Author Topic: PEY.TO - Peyto Exploration & Development  (Read 16104 times)

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #40 on: December 03, 2019, 05:38:51 AM »
Great post, thanks.

I hold this investment in a tax free account so I can just use the dividends to buy more shares. I always think the distinction between buybacks and dividends is overplayed.


petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #41 on: December 04, 2019, 07:41:30 AM »
Worth considering ..

Today's oil producing shale field is tomorrows gas field.
As the wells age the gas cut gets progressively bigger, and the gas is considered by-product. The closer the field is to both a pipeline & the user/export point, and the more egress capacity there is - the less incentive there is to raise value. As long as you can get > cost, just dump and take the cash. Most would expect that over time, gas from US shale will displace Cdn south-bound US exports, and lower world prices.


I agree - but assuming gas can move the impact will be felt where prices have historically been high relative to US prices (e.g. Asia), not where they are low (AECO).

So the question is: can gas move? Because if it can, AECO will close the gap to NYMEX, and is quite likely to rise in absolute terms, even while Asian prices (and possibly NYMEX) fall due to the dynamics you describe.

It seems to me that egress from the WCSB grows in 2021-23. The company's presentation claims that NGTL expansion and LNG Canada require production to go from 16b's a day to 21b's over 5 years, against a decline rate of 4b's a year. The previous record production level is 18b's. That would underpin AECO pricing and a very nice outlook for Peyto at these share prices.
« Last Edit: December 04, 2019, 07:45:18 AM by petec »

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #42 on: December 04, 2019, 07:49:05 AM »
At the current forward curve I'm calculating 2020 FCF (maintaining production flat) of ~$140-$150m (before financing activities) which works out to a ~30% FCF yield.

Would you mind sharing the details of this calculation?

Nelg

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Re: PEY.TO - Peyto Exploration & Development
« Reply #43 on: December 04, 2019, 11:07:50 AM »
At the current forward curve I'm calculating 2020 FCF (maintaining production flat) of ~$140-$150m (before financing activities) which works out to a ~30% FCF yield.

Would you mind sharing the details of this calculation?

2020 assumptions below. Although some of the assumptions' numbers look quite specific, most are just eyeballed from historical numbers. I almost never create models for my investment, but I have some background in E&P so could not stop myself.

Macro stuff (forward curve as of Nov 29):
AECO: $1.84/GJ = $1.94/Mcf
WTI: US$56.50/bbl = C$61.02/bbl

Pricing:
Realized Oil/NGLs prices excl hedging as % of CAD WTI: 55% (2017 was 76%, 2018 was 67%, 3Q 2019 was 50%)
Realized Gas prices excl hedging as % of AECO (Mcf basis): 125% (2017/18 was ~110%, 1Q 2019 was 122%, 2Q 2019 was 150%, 3Q 2019 was 141%. This is one of the things I don't quite understand. They talk a lot about how they've diversified the markets they sell gas to...but basically all companies are doing this. The difference is other companies usually have big increases in transportation costs to achieve this whereas Peyto has not. Anyway, if they continue to realize material premiums >125% of AECO then that's good, and if they don't, well then that's bad.)
Hedges: Only their CAD WTI and AECO hedges as of 3Q 2019 taken into account. I'm too lazy to model the basis swaps. 

Capex and Production:
Production mix: approx unchanged from 3Q 2019 (~14% oil and liquids)
Decline rate vs 4Q 2019E: 24% (I think someone mentioned it's in the low 20s? I believe Darren has mentioned it in previous letters)
Capex efficiency: $11,000/boe/d
Capex: $200m
Production: ~77mboe/d (with these assumptions, ~$200m of capex should be enough to keep production flat)

Operations stuff:
Royalties: 2.9% of realized prices
OpEx+Transportation: $3.09/boe
G&A: $18m
Working Capital: no changes




Financial summary
Revenues net of royalties and incl hedging (latter of which turn out to be immaterial at the assumed benchmark prices): $492m
less OpEx & Transportation: $87m
less G&A: $18m
= EBITDA: $387m

less Interest: $42m
= FFO: $345m

less Capex: $200m
= FCF: $145m

Capital allocation: assume they use the $145m of FCF in the following way: $40m dividends, remaining $105m to repay debt (hence the deleveraging).

So obviously not all that FCF would go to shareholders, so maybe the ~30% FCF yield comment is slightly misleading (though there should be quite a bit of value that accrues to equity because the risk of covenant breaches decreases, etc etc)...but that $145m should be increasing in the following years due to an upward sloping forward curve.

