Author Topic: PEY.TO - Peyto Exploration & Development  (Read 16121 times)

oec2000

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Re: PEY.TO - Peyto Exploration & Development
« Reply #10 on: December 08, 2017, 11:53:42 AM »
Hi oec2000, nice to see you back.

I think Cdn. Nat. gas, at the moment, is a crappy industry.  I am unsure is it ever gets better in the near term.  This is despite the continuous building of nat. gas plants and conversion of Coal to nat. gas projects (See Tampa Electric for an example). 

Right now many operators in Western Canada treat gas as a toss off. 

It always seems like there is more supply than demand, no matter how much demnd increases.  It is pure speculation whether this ever ends at least in our time horizons. 

I have no opinion on Peyto, except to say that when yields get that high there is almost always a dividend cut coming.  Management gains nothing by punishing the balance sheet in the face of adversity.  I have had this lesson repeated to me several times. 

Thanks for your comments, uccmal and StevieV.

I agree the natgas outlook is bleak but bleak environments should be the playgrounds of value investors. Many people on this board made out like bandits buying FFH and then the US banks (and their preferreds too) when it looked like Armageddon.

Not saying that PEY is at the same degree of undervaluation but it seems to me an opportunity that bears a closer look. I know that the resource industry has caused a lot of heartache for investors because of the insane way that most of the companies in the sector are managed. But, therein lies the opportunity because the market is so fearful and PEY management is not typical of the sector.

The dividend issue is a red herring imo. What should matter are owners' earnings and I think shareholders of PEY would be better served if they didn't pay any dividends because of the high incremental IRRs/ROEs they continue to generate on capex.

The fundamental question is whether free market economics will work to bring the natgas market in Canada back to equilibrium where producers can earn a reasonable return. I would argue that this is more likely to happen in a negative environment where investors/bankers are much more reluctant to let promoters destroy their capital than in bullish times when the "grow at any price" craziness was so in vogue. Free markets worked when WCS oil spreads to WTI and Brent blew out a few years ago and it's logical to think that it will happen again with gas.

I'm paying attention to capex plans among the gassy producers. When we start to see more drastic cuts to capex is when it's an indication of markets working. Meanwhile, low gas prices will only stimulate demand.


 


influx

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Re: PEY.TO - Peyto Exploration & Development
« Reply #11 on: January 18, 2018, 10:40:54 PM »
Hi oec2000, nice to see you back.

I think Cdn. Nat. gas, at the moment, is a crappy industry.  I am unsure is it ever gets better in the near term.  This is despite the continuous building of nat. gas plants and conversion of Coal to nat. gas projects (See Tampa Electric for an example). 

Right now many operators in Western Canada treat gas as a toss off. 

It always seems like there is more supply than demand, no matter how much demnd increases.  It is pure speculation whether this ever ends at least in our time horizons. 

I have no opinion on Peyto, except to say that when yields get that high there is almost always a dividend cut coming.  Management gains nothing by punishing the balance sheet in the face of adversity.  I have had this lesson repeated to me several times. 

Thanks for your comments, uccmal and StevieV.

I agree the natgas outlook is bleak but bleak environments should be the playgrounds of value investors. Many people on this board made out like bandits buying FFH and then the US banks (and their preferreds too) when it looked like Armageddon.

Not saying that PEY is at the same degree of undervaluation but it seems to me an opportunity that bears a closer look. I know that the resource industry has caused a lot of heartache for investors because of the insane way that most of the companies in the sector are managed. But, therein lies the opportunity because the market is so fearful and PEY management is not typical of the sector.

The dividend issue is a red herring imo. What should matter are owners' earnings and I think shareholders of PEY would be better served if they didn't pay any dividends because of the high incremental IRRs/ROEs they continue to generate on capex.

The fundamental question is whether free market economics will work to bring the natgas market in Canada back to equilibrium where producers can earn a reasonable return. I would argue that this is more likely to happen in a negative environment where investors/bankers are much more reluctant to let promoters destroy their capital than in bullish times when the "grow at any price" craziness was so in vogue. Free markets worked when WCS oil spreads to WTI and Brent blew out a few years ago and it's logical to think that it will happen again with gas.

I'm paying attention to capex plans among the gassy producers. When we start to see more drastic cuts to capex is when it's an indication of markets working. Meanwhile, low gas prices will only stimulate demand.


