrect and, while it is anticipated that
subsequent events and developments may cause the Corporation’s views to change, there is no intention to
update the forward-looking statements, except as required by applicable securities laws. These forward-looking
statements represent the Corporation’s views as of the date of this MD&A and such information should not be
relied upon as representing the Corporation’s views as of any date subsequent to the date of this MD&A. The
Corporation has attempted to identify important factors that could cause actual results, performance or
achievements to vary from those current expectations or estimates expressed or implied by the forward-looking
statements contained herein. However, there may be other factors that cause results, performance or
achievements not to be as expected or estimated and that could cause actual results, performance or
achievements to differ materially from current expectations. Other risks and uncertainties include, but are not
limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
normal risks common to the oil and gas industry, including exploration, development and production
operations risks;
volatility of commodity prices;
changes in interest and foreign exchange rates;
risks and uncertainty of petroleum and natural gas geological deposits and reserves estimates;
health, safety and environmental risks;
revisions, amendments or changes to capital expenditure plans including exploration, development and
exploitation projects;
uncertainty of estimates and projections of production and costs;
uncertainty of the outcome of the injunction application filed by the BRFN and the risk of delays resulting
from the need to change the location of planned activities and a potential reduction in future volumes of
natural gas and NGLs available for production by the Corporation;
risks as to the availability and pricing of appropriate financing alternatives on acceptable terms;
potential changes in income tax regulations, governmental policies, rules, practices or approval process
changes, or delays, or enhancements;
delays resulting from adverse weather conditions;
delays resulting from an inability to obtain required regulatory approvals and ability to access sufficient
debt or equity capital from internal and external sources; and
the Corporation’s ability to attract and retain qualified professional employees and consultants.
Statements relating to “reserves” or “resources” are by their nature deemed to be forward-looking statements, as
they involve the implied assessment based on certain estimates and assumptions that the resources and
reserves described can be profitably produced in the future.
26
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
There can be no assurance that the forward-looking statements contained herein will prove to be accurate, as
results and future events could differ materially from those expected or estimated in such statements.
Accordingly, readers should not place undue reliance on forward-looking statements. From time to time, Painted
Pony’s management makes estimates and forms opinions on which the forward-looking statements are based.
The Corporation assumes no obligation to update forward-looking statements if circumstances, management’s
estimates, or opinions change, unless prescribed by securities laws. Furthermore, readers should be aware that
historical results are not necessarily indicative of future performance.
Forecast Prices and Costs
Reserves estimates are calculated using the forecast price and cost assumptions by the reserves evaluator which
were in effect at the time of the applicable reserves evaluation. The complete GLJ January 1, 2017 price forecast
is available on its website at gljpc.com.
Gross Reserves
Unless otherwise stated, references to “reserves” are to the Corporation’s gross reserves, defined as the
Corporation’s working interest (operating or non-operating) share before deduction of royalties and without
including any royalty interests of the Corporation.
Estimated Future Net Revenues
Estimated future net revenues are stated before deducting income taxes and future estimated site restoration
costs and are reduced for estimated future abandonment costs and estimated capital for future development
associated with the reserves. The undiscounted and discounted net present values disclosed do not represent the
fair market value of the reserves.
Potential Transactions
Within its focus area, the Corporation regularly reviews potential property acquisitions and corporate mergers and
acquisitions for the purpose of determining whether any such potential transaction would benefit the Corporation,
as well as the terms on which such a potential transaction would be available. As a result, the Corporation may
from time to time be involved in discussions or negotiations with other parties or their agents in respect of
potential property acquisitions and corporate merger and acquisition opportunities. The Corporation is not
committed to any such potential transaction and cannot be reasonably confident that it can complete any such
potential transaction until appropriate legal documentation has been signed by the relevant parties.
BOE Conversions
Barrel of oil equivalent amounts have been calculated by using the conversion ratio of six thousand cubic feet (6
Mcf) of natural gas to one barrel of oil (1 bbl). Boe amounts may be misleading, particularly if used in isolation. A
boe conversion ratio of 6 Mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable
at the burner tip and does not represent a value equivalency at the wellhead.
MCFE Conversions
Thousands of cubic feet of gas equivalent amounts have been calculated by using the conversion ratio of one
barrel of oil (1 bbl) to six thousand cubic feet (6 Mcf) of natural gas. Mcfe amounts may be misleading,
particularly if used in isolation. A conversion ratio of 1 bbl to 6 Mcf is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Abbreviations
Natural Gas
Mcf
Mcf/d
MMcf/d
Boe barrels of oil equivalent
boe/d
Mboe
thousand cubic feet
thousand cubic feet per day
million cubic feet per day
barrels of oil equivalent per day Mcfe/d
thousand barrels of oil equivalent MMcfe/d
Natural Gas Liquids
bbls
bbls/d
NGLs
Mcfe
barrels
barrels per day
natural gas liquids
thousand cubic feet equivalent
thousand cubic feet equivalent per day
million cubic feet equivalent per day
27
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT ADDITIONAL INFORMATION
Additional information regarding the Corporation and its business and operations, including the AIF for the year
ended December 31, 2015 is available on the Corporation’s SEDAR profile at www.sedar.com. Copies of the
Corporation’s disclosure can also be obtained by contacting the Corporation at Painted Pony Petroleum Ltd.,
Suite 1800, 736 – 6 Avenue SW., Calgary, Alberta T2P 3T7 (Phone (403) 475-0440), by email at
info@paintedpony.ca or on the Corporation’s website at www.paintedpony.ca.
28
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
29
MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
Management of Painted Pony Petroleum Ltd. (the “Corporation”) is responsible for the preparation and integrity of
the accompanying consolidated financial statements and all other information contained in this report. The
consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) and include amounts that are based on management’s informed judgments and estimates
where necessary.
The Corporation has established internal accounting control systems which are designed to provide reasonable
assurance regarding the reliability of the Corporation’s financial reporting and the preparation of the consolidated
financial statements together with the other financial information for external purposes in accordance with IFRS.
The Board of Directors, through its Audit Committee, monitors management’s financial and accounting policies
and practices and the preparation of these consolidated financial statements. The Audit Committee meets
periodically with the external auditors and management to review the work of each and the propriety of the
discharge of their responsibilities.
The Audit Committee reviews the consolidated financial statements of the Corporation with management and the
external auditors prior to submission to the Board of Directors for final approval. The Board of Directors also
reviews the consolidated financial statements before they are finalized. The Board of Directors has approved the
consolidated financial statements for the years ended December 31, 2016 and 2015.
The external auditors have full and free access to the Audit Committee to discuss auditing and financial reporting
matters. The Audit Committee reviews the independence of the external auditors and pre-approves audit and
permitted non-audit services and fees. The Shareholders have appointed KPMG LLP as the external auditors of
the Corporation, and in that capacity, they have audited the consolidated financial statements for the years ended
December 31, 2016 and 2015.
“signed”
Patrick R. Ward
President and CEO
February 27, 2017
“signed”
Stuart W. Jaggard
Vice President and Interim CFO
30
29
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Painted Pony Petroleum Ltd.