I personally think Peyto should deleverage ASAP to below 2x, as this should allow them to weather declining prices for a longer period of time. If AECO drops to say around ~$1.50 next year, they will very likely need covenant relief which isn't the end of the world as I think it'll still be under 4x and this should be palatable to lenders/bondholders...but why risk going there?

ValuePadawan

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Re: PEY.TO - Peyto Exploration & Development
« Reply #44 on: December 04, 2019, 11:47:33 AM »
Thank you so much for the detailed calculation.

I couldn't agree more when it comes to paying down debt to get their balance sheet to a more conservative position. I'd rather they protect the downside because if they do that the upside should take care of itself.

SharperDingaan

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Re: PEY.TO - Peyto Exploration & Development
« Reply #45 on: December 04, 2019, 12:18:28 PM »
"So the question is: can gas move? Because if it can, AECO will close the gap to NYMEX, and is quite likely to rise in absolute terms, even while Asian prices (and possibly NYMEX) fall due to the dynamics you describe."

Big question.

Assume it doesn't, oil-sands use will set the lower price bound, with weather-related interruptions. Higher growth-related demand (more oil-sand & stripping) offsetting higher shale supply, reducing price volatility.

Near/Medium term movement depends on both user location/quantity, and egress point. Piping direct to a large on-shore user is fine, filling tide-water LNG carriers - not so much. Few tolerate floating bombs in their harbors.

Long term movement depends on geography/vision. Canadian NG should really flow NORTH to the Beaufort Sea, and not SOUTH or WEST to Asia. We would get a location premium to world price, be the natural supplier to most of the northern nations, and can still export to Asia - but this time from a remote egress point. Lot of other benefits as well.

SD


petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #46 on: December 04, 2019, 02:12:18 PM »
FWIW, my version of Nelg's maths...

Gas price: 50/50 weighting of the AECO summer and winter strips, which run from April 2020 to March 2021 = $1.80/GJ
NGL price: Edmonton propane spot = $55

GJ/mcf conversion 1.15.
Production 77kboe/d.
14% liquids, 86% gas.

Costs/mcf: $0.85

Operating cash flow =  $370m.
Decline rate 25% (from latest presentation).
Capex intensity $10k/boe (historically higher but that includes building gas plants, in which they now have excess capacity).
Capex to hold production flat = $190m.

Free cash flow at flat production: $175m, yield 38%.

I built this a year or so ago as a very rough guide - if there are any embarrassing errors please let me know.

BTW I tend to think that FCF used to pay down debt does accrue directly to shareholders. Assuming enterprise value does not change, lower debt means higher market cap; and one could argue that as debt falls risks also fall and the ev/ebitda multiple should rise, raising the enterprise value and magnifying the impact on market cap.

EDIT: three further observations. 1) $0.85/mcfe for cash costs is probably too low. $0.90 is likely nearer the mark - but 25c of that is interest costs which will fall. 2) transport is $0.17 of this, and this has been flat as production has fallen, so transport costs are rising, albeit not as much as one might have assumed given the sales mix. 3) p21 of the latest presentation suggests that at least part of the excess of realised price over AECO is due to heat content.





« Last Edit: December 04, 2019, 02:21:14 PM by petec »

ValuePadawan

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Re: PEY.TO - Peyto Exploration & Development
« Reply #47 on: December 04, 2019, 02:37:56 PM »
What are y'alls opinions on dividends vs buybacks?

Personally at these prices I think cash should be used to lower debt and buy back stock but because most E&P shareholders expect dividends I don't think management will do this. Even if they chose a middle option giving 10M in dividends and the rest split between debt and buybacks (mostly debt) I think that would be more value added than their current all dividend approach to returning capital.

Anyone have contrary opinions? I'd love to hear them.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #48 on: December 04, 2019, 02:51:59 PM »
What are y'alls opinions on dividends vs buybacks?

Personally at these prices I think cash should be used to lower debt and buy back stock but because most E&P shareholders expect dividends I don't think management will do this. Even if they chose a middle option giving 10M in dividends and the rest split between debt and buybacks (mostly debt) I think that would be more value added than their current all dividend approach to returning capital.

Anyone have contrary opinions? I'd love to hear them.

Personally I'd favour debt paydown.

Dividends vs buybacks is entirely a tax question. If tax treatment was the same, investors could simply buy more shares with the dividend and achieve the same result. Your preference will therefore depend on your tax situation. I own this in a tax free account so I couldn't give a fig about buybacks. The question is simply: capex vs debt paydown vs return to shareholders and personally I think they currently weight a little too much in favour of returning cash rather than paying down debt.

Then again if I was looking at a 40% increase in local demand against a backdrop of falling local supply (see p17 of current deck) and had a 50-year drilling inventory (p29) I might also have the confidence to maintain my leverage in anticipation of the coming upcycle...