Jeez... took a lot of time but:

For 300 Club Readers could be:

One of the Hottest Plays in the Bakken Oil Formation

Painted Pony Exploration

OTC: PDPYF.PK

CDNX – TSX Venture Exchange: PPY-A.V; PPY-B.V

The Bakken oil play – already one of the largest onshore oil discoveries in North America in decades – just keeps getting bigger.

So much so E-Bear, that producers in both Canada and the US are pushing out the “generally accepted” boundaries of the play – mostly to the west, into Alberta and into

Montana from North Dakota – even as far as western Montana.

What's more... Not only is the development activity in North Dakota expanding westward, it is also outside the six assessment units that the U.S. Geological Survey

(USGS) designated when it conducted the assessment of the Bakken Formation,Williston Basin Province as late as 2008.

And a land position this size (multi-zone) in this very young play has the ability to make a tangible difference in production and potentially stock price US producers.

None of the big producers in the play talk much about the Alberta Bakken, as the play is called (even in Montana) in their website or literature. Still, they are continually

Acquiring more land, and they are drilling.

What's even more exciting here is that this producer has estimated there is between 12.5 million and 15.3 million barrels of oil equivalent in place (this means oil and gas)

Per square mile.

Companies are now drilling lower cost vertical wells, trying to determine where the sweet spots are in the various formations in the Alberta Bakken. The market won’t

likely see an IP rate until they have drilled several horizontals, and have 30 days production behind them. Still, an IP rate from any of the producers would be a major

catalyst for the entire play.

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Painted Pony Exploration Ltd. is yet another exciting Bakken formation oil producer. Two others are,

Petrobank, and TriStar, who merged last year and gave subscribers 40% profits in just over a month. Painted Pony has a large undeveloped land position of low cost oil in the

Bakken and some strong natural gas assets that are basically valued at zero (one of their gas plays could be the lowest cost shale gas play in

North America!).

Painted Pony could very well be the next Bakken producer to get bought out. If not, production should rise steadily and quickly over the coming years. President Pat Ward has already built and sold a junior producer (Innova, bought by Crescent Point). And as a bonus, if

natural gas prices turn up, one could have a HUGE winner with Painted Pony.

Trading Symbols: PPY.A-TSX; PPY.B-TSX, PDPYF.PK

Share Price (As) $11 range

Share Price (Bs) $9 range

Share Price (.PK) $11 range

Current Production: 3,593 boe/day

A Shares Outstanding: 59,624,673

B Shares Outstanding 1,173,600 (converts to 1,397,142 A shares at current price)

Options Outstanding: 3,389,000 Class A @ $4 average price

Market Cap: $295,969,973

Net CASH: $15,000,000

Enterprise Value: $280,969,973

Price per flowing barrel $112,387 (land values have not been backed out of this)

PAINTED PONY:

THE LAST OF THE BAKKEN'S “BEST-KEPT SECRETS”

Large undeveloped land position in low-cost Bakken oil formation of SE Saskatchewan

Proved plus probable reserves grew to 85.6 mmboe (up 163% in 6 months)

Great balance sheet – positive working capital position of $40.3 million; and NO DEBT

Montney gas plays the market is getting for free -- Buckinghorse shale play

Very low cost

Management has been integral in building junior producers before

Crescent Point (CPG-TSX) owns 13% of the stock, management owns 11%

One thing to keep in mind, Painted Pony is prone to thin trading, and can experience

big price swings in a day.

THE BAKKEN: PAINTED PONY'S SOLID POSITION

As you know by now, the Bakken is one of the largest onshore oil discoveries in North America ever, with the formation stretching through North Dakota and up into southern Saskatchewan. The US Geological Survey (USGS) estimated the Bakken has over 4.3

billion barrels of Ultimate Recoverable barrels of oil, and that number could double to 8 or 9 billion barrels if the 3 Forks basin (directly underneath the Bakken) proves to be its own major oil-producing formation.