We have audited the accompanying consolidated financial statements of Painted Pony Petroleum Ltd., which
comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, the
consolidated statements of operations, changes in equity and cash flows for the years then ended, and notes,
comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment of
the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also
the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
the appropriateness of accounting policies used and
includes evaluating
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Painted Pony Petroleum Ltd. as at December 31, 2016 and December 31, 2015, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
February 27, 2017
Calgary, Canada
30
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
31
PAINTED PONY PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(000s)
As at
ASSETS
Current assets
Accounts receivable
Prepaid expenses and deposits
Fair value of risk management contracts (note 13)
Non-current assets
Fair value of risk management contracts (note 13)
Exploration and evaluation (note 4)
Property, plant and equipment (note 5)
Deferred tax (note 12)
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Deferred share units liability (note 10)
Fair value of risk management contracts (note 13)
Non-current liabilities
Fair value of risk management contracts (note 13)
Bank debt (note 6)
Decommissioning obligations (note 7)
Finance lease obligation (note 15)
EQUITY
Share capital (note 9)
Contributed surplus
Deficit
Commitments (notes 16 & 17)
Subsequent event (note 16)
December 31, 2016
December 31, 2015
$ 29,568
1,109
-
30,677
1,269
114,251
1,158,198
32,560
$ 8,174
1,576
9,106
18,856
6,039
116,145
625,833
14,701
$ 1,336,955
$ 781,574
$ 54,903
3,401
46,020
104,324
15,768
200,836
29,857
360,860
711,645
687,701
52,115
(114,506)
625,310
$ 1,336,955
$ 22,998
487
-
23,485
-
63,626
21,480
-
108,591
686,702
48,930
(62,649)
672,983
$ 781,574
See accompanying notes to the Consolidated Financial Statements
Approved on behalf of the Board:
“signed” Arthur J. G. Madden
Director
“signed” Patrick R. Ward
Director
32
31
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
PAINTED PONY PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share amounts)
Revenue
Petroleum and natural gas
Royalties
Realized gain on commodity risk management (note 13)
Unrealized gain (loss) on commodity risk management (note 13)
Expenses
Operating
Transportation
General and administrative
Share-based compensation (note 9)
Depletion and depreciation (note 5)
Loss from operations
Finance expense (note 11)
Loss before taxes
Deferred tax recovery (note 12)
Net loss and comprehensive loss
Net loss per share (note 8):
Basic and diluted
See accompanying notes to the Consolidated Financial Statements.
Years ended December 31,
2015
2016
$ 121,580
(2,672)
118,908
19,912
(75,664)
63,156
34,535
15,894
10,566
5,778
43,329
110,102
(46,946)
(22,770)
(69,716)
17,859
$ (51,857)
$ 81,583
(2,008)
79,575
6,830
10,015
96,420
31,978
12,149
10,944
5,067
39,829
99,967
(3,547)
(3,260)
(6,807)
1,597
$ (5,210)
$ (0.52)
$ (0.05)
32
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
33
PAINTED PONY PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(000s, except shares)
Years ended December 31, 2016 and 2015
Balance at December 31, 2014
Share-based compensation
Stock options exercised (note 9)
Net loss
Balance at December 31, 2015
Share-based compensation
Stock options exercised (note 9)
Net loss
Number of
Common Shares
99,469,775
-
561,167
-
100,030,942
-
127,250
-
Share capital
$ 680,820
-
5,882
-
686,702
-
999
-
Contributed
surplus
$ 45,544
5,653
(2,267)
-
48,930
3,484
(299)
-
Deficit
Total equity
$ (57,439)
-
-
(5,210)
(62,649)
-
-
(51,857)
$ 668,925
5,653
3,615
(5,210)
672,983
3,484
700
(51,857)
Balance at December 31, 2016
100,158,192
$ 687,701
$ 52,115
$ (114,506)
$ 625,310
See accompanying notes to the Consolidated Financial Statements.
34
33
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
PAINTED PONY PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
Cash flows from operating activities:
Net loss and comprehensive loss
Adjustments for:
Depletion and depreciation
Share-based compensation
Accretion expense
Deferred income tax recovery
Unrealized (gain) loss on commodity risk management
Decommissioning expenditures (note 7)
Changes in non-cash working capital (note 17)
Cash flows from investing activities:
Property, plant and equipment additions
Changes in non-cash working capital (note 17)
Cash flows from financing activities:
Exercise of stock options
Increase in bank debt
Changes in non-cash working capital (note 17)
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See accompanying notes to the Consolidated Financial Statements.
Years ended December 31,
2015
2016
$ (51,857)
$ (5,210)
43,329
2,864
550
(17,859)
75,664
(102)
(7,931)
44,658
(204,391)
20,609
(183,782)
700
137,210
1,214
139,124
-
-
-
39,829
4,580
392
(1,597)
(10,015)
(4)
3,730
31,705
(106,654)
(22,926)
(129,580)
3,613
63,626
(79)
67,160
(30,715)
30,715
-
34
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
35
PAINTED PONY PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended December 31, 2016 and 2015
1. REPORTING ENTITY
Painted Pony Petroleum Ltd.’s (“Painted Pony” or the “Corporation”) principal business activity is the
exploration, development and production of petroleum and natural gas resources in northeast British
Columbia. The consolidated financial statements of the Corporation as at and for the years ended December
31, 2016 and 2015 include the accounts of the Corporation and its wholly owned subsidiary, Painted Rock
Resources Ltd. The Corporation’s head office is located at 1800, 736 – 6th Avenue S.W., Calgary, Alberta.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The
consolidated financial statements were authorized for issuance by the Board of Directors of the Corporation
(the “Board”) on February 27, 2017.
The consolidated financial statements have been prepared on the historical cost basis except for derivative
financial instruments, which are measured at fair value. The methods used to measure fair value are
discussed in note 14.
These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s and its
subsidiary’s functional currency.
The preparation of consolidated financial statements in conformity with IFRS requires management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Actual results may differ materially from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting
estimates recognized in the period in which the estimates are revised and in any applicable future periods.
(a) Critical Accounting Judgments
The following are critical judgments that management has made in the process of applying accounting
policies and that have the most significant effect on the amounts recognized in the consolidated financial
statements.
Cash-Generating Units
The Corporation’s assets are aggregated into cash-generating units (“CGU” or “CGUs”) for the purpose of
assessing impairment. CGUs are based on an assessment of the unit’s ability to generate independent
cash inflows. The determination of these CGUs was based on management’s judgment in regard to
shared infrastructure, geographical proximity, petroleum type and exposure to market risk and materiality.
By their nature, these assumptions are subject to management’s judgment and may impact the carrying
value of the Corporation’s net assets in future periods.
Impairment Indicators
Judgments are required to assess when impairment indicators exist and impairment testing is required.
The Corporation is required to consider information from both external sources (such as negative
downturn in commodity prices, significant adverse changes in the technological, market, economic or
legal environment in which the entity operates) and internal sources (such as downward revisions in
reserves, significant adverse effect on the financial and operational performance of a CGU, evidence of
obsolescence or physical damage to the asset). In determining the recoverable amount of assets, in the
absence of quoted market prices, impairment tests are based on estimates of reserves, production rates,
future petroleum and natural gas prices, future costs, discount rates, market value of land and other
relevant assumptions.
36
35
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
The application of the Corporation’s accounting policy for exploration and evaluation (“E&E”) assets
requires management to make certain judgments as to future events and circumstances as to whether
economic quantities of reserves have been found.
Deferred Taxes
In determining its deferred tax provisions, the Corporation must apply judgment when interpreting and
applying tax laws and regulations. The determination of the appropriate rules may be uncertain for many
periods. The final outcome could result in amounts different from those initially recorded and could
impact tax expense in the periods where a determination is made. Judgments are also made by
management to determine the likelihood of whether deferred tax assets at the end of the reporting period
will be realized from future taxable income.
(b) Critical Accounting Estimates
The following are key estimates and their assumptions made by management affecting the measurement
of balances and transactions in these consolidated financial statements.
Impact of Reserves
Estimation of recoverable quantities of proved and probable reserves includes estimates and
assumptions regarding future commodity prices, exchange rates, discount rates and production and
transportation costs for future cash flows as well as the interpretation of complex geological and
geophysical models and data. Changes in expected future cash flows in reported reserves can affect the
impairment of assets, the decommissioning obligations, the economic feasibility of E&E assets and the
amounts reported for depletion and depreciation of property, plant and equipment (“PP&E”), and the
recognition of deferred tax assets. These reserve estimates are prepared in accordance with the
Canadian Oil and Gas Evaluation Handbook and are verified by independent qualified reserve evaluators,
who work with information provided by the Corporation to establish reserve determinations in accordance
with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).
In a business combination, management makes estimates of the fair value of assets acquired and
liabilities assumed which includes assessing the value of petroleum and natural gas properties based
upon the estimation of recoverable quantities of proved and probable reserves being acquired.
Share-Based Compensation
All equity-settled, share-based awards issued by the Corporation are fair valued using the Black-Scholes
option-pricing model. In assessing the fair value of equity-based compensation, estimates have to be
made regarding the expected volatility in share price, option life, dividend yield, risk-free rate and
estimated forfeitures at the initial grant date.
Derivative Financial Instruments
Painted Pony records commodity price contracts at fair value with changes in fair value recognized in the
statements of operations. The Corporation’s estimate of the fair value is determined using observable
market data and external counterparty information, including estimated forward prices and volatility in
those prices.
