Quarterlytics / Industrials / Rental & Leasing Services / Painted Pony Energy Ltd.

Painted Pony Energy Ltd.

pony · TSX Industrials
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Ticker pony
Exchange TSX
Sector Industrials
Industry Rental & Leasing Services
Employees 51-200
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FY2018 Annual Report · Painted Pony Energy Ltd.
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2018  |   PAINTED PONY ENERGY LTD  |  ANNUAL REPORT

2018  |   PAINTED PONY ENERGY LTD  |  ANNUAL REPORT

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TSX  |  PONY

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18 A N N U A L 

R E P O R T

Table of Contents
1  
2  
6  
29 
30 
32 
36 
61 

Financial and Operational Highlights 
Message to Shareholders
Management's Discussion and Analysis
 Management’s Responsibility for Financial Statements
Independent Auditors' Report
Financial Statements
Notes to Financial Statements
Corporate Information

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 “PONY”.

Annual General Meeting

Painted Pony Energy 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 9, 2019. Shareholders not attending are encouraged 
to complete the voting instruction form and deliver it in accordance with 
the instructions therein at their earliest convenience.

“Plowing through the Challenges”
- By Paul Van Ginkel

Cover painting "Plowing through the Challenges", oil on canvas by Paul Van Ginkel 

www.paulvanginkel.com

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Financial and  
Operating Highlights

Year Ended December 31
$ millions, except per share and shares outstanding
Financial 
Petroleum and natural gas revenue (1)  
Cash flows from operating activities 

Per share - basic (3)(8)  
Per share - diluted (4)(8)  

Adjusted funds flow from operations (2)  

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

Net income and comprehensive income  

Per share - basic (3)  

Net income and comprehensive income - diluted  

Per share - diluted (4)  

Capital expenditures  
Working capital (5)  
Bank debt  
Senior notes  
Convertible debentures - liability  
Net debt (6)  
Total assets 
Shares outstanding (millions)  
Basic weighted-average shares (millions)  
Fully diluted weighted-average shares (millions)  

Operational
Daily production volumes
Natural gas (MMcf/d)  
Natural gas liquids (bbls/d)  
Total (MMcfe/d)  
Total (boe/d)  
Realized commodity prices before financial risk
management contracts
Natural gas ($/Mcf)  
Natural gas liquids ($/bbl)  
Total ($/Mcfe) 
Operating netbacks ($/Mcfe) (7)  
Corporate netbacks ($/Mcfe) (7)  

2018 
404.4  
 169.0  
1.05  
0.99  
174.6  
1.08  
1.03  
7.1  
0.04 
7.1  
0.04  
154.4  
32.9  
163.1  
143.1  
46.1  
348.5  
 2,055.4  
161.0  
161.0  
169.9  

316.5  
5,128  
347.3  
57,879  

2.54  
59.43  
3.19  
2.16 
1.71  

2017 
249.2  
106.9  
0.76  
0.74  
109.2  
0.78  
0.76  
122.4  
 0.87  
123.2  
0.85  
302.6  
33.0  
149.2  
141.6  
44.9  
363.9  
2,031.6  
161.0  
140.7  
144.1  

235.8  
3,587  
257.3  
42,882  

2.13  
50.53  
2.65 
 2.01  
1.54  

Change
62 %
58 %
38 %
34 %
60 %
38 %
36 %
(94%)
(95%)
(94%)
(95%)
(49%)
— %
9 %
1 %
3 %
(4%)
1 %
— %
14 %
18 %

34 %
43 %
35 %
35 %

19 %
18 %
 20 %
7 %
11 %

1.  Before royalties.
2.   Adjusted funds flow from operations and adjusted 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 and decommissioning expenditures. Adjusted funds flow from operations per share is calculated by dividing 
adjusted funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See “Non-GAAP Measures” in Management Discussion 
and Analysis for the year ended December 31, 2018.

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 and convertible debentures.
5.   Working capital is a non-GAAP measure calculated as current assets less current liabilities. See “Non-GAAP Measures” in Management Discussion and Analysis for the year 

ended December 31, 2018.

6.   Net debt is a non-GAAP measure calculated as bank debt, senior notes, liability portion of convertible debentures, and working capital, adjusted for the net current portion of fair 

value of risk management contracts and current portion of finance lease obligation.

7.   Operating netbacks is a non-GAAP measure calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on risk 

management contracts, less royalties, operating expenses and transportation expenses. Corporate netback is calculated as operating netback less finance lease expense per unit. 
See “Non-GAAP Measures” and “Operating and Corporate Netbacks” in Management Discussion and Analysis for the year ended December 31, 2018.

8.   Cash flows from operating activities per share - basic and diluted are non-GAAP measures calculated by dividing cash flows from operating activities by the weighted average  

of basic or diluted shares outstanding in the period.