To be honest, I don't like when the no insider is buying. Not red flag per se, but definitely not good

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #12 on: December 11, 2018, 01:44:28 AM »
I've owned a small amount of this for a few months and I thought I'd bump it up the list as it is only getting cheaper and is heading towards deep value, I think. There is a structural supply vs takeaway issue but on a 3-year horizon LNG/pipe/propane projects may provide some relief. In the meantime an excellent management team is generating cash and (slowly) paying down debt.

awindenberger

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Re: PEY.TO - Peyto Exploration & Development
« Reply #13 on: December 24, 2018, 01:31:28 PM »
I've owned a small amount of this for a few months and I thought I'd bump it up the list as it is only getting cheaper and is heading towards deep value, I think. There is a structural supply vs takeaway issue but on a 3-year horizon LNG/pipe/propane projects may provide some relief. In the meantime an excellent management team is generating cash and (slowly) paying down debt.

I've been following Peyto since last winter but haven't bought in yet. Agree with you that it seems to be getting into deep value territory. Would love to see them stop drilling and allocate most FCF to buybacks right now until supply eases up.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #14 on: December 24, 2018, 07:30:08 PM »
I wouldn’t. Their decline rate is over 30% and they have debt. Under some assumptions that’s an existential threat to the equity. If they stop drilling I’d like to see them slash the debt.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #15 on: January 18, 2019, 04:33:53 AM »
Peyto have cut capex and the dividend and announced a 3-year plan: http://www.peyto.com/Files/News/2019/2019StrategyNewsRelease.pdf

This looks like a smart move to me. They are going to be able to continue to pay down debt while investing in midstream assets such as liquids deep cut capacity (to improve netbacks on liquids-rich gas production) and gas storage (to smooth out the incredible volatility at AECO). They also expect to be able to buy more land at good prices. They seem confident that by the end of the 3-year period local pricing will be heading for a better period on the back of NGTL expansion, local demand growth, and progress on LNG export terminals.

I have expected a dividend cut for a while and I hope it is the last shoe to drop. Of course it is possible commodity prices will be cut futher but at some point that has to impact production and Peyto, as one of the most efficient producers, will be one of the last men standing when the market rebalances.

WayWardCloud

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Re: PEY.TO - Peyto Exploration & Development
« Reply #16 on: January 18, 2019, 02:35:26 PM »
I have a small position in Peyto as well. Same story: Very competent management and lowest cost producer stuck in the midst of a temporary (?) macro nightmare. Lost tons of money :( What prevents me from adding to it is that if they're such good stewards of shareholder's capital then why on earth haven't they cut the dividend completely and started buying back shares already a while ago? Also no insider purchases.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #17 on: January 21, 2019, 10:31:55 PM »
The buyback issue doesn’t bother me greatly. Apart from tax there’s not much difference between buying back shares and paying a dividend so shareholders can buy more. I always think we overstate the importance of buybacks, and anyway I think derailing by paying down debt is more important. Their mistake was taking on debt when they did.

Insider purchases - very fair point.

50centdollars

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Re: PEY.TO - Peyto Exploration & Development
« Reply #18 on: January 22, 2019, 05:56:55 AM »
I have a small position in Peyto as well. Same story: Very competent management and lowest cost producer stuck in the midst of a temporary (?) macro nightmare. Lost tons of money :( What prevents me from adding to it is that if they're such good stewards of shareholder's capital then why on earth haven't they cut the dividend completely and started buying back shares already a while ago? Also no insider purchases.

insiders have been selling all the way down.
50centdollars

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #19 on: January 28, 2019, 09:08:12 AM »
Obviously production decline rates are high with assets like these. However, the decline rates also drop fairly rapidly. That means that if a company like this chooses to hold production flat rather than grow it, they start generating FCF fairly quickly unless commodity prices are unsustainably low.

In that context I think it's quite significant that guidance for Peyto's decline rate has fallen from 35% for 2018 and 32% for 2019 to 25% for 2019 and 21% for 2020. The reason for the drop is that the original guide assumed production growth and the new guide assumes a significant production drop in 2018, a smaller one in 2019, and slight growth in 2020 (so declines might be even lower in 2020 if they only hold production flat).

I'm pleasantly surprised at how fast the decline rate is tapering off. Assuming 21%, Peyto generate enough cash to keep production flat and continue paying down debt assuming they sell all their production at current depressed strip and earn no other revenues - and of course if they do hold production flat the decline rate will keep falling so the rate at which they pay down debt will accelerate. On top of that the leverage to commodity price upside is enormous and a lot is being spent on improving demand and access to it ($9bn on NGTL, more on LNG, more on coal-to-gas conversion, and yet more on liquids plants and the Ridley export terminal).

I'm starting to think there is deep value here.