Decommissioning Obligations
The Corporation estimates future remediation costs of production facilities, wells and pipelines at different
stages of development and construction of assets or facilities. In most instances, removal of assets
occurs many years into the future. This requires judgment regarding abandonment date, future
environmental and regulatory legislation, the extent of reclamation activities, the engineering methodology
for estimating cost, future removal technologies in determining the removal cost and liability-specific
discount rates to determine the present value of these cash flows.
Deferred Taxes
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect
amounts recognized in net income or loss both in the period of change, which would include any impact
on cumulative provisions, and in future periods.
Deferred tax assets are recognized only to the extent it is considered probable that those assets will be
recoverable. This involves an assessment of when those deferred tax assets are likely to reverse and a
judgment as to whether or not there will be sufficient taxable profits available to offset the tax assets when
they do reverse. This requires assumptions regarding future profitability and is therefore inherently
uncertain. Estimates of future taxable income are based on forecasted cash flows from operations.
37
36
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all years presented in these
consolidated financial statements, by both the Corporation and its subsidiary. Certain prior period amounts
have been restated to conform to presentation in the current period.
(a) Basis of Consolidation
Subsidiaries
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation has the power
to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In
assessing control, potential voting rights that currently are exercisable are taken into account. The
financial statements of subsidiaries are included in the consolidated financial statements from the date
that control commences until the date that control ceases.
The purchase method of accounting is used to account for acquisitions of subsidiaries and assets that
meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of
the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination
are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over
the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as
goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired,
the difference is recognized immediately in the statement of operations.
Jointly controlled operations and jointly controlled assets
A portion of the Corporation’s petroleum and natural gas activities involve jointly controlled assets. The
consolidated financial statements include the Corporation’s share of these jointly controlled assets and a
proportionate share of the relevant revenue and related costs.
Transactions eliminated on consolidation
Intercompany balances and transactions, and any unrealized income and expenses arising from
intercompany transactions, are eliminated in preparing the consolidated financial statements.
(b) Financial instruments
Non-derivative financial instruments
Non-derivative financial instruments comprise accounts receivable, accounts payable and accrued
liabilities, and bank debt. Non-derivative financial instruments are recognized initially at fair value plus, for
instruments not at fair value through comprehensive income or loss, any directly attributable transaction
costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described
below.
Accounts receivable are measured using the effective interest rate method, less any impairment losses.
Accounts payable and accrued liabilities are recognized at the amount required to be paid less any
required discount to reduce the payables to fair value. The carrying value of bank debt approximates its
fair value.
Derivative financial instruments
The Corporation has entered into certain financial derivative contracts in order to manage the exposure to
market risks from fluctuations in commodity prices. These instruments are not used for trading or
speculative purposes. The Corporation has not designated its financial derivative contracts as effective
accounting hedges and, therefore, has not applied hedge accounting, even though the Corporation
considers all commodity contracts to be economic hedges. As a result, all financial derivative contracts
are classified as fair value through profit or loss and are recorded on the statements of financial position
at fair value. Transaction costs are recognized in net income or loss when incurred.
The Corporation has issued deferred share units (“DSU” or “DSUs”) to members of the Board and eligible
executive officers. Each DSU is a notional unit equal in value to common share in the capital of the
Corporation (“Common Share”), which entitles the holder to a cash payment upon redemption. DSUs are
measured at fair value upon grant and each period end date, using the 20-day volume weighted average
price of Common Shares. DSUs are classified as fair value through profit or loss and are recorded on the
statements of financial position at fair value.
39
37
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
(c) Exploration and Evaluation Assets and Property, Plant and Equipment
Recognition and measurement
(i) Exploration and evaluation assets
Pre-licence costs are expensed as incurred. E&E costs, including the costs of acquiring licenses,
seismic, exploration drilling and directly attributable general and administrative costs initially are
capitalized as E&E assets according to the nature of the assets acquired. The costs are accumulated
in cost centers pending determination of technical feasibility and commercial viability.
The technical feasibility and commercial viability of extracting a mineral resource is considered to be
determinable when proved or probable reserves are determined to exist. A review is carried out, on a
quarterly basis, to ascertain whether proved or probable reserves have been discovered. Upon
determination of proved or probable reserves, E&E assets attributable to those reserves are first
tested for impairment and then reclassified from E&E assets to PP&E.
(ii) Property, plant and equipment
Items of PP&E, which include petroleum and natural gas development and production assets, and
finance lease assets, are measured at cost less accumulated depletion, depreciation and
accumulated impairment losses. Development and production assets are grouped into CGUs for
impairment testing. When significant parts of an item of PP&E, including petroleum and natural gas
interests, have different useful lives, they are accounted for as separate items.
Gains and losses on disposal of PP&E, are determined by comparing the proceeds from disposal, or
fair value or properties received, with the carrying amount of the asset and are recognized in income
or loss.
Costs incurred subsequent to the determination of technical feasibility and commercial viability and
the costs of replacing parts of PP&E are recognized as petroleum and natural gas interests only when
they increase the future economic benefits embodied in the specific assets to which they relate. All
other expenditures are recognized in net income or loss as incurred. Such capitalized petroleum and
natural gas interests generally represent costs incurred in developing proved and/or probable
reserves and bringing on or enhancing production from such reserves. The carrying amount of any
replaced or sold component is derecognized. The costs of periodic servicing of PP&E are recognized
in net income or loss.
Depletion and depreciation
The net carrying value of development or production assets and finance lease assets are depleted using
the unit of production method by reference to the ratio of production in the period to the related proved
and probable reserves, taking into account estimated future development costs necessary to bring those
reserves into production. Future development costs are estimated taking into account the level of
development required to produce the reserves. These estimates are reviewed by independent reserve
engineers on an annual basis, at a minimum.
Proved and probable reserves are estimated using independent reserve engineer reports in accordance
with NI 51-101 and represent the estimated quantities of petroleum, natural gas and natural gas liquids
which geological, geophysical and engineering data demonstrate with a specified degree of certainty to
be recoverable in future years from known reservoirs and which are considered commercially producible.
There should be a 50 percent statistical probability that the actual quantity of recoverable reserves will be
more than the amount estimated as proved and probable and a 50 percent statistical probability that it will
be less. The equivalent statistical probabilities for proved reserve components are 90 percent and 10
percent, respectively.
Such reserves may be considered commercially producible if management has the intention of
developing and producing them and such intention is based upon:
• a reasonable assessment of the future economics of such production;
• a reasonable expectation that there is a market for all or substantially all the expected petroleum and
natural gas production; and
38
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
41
• evidence that the necessary production, transmission and transportation facilities are available or can
be made available.
In determining reserves for use in the depletion and impairment calculations, a barrel of oil equivalent
(“boe”) conversion ratio of six thousand cubic feet of gas (“Mcf”) to one barrel of oil (“bbl”) (6 Mcf:1 bbl) is
used as an energy equivalency conversion method.
For other assets, depreciation is recognized in net income or loss on a declining-balance rate of 20%
based on their estimated useful lives. E&E assets are not depreciated.
(d) Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence
that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or
more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the
difference between its carrying amount and the present value of the estimated future cash flows
discounted at the original effective interest rate.
Individually significant financial assets are tested for impairment on an individual basis. The remaining
financial assets are assessed collectively in groups that share similar credit risk characteristics. All
impairment losses are recognized in net income or loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the
impairment loss was recognized. For financial assets measured at amortized cost the reversal is
recognized in net income or loss.
Non-financial assets
The carrying amounts of the Corporation’s non-financial assets, other than E&E assets and deferred tax
assets, are reviewed whenever there is an indication of impairment. If any such indication exists, the
asset’s recoverable amount is estimated.
For the purpose of impairment testing, assets are grouped together into CGUs, being the smallest group
of assets that generate cash inflows from continuing use that are largely independent of the cash inflows
of other assets or groups of assets. The recoverable amount of an asset or a CGU is the greater of its
value in use and its fair value less costs to sell.
In assessing fair value less costs to sell, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset. Fair value less costs to sell is generally computed by reference to the
present value of the future cash flows expected to be derived from production of proved and probable
reserves.