The Bakken is a “tight” rock deposit, which are also called “unconventional” plays.

They have very low porosity (size of pores in rock) and permeability (openings in rock that allow oil to flow to the well). Most oil & gas formations are actually sand, not

rock. That’s why these rock (shale) based deposits are called “unconventional”. The Bakken has been known for years – decades - but only recently have the ever improving technologies of horizontal drilling (HD) and multi-stage fracing (MSF) become so proficient that the oil could be recovered economically from it.

Bakken producers like Painted Pony, Crescent Point and Petrobakken are continually improving fracing techniques , and increasing production and reserves per well.

For example, the Recovery Factor (RF), the percentage of oil in the reservoir you actually expect to recover, has gone from 12-20% recently, and a secondary recovery method called water flooding is increasing that even more in the last year.

Fracking involves sending a special fluid or chemical down a horizontal well bore at very high pressures to break open (fracture) the rock and allow the oil to flow to the well. Companies will frac a well every 100 m or so, breaking up the surrounding rock in chunks.

PPY now has a total of 81,896 net acres – or about 128 net sections (1 section =1 sq mile) in the Bakken – and only 3% of it is drilled.

So there is years of growth here.

About 9,000 acres is now considered a low risk development play, where the company has over 100 net drilling locations. So by far, most of their land is still exploratory...but

it has a good chance of finding economic wells.

PPY’s average horizontal Bakken well starts production at a rate of 140-160 bopd, but quickly drops to 50-60 bopd. Wells naturally decline in production year after year.

President Pat Ward has told investors declines start at 65% in the first year and end up at 30% a

year later, then get flatter after a couple years to 20% for a couple years, then 10% etc.

Each horizontal well costs PPY about $1.6 million to drill, and payback is less than 24

months at the current price deck. (Anything under 30 months is good.)

Aided occasionally by 3D seismic technology, developmental areas rarely hit a duster, i.e. when they find NO oil at all. Because of the uncertainty around the oil price last year, Painted Pony focused on their

core, lower risk inventory, of which Ward says that PPY has an average 86-90% working interest (WI).

They have increased production from under 1000 boe to about 2500 boe and now to 3,593 boe, with most of that increase coming from their core area, in the main Bakken

area called View field Stoughton in southeast Saskatchewan.

Painted Pony drilled an estimated 27 wells in this field in 2010.

Now they have acquired more lands farther away from the core, like their Wapella lands to the northeast of View field, where they are drilling 2 holes now, and down at Flat Lake, which is to the southwest of View field and right along the North Dakota border.

THE BAKKEN: PROFITABILITY UNDERSTATED

At $80 oil they get $59 profit per barrel (this is called the netback). One can estimate the recycle ratio for Painted Pony to be just over 2x. The recycle ratio is a key measure of

profitability in the oil patch. You divide the profit per barrel (netback) into the finding costs for that barrel.

Painted Pony should have lower costs for finding oil in the future, as they have now built a lot of infrastructure (pipelines, processing facilities), and they had very low land acquisition costs for the Bakken properties. They were one of the first groups to start earning Bakken land by drilling via farm-in agreements, and bought land early in the play when it was cheaper.

In summary readers, the company has a lot of land to drill yet in the Bakken, both in their low risk core area and in some of the riskier outlying areas. This should ensure lots of low cost, profitable growth for several years. Insiders suspect the first Wapella well hit economic

oil, as management has said they are drilling a second one already.

NATURAL GAS PROPERTIES

If one owns the stock for this Bakken oil play, the growth for the company should make investors enjoy a pleasant profit over the next 3-4 years. But if the price of natural gas starts to go up, Painted

Pony has GREAT growth prospects, with a land position that could see them go from almost zero to 200 mmcf/d of natural gas production in five years with some of the

Lowest cost gas in all of North America. It’s a freebie for investors at this stage.

