To Our Shareholders
Painted Pony Petroleum Ltd. (“Painted Pony” or the “Corporation”) (TSX: PPY) is pleased to announce a recent
acquisition of northeast British Columbia Montney land and third quarter 2014 financial and operating results from
its Montney natural gas growth initiatives.
Current and third quarter 2014 highlights include:

Acquisition at a recent Crown land sale of 14.5 sections (100% working interest) northeast BC Montney
lands, directly contiguous to the Corporation’s premium liquids-rich natural gas project in the Townsend area;

Entry into a 15-year Strategic Alliance with AltaGas for processing infrastructure and marketing services,
including the construction of a 198 MMcf/d natural gas processing facility in the Corporation’s Townsend area
that is expected to commence operations by the end of 2015; and

Closing of the sale of the Corporation’s southeast Saskatchewan crude oil assets for approximately $100
million.
Financial and operational highlights for the third quarter of 2014 versus the third quarter of 2013 include:

60% increase in average production volumes to 14,283 boe/d (53% increase per share);

105% increase in natural gas liquids production to 964 bbls/d;

90% increase in funds flow from operations to $23.2 million (79% increase per share to $0.25);

29% reduction in operating costs per boe to $6.75;

26% reduction in general and administrative costs per boe to $1.46;

Net income of $8.2 million (compared to a net loss of $0.2 million in the third quarter of 2013); and