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Message  
to Shareholders

Despite predictions coming into 2018 of a very 
challenging year, we delivered record adjusted 
funds flow per share, reduced debt, cut costs, 
and grew production and PDP reserves  
year-over-year. We realized a natural gas 
price of $2.54/Mcf in 2018 which significantly 
exceeded the average natural gas price at the 
main Canadian sales hub at AECO (5A) that 
averaged just $1.50/Mcf for the year. Our much 
higher realized natural gas price was made 
possible through the market diversification 
strategy we began pursuing several years 
ago in response to our growing concern 
about being tied to just two sales locations. 
Natural gas strip prices in western Canada 
remain low and that has resulted in another 
year of forecasted lower capital investment by 
industry, which we believe is likely to result 
in lower overall natural gas production levels 
from industry. We will continue to diversify 
our sales points while also seeking long-term 
sales contracts with large-scale end-users, as 
we did with our 14 year supply contract with 
Methanex Corporation. 

Cold weather, slowing supply growth, and 
increasing US exports have forced natural gas 
storage levels well below the 5-year average in 
Canada and in the US. We believe this positions 
Painted Pony for better realized prices than 
the AECO 5A daily spot price in 2019. It is 
because of this economic backdrop that we 
plan, once again, to constrain capital spending 
to internally generated adjusted funds flow, 
while retaining our optimism for the future of 

clean, energy efficient Canadian natural gas. 
We stated clearly in late 2017 that any adjusted 
funds flow in excess of capital spending in 
2018 would be used to reduce debt levels, 
which I am pleased to report we did. We believe 
2019 is not the time to grow our production, 
rather it is a time to continue to ‘Plow Through 
The Challenges’, as illustrated in our annual 
painting on the cover of this report.

Sales Diversification 
Our 2018 adjusted funds flow of $1.08 per share 
was a record for us and was delivered through 
a combination of increased production volumes, 
capital discipline, and diversification of sales 
points. We structured a sales diversification 
portfolio for 2018 that included fixed price and 
basis contracts, and firm transportation that 
took Painted Pony natural gas to the Dawn 
market in southern Ontario and to the Sumas 
sales hub on the BC / Washington state border 
as well as to Station 2 and AECO as well as our 
contract with Methanex Corporation.

In October 2018, LNG Canada announced a 
positive Final Investment Decision (“FID”) 
on the construction of their West Coast LNG 
project. This was a great day for Canada, for 
the Canadian natural gas industry, and for 
Painted Pony. With construction well under-
way in Kitimat, BC and on the Coastal GasLink 
Pipeline, we continue to expect that some 
portion of gas supply for LNG Canada will be 
sourced by producers in British Columbia.  
Long-term LNG contracts would fit into our 

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day in and day out“
“      Success is the sum of 

small efforts, repeated 

-- Robert Collier

focus on delivery diversity and our strategy of 
increasing profitability through direct sales 
diversification.

Capital Expenditures 
Our 2018 capital investment program totaled 
approximately $154 million, which was  
$21 million less than our 2018 adjusted funds 
flow of $175 million. Activities included the 
drilling of 22 (22.0 net) wells, the completion 
of 28 (28.0 net) wells and investment into 
associated facilities and infrastructure.  
We stated in early 2018 that we would limit 
2018 capital spending to match adjusted funds 
flow and that any cash generated above our 
planned capital spending would be used to 
reduce debt. I am proud that through prudent 
and disciplined capital spending we were able 
to reduce our net-debt from the third quarter 
of 2018 to the end of the fourth quarter  
of 2018 by $37 million, a change of 10%. 

Health, Safety and Environment 
I cannot stress enough the importance 
we place on the health and safety of our 
employees and contractors at Painted Pony  
as well as protection of the environment.  
We foster a culture of safe work, making it a 
top priority in all that we do. We are proud that 
in 2018 we had no material incidents and zero 
lost time incidents. Our total recordable injury 
frequency averaged 0.70 in 2018 compared to 
an industry average of 0.75. Never satisfied 
with the status quo, work is ongoing to improve 
our overall performance. Recent initiatives 

include hazard identification and near-miss 
reporting, integrity management plans for 
regulatory compliance and we will soon 
implement a new preventative maintenance 
program. We continue to focus significant 
effort on water management initiatives, 
including recycling an average of 93% of water 
from completions operations over the past 
three years. 