E&E assets are assessed for impairment if: (i) sufficient data exists to determine technical feasibility and
commercial viability, or (ii) facts and circumstances suggest that the carrying amount exceeds the
recoverable amount.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated
recoverable amount. Impairment losses are recognized in net income or loss. For purposes of impairment
testing, E&E assets are combined with cash-generating units.
Impairment losses recognized in prior years are assessed at each reporting date for any indications that
the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in
the estimates used to determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been
determined, net of depletion and depreciation, if no impairment loss had been recognized.
42
39
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
(e) Leased Assets
Payments made under operating leases are recognized in net income or loss on a straight-line basis (or
as otherwise contractually defined) over the term of the lease. Lease incentives received are recognized
as part of the total lease expense over the term of the lease.
Leases which transfer substantially all of the risks and rewards of ownership are classified as finance
leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its fair
value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset
is accounted for in accordance with the accounting policy applicable to the asset. Minimum lease
payments are apportioned between the finance expense and the reduction of the outstanding liability. The
finance expense is allocated to each period during the lease term so as to produce a constant periodic
rate of interest on the remaining balance of the liability.
(f) Share Capital
Common Shares are classified as equity. Incremental costs directly attributable to the issue of shares and
stock options are recognized as a deduction from equity, net of tax.
(g) Share-Based Compensation
The Corporation has issued stock options to acquire Common Shares to directors, executive officers and
employees. The fair value of stock options on the date they are granted is recognized as share-based
compensation expense with a corresponding increase in contributed surplus over the vesting period. A
forfeiture rate is estimated on the grant date, and the expense is adjusted to reflect actual forfeitures
throughout the vesting period. The Corporation uses the Black-Scholes model to estimate fair value.
(h) Provisions
A provision is recognized if, as a result of a past event, the Corporation has a present legal or
constructive obligation that can be estimated reliably and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are determined by discounting the expected
future cash flows at a pre-tax risk free rate.
Decommissioning obligations
The Corporation’s activities give rise to dismantling, decommissioning and site disturbance remediation
activities. Provision is made for the estimated cost of site restoration and is capitalized in the relevant
asset category.
Decommissioning obligations are measured at the present value of management’s best estimate of the
expenditure required to settle the present obligation at the reporting date. Subsequent to the initial
measurement, the obligation is adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. The increase in the provision due to
the passage of time is recognized as a finance expense whereas increases/decreases due to changes in
the estimated future cash flows are capitalized. Actual costs incurred upon settlement of the
decommissioning obligations are charged against the provision to the extent the provision had been
established.
(i) Revenue Recognition
Revenue from the sale of petroleum and natural gas is recorded when the significant risks and rewards of
ownership of the product are transferred to the buyer, which is usually when legal title passes to the
external party, and when collection is reasonably assured.
(j) Finance Expense
Finance expense consists of interest expense and standby fees on credit facilities, costs related to the
implementation of the credit facilities, accretion on the decommissioning obligation, and costs associated
with the finance lease obligation.
(k) Income Tax
Income tax expense comprises current and deferred tax expense and is recognized in net income or loss
except to the extent that it relates to items recognized directly in equity.
40
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
43
Deferred tax is recognized using the balance sheet method, providing for temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a
transaction that is not a business combination. Deferred tax is measured at the tax rates that are
expected to be applied to temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if
there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax
authority on the same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is likely that future taxable profits will be available
against which the temporary difference can be utilized. Deferred tax assets are reviewed at each
reporting date and are reduced to the extent that it is no longer likely that the related tax benefit will be
realized.
(l) Foreign Currency Translation
The principal currency of the economic environment in which the Corporation and its wholly owned
subsidiary operate is the Canadian dollar. Monetary assets and liabilities denominated in foreign
currencies are translated into Canadian dollars at exchange rates in effect at the end of the period, and
revenues and expenses are translated into Canadian dollars at average exchange rates. All translation
gains and losses are recorded to income.
(m) Per Share Information
Basic per share information is calculated on the basis of the weighted average number of Common
Shares outstanding during the period. Diluted per share information reflects the potential dilutive effect of
stock options. Anti-dilutive instruments are not included in the determination of diluted income (loss) per
share.
(n) Future Accounting Pronouncements
A number of new accounting standards, amendments to accounting standards and interpretations are
effective for annual periods beginning on or after January 1, 2017 and have not been applied in preparing
the consolidated financial statements for the year ended December 31, 2016. The standards applicable to
the Corporation are as follows and will be adopted on their respective effective dates:
Liabilities Arising from Financing Activities
As of January 1, 2017, the Corporation will be required to adopt IAS 7 “Statement of Cash Flows”, which
requires disclosures that enable financial statement users to evaluate changes in liabilities arising from
financing activities, including both changes arising from cash flows and non-cash changes. The
Corporation does not anticipate a material impact on its consolidated financial statements as a result of
adopting IAS 7.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 “Financial Instruments”, which replaces IAS 39
“Financial Instruments: Recognition and Measurement”. The standard will come into effect for annual
periods beginning on or after January 1, 2018 with earlier adoption permitted.
IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized
cost or fair value and replaces the multiple rules in IAS 39. The approach is based on how an entity
manages its financial instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. For financial liabilities, IFRS 9 retains most of the requirements of
IAS 39; however, where the fair value option is applied to financial liabilities, any change in fair value
resulting from an entity’s own credit risk is recorded in OCI rather than the statement of operations,
unless this creates an accounting mismatch. Based on its preliminary assessment, the Corporation does
not anticipate these changes to have a material impact on its consolidated financial statements.
In addition, IFRS 9 introduces a new expected credit loss model for calculating impairment of financial
assets, replacing the incurred loss impairment model required by IAS 39. The new model will result in
more timely recognition of expected credit losses. Painted Pony does not anticipate the new impairment
model to have a material impact on the consolidated financial statements.
44
41
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
IFRS 9 also contains a new model to be applied for hedge accounting, aligning hedge accounting more
closely with risk management. The Corporation does not currently apply hedge accounting to its risk
management contracts and does not currently intend to apply hedge accounting to any of its existing risk
management contracts on adoption of IFRS 9.
Revenue Recognition
As of January 1, 2018, the Corporation will be required to adopt IFRS 15 “Revenue from Contracts with
Customers”, which replaces IAS 18 “Revenue”. The standard provides a single, principles based 5 step
model to be applied to all contracts with customers. The standard requires an entity to recognize revenue
to reflect the transfer of goods and services for the amount it expects to receive, when control is
transferred to the purchaser. Disclosure requirements have also been expanded.
The standard is required to be adopted either retrospectively or using a modified retrospective approach
for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Corporation
is in the process of reviewing its revenue streams and underlying contracts with customers to determine
the impact, if any, that the adoption of IFRS 15 will have on its financial statements and related
disclosure.
Leases
In January 2016, the IAS issued IFRS 16 “Leases”, which replaces IAS 17 “Leases”, and provides that a
single recognition and measurement model for leases would apply, with required recognition of assets
and liabilities for most leases. For lessees, IFRS 16 removes the classification of leases as either
operating or finance leases, effectively treating all leases as finance leases. Certain short-term leases
(less than 12 months) and leases of low-value assets are exempt from the requirements, and may
continue to be treated as operating leases.
IFRS 16 is effective for years beginning on or after January 1, 2019, with early adoption permitted if IFRS
15 “Revenue from Contracts with Customers” has been adopted. The standard may be applied
retrospectively or using a modified retrospective approach. It is anticipated that the adoption of IFRS 16
will have a material impact on the Corporation’s consolidated statement of financial position due to
material
operating lease commitments as disclosed in note 16.
4. EXPLORATION AND EVALUATION (“E&E”) ASSETS
(000s)
As at December 31, 2014
Transfer to property, plant and equipment
As at December 31, 2015
Transfer to property, plant and equipment
As at December 31, 2016
$ 120,078
(3,933)
$ 116,145
(1,894)
$ 114,251
Exploration and evaluation assets consist of undeveloped lands and unevaluated seismic data on the
Corporation’s exploration projects which are pending the determination of proved or probable reserves.
Additions represent the Corporation’s share of costs incurred on E&E assets during the period. Transfers are
made to PP&E as proved or probable reserves are determined. E&E assets are expensed due to non-
economic drilling and completion activities and lease expiries. The Corporation assesses the recoverability of
E&E assets on the transfer to PP&E.