$63.4 million of positive working capital.
THREE TRANSACTIONS SUPPORT FIVE-YEAR PLAN
Northeast BC Montney Land Acquisition
At the November 5, 2014 British Columbia Crown land sale Painted Pony acquired 14.5 sections of 100% working
interest prospective Montney land for $66.8 million. The land acquired consists of 3,710 hectares or 9,275 acres
immediately adjacent to Painted Pony’s liquids-rich Montney natural gas project in the Townsend area of
northeast British Columbia. As there are limited opportunities to acquire Crown land in this area, this was a
strategic land acquisition for the Corporation. This acquisition increases Painted Pony’s land base in the
Townsend area by 50% and is in close proximity to the AltaGas Ltd. (“AltaGas”) Townsend gas processing facility
that will be built through a strategic alliance between Painted Pony and AltaGas. With this acquisition the
Corporation’s total Montney land position has expanded by 7% to 217 net sections (76% average working
interest).
1
As shown on the map below, the newly acquired land is directly contiguous to Painted Pony’s Townsend area, a
“sweet spot” of the northeast BC Montney where the average reservoir thickness is approximately 340 metres
(1,100 feet) and the liquids yields are substantially higher than regional averages. The acquired land is expected
to add over 170 liquids-rich drilling locations within three prospective intervals of the Montney. The new acreage is
believed to exhibit the same over-pressured geological characteristics as the Corporation’s existing Townsend
block, with wells expected to yield similar liquids recovery of 40 to 80 bbls/MMcf of condensate, propane and
butane (C3+). An offsetting land block to the east, consisting of 32.6 sections (8,350 hectares or 20,875 acres),
was purchased by a third party at the same Crown land sale for approximately $124 million.
Painted Pony Petroleum Ltd. South Townsend Land Sale Acquisition – November 5, 2014
2
Strategic Alliance with AltaGas
In the third quarter of 2014, as previously announced on August 19, 2014, the Corporation entered into a 15-year
strategic alliance with AltaGas for the development of processing infrastructure and marketing services for natural
gas and natural gas liquids (the “Strategic Alliance”). The Strategic Alliance is expected to provide for the
development of essential liquids-rich gas processing infrastructure in northeast BC and provide preferred access
to international energy markets for the Corporation’s Montney production. In the first phase of the Strategic
Alliance, AltaGas will construct and operate a 198 MMcf/d shallow-cut gas processing facility (the “AltaGas
Townsend Facility”) on the Montney resource play, of which the Corporation will maintain the right to a minimum
of 150 MMcf/d of firm capacity. Engineering work, application preparations and field lease construction for the
AltaGas Townsend Facility began in the third quarter of 2014.
The Corporation also closed a private placement of common shares with AltaGas for total cash consideration of
approximately $50 million. The proceeds from this transaction further strengthened the Corporation’s balance
sheet in support of execution of the five-year plan.
Disposition of Saskatchewan Assets
On July 30, 2014 the Corporation closed the sale of its southeast Saskatchewan assets, with an effective date of
June 1, 2014, for total cash consideration of $100 million, subject to adjustments. The Corporation used the
proceeds of the disposition in its high return Montney initiatives, further supporting the five-year plan by focusing
the Corporation as a pure-play Montney natural gas and natural gas liquids producer on a go forward basis.
THIRD QUARTER 2014 FINANCIAL & OPERATING RESULTS
Production
Average production volumes for the third quarter of 2014 reached 14,283 boe/d, weighted 91% to natural gas,
representing an increase of 60% over third quarter 2013 average production of 8,925 boe/d (83% natural gas).
Natural gas liquids volumes for the third quarter of 2014 averaged 964 bbls/d, representing an increase of 105%
over the third quarter of 2013 average natural gas liquids production of 470 bbls/d. This is despite third quarter
production being negatively impacted by unscheduled facility outages.
Funds Flow and Netbacks
During the third quarter of 2014, Painted Pony generated funds flow from operations of $23.2 million, which
represents a 90% increase over the third quarter of 2013. On a per share basis, Painted Pony generated funds
flow from operations of $0.25 per share, an increase of 79% over the third quarter 2013. Similarly, funds flow from
operations for the nine months ended September 30, 2014 of $76.3 million ($0.84 per share) was almost double
the funds flow from operations for the nine months ended September 30, 2013 of $38.9 million ($0.44 per share).
Painted Pony continued to realize excellent field operating netbacks in 2014 as a result of ongoing cost reductions
and efficiencies in operations coupled with increased natural gas pricing. Painted Pony realized field operating
netbacks of $19.12 per boe or $3.19 per Mcfe for the three months ended September 30, 2014, a 14%
improvement over realized field operating netbacks for the comparable period in 2013. Realized natural gas
prices for the three months ended September 30, 2014 increased to $4.15 per Mcf, an increase of 41% over the
realized natural gas prices for the three months ended September 30, 2013 of $2.95 per Mcf.
Capital Expenditures
For the nine months ended September 30, 2014, capital expenditures totaled $126.4 million, which included $91.7
million on drilling and completions and $24.5 million on facilities and equipment.
The Corporation drilled 7 (6.0 net) Montney natural gas wells during the third quarter of 2014, bringing the total for
the first nine months of 2014 to 14 (13.0 net) Montney natural gas wells.
All of the wells drilled in 2014 utilized the industry leading open-hole ball drop completion system. Painted Pony
continues to see significant increases in per well production rates due to the implementation of new drilling and
industry leading completion technology. This technology includes completing the wells with open-hole ball drop
completions, shifting most of the drilling to parallel-pairs, and most recently, moving to shorter stage lengths for
fracturing. Although at varying stages of implementation, all three of these techniques have delivered strong
improvements in well productivity.
3
During the third quarter of 2014, the Corporation initiated expansion of its 50% working interest dry gas facility in
the Daiber area (the “Daiber Facility”) from its current processing of 25 MMcf/d to 50 MMcf/d. This expansion is
expected to be completed by the end of 2014.
Also in the third quarter of 2014, the Corporation initiated construction of a 25 MMcf/day natural gas compression
and dehydration facility in the West Blair area (the “West Blair Facility”). Construction is expected to be
completed by the end of 2014.
Operating and G&A Costs
During the third quarter of 2014, Painted Pony improved its operating and general and administrative (“G&A”)
costs on a per boe basis. Operating costs were $6.75 per boe for the three months ended September 30, 2014, a
29% reduction from operating costs for the comparable period in 2013 of $9.47 per boe. G&A costs were reduced
to $1.46 per boe for the three months ended September 30, 2014, a 26% improvement over G&A costs for the
three months ended September 30, 2013 of $1.98 per boe.
Net Income and Working Capital
Net income for the third quarter of 2014 was $8.2 million, compared to a net loss of $0.2 million for the third
quarter of 2013. Painted Pony had working capital of $63.4 million as well as undrawn credit facilities of $150
million at September 30, 2014, leaving the Corporation well positioned to execute on its development plans.
OUTLOOK
Painted Pony continues to expect production volumes for 2014 to average approximately 13,500 boe/d (90%
natural gas). This would result in a 55% increase over 2013 average production of 8,693 boe/d. Fourth quarter
2014 average production is expected to be approximately 15,000 boe/d, with 7 (5.5 net) wells currently being
completed and an additional 7 (7.0 net) wells ready for completion in early 2015.
In the fourth quarter of 2014, the Corporation plans to drill 8 (7.5 net) Montney natural gas wells. With respect to
facilities, the Corporation anticipates that the expansion of its 50% working interest Daiber Facility will be
completed in the fourth quarter of 2014, bringing gross processing capacity to 50 MMcf/d (25 MMcf/d net) and
allowing the Corporation to address near-term processing constraints. Engineering work, application preparations
and field lease construction for the AltaGas Townsend Facility will be ongoing through the fourth quarter of 2014,
targeting a facility start-up by the end of 2015, subject to receipt of the required regulatory approvals.
Painted Pony will announce its 2015 budget in December. The Corporation is well positioned to execute on its
five-year plan to grow production to over 100,000 boe/d by 2018 as a result of a strong balance sheet, the
Strategic Alliance with AltaGas, the expanded land position and continued improvements in well results.
Patrick R. Ward
President & Chief Executive Officer
November 12, 2014
4
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended
September 30,
Nine months ended
September 30,
2014
2013
Change
2014
2013
Change
38.9
23.2
0.25
0.25
8.2
0.09
48.8
63.4
669.5
94,082
91,280
92,944
25.5
12.2
0.14
0.14
(0.2)
(0.00)
39.1
(20.7)
615.9
88,457
88,456
88,635
53%
90%
79%
79%
N/A
N/A
25%
N/A
9%
6%
3%
5%
130.5
76.3
0.85
0.84
(12.2)
(0.14)
126.4
63.4
669.5
94,082
89,695
90,739
75.6
38.9
0.44
0.44
(1.3)
(0.01)
106.9
(20.7)
615.9
88,457
88,408
88,824
73%
96%
93%
91%
N/A
N/A
18%
N/A
9%
6%
1%
2%
78.2
964
290
14,283
44.5
470
1,034
8,925
76%
105%
(72%)
60%
68.7
912
673
13,032
41.5
419
1,147
8,484
66%
118%
(41%)
54%
4.15
71.26
101.16
19.12
2.95
72.10
105.58
16.81
41%
(1%)
(4%)
14%
4.84
81.52
102.35
24.29
3.34
62.14
94.76
19.10
45%
31%
8%
27%
Financial ($ millions, except per share and shares outstanding)
Petroleum and natural gas revenue(1)
Funds flow from operations(2)
Per share – basic(3)
Per share – diluted(4)
Net income (loss)
Per share – basic(3) and diluted(4)
Capital expenditures(5)
Working capital (deficiency) (6)
Total assets
Shares outstanding (000s)
Basic weighted-average shares (000s)
Fully diluted weighted-average shares (000s)
Operational
Daily production volumes
Natural gas (mmcf/d)
Natural gas liquids (bbls/d)
Crude oil (bbls/d)(7)
Total (boe/d)
Realized prices
Natural gas ($/mcf)
Natural gas liquids ($/bbl)
Crude oil ($/bbl)
Field operating netbacks(8) ($/boe)
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 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.
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 options.
5.
Capital expenditures includes acquisitions, decommissioning costs and capitalized share-based payments.
6.
7.
8.
Working capital is a non-GAAP measure calculated as current assets less current liabilities.
Related to one month of Saskatchewan crude oil production before closing of the disposition on July 30, 2014.
Field operating netbacks is a non-GAAP measure calculated using field operating netbacks on a per unit basis as crude oil, natural gas and natural gas
liquids revenues and other income less royalties, operating and transportation costs.
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 “Company”) should be read in conjunction with the condensed interim
consolidated financial statements and related notes thereto for the three and nine months ended September 30,
2014 and the consolidated financial statements and related notes thereto for the year ended December 31, 2013.
This commentary is dated November 12, 2014.
The condensed interim 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, 2013, are available on SEDAR at
www.sedar.com and on the Company’s website at www.paintedpony.ca.
Description of Company
Painted Pony is a natural gas company based in Western Canada. The Company is primarily focused on natural
gas and natural gas liquids from the Montney formation in northeast British Columbia. The common shares of
Painted Pony trade on the Toronto Stock Exchange (“TSX”) under the symbol “PPY”. The Company’s head office
is located at Suite 1800, 736 – 6th Avenue SW, Calgary, Alberta.
Painted Pony commenced commercial operations on April 3, 2007 upon completion of a financial reorganization
as part of an overall restructuring of the Company. On May 23, 2007, subsequent to completion of an initial public
offering on May 17, 2007, the Class A shares and Class B shares of Painted Pony began trading on the TSX
Venture Exchange. Painted Pony then commenced an active exploration program. Effective December 1, 2011,
the Class B shares of Painted Pony were converted to Class A shares and, as such, the Class B shares were delisted from the TSX Venture Exchange. Effective June 7, 2012, the Class A shares of Painted Pony were redesignated as Common Shares. Effective October 17, 2013, the Common Shares of Painted Pony began trading
on the Toronto Stock Exchange under the symbol “PPY” and were de-listed from the TSX Venture Exchange.
Non-GAAP Measures
This MD&A contains the term “funds flow from operations”, which 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 Company’s performance. Funds flow from operations and funds flow from operations per share (basic and
diluted) do not have any standardized meanings prescribed by IFRS and may not be comparable with the
calculation of similar measures for other entities. 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
Company’s ability to generate the cash necessary to fund future capital investment and to repay debt. Funds flow
from operations per share is calculated using the basic and diluted weighted average number of shares for the
period. The Company 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:
Funds Flow from Operations
($000s)
Three months ended
September 30,
2013
2014
Nine months ended
September 30,
2013
2014
Cash flows from operating activities
Changes in non-cash working capital
Decommissioning expenditures
23,201
(246)
234
11,619
557
1
74,326
1,621
397
38,884
(134)
155
Funds flow from operations
23,189
12,177
76,344
38,905
6
This MD&A also contains other industry benchmarks and terms, such as “working capital (deficiency)”, calculated
as current assets less current liabilities, and “field operating netbacks”, calculated on a per unit basis as natural
gas, natural gas liquids (“NGLs”) and crude oil revenues and other income, less royalties and operating and
transportation costs. These are not recognized measures under IFRS. Management believes these measures are
useful supplemental measures of the net position of current assets and current liabilities of the Company and the