MONTNEY

The Montney natural gas play that straddles the Alberta-B.C. border has become one of the most prolific new gas discoveries in North America, just like the Haynesville,

Fayetteville and Barnett plays in the US. Some producers are hitting up to 10 mmcf/d (million cubic feet of gas per day) plus in this formation for a horizontal well. That is 20x more than the average Canadian well of 500 mcf/d; a huge prize.

PPY has 127 net sections of Montney acreage, for which they paid on average about

$200,000 per section in 2008. Now the ground surrounding them is selling for $1-$2 million per section, with some land as high as $4 million. An independent report estimated the value of Painted Pony’s undeveloped Montney lands at $127 million, or

45% of the enterprise value of the company.

In their core Montney areas, called Blair/Town and Cameron/Kobes, Painted Pony has a plan that could take them to 50 mmcf/d production in 2 years, and 200/mmcf/d

production in five years – from just the upper zone at Montney. There are 3 producing pay zones in the Montney, and Painted Pony’s partners on a couple wells were the first to hit the Lower Montney formation in their area.

PPY’s partners in the Cameron /Kobes area have drilled two wells that hit IP rates of 8.7 and 7.9 mmcf/d – boomer wells. Remember these IP rates fall off dramatically, usually 60-80% in the first year, and these published IP rates are mainly promotional gimmicks the industry loves to use to attract attention. But those are still VERY good wells. PPY only has 20% WI in these wells, but they get to elect to pay to participate after the well is drilled, and just have to pay tie-in costs, not drilling costs. Their 20% only cost $60,000 on these wells – far less than the 20% it cost to drill them.

The Montney potential in-depth, as gas prices are low enough, and their

production is small enough, that it’s not very relevant to their stock price until gas prices improve.

But readers should note there is a large undeveloped land package here with years of drilling inventory that could be exploited quickly.

This is also a multi-zone play, and

the newer (as in newly discovered), lower Montney is just as thick and has better porosity than the upper zone. And with $15 million cash, $45 million of undrawn debt

capacity and growing cash flow from the Bakken, there is lots of capital here to go after this fast, with no dilution, if gas prices move up.

Management will exploit it steadily with gas at current prices. They also have the two largest pipelines in the Montney – which have spare capacity – going through their

properties. So getting production on stream for Painted Pony is not an issue.

BUCKINGHORSE SHALE – INVESTORS HAVEN’T DISCOVERED THIS YET

This is one of the very few natural gas plays that investors can get excited about. It can be the lowest cost gas producer in North America, and nobody is talking about it.

It’s shallow, starting at about 1200 metres, which makes for low drilling costs. Its 800 METRES thick, it’s over pressured, which means gas could flow unstimulated (i.e. no

fracking, which is a big part of the well cost), and it has TWICE the OGIP (Original Gas in Place) that the regular Montney plays do. So there is potentially lots of cheap

gas very shallow, making for good profits even at current prices. The Buckinghorse potentially has much lower costs with more gas in place than the regular Montney gas.

Now, this play is not a slam dunk. The issue is there is a lot of clay in the formation, so if any water gets into the formation the clay will swell up and cut off the gas. Ward is

now confident there is no water there, but it could still take some time to tinker with the completion technology to get this play to work properly.

Ward has told the media with 63,000 net acres, or 98 net sections, there are potentially several Tcf

(trillion cubic feet) of very low cost natural gas on Painted Pony lands.

A B.C. government report estimates there is 60 bcf of gas per section per 100 metres at Buckinghorse. At 800 metres thick, 8 x 60 = 480 bcf OGIP; folks, that is HUGE – almost half a Tcf (trillion cubic feet) per section.

That could be 45 Tcf net to Painted

Pony. The size of the prize and the economics behind it could become very compelling, even with gas at $4/mcf.

The market will have a much better idea of Buckinghorse potential later this year after the first wells get completed.

PAINTED PONY: THE FINANCIALS

The financials are steadily improving as their oil production ramps up. In the company’s 2011 Quarter 2 PowerPoint they show $40 working capital and its credit facility was subsequently increased to $80 million. President Pat Ward has stayed away from using up his debt room so far. PPY usually trades well above its Net Asset Value (NAV) making stock issues cheaper and less dilutive than for many juniors which

trade at or below NAV.