42
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
46
5. PROPERTY, PLANT & EQUIPMENT
(000s)
Cost:
As at December 31, 2014
Cash additions
Non-cash additions
Transfer from exploration and evaluation
As at December 31, 2015
Cash additions
Non-cash additions
Finance lease assets
Transfer from exploration and evaluation
As at December 31, 2016
Accumulated depletion and depreciation:
As at December 31, 2014
Depletion and depreciation
As at December 31, 2015
Depletion and depreciation
As at December 31, 2016
Carrying amounts:
December 31, 2015
December 31, 2016
$ 683,898
106,654
7,907
3,933
$ 802,392
204,391
8,549
360,860
1,894
$ 1,378,086
$ 136,730
39,829
$ 176,559
43,329
$ 219,888
$ 625,833
$ 1,158,198
Estimated future development costs associated with the development of the Corporation’s proved plus
probable reserves at December 31, 2016 and at December 31, 2015 were $2.9 billion and $3.2 billion,
respectively.
(a) Property Swap
On July 27, 2016, Painted Pony announced that it had entered into a non-cash asset exchange
agreement, in respect of acreage, wells and non-operated facility interests, with a large industry partner
on jointly held acreage in the Daiber, Cameron and Blair Creek areas of British Columbia. The asset
exchange closed on September 26, 2016, with an effective date of January 1, 2016. Adjustments
between the effective and closing dates are included in PP&E as property dispositions. Management
performed an assessment of the exchange agreement, and concluded that the transaction did not meet
the criteria to record an accounting gain or loss.
(b) Capitalized General and Administrative Expense, Recoveries and Share-Based Compensation
(000s)
General and administrative
Capital recoveries
Share-based compensation
Total
Years ended December 31,
2016
2015
$ 4,720
$ 5,937
1,291
2,343
1,073
620
$ 8,900
$ 7,084
47
43
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
6. BANK DEBT
At December 31, 2016, the Corporation’s syndicated credit facilities were $325 million, with the semi-annual
borrowing base review to be completed by April 30, 2017.
The facilities are provided by a syndicate of financial institutions, and include a $275 million extendible
revolving facility and a $50 million operating facility. The facilities revolve for a 2-year period, which is
extendible annually, subject to syndicate approval. The facilities are subject to semi-annual review and re-
determination of borrowing base by April 30 and October 31 of each year, or in the circumstance of a material
adverse event. Any re-determination of the borrowing base is effective immediately, and if the borrowing base
is reduced, the Corporation has 60 days to repay any shortfall.
As at December 31, 2016 Painted Pony had $200.0 million in bankers’ acceptances with an effective interest
rate of 4.68% per annum. In addition, as at December 31, 2016 the Corporation had an outstanding letter of
credit of $14.9 million, which reduces the credit available on the operating facility.
The credit facilities bear interest on a matrix system that ranges from the bank’s prime rate plus 1.0% to the
bank’s prime rate plus 3.5% per annum depending on the Corporation’s total debt to EBITDA ratio as defined
by the lenders, ranging from less than 1:1 to greater than 4:1. The credit facilities provide that advances may
be made by way of prime rate loans, U.S. Base Rate loans, London InterBank Offered Rate loans, bankers’
acceptances, letters of credit or letters of guarantee. A standby fee of 0.5% to 1.125% per annum is charged
on the undrawn portion of the credit facilities, also calculated depending on the Corporation’s total debt to
EBITDA ratio, as defined by the lenders. At December 31, 2016, the Corporation’s total debt to EBITDA ratio
was 1.96:1.
Security is provided by a floating charge demand debenture in the aggregate amount of $500 million on all of
the Corporation’s assets. The Corporation has provided a negative pledge and an undertaking to provide
fixed charges over major producing petroleum and natural gas reserves in certain circumstances. The
syndicated credit facilities are not subject to financial covenants.
7. DECOMMISSIONING OBLIGATIONS
Years ended December 31, (000s)
Balance, beginning of year
Provisions
Revisions
Decommissioning expenditures
Accretion (note 11)
Balance, end of year
2016
$ 21,480
7,721
208
(102)
550
2015
$ 14,258
2,446
4,388
(4)
392
$ 29,857
$ 21,480
The Corporation’s decommissioning obligations result from its ownership interest in petroleum and natural
gas assets including well sites and facilities. The total decommissioning obligation is estimated based on the
Corporation’s net ownership interest in all wells and facilities, estimated costs to reclaim and abandon these
wells and facilities and the estimated timing of the costs to be incurred in future years. The Corporation has
estimated the net present value of the decommissioning obligations based on an undiscounted total future
liability of $64.2 million, compared to $47.5 million at December 31, 2015, with payments expected to be
made over the next 12 to 49 years. The discount factor, being the risk-free rate related to the liability at
December 31, 2016, was 2.1%, compared to 2.2% at December 31, 2015, and the inflation rate was 2% at both
December 31, 2016 and 2015.
44
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
48
8. NET LOSS PER SHARE
Years ended December 31,
Net loss (000s)
2016
$ (51,857)
2015
$ (5,210)
Weighted average common shares – basic and diluted
100,069,546
99,800,764
Net loss per share – basic and diluted
$ (0.52)
$ (0.05)
The average market value of the Corporation’s Common Shares for purposes of determining the dilutive
effect of outstanding stock options was based on quoted market prices for the period. During the years ended
December 31, 2016 and 2015, all stock options were excluded from the weighted-average diluted share
calculation of Common Shares.
9. SHARE CAPITAL
(a) Authorized
The Corporation has an unlimited number of Common Shares and an unlimited number of preferred
shares (“Preferred Shares”) authorized for issuance. At December 31, 2016 there were 100,158,192
Common Shares issued and outstanding, compared to 100,030,942 Common Shares issued and
outstanding at December 31, 2015 and, nil Preferred Shares issued and outstanding at either date.
The Common Shares entitle the holder thereof to one vote for every share held. There are no fixed
dividends payable on the Common Shares. In the event of the liquidation or dissolution of the
Corporation, the Common Shares are entitled to receive, on a pro rata basis, all assets of the Corporation
as are distributable to the holders of shares.
(b) Stock options
The Corporation has a stock option program that entitles employees, officers and directors to purchase
Common Shares in the Corporation. Stock options are granted at the market price of the shares at the
date of grant and have a five-year term. Prior to December 31, 2015, options granted vested as to one-
third immediately, with the balance over two years. Effective January 1, 2016, options granted vest as to
one-third on each of the first, second and third anniversaries of the grant date.
The number and weighted average exercise prices of stock options are as follows:
As at December 31, 2014
Granted
Exercised
Forfeited
As at December 31, 2015
Granted
Exercised
Forfeited
As at December 31, 2016
Weighted Average
Exercise Price
$ 9.17
4.34
6.45
9.11
$ 8.26
4.30
5.50
10.93
$ 7.45
Number
8,155,101
1,979,300
(561,167)
(697,767)
8,875,467
1,066,650
(127,250)
(1,192,350)
8,622,517
49
45
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
The following table summarizes information about stock options outstanding at December 31, 2016:
Number of
Stock Options
Outstanding
411,900
408,900
330,000
353,100
360,000
359,000
1,349,167
290,000
66,000
154,000
210,000
1,398,100
33,000
4,500
1,837,350
987,000
39,000
16,500
15,000
8,622,517
Exercise
Price ($)
11.80
7.56
10.86
10.59
10.33
10.13
6.44
8.44
10.64
12.17
14.14
8.78
6.72
6.09
4.26
4.14
5.58
7.61
7.90
7.45
Remaining Life
(Years)
0.1
0.3
0.7
0.9
1.0
1.2
1.9
2.2
2.4
2.5
2.7
2.9
3.2
3.2
3.9
4.1
4.4
4.5
4.7
2.5
Exercisable
Stock Options
411,900
408,900
330,000
353,100
360,000
359,000
1,349,167
290,000
66,000
154,000
210,000
1,398,100
22,000
3,000
1,205,184
-
-
-
-
6,920,351
Exercise
Price ($)
11.80
7.56
10.86
10.59
10.33
10.13
6.44
8.44
10.64
12.17
14.14
8.78
6.72
6.09
4.26
4.14
5.58
7.61
7.90
8.22
The Corporation accounts for its stock options granted to employees, officers and directors using the fair
value method. In accordance with the Corporation’s incentive stock plan, these stock options have an
exercise price equal to the fair value of the Common Shares at the date of grant.