profitability relative to commodity prices, respectively. 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. Painted Pony’s method of calculating
these measures may differ from other companies and, accordingly, may not be comparable to similar measures
used by other companies.
Results of Operations – Overview
Results of operations for the third quarter of 2014 reflect a focused progression of Painted Pony’s five year model.
During the quarter the Company entered into a 15-year strategic alliance with AltaGas Ltd. (“AltaGas”) for the
development of processing infrastructure and marketing services for natural gas and natural gas liquids (the
“Strategic Alliance”). The Strategic Alliance will provide for the development of essential liquids-rich processing
infrastructure in northeast British Columbia and can provide preferred access to international energy markets for
Painted Pony’s Montney production. As part of the Strategic Alliance, AltaGas has begun field lease work, and
application and construction preparation on a 198 million cubic feet per day (“mmcf/d”) gas processing facility at
the Company’s Townsend property, of which Painted Pony will maintain the right to a minimum of 150 mmcf/d of
firm capacity. Concurrent with the Strategic Alliance, Painted Pony completed a private placement with AltaGas
for 4,166,666 Common Shares at $12.00 per share, for total proceeds of approximately $50 million.
During the quarter the Company also completed the disposition of its southeast Saskatchewan assets for cash
consideration of $100 million, subject to final adjustments. The disposition was completed with a view to
positioning the Company as a highly focused Montney natural gas and natural gas liquids producer.
Following the closing of the private placement and the asset disposition, Painted Pony had working capital of
$63.4 million as well as undrawn credit facilities of $150 million at September 30, 2014, leaving the Company well
positioned to execute on its future development plans.
In the third quarter of 2014 the Company drilled 7 (6.0 net) Montney natural gas wells. In the fourth quarter of
2014 the Company plans to drill an additional 8 (7.5 net) Montney natural gas wells. As previously announced, the
2014 capital budget includes accelerating the construction of a planned 25 mmcf/d natural gas compression and
dehydration facility at West Blair in the fourth quarter of 2014. Additional facility capital has been spent in the third
quarter as part of an expansion of the processing capacity at its 50% working interest Daiber dry gas facility from
its current capacity of 25 mmcf/d to 50 mmcf/d. The Company expects that this capital in connection with the
Strategic Alliance will address near term facility constraints, with the capability to expand as the production base
increases in line with the five year plan.
Painted Pony had average production volumes of 14,283 boe/d in the third quarter, which represents an increase
of 60% compared to the third quarter of 2013. Production volumes were weighted towards natural gas and natural
gas liquids, as the Company’s light oil properties in Saskatchewan were disposed of effective July 30, 2014.
Production volumes from natural gas liquids of 964 boe/d for the quarter ended September 30, 2014 represented
an increase of 105% over production volumes from NGL’s in the quarter ended September 30, 2013, and
consisted of 53% condensate, which received a price reflective of a 2% discount to the Edmonton light reference
price during the quarter.
7
The third quarter of 2014 reflected some softening in natural gas prices as compared to the previous quarter, with
the AECO natural gas spot price averaging $4.04/mcf for the quarter. Painted Pony realized a natural gas price of
$4.15/mcf for the three months ended September 30, 2014, which represents a 3% premium to the AECO
reference price and a 41% increase over the realized price of $2.95/mcf in the third quarter of 2013. Higher
natural gas prices combined with lower per unit royalties and operating costs in the quarter, primarily as a result of
the asset disposition, contributed to increased funds flow from operations and an improved field operating
netback.
Funds Flow from Operations and Net Income (Loss)
Painted Pony generated funds flow from operations of $23.2 million during the third quarter of 2014 compared to
$12.2 million during the third quarter of 2013, which represents an increase of 90%. During the nine months
ended September 30, 2014, the Company generated funds flow from operations of $76.3 million, compared to
$38.9 million during the nine months ended September 30, 2013. The increase in funds flow from operations for
both periods was primarily driven by significantly higher natural gas prices combined with higher natural gas and
NGL production volumes.
During the third quarter of 2014 Painted Pony had net income of $8.2 million, compared to a net loss of $0.2
million in the third quarter of 2013, primarily due to lower depletion as a result of the sale of the Company’s
Saskatchewan assets. In the nine months ended September 30, 2014, the net loss increased to $12.2 million
from $1.3 million in the nine months ended September 30, 2013 primarily due to a $43.3 million loss on
disposition relating to the sale of the Saskatchewan assets.
Average Daily Production
Three months ended September 30,
% of
% of
2013
total
2014
total
Nine months ended September 30,
% of
% of
2013
total
2014
total
Natural Gas (mcf/d)
NGLs (bbls/d)
Crude Oil (bbls/d)
78,175
964
290
91
7
2
44,529
470
1,034
83
5
12
68,687
912
673
88
7
5
41,509
419
1,147
82
5
13
Total (boe/d)
14,283
100
8,925
100
13,032
100
8,484
100
Third quarter production volumes increased 60% compared to the third quarter of 2013 to average 14,283 boe/d.
These volumes were weighted 91% towards natural gas. The increase in overall production volumes is the result
of a 76% increase in natural gas volumes and a 105% increase in NGL volumes in the third quarter of 2014
compared to the third quarter of 2013, reflecting the success of the natural gas-focused Montney drilling program
and production facility capacity additions.
Crude oil volumes for the three months ended September 30, 2014 decreased by 72% compared to the third
quarter of 2013, as a result of the sale of the Company’s crude oil assets in Saskatchewan on July 30, 2014 and
as a result of less capital having been deployed in the area during 2014.
Production volumes for the fourth quarter of 2014 will be comprised of natural gas and associated NGLs targeting
the Montney formation in British Columbia. Painted Pony continues to expect production volumes for 2014 to
average 13,500 boe per day, weighted 90% towards natural gas. The production increase is a direct result of
Painted Pony’s continued success in its ongoing development program, as well as the commissioning of facilities
in the Townsend, Blair and Daiber areas which has allowed shut-in production and incremental volumes from the
Company’s successful drilling program to come on stream.
8
Petroleum and Natural Gas Revenue
Three months ended
September 30,
2013
2014
($000s)
Nine months ended
September 30,
2013
2014
Natural Gas
NGLs
Crude Oil
Other Income
29,817
6,319
2,696
87
12,073
3,118
10,038
238
90,666
20,286
18,797
793
37,839
7,105
29,676
1,013
Total
38,919
25,467
130,542
75,633
Petroleum and natural gas revenue totaled $38.9 million for the three months ended September 30, 2014, 53%
higher than the third quarter 2013 revenue of $25.5 million due to increases of 147% and 103% in natural gas and
NGL revenues, respectively. Revenue in the third quarter was weighted 77% towards natural gas, compared to
47% in the third quarter of 2013. Revenue growth is consistent with the increase in production over the same
period, and was also positively impacted by higher realized natural gas prices.
During the nine months ended September 30, 2014 petroleum and natural gas revenue totaled $130.5 million,
weighted 69% towards natural gas, compared to $75.6 million during the nine months ended September 30,
2013, weighted 50% towards natural gas.
Other income is comprised primarily of third party compression, processing, transportation and salt water disposal
fees.
Commodity Prices
Three months ended
September 30,
2013
2014
Average Benchmark Prices:
Natural Gas
Crude Oil
- Nymex (US$/mmbtu)
- AECO, daily spot ($/mcf)
- WTI (US$/bbl)
- Edmonton par – light oil ($/bbl)
Exchange rate (US$/Cdn$)
Nine months ended
September 30,
2013
2014
3.95
4.04
97.17
96.50
3.56
2.44
105.81
100.28
4.42
4.85
99.61
100.88
3.69
3.06
98.19
93.88
0.92
0.96
0.91
0.98
4.15
71.26
101.16
29.62
2.95
72.10
105.58
31.02
4.84
81.52
102.35
36.69
3.34
62.14
94.76
32.66
Realized Commodity Prices:
Natural Gas ($/mcf)
NGLs ($/bbl)
Crude Oil ($/bbl)
Combined ($/boe)
During the three months ended September 30, 2014, the Company received an average natural gas price that
was reflective of a 3% premium to the AECO daily spot price. During the nine months ended September 30, 2014,
the Company received an actual natural gas price that approximated the AECO daily spot price. This compares to
21% and 9% premiums realized for the three and nine months ended September 30, 2013, respectively. Painted
Pony receives a price for its British Columbia natural gas which reflects a higher heat content than the
benchmark, and which varies from the AECO spot price with reference to the British Columbia Westcoast Station
2 reference price.
9
The realized average crude oil prices for the three and nine months ended September 30, 2014 were $101.16 per
bbl and $102.35 per bbl, representing premiums of 5% and 1% over the Edmonton light reference price,
compared to premiums of 5% and 1% for the three and nine months ended September 30, 2013, respectively.
Painted Pony’s crude oil was a premium light crude oil with low sulphur content.
For the three months ended September 30, 2014, approximately 53% of the Company’s NGL volumes were
condensate, which received an average price of $94.29 per bbl, representing a 2% discount to the Edmonton light
reference price.
For the remainder of 2014, the Company expects to receive a natural gas price which will be closely aligned with
the AECO daily spot price. The average prices reported by Painted Pony are reflective of month to month price
and production volume changes.
Commodity Risk Management
In 2013 Painted Pony initiated a natural gas hedging program on a portion of its natural gas production volumes.
The financial risk management program currently uses forward price swaps and basis swaps 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 Company to fund its capital development program. For the three months ended September 30, 2014,
Painted Pony had a realized loss of less than $0.1 million and an unrealized gain of $2.2 million on its commodity
risk management contracts. For the nine months ended September 30, 2014, Painted Pony had a realized loss of
$3.9 million and an unrealized loss of $0.5 million.
As at September 30, 2014, Painted Pony had the following commodity risk management contracts outstanding:
Natural Gas Financial Contracts
Reference
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
CDN$ AECO
Volume (GJ/d)
10,000
5,000
5,000
5,000
15,000
10,000
5,000
5,000
5,000
Term
January – December
April – December 2014
May – December 2014
April 2014 – March 2015
June – October 2014
January – March 2015
January – March 2015
January – March 2015
January – March 2015
Price ($/GJ)
3.72
3.83
4.50
3.85
0.005
3.90
4.21
4.70
4.19
Option Traded
Swap
Swap
Swap
Swap
Basis Swap
Swap
Swap
Swap
Swap
Subsequent to September 30, 2014, the Company entered into an additional commodity risk management
contract as outlined below:
Natural Gas Financial Contracts
Reference
Volume (GJ/d)
CDN$ AECO
10,000
Term
January – March 2015
10
Price ($/GJ)
4.23
Option Traded
Swap
Royalties
Three months ended
September 30,
2013
2014
Royalty expense ($000s)
Per unit ($/boe)
Royalties as a % of Revenue (%)
Nine months ended
September 30,
2013
2014
1,371
1,816
6,251
5,122
1.04
2.21
1.76
2.21
3.5
7.1
4.8
6.7
For the three months ended September 30, 2014 royalties were $1.4 million, or 3.5% of total revenue,
representing a 51% decrease compared to the third quarter 2013 royalty rate of 7.1% of total revenue. On a per
unit basis, royalties have decreased by $1.17 per boe as the properties disposed of in southeast Saskatchewan
historically had higher royalty rates than the Company’s British Columbia properties, where Painted Pony receives
average royalty credits of $2.2 million per well.
Painted Pony’s producing properties in British Columbia are on Crown lands and in Saskatchewan were on a
combination of freehold and Crown lands. Royalties include the Saskatchewan resource charge, which totaled
$0.3 million and $0.6 million for the three and nine months ended September 30, 2014, and $0.2 million and $0.5
million for the three and nine months ended September 30, 2013.
For the remainder of 2014, assuming similar commodity prices, the Company anticipates overall royalty rates to
be less than 4% of total revenues as a result of royalty credits received on revenues generated from British
Columbia. This estimate considers the combined impact of incremental sales volumes from newly drilled wells
which will qualify for royalty holidays, net of royalties paid on wells which have obtained the full benefit of
provincial royalty incentives.
Operating Expenses
Three months ended
September 30,
2013
2014
Operating expenses ($000s)
Per unit ($/boe)
8,866
6.75
7,778
9.47
Nine months ended
September 30,
2013
2014
27,700
7.79
21,221
9.16
Operating expenses decreased by $2.72 per boe or 29% in the third quarter of 2014 compared to the third quarter
of 2013. On a year to date basis, operating expenses have decreased by $1.37 per boe or 15%.
Per unit operating costs have improved due to the disposition of the Company’s higher cost Saskatchewan assets
combined with incremental production volumes from British Columbia, which positively impacted fixed cost
components including equipment rentals, repairs and maintenance, operator costs, lease costs, and fuel and
power costs.
For the remainder of 2014, the Company anticipates that per unit operating costs will continue to be less than
$7.50 per boe.
11
Transportation Costs
Three months ended
September 30,
2013
2014
Transportation costs ($000s)
Per unit ($/boe)
3,556
2.71
2,069
2.52
Nine months ended
September 30,
2013
2014
10,167
2.86
5,055
2.18
Transportation costs for the three months ended September 30, 2014 increased by $1.5 million or $0.19 per boe
compared to the three months ended September 30, 2013. On a year to date basis, transportation costs
increased by $5.1 million or $0.68 per boe compared to the first nine months of 2013.
The increases are primarily due to higher transportation costs associated with increased NGL volumes in British