Reserves Growth 
In 2018, we focused our capital program on 
converting our Total Proved Plus Probable 
reserves to Proved Developed Producing 
reserves and grew this reserves category 
by 19% to approximately 1.0 Tcfe. As we 
continuously improve the cost effectiveness and 
efficiency of operations, our average reserves 
bookings per well continues to increase.  
We were able to lower the cost of bringing 
on future production by reducing future 
development capital in both the Total Proved 
Plus Probable and the Total Proved categories. 
In the Total Proved Plus Probable category 
alone, we were able to reduce the future 
development capital requirements by over  
$650 million, and over $300 million in 
Total Proved reserves. This is a significant 
accomplishment as larger reserve bookings per 
well means fewer wells needed to develop the 
same amount of reserves. Our recycle ratio is 
a great measure of our ability to invest capital 
efficiently. Our recycle ratio is calculated by 
dividing the annual corporate netback of  

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35%  
Growth in Annual  
Average Daily  
Production Volumes

2018 Adjusted  
funds flow
$175Million  

          ($1.08 per share basic)

$1.71/Mcfe by the annual finding, development 
and acquisition cost of $0.55/Mcfe. Our Proved 
Developed Producing recycle ratio of 3.1x is 
industry leading and is proof of the robustness 
of our assets in both the near and long term. 

Production Growth  
We delivered 35% annual production growth 
over our 2017 annual average daily production 
volumes, averaging 347 MMcfe/d  
(57,879 boe/d) during 2018. Also notable was 
the 43% increase in our average daily liquids 
volumes of 5,128 bbls/d in 2018, compared to 
our 2017 average daily liquids volumes  
of 3,587 bbls/d. We continue to face low 
natural gas prices on the forward strip in 
western Canada and as a result we have 
decided to allow production volumes  
to reduce by approximately 4% in 2019 to 
preserve financial flexibility. While we are 
forecasting slightly lower production volumes 
this year, I think it is important to reflect  
back on just how far we have come over the 
past 3 years. In 2016 we generated adjusted 
funds flow of $0.53 per share on 139 MMcfe/d 
(23,204 boe/d) or 1.39 MMcfe/d per share. In 
2018 we generated adjusted funds flow  
of $1.08 per share on 347 MMcfe/d  
(57,879 boe/d) or 2.16 MMcfe/d per share.  
I believe our production growth of over  
149% and the corresponding adjusted funds 
flow per share growth of 104% during the 
past 3 years speaks for itself. I think our track 
record of rapid production growth  

is compelling for our future as demand for 
western Canadian natural gas increases. 

2019 and Forward 
Despite the headwinds we have faced over 
the past few years both in western Canadian 
natural gas pricing and in the capital markets, 
we remain focused on creating 
shareholder value through 
strong adjusted funds flow per 
share growth and through the 
pursuit of strategies that will 
continue to produce profitability 
for Painted Pony shareholders 
in the coming years.

Finally, a sincere thank you to the staff and 
Board of Directors at Painted Pony for another 
year of jobs well done. We also would like to 
thank our First Nations neighbours, the people 
of BC, service providers and shareholders for 
your continued support of Painted Pony Energy.

“signed”
Patrick R. Ward
President and Chief Executive Officer

March 21, 2019

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Advisories

Boe Conversions: Barrel of oil equivalent (“boe”) 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 (“Mcfe”) 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.

Forward-Looking Information: This message to shareholders section contains certain forward-looking information and forward-looking statements within the 
meaning of Canadian securities laws (collectively, “forward-looking information”). Forward-looking information relates to future events or future performance and is 
based upon the Corporation’s current internal expectations, estimates, projections, assumptions and beliefs. All information other than historical fact is forward-
looking information. Information relating to “reserves” or “resources” is forward-looking as it involves the implied assessment, based on certain estimates and 
assumptions, that the reserves or resources exist in the quantities estimated and that they will be commercially viable to produce in the future. Words such as “plan”, 
“expect”, “intend”, “believe”, “anticipate”, “estimate”, “may”, “will”, “could”, “potential”, and other similar words that indicate events or conditions may occur are 
intended to identify forward-looking information. This message to shareholders section contains forward-looking information, including, without limitation, information 
relating to: forecasted lower capital investment by industry, assumptions regarding overall natural gas production levels and realized prices, future capital spending, 
forecasted production volumes, and estimates regarding the Corporation's growth.

Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations on which they are based 
will occur. Although the Corporation’s management believes that the expectations in the forward-looking statements are reasonable, there can be no assurance that 
such expectations will prove to be correct.

Forward-looking information is based on estimates and opinions of management at the time the information is presented. The Corporation is not under any duty to, nor 
will it, update the forward-looking information after the date of this document to revise such information to actual results or to changes in the Corporation’s plans or 
expectations, except as required by applicable securities laws.