The weighted-average fair values of the stock options granted and the assumptions used in the Black-
Scholes option pricing model were as follows:
Years ended December 31,
Fair value per stock option
Volatility (%)
Life (years)
Risk-free interest rate (%)
2016
$ 1.86
50
5
0.68
2015
$ 1.81
47
5
0.96
A forfeiture rate of 11% was used when measuring share-based compensation, for both December 31,
2016 and 2015.
The components of share-based compensation expense are presented in the table below:
Years ended December 31, (000s)
Share-based compensation
Deferred share unit expense
Total
2016
$ 2,864
2,914
$ 5,778
2015
$ 4,580
487
$ 5,067
46
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
50
10. DEFERRED SHARE UNITS
As at December 31, 2014
Grant
Revaluation
As at December 31, 2015
Grant
Accrued but not granted
Revaluation
As at December 31, 2016
Deferred Share Units
-
143,337
-
143,337
139,005
70,347
-
352,689
Deferred Share
Units Liability (000s)
$ -
939
(452)
487
812
670
1,432
$ 3,401
The Corporation has a deferred share unit (“DSU”) plan, where by DSUs are issued to members of the Board
and eligible executive officers. Each DSU is a notional unit equal in value to one Common Share, which
entitles the holder to a cash payment upon redemption. DSUs vest upon grant but can only be converted to
cash upon the holder ceasing to be a director or executive officer of the Corporation.
The expense associated with the DSU plan is determined based on the 20-day volume weighted average
price of Common Shares at the grant date. The expense is recognized in the statement of operations
immediately upon grant, with a corresponding DSU liability recorded as a current liability in the statement of
financial position. At period end dates, the DSU liability is adjusted based on the 20-day volume weighted
average price of Common Shares.
11. FINANCE EXPENSE
Years ended December 31, (000s)
Finance lease expense (note 15)
Bank finance expense
Accretion of decommissioning obligations (note 7)
Finance expense
12. DEFERRED TAXES
Reconciliation of effective tax rate:
Years ended December 31, (000s)
Loss before taxes
Combined corporate tax rate
Expected tax reduction
Non-deductible expenses
Non-deductible share-based compensation
Change in statutory tax rates and true-ups
Other
Total deferred tax recovery
2016
$ 14,165
8,055
550
$ 22,770
2015
$ -
2,868
392
$ 3,260
2016
$ (69,716)
26.5%
2015
$ (6,807)
26.0%
(18,475)
45
759
(214)
26
(1,770)
38
1,191
(1,081)
25
$ (17,859)
$ (1,597)
51
47
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Deferred tax assets and liabilities are attributable to the following:
December 31, (000s)
Deferred tax liabilities:
PP&E and E&E assets
Fair value of financial instruments
Less deferred tax assets:
Non-capital losses
Fair value of financial instruments
Decommissioning obligations
Other
2016
2015
$ (69,174)
-
(69,174)
$ (38,487)
(3,938)
(42,425)
75,897
16,038
7,912
1,887
49,944
-
5,692
1,490
Net deferred tax asset
$ 32,560
$ 14,701
The Corporation has non-capital losses of $286.4 million. Virtually all of these losses expire beginning in the
year 2030. The Corporation has determined that it is likely that these losses will be utilized against future
taxable income.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation’s activities expose it to a variety of financial risks that arise as a result of its exploration,
development, production and financing activities. These include market risk, credit risk and liquidity risk.
The Board oversees management’s establishment and execution of the Corporation’s risk management
framework. Management has implemented and monitors compliance with risk management policies. The
Corporation’s risk management policies are established to identify and analyze the risks faced by the
Corporation, to set appropriate risk limits and controls and to monitor risks and adherence to market
conditions and the Corporation’s activities.
(a) Market risk
Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates
and interest rates, will affect the Corporation’s income or the value of the financial instruments. The
objective of market risk management is to manage and control market risk exposures within acceptable
parameters, while optimizing the return.
Natural gas prices obtained by the Corporation are influenced by both US and Canadian supply and
demand. The exchange rate effect cannot be quantified but generally an increase in the value of the
Canadian dollar as compared to the U.S. dollar will reduce the prices received by the Corporation for its
petroleum and natural gas sales. Commodity price risk is the risk that the fair value or future cash flows
will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas
are impacted by not only the relationship between the Canadian and United States dollars, but also upon
world political and economic events that dictate the levels of supply and demand.
The Corporation’s production is usually sold through near term sales contracts with prices fixed at the
time of transfer of custody or on the basis of a monthly average market price. The Corporation, however,
may give consideration in certain circumstances to the appropriateness of entering into long term fixed
price marketing contracts. The majority of the Corporation’s natural gas and NGLs are sold to one purchaser
monthly on a best-efforts basis.
The Corporation uses financial derivatives and physical delivery sales contracts to mitigate some of the
exposure to commodity price risk, and provide a level of stability to operating cash flows which enables
the Corporation to fund its capital development program. The use of these transactions is governed by
and is subject to risk management policies established by the Board.
48
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
52
These instruments are not used for trading or speculative purposes. The Corporation has not designated
its financial derivative contracts as effective accounting hedges, even though the Corporation considers
all commodity contracts to be effective economic hedges. As a result, all such commodity contracts are
recorded at fair value on the statement of financial position, with changes in the fair value being
recognized as an unrealized gain or loss in the statement of operations.
Financial assets and liabilities carried at fair value are required to be classified into a hierarchy that
prioritizes the inputs used to measure the fair value. The Corporation’s risk management contracts are
valued using Level 2 inputs. Assets and liabilities in Level 2 are based on valuation models and
techniques where the significant inputs are derived from quoted indices.
The following is a summary of all commodity risk management contracts in place as at December 31, 2016.
Financial AECO Natural Gas Contracts
Reference
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
Volume
(GJ/d)
90,000
75,000
90,000
145,000
71,000
71,000
50,000
24,000
18,000
18,000
25,000
Term
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q4 2017 – Q4 2019
Weighted Average
Price ($/GJ)
2.87
2.85
2.86
2.89
2.93
2.85
2.81
2.72
2.64
2.64
2.88
Options
Traded
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Call Options
Financial Station 2 Natural Gas Contracts
Reference
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
CDN$ Station 2
Volume
(GJ/d)
75,000
90,000
100,000
120,000
105,000
42,000
37,000
37,000
37,000
37,000
25,000
10,000
Term
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Weighted Average
Price ($/GJ)
1.82
1.90
1.93
2.07
2.04
2.38
2.36
2.36
2.36
2.36
2.37
2.45
Options
Traded
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Swaps
Financial WTI Crude Oil Contracts
Volume
(bbl/d)
500
500
Reference
CDN$ WTI
CDN$ WTI
Term
Q1 2017 – Q4 2017
Q1 2018 – Q4 2019
Weighted Average
Price ($/bbl)
70.05
70.20
Options
Traded
Swaps
Swaps
53
49
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Subsequent to December 31, 2016, Painted Pony entered into an additional commodity risk management
contract as follows:
Reference
CDN$ AECO
Volume
(GJ/d)
10,000
Term
Q1 2018
Weighted Average
Price ($/GJ)
3.16
Options
Traded
Swap
Changes in the price assumptions can have a significant effect on the fair value of the derivative assets and
liabilities and thereby impact income. For financial instruments in place at December 31, 2016, It is
estimated that a $0.10 per mcf change in the forward natural gas prices used to calculate the fair value of
natural gas derivatives at December 31, 2016 would result in a $10.1 million change in net loss for the year
ended December 31, 2016. It is estimated that a $1.00 per bbl change in the forward crude oil prices used to
calculate the fair value of crude oil derivatives at December 31, 2016 would result in a $0.4 million change in
net loss for the year ended December 31, 2016.
Foreign currency exchange risk is the risk that the fair value of future cash flows will fluctuate as a result of
changes in foreign exchange rates. Substantially all of the Corporation’s petroleum and natural gas sales
are conducted in Canada and are denominated in Canadian dollars, however, Canadian commodity prices
are influenced by fluctuations in the Canadian to U.S. dollar exchange rate.