Columbia at the Company’s Townsend properties. For the remainder of 2014 the Company expects transportation
costs to continue to be less than $3.00 per boe.
Field Operating Netbacks
($/boe)
Three months ended
September 30,
2013
2014
Nine months ended
September 30,
2013
2014
Revenue
Royalties
Operating expenses
Transportation costs
29.62
(1.04)
(6.75)
(2.71)
31.02
(2.21)
(9.47)
(2.52)
36.69
(1.76)
(7.79)
(2.86)
32.66
(2.21)
(9.16)
(2.18)
Field operating netback
19.12
16.81
24.29
19.10
For the three and nine months ended September 30, 2014, field operating netbacks increased as a result of
higher natural gas prices, which increased 41% and 45%, respectively. Per unit royalties have decreased in both
periods as a result of royalty credits on new wells drilled, and per unit operating expenses have decreased as
fixed costs are spread over a larger production base. Per unit royalties and operating expenses were also
positively impacted by the disposition of the Company’s Saskatchewan assets. Per unit transportation costs have
increased due to higher costs associated with NGL transportation.
During the third quarter and nine months ended September 30, 2014, the Company’s field operating netbacks per
unit were 65% and 66% of revenue per unit, respectively. This compares to 54% and 58%, respectively, for the
three and nine months ended September 30, 2013.
12
General and Administrative Expenses
($000s, except per boe)
Three months ended
September 30,
2013
2014
Nine months ended
September 30,
2013
2014
Gross expense
Capitalized
Recoveries
3,251
(858)
(469)
2,814
(712)
(475)
9,972
(2,313)
(1,455)
8,740
(2,141)
(1,269)
Net expense
1,924
1,627
6,204
5,330
1.46
1.98
1.74
2.30
Per unit ($/boe)
Net general and administrative (“G&A”) expenses increased by $0.3 million and $0.9 million, respectively, for the
three and nine months ended September 30, 2014 compared to the three and nine months ended September 30,
2013. Increases were driven primarily by higher administrative costs related to an increase in the number of
employees compared to the same period of 2013.
For the three months ended September 30, 2014, net G&A expenses per boe declined 26% compared to the
three months ended September 30, 2013, reflecting a 61% increase in production volumes which offset
incremental staffing and associated costs in the period. For the remainder of 2014, the Company expects net
G&A expenses to continue to be less than $2.00 per boe.
The Company’s policy of allocating and capitalizing costs associated with new capital projects was unchanged in
the third quarter of 2014 compared to 2013. During the three months ended September 30, 2014 and 2013, the
Company capitalized $0.9 million and $0.7 million of administrative costs to capital projects, respectively. G&A
capital and operating recoveries were in accordance with industry practice and were $0.5 million for both the three
month periods ended September 30, 2014 and 2013.
Share-Based Compensation Expense
($000s)
Three months ended
September 30,
2013
2014
Nine months ended
September 30,
2013
2014
Gross expense
Capitalized
1,893
(500)
1,626
(535)
4,792
(1,420)
6,881
(1,794)
Net expense
1,393
1,091
3,372
5,087
Gross share-based compensation expense was $1.9 million for the three months ended September 30, 2014
compared to $1.6 million for the three months ended September 30, 2013. The higher expense is reflective of the
expense attributed to stock options granted during the third quarter of 2014, as compared to the third quarter of
2013 when no stock options were granted. The weighted average fair value of stock options granted during the
first nine months of 2014 was $4.39 per option compared to $6.05 per option in the first nine months of 2013.
Share-based compensation expense is a non-cash estimate of the cost of granting options to purchase shares,
calculated using a Black-Scholes model. The expense does not represent actual cash compensation realized by
the recipients of the options upon the eventual exercise of these options.
13
Depletion and Depreciation Expense
Three months ended
September 30,
2013
2014
Depletion and depreciation ($000s)
Per unit ($/boe)
Nine months ended
September 30,
2013
2014
11,884
10,226
38,204
31,144
9.04
12.45
10.74
13.45
Depletion and depreciation expense for the three months ended September 30, 2014 decreased by $3.41 per boe
or 27%, as compared to the same period in 2013. The depletion rate was positively impacted by the disposition of
Saskatchewan assets, which historically had a higher depletion rate than the Company’s British Columbia assets,
combined with a 36% increase in total proved and probable reserves since September 30, 2013. The depletion
calculation for the three months ended September 30, 2014 included future development costs associated with
the development of the Company’s proved plus probable reserves of $2.3 billion, compared to $1.6 billion for the
three months ended September 30, 2013.
For the quarter ended September 30, 2014, Painted Pony excluded exploration and evaluation assets of $62.6
million from the depletion calculation, compared to $67.1 million for the quarter ended September 30, 2013.
Depreciation expense was recognized for leasehold improvements, office equipment, computer hardware and
software and office furniture on a 20% per annum declining-balance basis.
Exploration and Evaluation Expense
During the three and nine months ended September 30, 2014, the Company recorded $0.2 million and $3.6
million, respectively, in exploration and evaluation expense. During the three and nine months ended September
30, 2013, the Company recorded $0.1 million and $2.0 million, respectively, in exploration and evaluation
expense. In both years, the expense related to lease expiries in Saskatchewan and non-economic drilling activity.
Net Finance Expense
($000s)
Three months ended
September 30,
2013
2014
Finance charges
Accretion of decommissioning obligations
Interest income
410
85
(140)
529
102
(37)
1,649
367
(154)
633
287
(259)
355
594
1,862
661
Total
Nine months ended
September 30,
2013
2014
Finance charges include interest expense on bank debt and standby charges on the Company’s syndicated credit
facilities. For the three months ended September 30, 2014, finance charges were lower than in the comparable
period of 2013 as a result of the Company having been in a cash position for the majority of the quarter, combined
with costs related to the implementation of the syndicated credit facilities in the third quarter of 2013.
Accretion expense on decommissioning obligations has decreased for the three months ended September 30,
2014 as a result of the impact of a lower discount rate used in calculating the present value of the
decommissioning obligation. At September 30, 2014, the risk-free interest rate related to the decommissioning
obligations was decreased to 2.6% from 3.1% in the third quarter of 2013.
Interest income for the three months ended September 30, 2014 increased compared to the same period in 2013,
reflective of increased levels of cash.
14
Capital Expenditures
($000s)
Three months ended
September 30,
2013
2014
Nine months ended
September 30,
2013
2014
Lease acquisitions and retention
Seismic
Drilling and completions
Facilities and equipment
Exploration and evaluation
Capitalized G&A
244
238
36,095
8,749
237
858
222
2
24,264
9,148
3,316
712
626
238
91,650
24,491
429
2,313
535
824
55,817
20,758
23,926
2,141
Exploration and development
Head office expenditures
46,421
403
37,664
1,825
119,747
701
104,001
2,462
Capital expenditures
Property acquisitions
Share-based compensation
Decommissioning costs
46,824
500
1,502
39,489
238
535
(1,117)
120,448
1,155
1,420
3,412
106,463
238
1,794
(1,618)
48,826
39,145
126,435
106,877
Total
-
During the three and nine months ended September 30, 2014, the Company invested $46.4 million and $119.7
million, respectively, in exploration and development capital expenditures, compared to $37.7 million and $104.0
million, respectively, for the three and nine months ended September 30, 2013.
Capital expenditures for the three months ended September 30, 2014 included $36.1 million spent on drilling and
completions activity. The Company drilled 7 (6.0 net) Montney natural gas wells in the three month reporting
period. Facilities and equipment spending of $8.7 million in the quarter primarily reflects costs related to a 25
mmcf/d (12.5 mmcf/d net) expansion of a Company operated natural gas processing facility at Daiber as well as
preliminary costs related to the construction of a 25 mmcf/d natural gas compression and dehydration facility at
West Blair.
Painted Pony’s total capital budget for 2014 of $207 million includes the drilling of 22 (20.5 net) Montney
horizontal wells, of which 8 (7.5 net) wells will be drilled in the fourth quarter, as well as additional facility
infrastructure. Major facility projects for the remainder of 2014 include completion of the facility expansion at
Daiber and the 25 mmcf/d gas processing facility at West Blair.
Liquidity and Capital Resources
As at September 30, 2014, the Company had a working capital position of $63.4 million. Management anticipates
that the Company will continue to have adequate liquidity to fund future working capital requirements and capital
expenditures through a combination of cash flows and available credit facilities. As a result of the global economic
slowdown, uncertainty exists in the commodity, credit and capital markets, which the Company continues to
monitor in conjunction with its financing alternatives.
On May 9, 2014 the Company’s syndicated credit facilities were increased from $125 million to $175 million and
expanded to include four Canadian chartered banks. As a result of the July 30, 2014 asset disposition, the credit
facilities have been reduced to $150 million. The facilities include a $140 million extendible revolving facility and a
$10 million operating facility. The facilities revolve for a 364 day period plus a one year term-out, which is
extendible annually, subject to syndicate approval. The facilities are subject to a semi-annual borrowing base
review, the next of which is expected to occur on or before November 30, 2014.
15
The credit facilities bear interest on a matrix system which ranges from bank prime plus 1.0% to bank prime plus
3.5% per annum depending on the Company’s total debt to cash flow ratio as defined by the lender, ranging from
less than 1:1 to greater than 3:1. 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 0.875% per annum is charged on the undrawn portion of the credit
facilities, also calculated depending on the Company’s total debt to cash flow ratio, as defined by the lender.
Security is provided by a floating charge demand debenture in the principal amount of $300 million on all of the
Company’s assets. The Company has provided a negative pledge and undertaking to provide fixed charges over
major producing petroleum and natural gas reserves in certain circumstances.
Commitments
($000s)
Gas processing
Gas gathering
Equipment leases
Office leases
2014
1,294
803
933
351
2015
5,037
3,740
4,838
1,703
2016
4,947
3,311
618
1,428
2017
4,147
2,141
143
1,447
2018
3,760
750
1,466
Thereafter
4,833
1,175
Total
24,018
10,745
6,532
7,570
Gas processing includes numerous contracts to process natural gas through third party owned gas processing
facilities in British Columbia. Gas gathering includes contracts to transport natural gas through third party owned
pipeline systems in British Columbia. Equipment leases include drilling rig contracts and agreements to lease
compressors. Office leases include the Company’s contractual obligations for office space.
On August 18, 2014 Painted Pony 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 natural gas liquids. Under the Strategic Alliance, AltaGas is committed to build a number of gas
processing facilities for which the field lease work and application process on a 198 mmcf/d gas processing facility
at the Company’s Townsend property has commenced. Painted Pony will maintain the right to a minimum of 150
mmcf/d of firm capacity at this facility, on which there will be a take or pay obligation on a component of the
production volumes that will be delivered to the facility upon commencement of commercial operations. The
obligation related to the take or pay is not reflected in the above commitment table due to the uncertainty of the
magnitude of the commitment.
Share Capital
As at September 30, 2014, there were 94,081,792 Common Shares issued and outstanding.
The Company has an incentive stock option plan (the “Plan”) whereby options to purchase Common Shares may
be granted by the Board of Directors to directors, officers and employees of the Company. The Plan has
reserved for issuance a number of Common Shares equal to ten percent of the aggregate number of Common
Shares issued and outstanding from time to time.
During the three and nine months ended September 30, 2014, a total of 364,000 and 729,000 options were
granted at average exercise prices of $13.31 and $11.07, respectively. There were 593,666 and 1,458,366
options exercised during the three and nine months at an average price of $8.28 and $6.49, respectively, and
31,000 and 393,000 options forfeited at average prices of $7.96 and $11.30, respectively.
As at September 30, 2014, 6,704,601 options to purchase Common Shares were issued and outstanding at a
weighted-average price of $9.20 per option for each Common Share. The options are exercisable over a five
year period, with one-third vesting immediately, one-third vesting one year from the date of grant, and one-third
vesting two years from the date of grant.
16
The Company is authorized to issue an unlimited number of Preferred Shares, issuable in series. As at
September 30, 2014 and November 12, 2014, no Preferred Shares were issued or outstanding.
As at November 12, 2014, there were 94,106,792 Common Shares and 6,679,601 options issued and
outstanding.
Income Taxes
As at September 30, 2014, the Company had a $12.0 million deferred income tax asset, compared to $9.4 million
as at December 31, 2013. The Company recognized deferred income tax recovery of $2.3 million in the first nine
months of 2014. For the comparable period of 2013, the Company recognized a deferred income tax expense of
$1.3 million.
Subsequent Event
On November 5, 2014, Painted Pony acquired 14.5 net sections of 100% working interest Montney lands at a
British Columbia Crown land sale for cash consideration of $66.8 million. The lands are directly contiguous to the
Company’s Townsend property.
Dividends
The Company has not declared or paid any dividends and does not intend to do so in the near future.
Off Balance Sheet Arrangements
No off balance sheet arrangements existed as at September 30, 2014 or December 31, 2013.
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, certain or all of which may prove to be incorrect. A comparison of actual performance to
Company expectations previously announced is as follows:

Average daily production in the third quarter of 2014 was expected to average 14,500 boe/d, and be
weighted towards natural gas. Actual production volumes averaged 14,283 boe/d in the third quarter of
2014, and were weighted 91% towards natural gas.

For 2014, the Company expected to receive a natural gas price that slightly exceeded the AECO daily
spot price as a result of heat content and a differential. The actual weighted average price received in the
third quarter of 2014 represented a 3% premium to the AECO reference price. Painted Pony’s British
Columbia natural gas receives a price determined with reference to the British Columbia Westcoast
Station 2 reference price, which received a premium compared to the AECO reference price during the
third quarter of 2014.

For 2014, the Company expected to receive an average crude oil price that was comparable to the
Edmonton par reference price. For the third quarter of 2014, Painted Pony received a weighted average
crude oil price that represented a 5% premium to this reference price.

Overall royalties in 2014 were expected to average 6% to 7% of total revenues. The actual royalty rate for
the three months ended September 30, 2014 was 3.5% of total revenues as the Company’s crude oil
properties in Saskatchewan, which have historically had higher royalty rates, were disposed of during the
quarter.

Net G&A expenses in 2014 were expected to be less than $2.00 per boe. Actual net G&A expenses for
the three months ended September 30, 2014 were $1.46 per boe.
17
Critical Accounting Estimates
The significant accounting policies used by the Company are disclosed in note 3 of the annual audited
consolidated financial statements for the years ended December 31, 2013 and 2012.
The reader is cautioned that the preparation of financial statements in accordance with IFRS requires
management of the Company to make certain judgments and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and
requires judgments and decisions based upon available geological, geophysical, engineering and economic data.
Estimated reserves are also utilized by Painted Pony’s banks in determining credit facilities. Reserves affect net
income through depletion, decommissioning obligation estimates and the impairment test calculation. Estimating
reserves is very complex, requiring many judgments based on available geological, geophysical, engineering and
economic data. Changes in these judgments could have a material impact on the estimated reserves. These
estimates may change, having either a negative or positive effect on net earnings as further information becomes
available, and as the economic environment changes. Changes in these judgments and estimates could have a
material impact on the financial results and financial condition of the Company. The MD&A outlines the
accounting policies and practices that are critical to determining Painted Pony’s financial results. Certain
accounting policies require that management make appropriate decisions with respect to the formulation of
estimates and assumptions that affect the reported amounts of assets, liabilities and expenses. The Company’s
management reviews its estimates regularly.
In following the liability method of accounting for income taxes, related assets and liabilities are recognized for the
estimated tax consequences between amounts included in the financial statements and their tax base, using
substantively enacted future income tax rates. Timing of future revenue streams and future capital spending
changes can affect the timing of any temporary differences, and accordingly affect the amount of the future
income tax liability calculated at a point in time. These differences could materially impact earnings.
The Black-Scholes option valuation model was developed for use in estimating the fair value of options, which
were fully tradable with no vesting restrictions. This option valuation model requires the input of assumptions
including the expected stock price volatility. Because the Company’s stock options have characteristics
significantly different from those of traded options and because changes in the input assumptions can materially
affect the calculated fair value, such value is subject to measurement uncertainty. With the above risks and
uncertainties, the reader is cautioned that future events and results may vary substantially from that which the
Company currently foresees.
Changes in Accounting Policies
On January 1, 2014 the Company implemented IAS 32 “Financial Instruments: Presentation”, which clarifies the
requirements for offsetting financial assets and liabilities. The amendments clarify when an entity has a legally
enforceable right to offset and certain other requirements that are necessary to present a net financial asset or
liability.
On January 1, 2014 the Company implemented the IASB issued IFRIC 21 “Levies”, which was developed by the
IFRS Interpretations Committee ("IFRIC"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when
the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies
that no liability should be recognized before the specified minimum threshold to trigger that levy is reached.
The adoption of these standards had no impact on the amounts recorded in the financial statements as at and for
the period ended September 30, 2014.
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:
18




The availability of qualified personnel and drilling equipment;
Finding and developing crude oil and natural gas reserves at economic costs;
Production of crude oil and natural gas in commercial quantities; and
Marketability of crude oil and natural gas production.
In order to reduce exploration risk, the Company 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 Company’s officers and
employees have significant experience.
The Company mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate
technology and information systems. In addition, Painted Pony seeks operational control of its projects, where
feasible.
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 Company maintains current
insurance coverage for general and comprehensive liability as well as limited pollution liability. 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 of Directors.
Legal, Environmental, Remediation and Other Contingent Matters
The Company reviews legal, environmental, remediation and other contingent matters to both determine whether
a loss is probable based on judgment and interpretation of laws and regulations, and determine whether the loss
can reasonably be estimated. When the loss is determined, it is charged to earnings. The Company’s
management monitors known and potential contingent matters and makes appropriate provisions by charges to
earnings when warranted by the circumstances.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed, or caused to
be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i)
material information relating to the Company is made known to the Company’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 Company 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.
The Company’s CEO and CFO have designed, or caused to be designed under their supervision, internal controls
over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS. The Company is required to
disclose herein any change in the Company’s internal controls over financial reporting that occurred during the
period beginning on July 1, 2014 and ended on September 30, 2014 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal controls over financial reporting. No material changes in the
Company’s internal controls over financial reporting were identified during such period that have materially
affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
19
It should be noted that a control system, including the Company’s disclosure and internal controls and
procedures, no matter how well conceived, can provide only reasonable, but not absolute assurance 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 Company for the eight most
recently completed quarters ending at the third quarter of 2014.
Quarter ended
($000s, except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic
Per share – diluted
Net income (loss)
Per share – basic and diluted
Cash capital expenditures, net
Capital acquisitions, net
Working capital (deficiency)
Bank debt
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Realized prices
Natural gas ($/mcf)
Natural gas liquids ($/bbl)
Crude oil ($/bbl)
Field operating netbacks ($/boe)
(1)
March 31,
2014
June 30,
2014
Sept. 30,
2014
37,235
19,450
0.22
0.22
(1,511)
(0.02)
45,526
250
(41,284)
33,354
669,816
17,858
9,734
54,388
33,705
0.38
0.37
(18,923)
(0.21)
28,098
905
80,389
49,270
649,648
11,461
15,029
38,919
23,189
0.25
0.25
8,222
0.09
46,824
63,410
669,495
12,814
14,283
5.72
80.27
99.41
27.75
4.97
89.70
105.39
27.04
4.15
71.26
101.16
19.12
Before royalties and including other income.
20
Quarter ended
($000s, except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic and diluted
Net income (loss)
Per share – basic and diluted
Cash capital expenditures, net
Capital acquisitions, net
Working capital (deficiency)
Bank debt
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Realized prices
Natural gas ($/mcf)
Natural gas liquids ($/bbl)
Crude oil ($/bbl)
Field operating netbacks ($/boe)
(1)
March 31,
2013
June 30,
2013
Sept. 30,
2013
Dec. 31,
2013
25,522
14,118
0.16
(1,794)
(0.02)
52,103
9,267
614,714
14,582
8,596
24,644
12,610
0.14
698
0.01
14,871
7,324
595,417
14,351
7,928
25,467
12,177
0.14
(209)
(0.00)
39,489
238
(20,657)
615,935
13,335
8,925
27,453
12,322
0.14
(4,417)
(0.05)
36,114
20
(16,348)
28,626
635,055
16,482
9,312
3.34
45.79
87.70
20.63
3.79
66.67
93.30
20.06
2.95
72.10
105.58
16.81
3.76
63.47
86.88
18.28
Before royalties and including other income.
Dec. 31,
2012
Quarter ended
($000s except where noted)
Petroleum and natural gas revenue(1)
Funds flow from operations
Per share – basic and diluted
Net loss
Per share – basic and diluted
Cash capital expenditures, net
Capital acquisitions, net
Working capital
Total assets
Decommissioning obligations
Average daily production volumes (boe/d)
Realized prices
Natural gas ($/mcf)
Natural gas liquids ($/bbl)
Crude oil ($/bbl)
Field operating netbacks ($/boe)
(1)
22,915
12,359
0.17
(40,669)
(0.56)
45,545
109,322
45,216
612,181
14,821
7,289
3.31
56.02
83.49
21.14
Before royalties and including other income.
21
Significant factors and trends that have affected the Company’s results during the above quarterly periods
include:

Gross revenues are impacted by both fluctuating commodity prices and production volumes. The
Company’s successful capital program has generated incremental production volumes and higher cash
flows. The commodity prices realized by the Company 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. Throughout 2012 and early 2013, natural gas and crude oil prices weakened, while
commodity prices increased in late 2013 and into 2014. 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 in the third quarter of 2014 is reflective of the Company’s lower depletion rate as a result of
the sale of its Saskatchewan crude oil assets. The net loss in the second quarter of 2014 is attributable to
the $43.3 million loss recorded on disposition of the Saskatchewan assets. In the first quarter of 2014 the
net loss is the result of realized and unrealized losses on commodity risk management and exploration
and evaluation expense. Throughout 2013 the net loss is primarily attributable to exploration and
evaluation expenses. Net loss in the fourth quarter of 2012 was primarily attributable to a $42.1 million
impairment of property, plant and equipment as well as exploration and evaluation expense.

Fluctuations in capital expenditures have reflected both available capital resources and intentional capital
spending restraint during weaker commodity price cycles.

As the Company’s focus has shifted from exploration to development, working capital has decreased and
the Company has begun utilizing bank debt. Working capital as at June 30, 2014 was reflective of the
presentation of assets held for sale. As a result of the asset disposition and private placement completed
in the third quarter, the Company had $63.4 million in working capital as at September 30, 2014.

Total assets and non-current liabilities have increased as the Company’s capital program has been
executed.
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 earnings, expected future events 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
Company’s control, which may cause actual results or events to differ materially from those anticipated in such
forward-looking statements.
22
The forward-looking statements contained in this MD&A represent management’s reasonable projections,
expectations and estimates as of the date of this document, but undue reliance should not be placed upon them
as they are derived from numerous assumptions. In addition, forward-looking statements may include statements
or information attributable to third party industry sources. These assumptions are subject to known and unknown
risks and uncertainties, including the business risks discussed in this MD&A, 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.
Additionally, there can be no assurance that the plans, intentions or expectations upon which such forwardlooking statements are based will occur.
The 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, certain or all of
which may prove to be incorrect including, but not limited to, the following:

production volumes in 2014 will meet forecasted levels;

the Company will receive a natural gas price which varies in concert with Westcoast Station 2 pricing;

overall royalties for the remainder of 2014 will be less than 4% of total revenues;

average per unit operating expenses in 2014 are expected to be less than $7.50 per boe, assuming
normal seasonal weather conditions;

average per unit transportation costs in 2014 are expected to be less than $3.00 per boe;

net G&A expenses are expected to average below $2.00 per boe in 2014;

the Company has sufficient financial resources with which to conduct its capital program assuming that
the drilling rigs, field service providers and completion and tie-in equipment will be available as required
and that the costs of securing such services and equipment will not materially exceed expectations;

available credit facilities will continue to be utilized in 2014;

commitments to process and transport natural gas through third party owned facilities and pipeline
systems are expected to be fulfilled;

agreements to lease equipment and office space are expected to be adhered to; and

the risk of accounts receivable becoming uncollectible is mitigated by the financial position of the
applicable entities.
Certain or all of the foregoing assumptions may prove to be incorrect and, while it is anticipated that subsequent
events and developments may cause the Company’s views to change, there is no intention to update the forwardlooking statements, except as required by applicable securities laws. These forward-looking statements represent
the Company’s views as of the date of this MD&A and such information should not be relied upon as representing
the Company’s views as of any date subsequent to the date of this MD&A. The Company 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;
23

risks and uncertainty of crude oil 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;