The balance of the year will mostly be directed towards drilling for more Bakken production. Netbacks (the profit per barrel) on the Bakken oil are great – the latest quarterly showing $58 netback on $80 oil. To compare, natural gas netbacks for

Painted Pony was $13. That’s why savvy investor portfolios have almost NO gas stocks.

VALUATION

Bakken producers have the highest valuation of any subgroup in the Canadian energy space. First, check at “price per flowing barrel” where you divide the company’s Enterprise Value into its daily production. Enterprise value is simply market cap + net debt or – net cash. The higher the value, generally the better the company (read: more profitable, less risky, better quality assets etc.).

Painted Pony’s stock now trades at roughly $112,000 per flowing barrel, which is almost twice the average of the junior oil & gas market in Canada.

But that large peer group contains many gas weighted stocks, which have much lower profitability that trade at $40,000 per flowing barrel.

But looking at a comparable chart that includes several junior/intermediate Bakken

Producers, by Canadian brokerage firm BMO Nesbitt Burns, Painted Pony isn’t so expensive.

Legacy Oil and Gas (LEG-TSX) $184,000 per flowing barrel

Petrobakken (PBN-TSX) $131,500

Crescent Point (CPG-TSX) $173,800

Nu-Loch Resource (NLR.A-TSXv) some estimate at $101,000.

The first three comparables are slightly larger companies, so deserve a slightly higher valuation, and Nu-Loch is smaller, at only 1000 boe/d, and it has a slightly lower valuation.

So on a per flowing barrel metric, consider Painted Pony to be fairly valued – with lots of growth in the pipeline to keep the stock moving up. (The junior US-listed Bakken producers – like the recently bought out American Oil and Gas, or Brigham Explorations – often trade at TWICE the valuation of the Canadian listings – but their

wells have larger flow rates.)

The other main metric for valuation is Enterprise Value over Cash Flow. Again, more profitable companies will garner a higher ratio.

Canadian brokerage firm Haywood Securities recently compared six junior Bakken producers, who had an average ratio of 14.1 – meaning their enterprise value was 14.1

X their estimated 2010 cash flow. Painted Pony had the lowest ratio of 10.8, and the highest was 17.2. I like buying the lower valuation high growth stories!

THE STOCK

The A class shares – the only ones that trade – ran to $8 before the 2008 crash. They bottomed at $1, and ran back up to $7.50 in February 2010. The stock now trades in the $11 range. The long term moving average caught up to the stock, and the short, medium and long term averages converged – often a harbinger of a move in the stock.

Investors should know the stock is relatively expensive – trading at roughly 3x the NAV (Net Asset Value), according to one analyst. Keep in mind -- WE WANT to own

expensive stocks. That means the market is rewarding management early and often and more richly for increases inland /reserve/production.

The B shares are irrelevant for purposes here; but do include them in enterprise valuation. Class B shares are converted into Class A shares at $10 divided by the greater of $1.00 and the Current Trading Price.

CONCLUSION:

Painted Pony is increasing their oil weighting, and has a large undeveloped land position in a large field of high netback (very profitable) oil, which should

provide one with steady growth for several years. They are well known and respected by the analysts and institutions in Canada, which means the stock, should get rewarded

for the company’s growth. President Pat Ward and his team have grown – and sold -junior producers before.

Recent M&A in the Montney gas play has increased the land value of Painted Pony’s land. Their Buckinghorse Shale Play has the potential to be one of the lowest costs Natural gas plays in all of North America, giving one a bonus free call on the natural gas market.

Potential catalysts for the stock include increased production, and proving up their gas resources; particularly the Buckinghorse.

(Despite giving shareholders very low cash flow, stocks are being rewarded when making new gas discoveries.)

Probably next week I’ll buy shares but own none at present.