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest
rates. The Corporation is exposed to interest rate fluctuations on its bank debt which bears a floating rate
of interest. In the year ended December 31, 2016, if interest rates had been 1.0% lower with all other
variables held constant, net loss for the year would have been $1.3 million lower. An equal and opposite
impact would have occurred to net loss had interest rates been 1.0% higher.
Financial assets and liabilities are presented on a net basis if the Corporation has a legal right to offset
and intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. The
Corporation offsets financial assets and liabilities when the counterparty, currency and timing of
settlement are the same. The following tables provide a summary of the Corporation’s offsetting financial
derivative positions, and how risk management contracts are classified on the statement of financial
position, respectively.
As at
Gross in-the-money risk management contracts
Gross out-of-the-money risk management contracts
Net fair value of risk management contracts
December 31, 2016 December 31, 2015
$ 1,269
(61,788)
$ (60,519)
$ 15,145
-
$ 15,145
As at
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net fair value of risk management contracts
December 31, 2016 December 31, 2015
$ 9,106
6,039
-
-
$ -
1,269
(46,020)
(15,768)
$ (60,519)
$ 15,145
(b) Credit risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial
instrument fails to meet its contractual obligations and arises principally from the Corporation’s
receivables from joint venture partners and petroleum and natural gas purchasers. The Corporation’s
maximum exposure to credit risk at December 31, 2016 and 2015 is as follows:
Carrying amount, December 31, (000s)
Accounts receivable
Fair value of financial instruments
Total
54
50
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
2016
$ 29,568
1,269
$ 30,837
2015
$ 8,174
15,145
$ 23,319
Accounts receivable
All of the Corporation’s operations are conducted in Canada. The Corporation’s exposure to credit risk is
influenced mainly by the individual characteristics of each customer.
Receivables from petroleum and natural gas purchasers are normally collected on the 25th day of the month
following production. The Corporation’s policy to mitigate credit risk associated with these balances is to
establish marketing relationships with large purchasers. The Corporation historically has not experienced
any collection issues with its petroleum and natural gas purchasers. Receivables from joint venture
partners are typically collected within one to three months of the joint venture bill being issued. The
Corporation does not typically obtain collateral from petroleum and natural gas purchasers or joint venture
partners; however, the Corporation does have the ability to withhold joint venture partners’ share of
production from operated wells in the event of non-payment.
The Corporation does not anticipate any default as it transacts with creditworthy customers and
management does not expect any losses from non-performance by these customers. As such, a provision
for doubtful accounts has not been recorded at either December 31, 2016 or 2015.
The breakdown of accounts receivable at the reporting date by type of customer was:
Carrying amount, December 31, (000s)
Petroleum and natural gas revenue
Joint interest
Other
Total
2016
$ 27,781
523
1,264
$ 29,568
2015
$ 6,855
143
1,176
$ 8,174
The Corporation has one primary purchaser (see note 15) of natural gas and NGLs; these purchases
accounted for $23.6 million of accounts receivable at December 31, 2016, compared to $5.5 million as at
December 31, 2015. As at December 31, 2016 and 2015, the Corporation’s accounts receivable are aged
as follows:
Carrying amount, December 31, (000s)
Less than 30 days
From 31 – 90 days
More than 90 days
Total
2016
$ 29,542
24
2
$ 29,568
2015
$ 8,124
7
43
$ 8,174
Derivative Financial Instruments
The use of financial swap agreements involves a degree of credit risk that the Corporation manages
through its risk management policies which are designed to limit eligible counterparties to those with
investment grade credit ratings or better.
(c) Liquidity risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they
become due. The Corporation’s approach to managing liquidity is to ensure, to the extent possible, that it
will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the Corporation’s reputation.
Management closely monitors cash flow requirements to ensure that is has sufficient borrowing capacity
to meet operational and financial obligations currently and in the foreseeable future; this excludes the
potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters.
To achieve this objective, the Corporation prepares annual capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the Corporation utilizes authority for
expenditures on both operated and non-operated projects to further manage capital expenditures. The
Corporation also typically collects its petroleum and natural gas revenues from most properties on the 25th
of each month.
55
51
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
To facilitate the capital expenditure program, the Corporation has an aggregate of $325 million in
available syndicated credit facilities at December 31, 2016 compared to $225 million at December 31,
2015, which are reviewed semi-annually by its lenders.
(d) Capital management
The Corporation’s policy is to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business. The Corporation manages its
capital structure and makes adjustments to it in the light of changes in economic conditions and the risk
characteristics of the underlying petroleum and natural gas assets. The Corporation considers its capital
structure to include shareholders’ equity, loans and borrowings and working capital. In order to maintain
or adjust the capital structure, the Corporation may issue shares and adjust its capital spending to
manage current and projected debt levels.
The Corporation monitors capital based on the ratio of total debt to annualized cash flow. This ratio is
calculated as total debt, defined as outstanding loans and borrowings plus or minus working capital,
excluding fair value of risk management contracts, divided by cash flow from operations before changes
in non-cash working capital and decommissioning expenditures for the most recent calendar quarter and
then annualized. In order to facilitate the management of this ratio, the Corporation prepares annual
capital expenditure budgets, which are updated as necessary depending on varying factors including
current and forecast prices, successful capital deployment and general industry conditions. The annual
and updated budgets are approved by the Board of Directors of the Corporation.
As a result of shifting from an exploration-focused program to a development-focused program, the
Corporation has adapted its approach to capital management to include low cost bank debt as part of the
capital structure going forward. Neither the Corporation nor its subsidiary is subject to externally imposed
capital requirements. The syndicated credit facilities are subject to a periodic review of the borrowing
base which is directly impacted by the value of the petroleum and natural gas reserves.
14. DETERMINATION OF FAIR VALUES
A number of the Corporation’s accounting policies and disclosures require the determination of fair value, for
both financial and non-financial assets and liabilities. Fair values have been determined for measurement
and/or disclosure purposes based on the following methods. When applicable, further information about the
assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
(a) Property, Plant and Equipment and Exploration and Evaluation Assets
The fair values of PP&E and E&E assets recognized in an acquisition, are based on market values. The
fair values of PP&E and E&E are the estimated amounts for which they could be exchanged on the
acquisition date between a willing buyer and a willing seller in an arm’s length transaction after proper
marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair
value of petroleum and natural gas interests (included in PP&E) and E&E assets is estimated with
reference to the discounted cash flows expected to be derived from petroleum and natural gas
production, based on externally prepared reserve reports. The risk-adjusted discount rate is specific to
the asset with reference to general market conditions.
(b) Accounts Receivable, Accounts Payable and Accrued Liabilities and Bank Debt
The fair value of accounts receivable, accounts payable and accrued liabilities, and bank debt are
estimated as the present value of future cash flows, discounted at the market rate of interest at the
reporting date. At December 31, 2016 and December 31, 2015, the fair value of these balances
approximated their carrying value. Bank debt has a floating rate of interest and therefore the carrying
value approximates the fair value.
(c) Stock Options
The fair value of employee stock options is measured using a Black-Scholes option pricing model.
Measurement inputs include share price on measurement date, exercise price of the instrument,
expected volatility, weighted average expected life of the instruments (based on historical experience and
general stock option holder behavior), expected dividends and the risk-free interest rate.
52
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
56
(d) Derivatives
Measurement
The Corporation classifies the fair value of derivative transactions according to the following hierarchy
based on the amount of observable inputs used to value the instrument.
(i)
(ii)
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1. Prices
are either directly or indirectly observable as of the reporting date. Level 2 valuations are based
on inputs, including quoted forward prices for commodities, time value and volatility factors, which
can be substantially observed or corroborated in the marketplace.
(iii)
Level 3: Valuations in this level are those with inputs for the asset or liability that are not based on
observable market data.
The fair value of commodity price risk management contracts is determined by discounting the difference
between the contracted prices and published forward price curves as at the date of the statement of
financial position, using the remaining contracted petroleum and natural gas volumes and risk-free
interest rate (based on published government rates). The Corporation’s commodity price contracts are
valued using Level 2 of the hierarchy.