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 Company’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.
There can be no assurance that forward-looking statements 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 Company 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.
Potential Transactions
Within its focus area, the Corporation is always reviewing potential property acquisitions and corporate mergers
and acquisitions for the purpose of determining whether any such potential transaction is of interest to 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.
24
Abbreviations
Natural Gas
Mcf
thousand cubic feet
Mcf/d
thousand cubic feet per day
MMcf/d
million cubic feet per day
boe
barrels of oil equivalent
boe/d
barrels of oil equivalent per day
Natural Gas Liquids
bbls
barrels
bbls/d barrels per day
NGLs natural gas liquids
Mcfe thousand cubic feet equivalent
Mcfe/d thousand cubic feet equivalent per day
Additional Information
Additional information regarding the Company and its business and operations is available on the Company’s
SEDAR profile at www.sedar.com. Copies of the Company’s disclosure can also be obtained by contacting the
Company at Painted Pony Petroleum Ltd., 1800, 736 – 6 Avenue SW., Calgary, Alberta T2P 3T7 (Phone (403)
475-0440), by email at [email protected] or on the Company’s website at www.paintedpony.ca.
25
PAINTED PONY PETROLEUM LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(000s)
September 30,
2014
As at
December 31,
2013
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Prepaid expenses and deposits
Fair value of risk management contracts (note 8)
$
97,347
13,765
1,090
$
-
112,202
Non-current assets
Fair value of risk management contracts (note 8)
Exploration and evaluation (note 3)
Property, plant and equipment (note 4)
Deferred tax asset
-
16,647
544
42
17,233
62,560
482,770
11,963
36
72,482
535,862
9,442
$ 669,495
$ 635,055
$
$
-
LIABILITIES
Current liabilities
Trade and other payables
Fair value of risk management contracts (note 8)
Non-current liabilities
Bank debt (note 5)
Decommissioning obligations
48,362
430
48,792
33,581
-
33,581
12,814
61,606
28,626
16,482
78,689
619,054
42,922
(54,087)
607,889
554,149
44,092
(41,875)
556,366
-
EQUITY
Share capital (note 7)
Contributed surplus
Deficit
$
669,495
Commitments (note 9)
Subsequent Events (notes 8 and 10)
The notes are an integral part of these consolidated financial statements.
26
$
635,055
PAINTED PONY PETROLEUM LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000s, except per share amounts)
Three months ended
September 30,
2014
2013
Revenue
Petroleum and natural gas
Royalties
Realized loss on commodity risk management (note 8)
Unrealized gain (loss) on commodity risk management (note 8)
Nine months ended
September 30,
2014
2013
$ 38,919 $ 25,467 $ 130,542 $ 75,633
(1,371)
(1,816)
(6,251)
(5,122)
37,548
23,651
124,291
70,511
(13)
(3,876)
2,223
(508)
39,758
23,651
119,907
70,511
Expenses
Operating
Transportation
General and administrative
Share-based compensation (note 7)
Depletion and depreciation (note 4)
Exploration and evaluation (note 3)
Loss on disposition of assets (note 3 and 4)
Results from operating activities
8,866
3,556
1,924
1,393
11,884
234
27,857
11,901
7,778
2,069
1,627
1,091
10,226
138
22,929
722
27,700
10,167
6,204
3,372
38,204
3,632
43,318
132,597
(12,690)
21,221
5,055
5,330
5,087
31,144
1,969
69,806
705
Finance expense
Income (loss) before income tax
355
11,546
594
128
1,862
(14,552)
661
44
Deferred income tax (expense) recovery
Net income (loss) and comprehensive income (loss)
$
(3,324)
8,222
$
(337)
(209)
2,340
$ (12,212)
(1,349)
$ (1,305)
Net income (loss) per share (note 6):
Basic and diluted
$
0.09
$
(0.00)
$
$
The notes are an integral part of these consolidated financial statements.
27
(0.14)
(0.01)
PAINTED PONY PETROLEUM LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(000s, except shares)
Nine months ended September 30, 2014 and 2013 and year ended December 31, 2013
Balance at December 31, 2012
Share-based compensation
Options exercised (note 7)
Net loss for the period
Balance at September 30, 2013
Share-based compensation
Net loss for the period
Balance at December 31, 2013
Issue of shares (note 7)
Share issue costs, net of tax of $181
Share-based compensation
Options exercised (note 7)
Net loss for the period
Balance at September 30, 2014
Number of
Common Shares
Share capital
Contributed
surplus
88,051,760
$ 550,116
$ 36,226
-
-
405,000
4,033
Deficit
$ (36,153)
6,881
-
6,881
-
2,452
-
-
-
(1,305)
$ 554,149
$ 41,526
$ (37,458)
-
-
2,566
-
-
-
-
(4,417)
88,456,760
$ 554,149
$ 44,092
$ (41,875)
4,166,666
50,000
-
(526)
-
1,458,366
15,431
(5,962)
-
-
-
$ 619,054
$ 42,922
28
-
4,792
94,081,792
The notes are an integral part of these consolidated financial statements.
$ 550,189
(1,581)
88,456,760
-
Total equity
(12,212)
$
(54,087)
(1,305)
$ 558,217
2,566
(4,417)
$ 556,366
50,000
(526)
4,792
9,469
(12,212)
$ 607,889
PAINTED PONY PETROLEUM LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000s)
Three months ended
September 30,
2014
2013
Nine months ended
September 30,
2014
2013
Cash flows from operating activities:
Net income (loss) and comprehensive income (loss)
Adjustments for:
Share-based compensation
Depletion and depreciation expense
Exploration and evaluation expense
Net finance expense
Deferred income tax expense (recovery)
Unrealized (gain) loss on commodity risk management
Loss on disposition of assets
Decommissioning expenditures
Changes in non-cash working capital
$
8,222
1,393
11,884
234
355
3,324
(2,223)
-
$
(209) $ (12,212) $
1,091
10,226
138
594
337
-
(234)
246
23,201
(1)
(557)
11,619
(237)
(46,587)
(3,316)
(36,173)
(238)
(1,305)
3,372
38,204
3,632
1,862
(2,340)
508
43,318
(397)
(1,621)
74,326
5,087
31,144
1,969
661
1,349
(429)
(120,019)
(1,155)
98,980
(1,735)
18,537
(5,821)
(23,926)
(82,537)
(238)
-
(155)
134
38,884
Cash flows from investing activities:
Exploration and evaluation additions
Property, plant and equipment additions
Property, plant and equipment acquisitions
Property, plant and equipment disposition (note 4)
Transaction costs on disposition
Changes in non-cash working capital
-
98,980
-
-
-
17,099
69,255
17,125
(22,602)
-
(824)
(107,525)
Cash flows from financing activities:
Issue of share capital
Share issuance costs
Exercise of share options
Repayment of bank debt
Net cash finance expense
Changes in non-cash working capital
50,000
(707)
4,914
(49,270)
(270)
224
4,891
97,347
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
-
$ 97,347
The notes are an integral part of these consolidated financial statements.
29
-
61
-
(491)
-
(430)
(11,413)
22,100
$ 10,687
50,000
(707)
9,469
(28,626)
(1,495)
201
28,842
97,347
-
$ 97,347
-
2,452
-
(374)
(272)
1,806
(66,835)
77,522
$ 10,687
PAINTED PONY PETROLEUM LTD.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
As at and for the periods ended September 30, 2014 and 2013
(Unaudited)
1. Reporting Entity
Painted Pony Petroleum Ltd.’s (“Painted Pony” or the “Company”) principal business activity is the
exploration, development and production of petroleum and natural gas resources in western Canada. The
condensed interim consolidated financial statements of the Company as at and for the three and nine month
periods ended September 30, 2014 and 2013 include the accounts of the Company and its wholly owned
subsidiary, Painted Rock Resources Ltd. The Company’s head office is located at 736 – 6th Avenue S.W.,
Suite 1800, Calgary, Alberta.
2. Basis of Preparation
These condensed interim consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) International Accounting Standard (“IAS”) 34 – “Interim
Financial Reporting”. The condensed interim consolidated financial statements do not include all of the
information required for full annual financial statements. The condensed interim consolidated financial
statements were authorized for issue by the Board of Directors on November 12, 2014.
These condensed interim consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2013. These condensed interim
consolidated financial statements have been prepared following the same accounting policies and methods of
computation as the consolidated financial statements of the Company for the year ended December 31, 2013,
except as noted below. Certain prior period amounts have been restated to conform to presentation in the
current period.
On January 1, 2014 the Company implemented IAS 32 “Financial Instruments: Presentation”, which clarifies
the requirements for offsetting financial assets and liabilities. The amendments clarify when an entity has a
legally enforceable right to offset and certain other requirements that are necessary to present a net financial
asset or liability. On January 1, 2014 the Company implemented the IASB issued IFRIC 21 "Levies", which
was developed by the IFRS Interpretations Committee ("IFRIC"). IFRIC 21 clarifies that an entity recognizes a
liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The
interpretation also clarifies that no liability should be recognized before the specified minimum threshold to
trigger that levy is reached. The adoption of these standards had no impact on the amounts recorded in the
financial statements as at and for the period ended September 30, 2014.
3. Exploration and Evaluation
(000s)
Cost:
Balance, December 31, 2012
Additions
Transfer to property, plant and equipment
Expensed
Balance, December 31, 2013
Additions
Transfer to property, plant and equipment
Dispositions
Expensed
Balance, September 30, 2014
$
68,707
33,061
(23,752)
(5,534)
$ 72,482
429
(3,101)
(3,618)
(3,632)
$ 62,560
30
Exploration and evaluation (“E&E”) assets consist of undeveloped lands, unevaluated seismic data and
unevaluated drilling and completion costs on the Company’s exploration projects which are pending the
determination of proven or probable reserves. Additions represent the Company’s share of costs incurred on
E&E assets during the period. Transfers are made to property, plant and equipment (“PP&E”) as proven or
probable reserves are determined. E&E assets are expensed due to non-economic drilling and completion
activities and lease expiries.
The Company assesses the recoverability of E&E assets as the transfer to PP&E is considered.
4. Property, Plant and Equipment
(000s)
Cost:
Balance, December 31, 2012
Acquisitions
Cash additions
Non-cash additions
Transfer from exploration and evaluation
Balance, December 31, 2013
Acquisitions
Cash additions
Non-cash additions
Transfer from exploration and evaluation
Dispositions
Balance, September 30, 2014
$ 576,570
258
109,516
3,748
23,752
$ 713,844
1,155
120,019
4,832
3,101
(232,840)
$ 610,111
Accumulated depletion and depreciation:
Balance, December 31, 2012
Depletion and depreciation
Balance, December 31, 2013
Depletion and depreciation
Dispositions
Balance, September 30, 2014
$ 135,560
42,422
$ 177,982
38,204
(88,845)
$ 127,341
Carrying amounts:
December 31, 2013
September 30, 2014
$ 535,862
$ 482,770
Estimated future development costs associated with the development of the Company’s proved plus probable
reserves at September 30, 2014 were $2.3 billion, compared to $2.4 billion at December 31, 2013.
31
(a) Property Disposition
On July 30, 2014, the Company disposed of certain petroleum and natural gas properties with a net book
value of $147.6 million and associated decommissioning liabilities of $7.1 million. Consideration consisted
of cash of $100 million before closing adjustments. These properties were held for sale as of June 30,
2014 and a preliminary loss of $43.3 million, subject to final adjustments, was recognized in the nine
month period ended September 30, 2014.
(b) Capitalized General and Administrative Expense and Share-Based Compensation
Three months ended
Nine months ended
(000s)
September 30,
September 30,
2014
858
500
$ 1,358
General and administrative
Share-based compensation
Total
$
2013
712
535
$ 1,247
$
$
$
2014
2,313
1,420
3,733
$
$
2013
2,141
1,794
3,935
(c) Other Assets
The total cost associated with office furniture and fixtures and leasehold improvements at September 30,