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

Non-GAAP Measures: This message makes reference to the terms “adjusted funds flow”, “adjusted funds flow per share”, and "corporate netback" 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 
of the Corporation believes these measures are useful supplemental measures of the net position of current assets and current liabilities of the Corporation and the 
profitability relative to commodity prices. Readers are cautioned, however, that these measures should not be construed as alternatives to other terms such as current 
and long-term debt or comprehensive income determined in accordance with IFRS as measures of performance. The Corporation's method of calculating these non-
GAAP measures may differ from other companies, and accordingly, may not be comparable to similar measures used by other entities. 

Management uses “adjusted funds flow” to analyze operating performance and considers adjusted funds flow 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. Adjusted funds flow denotes cash flow from operating activities before the 
effects of changes in non-cash working capital and decommissioning expenditures. “Adjusted funds flow from operations per share” is calculated using the basic and 
diluted weighted average number of shares for the period. These terms should not be considered alternatives to, or more meaningful than, cash flows from operating 
activities as determined in accordance with IFRS as an indicator of the Corporation’s performance.

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

Independent Reserves Evaluation: GLJ Petroleum Consultants ("GLJ"), independent qualified reserves evaluators of Calgary, Alberta, prepared a reserves estimation 
and economic evaluation of the Corporation's oil and natural gas properties effective December 31, 2018, which is contained in a report dated March 5, 2019  
(the "2018 Reserves Report"). GLJ prepared reserves estimations and economic evaluations of the Corporation's reserves effective December 31, 2018. The 2018 
Reserves Report and the prior reserves evaluation were prepared in accordance with the standards contained in the Canadian Oil & Gas Evaluation Handbook and 
National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities, which were in effect at the time of the evaluation.

Reserves Categories: Reserves means estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known 
accumulations, as of a given date, based on the analysis of drilling, geological, geophysical and engineering data; the use of established technology; and specified 
economic conditions, which are generally accepted as being reasonable. Reserves are classified according to the degree of certainty associated with the estimates:

•  Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining 

quantities recovered will exceed the estimated proved reserves; and

•  Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining 

quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.

Each of the reserves categories (proved, probable and possible) may be divided into developed and undeveloped categories:

•  Developed Reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been 
installed, that would involve a low expenditure (e.g. when compared to the cost of drilling a well) to put the reserves on production. The developed 
category may be subdivided into producing and non-producing.

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Corporate 
Information

BOARD OF DIRECTORS

Glenn R. Carley 
Chairman of the Board 
Independent Director
Compensation and HR Committee  
Nominating Committee  
Governance Committee  
Audit and Risk Committee

Kevin D. Angus
Independent Director
Compensation and HR Committee (Chair)

Paul J. Beitel
Director

Joan E. Dunne
Independent Director
Audit and Risk Committee (Chair) 
Reserves and HSE Committee

Nereus L. Joubert
Independent Director
Governance Committee (Chair)  
Nominating Committee (Chair)
Compensation and HR Committee

Lynn Kis
Independent Director
Reserves and HSE Committee (Chair) 
Audit and Risk Committee

Arthur J. G. Madden
Independent Director
Audit and Risk Committee 
Governance Committee 
Nominating Committee

George W. Voneiff
Director
Reserves and HSE Committee

Patrick R. Ward
Director
President and Chief Executive Officer

DESIGN: ARTHUR / HUNTER

OFFICERS

Patrick R. Ward 
President and Chief Executive Officer

Stuart W. Jaggard 
Chief Financial Officer

Richard W. Kessy 
Chief Operating Officer

Edwin (Ted) S. Hanbury 
Senior Vice President, Strategic Projects

Tonya L. Fleming 
Vice President, General Counsel and Corporate Secretary

L. Barry McNamara 
Vice President, Development and Marketing

STOCK EXCHANGE LISTING

The Toronto Stock Exchange
Trading symbol for Common Shares: PONY

AUDITORS

KPMG LLP

BANKERS

The Toronto-Dominion Bank
The Bank of Nova Scotia
Alberta Treasury Branches
Canadian Imperial Bank of Commerce
Royal Bank of Canada
HSBC Bank Canada
Wells Fargo Bank, N.A. Canadian Branch

EVALUATION ENGINEERS

GLJ Petroleum Consultants Ltd.

REGISTRAR AND TRANSFER AGENT

TSX Trust Company

HEAD OFFICE

Suite 1200, 520 – 3rd Avenue SW
Calgary, Alberta  T2P 0R3 
T  403.475.0440      F  403.238.1487 
TOLL FREE 1.866.975.0440
info@paintedpony.ca 
E 
W  www.paintedpony.ca

 
PAINTED PONY ENERGY LTD.

Suite 1200, 520 – 3rd Avenue SW
Calgary, Alberta  T2P 0R3 
T  403.475.0440      F  403.238.1487 
TOLL FREE 1.866.975.0440
E 
info@paintedpony.ca 
W  www.paintedpony.ca

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2018  |   PAINTED PONY ENERGY LTD  |  ANNUAL REPORT

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