The fair value of DSUs is measured upon grant and at each period end date, using the 20-day volume
weighted average price of Common Shares. The Corporation’s deferred share units are valued using
Level 1 of the hierarchy.
15. ALTAGAS STRATEGIC ALLIANCE
On August 18, 2014 the Corporation entered into a series of agreements (collectively the “Strategic Alliance”)
with AltaGas Ltd. (“AltaGas”) relating to the development of processing infrastructure and marketing services
for natural gas and NGLs. The chairman of the board of directors of AltaGas is a director of Painted Pony.
Under the Strategic Alliance, AltaGas committed to building gas processing facilities including a 198 MMcf/d
shallow cut gas processing facility at the Townsend property (the “Townsend Facility”) and related pipeline
infrastructure, which commenced commercial operations in July 2016. Painted Pony does not acquire any
legal right, title, or interest in the Townsend Facility or pipeline. All construction costs are borne by AltaGas.
The Corporation has the right to a minimum of 150 MMcf/d of firm capacity at this facility effective October 1,
2016, increasing to 198 MMcf/d of firm capacity by August 1, 2017, in respect of each of which there is a take
or pay obligation on production volumes delivered to the facility of 135 MMcf/d commencing October 1, 2016
and 180 MMcf/d commencing August 1, 2017.
The Townsend Facility and related pipeline infrastructure have been recorded as a finance lease. Painted
Pony has recorded the asset, representing the total estimated construction cost of the Townsend Facility, with
a corresponding obligation on the statement of financial position. Over the course of the 20-year lease, there
will be a capital fee paid to AltaGas, which will include finance costs and the amortization of the obligation.
The associated processing fee will be recorded in operating expenses.
The cost of the Townsend Facility is approximately $325.2 million and the cost of related pipeline
infrastructure is approximately $35.6 million. Total expected payments based on annual take or pay volumes,
including both the principal and financing components, are reflected in the table below in addition to other
commitments that are reflected in Note 16.
57
53
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
($000s)
Processing
Transportation
Total
Principal
Within 1
year
34,437
3,570
38,007
-
After 1 year but no
more than five years
218,669
20,653
239,322
44,515
More than
five years
487,113
83,372
570,485
316,345
Total
740,219
107,595
847,814
360,860
Under the Strategic Alliance, AltaGas is committed to acting as the primary marketer of Painted Pony’s
natural gas and NGLs production volumes. As a result, effective April 1, 2015, Painted Pony began receiving
and will continue to receive substantially all of its NGLs revenue from AltaGas. Effective November 1, 2015,
Painted Pony also began receiving and will continue to receive substantially all of its natural gas revenue
from AltaGas. At December 31, 2016, $23.6 million was outstanding from Altagas in accounts receivable.
16. COMMITMENTS
($000s)
Transportation
Processing
Office leases
Total commitments
2017
18,733
3,129
1,447
23,309
2018
40,229
-
1,466
41,695
2019
46,228
-
1,175
47,403
2020
44,618
-
-
44,618
2021 Thereafter
663,935
-
-
41,518
-
-
41,518
663,935
Total
855,261
3,129
4,088
862,478
Transportation commitments include contracts to transport natural gas and NGLs through third-party owned
pipeline systems in British Columbia. Processing commitments include contracts to process natural gas
through third-party owned gas processing facilities in British Columbia. Office leases include the Corporation’s
contractual obligations for office space.
The Corporation has certain lease arrangements that are reflected in the commitments table above, which
were entered into in the normal course of operations. All leases, other than the Townsend Facility finance
lease, have been treated as operating leases whereby the lease payments are included in operating
expenses or general and administrative expenses depending on the nature of the lease.
Subsequent to December 31, 2016, Painted Pony committed to enter into an agreement with AltaGas in
respect of the next phase of the Townsend Facility (“Townsend Phase 2”). AltaGas will be constructing
Townsend Phase 2 in two separate gas processing trains, the first of which will be a 99 MMcf/d gas
processing facility to be located on the existing Townsend site. Including the addition of incremental field
compression equipment, the estimated total cost of the first train will be approximately $120 to $140 million.
Painted Pony expects to enter into the agreement to be the sole supplier of natural gas to this first train and
associated field compression equipment during 2017.
17. SUPPLEMENTAL DISCLOSURES
(a) Key Management Personnel Compensation
Key management personnel are persons who have the authority and responsibility for planning, directing
and controlling the activities of the Corporation, directly or indirectly. This includes all directors and
executives of the Corporation. Short-term compensation includes salaries, bonuses and short-term
benefits paid to executives and fees paid to directors. Share-based compensation represents
amortization of the expense associated with stock options granted to executives and directors.
Years ended December 31, (000s)
Short-term compensation
Share-based compensation
Total
2016
$ 4,256
4,711
2015
$ 5,190
3,454
$ 8,967
$ 8,644
54
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
58
(b) Presentation in Statements of Operations
In the Corporation’s financial statements, items are primarily disclosed by nature except for employee
compensation costs which are included in general and administrative expenses, operating expenses and
share based compensation expenses. In the year ended December 31, 2016, employee compensation
costs of $9.6 million were included in general and administrative expenses and share based
compensation expense, compared to $11.1 million in the year ended December 31, 2015. In the year
ended December 31, 2016 employee compensation costs of $1.0 million were included in operating
expenses, compared to $1.0 million in the year ended December 31, 2015.
(c) Presentation in Statements of Cash Flows
Changes in non-cash working capital are comprised of:
Years ended December 31, (000s)
Source/(use) of cash:
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Deferred share units liability
Operating activities
Investing activities
Financing activities
2016
2015
$ (21,394)
467
31,905
2,914
13,892
(7,931)
20,609
1,214
$ 12,540
(647)
(31,655)
487
(19,275)
3,730
(22,926)
(79)
$ 13,892
$ (19,275)
59
55
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Notes
56
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT
Corporate
Information
DIRECTORS
Glenn R. Carley
Independent Director
and Chairman of the Board
Compensation Committee
Nominating Committee
Governance Committee
Audit Committee
Kevin D. Angus
Independent Director
Reserves Committee
Compensation Committee
David W. Cornhill
Director
Governance Committee
Joan E. Dunne
Independent Director
Nereus L. Joubert
Independent Director
Governance Committee (Chair)
Nominating Committee (Chair)
Lynn Kis
Independent Director
Reserves Committee (Chair)
Audit Committee
Arthur J. G. Madden
Independent Director
Audit Committee (Chair)
Reserves Committee
Patrick R. Ward
Director
Peter A. Williams
Independent Director
Compensation Committee (Chair)
Audit Committee
DESIGN: ARTHUR / HUNTER
OFFICERS
Patrick R. Ward
President and Chief Executive Officer
John H. Van de Pol
Senior Vice President & Chief Financial Officer
Edwin S. (Ted) Hanbury
Senior Vice President, Engineering
Tonya L. Fleming
Vice President, General Counsel & Corporate Secretary
Bruce G. Hall
Vice President, Land
Stuart W. Jaggard
Vice President & Controller
L. Barry McNamara
Vice President, Corporate Development & Marketing
James D. Reimer
Vice President, Geoscience & Technology
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Trading symbol for Common Shares: PPY
AUDITORS
KPMG LLP
BANKERS
The Toronto-Dominion Bank
The Bank of Nova Scotia
Alberta Treasury Branches
Canadian Imperial Bank of Commerce
HSBC Bank Canada
Wells Fargo Bank, N.A. Canadian Branch
EVALUATION ENGINEERS
GLJ Petroleum Consultants Ltd.
REGISTRAR AND
TRANSFER AGENT
TMX Equity Transfer Services Inc.
HEAD OFFICE
1800, 736 - 6 Ave SW
Calgary, Alberta T2P 3T7
403.475.0440
T
F
403.238.1487
TOLL FREE 1.866.975.0440
E
info@paintedpony.ca
W www.paintedpony.ca
57
2016 PAINTED PONY PETROLEUM LTD ANNUAL REPORT PAINTED PONY PETROLEUM LTD.
1800, 736 - 6 Ave SW
Calgary, Alberta T2P 3T7
T
403.475.0440
F
403.238.1487
TOLL FREE 1.866.975.0440
E
info@paintedpony.ca
W www.paintedpony.ca