2014 was $4.1 million, with accumulated amortization of $1.2 million. This compares to a cost of $3.4
million as at December 31, 2013, with accumulated amortization of $0.8 million.
5. Bank Debt
On May 9, 2014 the Company’s syndicated credit facilities were increased from $125 million to $175 million
and expanded to include four Canadian chartered banks. As a result of the July 30, 2014 asset disposition,
the credit facilities have been reduced to $150 million. The facilities include a $140 million extendible
revolving facility and a $10 million operating facility. The facilities revolve for a 364 day period plus a one year
term-out, which is extendible annually, subject to syndicate approval. The facilities are subject to a semiannual borrowing base review, the next of which is expected to occur on or before November 30, 2014.
The credit facilities bear interest on a matrix system which ranges from bank prime plus 1.0% to bank prime
plus 3.5% per annum depending on the Company’s total debt to cash flow ratio as defined by the lender,
ranging from less than 1:1 to greater than 3:1. 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 0.875% per annum is charged on the
undrawn portion of the credit facilities, also calculated depending on the Company’s total debt to cash flow
ratio, as defined by the lender.
Security is provided by a floating charge demand debenture in the principal amount of $300 million on all of
the Company’s assets. The Company has provided a negative pledge and undertaking to provide fixed
charges over major producing petroleum and natural gas reserves in certain circumstances.
32
6. Net Income (Loss) per Share
Three months ended
September 30,
Net income (loss) for the period (000s)
Weighted average common shares – basic
Weighted average common shares – diluted
$
2014
8,222
91,279,995
92,944,487
Net income (loss) per share – basic and diluted
$
0.09
$
2013
(209) $
88,455,543
88,455,543
$
Nine months ended
September 30,
(0.00)
2014
(12,212)
2013
$ (1,305)
89,694,884
89,694,884
88,407,690
88,407,690
$
(0.14)
$
(0.01)
The average market value of the Company’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 three and nine
months ended September 30, 2014, 210,000 and 6,704,601 options, respectively, were excluded from the
weighted-average diluted share calculation of Common Shares. During the three and nine months ended
September 30, 2013, all options were excluded from the weighted-average diluted share calculation of
Common Shares.
7. Share Capital
(a) Authorized
The Company has an unlimited number of Common and Preferred Shares authorized for issuance. At
September 30, 2014 there were 94,081,792 Common Shares outstanding, compared to 88,456,760
Common Shares outstanding at December 31, 2013. On August 25, 2014 the Company completed a
private placement of 4,166,666 Common Shares at $12.00 per share for total consideration of $50 million.
At September 30, 2014 and December 31, 2013 there were no Preferred Shares outstanding.
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 Company,
the Common Shares are entitled to receive, on a pro rata basis, all assets of the Company as are
distributable to the holders of shares.
(b) Stock options
The Company has an option program that entitles employees, officers and directors to purchase Common
Shares in the Company. Stock options are granted at the market price of the shares at the date of grant,
have a five year term and vest one-third immediately with the balance over two years.
The number and weighted average exercise prices of stock options are as follows:
Weighted Average
Exercise Price
Balance, December 31, 2012
$ 9.05
Granted
7.58
Exercised
6.06
Forfeited
10.86
Balance, December 31, 2013
$ 8.63
Granted
11.07
Exercised
6.49
Forfeited
11.30
Balance, September 30, 2014
$ 9.20
33
Number
6,361,467
2,416,500
(405,000)
(546,000)
7,826,967
729,000
(1,458,366)
(393,000)
6,704,601
The following table summarizes information about stock options outstanding at September 30, 2014:
Number of
Options
Outstanding
224,167
383,200
889,000
354,000
30,000
500,800
444,300
80,000
375,000
426,300
360,000
359,000
1,552,834
296,000
66,000
154,000
210,000
6,704,601
Exercise
Price ($)
5.88
6.51
10.60
12.10
11.19
11.80
7.56
7.10
10.86
10.59
10.33
10.13
6.44
8.44
10.64
12.17
14.14
9.20
Remaining Life
(Years)
0.3
0.9
1.5
1.7
1.8
2.2
2.6
2.7
3.0
3.2
3.3
3.5
4.2
4.5
4.6
4.8
4.9
2.9
Exercisable
Options
224,167
383,200
889,000
354,000
30,000
500,800
444,300
80,000
375,000
284,200
240,000
237,666
480,500
96,666
22,000
51,333
70,000
4,762,832
Exercise
Price ($)
5.88
6.51
10.60
12.10
11.19
11.80
7.56
7.10
10.86
10.59
10.33
10.13
6.44
8.44
10.64
12.17
14.14
9.54
The weighted average share price at the date of exercise for share options exercised during the three
months ended September 30, 2014 was $13.19, compared to $8.57 during the three months ended
September 30, 2013. The weighted average share price at the date of exercise for share options
exercised during the nine months ended September 30, 2014 was $11.15, compared to $10.10 during the
nine months ended September 30, 2013.
The Company accounts for its stock options granted to employees, officers and directors using the fair
value method. In accordance with the Company’s incentive stock plan, these options have an exercise
price equal to the fair value of the Company’s Common Shares at the date of grant.
The weighted-average fair values of the options granted and the assumptions used in the Black-Scholes
option pricing model were as follows:
Nine months ended September 30,
Fair value per option
Volatility (%)
Option life (years)
Dividends
Risk-free interest rate (%)
2014
$ 4.39
43
5
1.86
2013
$ 6.05
72
5
1.63
During the three and nine months ended September 30, 2014, 364,000 and 729,000 stock options were
granted at average prices of $13.31 and $11.07, respectively. During the three months ended September
30, 2013, no stock options were granted. During the nine months ended September 30, 2013, 724,000
stock options were granted at an average price of $10.23.
A forfeiture rate of 9% was used when measuring share-based compensation during the three months
ended September 30, 2014, compared to 8% during the three months ended September 30, 2013.
34
8. Financial Instruments and Risk Management
The Company’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 of Directors of the Company oversees management’s establishment and execution of the
Company’s risk management framework. Management has implemented and monitors compliance with risk
management policies. The Company’s risk management policies are established to identify and analyze the
risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to
market conditions and the Company’s activities. The Company’s financial risks are consistent with those
discussed in note 14 of the Company’s audited consolidated financial statements for the year ended
December 31, 2013.
The Company 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
Company 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 of Directors of the Company. These
instruments are not used for trading or speculative purposes. The Company has not designated its financial
derivative contracts as effective accounting hedges, even though the Company 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 on 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 Company’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.
At September 30, 2014 the Company held derivative contracts as follows:
Natural Gas Financial Contracts
Volume
Reference
(GJ/d)
Term
CDN$ AECO
10,000
January – December 2014
CDN$ AECO
5,000
April – December 2014
CDN$ AECO
5,000
May – December 2014
CDN$ AECO
5,000
April 2014 – March 2015
CDN$ AECO
15,000
June – October 2014
CDN$ AECO
10,000
January – March 2015
CDN$ AECO
5,000
January – March 2015
CDN$ AECO
5,000
January – March 2015
CDN$ AECO
5,000
January – March 2015
Total Fair Value
Price
($/GJ)
3.72
3.83
4.50
3.85
0.005
3.90
4.21
4.70
4.19
Option
Traded
Swap
Swap
Swap
Swap
Basis Swap
Swap
Swap
Swap
Swap
Fair Value
(000s)
$ (347)
(123)
296
(260)
54
(268)
1
220
(3)
$ (430)
Subsequent to September 30, 2014, the Company entered into an additional commodity risk management
contract as outlined below:
Natural Gas Financial Contracts
Reference
Volume (GJ/d)
CDN$ AECO
10,000
Term
January – March 2015
35
Price ($/GJ)
4.23
Option Traded
Swap
For the three months ended September 30, 2014, if natural gas prices had been US$0.10/mcf higher, with all
other variables held constant, net income for the period would have been $0.4 million higher. An equal and
opposite impact would have occurred to net income had natural gas prices been US$0.10/mcf lower.
9. Commitments
($000s)
Gas processing
Gas gathering
Equipment leases
Office leases
2014
1,294
803
933
351
2015
5,037
3,740
4,838
1,703
2016
4,947
3,311
618
1,428
2017
4,147
2,141
143
1,447
2018
3,760
750
1,466
Thereafter
4,833
1,175
Total
24,018
10,745
6,532
7,570
Gas processing includes numerous contracts to process natural gas through third party owned gas
processing facilities in British Columbia. Gas gathering includes contracts to transport natural gas through
third party owned pipeline systems in British Columbia. Equipment leases include drilling rig contracts and
agreements to lease compressors. Office leases include the Company’s contractual obligations for office
space.
On August 18, 2014 Painted Pony 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 natural gas liquids. Under the Strategic Alliance, AltaGas is committed to build a number
of gas processing facilities for which the field lease work and application process on a 198 mmcf/d gas
processing facility at the Company’s Townsend property has commenced. Painted Pony will maintain the right
to a minimum of 150 mmcf/d of firm capacity at this facility, on which there will be a take or pay obligation on a
component of the production volumes that will be delivered to the facility upon commencement of commercial
operations. The obligation related to the take or pay is not reflected in the above commitment table due to the
uncertainty of the magnitude of the commitment.
10. Subsequent Event
On November 5, 2014, Painted Pony acquired 14.5 net sections of 100% working interest Montney lands at a
British Columbia Crown land sale for cash consideration of $66.8 million. The lands are directly contiguous to
the Company’s Townsend property.
36
CORPORATE INFORMATION
BOARD OF DIRECTORS
Glenn R. Carley, Chairman
President
Selinger Capital Inc.
Calgary, Alberta
OFFICERS
Patrick R. Ward
President and Chief Executive Officer
John H. Van de Pol
Vice President, Finance and Chief Financial Officer
Kevin D. Angus
President
KD Angus Corp.
Calgary, Alberta
Bruce G. Hall
Vice President, Land
Edwin S. (Ted) Hanbury
Vice President, Engineering
Allan K. Ashton
Independent Businessman
Priddis, Alberta
L. Barry McNamara
Vice President, Corporate Development
Nereus L. Joubert
Independent Businessman
Former Country President
Sasol Canada
Calgary, Alberta
James D. Reimer
Vice President, Exploration
Arthur J. G. Madden
Chief Financial Officer
Crown Point Energy Inc.
Calgary, Alberta
Tonya L. Fleming
Vice President and General Counsel
Stuart W. Jaggard
Vice President and Controller
Douglas T. McCartney
Partner, Burstall Winger Zammit LLP
Corporate Secretary
Peter A. Williams
Managing Partner
Annapolis Capital Limited
Calgary, Alberta
LEGAL COUNSEL
Burstall Winger Zammit LLP
Patrick R. Ward
President & Chief Executive Officer
Painted Pony Petroleum Ltd.
Calgary, Alberta
AUDITORS
KPMG LLP
BANKERS
National Bank of Canada
Alberta Treasury Branches
Canadian Imperial Bank of Commerce
The Bank of Nova Scotia
HEAD OFFICE
1800, 736 – 6 Ave SW
Calgary, Alberta T2P 3T7
Phone: (403) 475-0440
Fax: (403) 238-1487
Email: [email protected]
Toll Free Investor: 1 (866) 975-0440
Website: www.paintedpony.ca
EVALUATION ENGINEERS
GLJ Petroleum Consultants Ltd.
REGISTRAR AND TRANSFER AGENT
Computershare
1 (800) 564-6253
EXCHANGE LISTING
The Toronto Stock Exchange
Trading symbol for Common Shares: PPY
37