Author Topic: PEY.TO - Peyto Exploration & Development  (Read 15893 times)

Nelg

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Re: PEY.TO - Peyto Exploration & Development
« Reply #30 on: November 26, 2019, 11:08:06 AM »
Peyto seem to think the new NGTL temporary service protocol is a game changer, as it sorts out access to storage until egress is increased permanently starting 2021:
http://www.peyto.com/Files/PMReport/2019/PMR20191003.pdf

Does anyone more knowledgeable than me have a view?

No view regarding NGTL, but I've been building a decent position in PEYTO under $3/sh USD. Lower gas prices for longer will help them long term because they actually have a low cost structure.

As a "patient" owner for some time it seems to me that the new NGTL temporary service protocol ("TSP") could in fact be a game-changer....in that it reduces the risk of negative AECO prices occurring again next summer (funny when you keep lowering the bar).

Start with one conundrum: with AECO prices at extremely low prices, you would assume this is due to excess supply, which you would then assume means Alberta's gas storage tanks should be bursting at the seams. However, I understand the storage levels in the main storage facilities connected to the NGTL are at 13-year lows. Something in the market does not seem to be working properly, and since the NGTL transports the overwhelming majority of produced gas in the province, it probably has something to do with that.

Peyto's monthly letters in the last few months talk about this issue a lot, but here's my understanding - would be great if anyone can correct me and/or provide extra nuances!

TransCanada/TC Energy ("TRP") has always prioritized shippers with long-term contracts vs intermittent/short-term contracts. Generally, shippers with long-term contracts would typically be very large E&P companies who would ship their produced Alberta gas and ship it through TRP's Mainline which goes out to eastern markets, where the E&P-co might have a supply contract with a large utility. Shippers with intermittent/short-term contracts would normally sell to marketers who would buy the gas, fill it up in AECO-connected storage facilities and/or sell it in local markets.

Prior to July 2017, TRP used to scale back the long-term shipper volumes in the summer months (low demand), and allow the short-term shippers to get volumes onto the NGTL which would then be stored in AECO-connected storage tanks in southern Alberta. This gas inventory would then be used during the high-demand winter months.

In July 2017, TRP (with regulatory approval) said they won't be scaling back the long-term shipper volumes during the summer months anymore. This meant that if you weren't one of the large few companies that signed long-term NGTL contracts (to then ship it on TRP's Mainline out east), you couldn't reach storage facilities anymore because you couldn't get onto the NGTL. Combine this with unscheduled outages, maintenance, etc, and this made it even more difficult to reach storage facilities. You can see a NYMEX HH vs AECO chart and see the differential volatility blows up after 2017.

With the TSP, TRP basically agreed to go back to the pre-July 2017 service protocol for (1) the month of Oct 2019, and (2) April - October 2020 summer months. In 2021, Peyto/Darren thinks the extra NGTL capacity should be more than enough to service both long-term and short-term shipper volumes, leading to at least "normal"/stabilized AECO prices.

Unfortunately or fortunately depending on your perspective, the post-October TSP storage levels are still extremely low (and I think there may still be some uncertainty over how easy it is for the stored gas to again get onto the NGTL to supply the province during the winter months), leading some in the industry to believe we're in for a wild ride this winter. In one oilfield services company conference call, the CEO mentioned he has a steak bet with one of his VPs that AECO will go over $7.50/GJ this winter.
« Last Edit: November 26, 2019, 11:12:07 AM by Nelg »


petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #31 on: November 27, 2019, 06:47:55 AM »
That fits my understanding but adds clarity and detail. Thanks.

I have a fairly basic model that tried to calculate free cash yield after capex required to maintain production flat. Last week Peyto’s yield was 50% on this measure, using spot pricing. If next summer is better than last summer, it’s dirt cheap.

awindenberger

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Re: PEY.TO - Peyto Exploration & Development
« Reply #32 on: November 27, 2019, 09:47:19 AM »
That fits my understanding but adds clarity and detail. Thanks.

I have a fairly basic model that tried to calculate free cash yield after capex required to maintain production flat. Last week Peyto’s yield was 50% on this measure, using spot pricing. If next summer is better than last summer, it’s dirt cheap.

I am quite confident that in 2-3 years people will be shocked that PEYTO ever got this low.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #33 on: November 27, 2019, 10:22:36 AM »
I am inclined to agree.

ValuePadawan

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Re: PEY.TO - Peyto Exploration & Development
« Reply #34 on: November 27, 2019, 07:08:21 PM »
Does anyone have a bear case for Peyto? If so I'd love to hear it.

I feel like I am among like minded people in seeing it undervalued but if there's a contrarian out there with reasons for instance why AECO prices will go low and stay low or why the debt is a major danger to the company or anything like that I'd love to hear that side of the story if there is one.

petec

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Re: PEY.TO - Peyto Exploration & Development
« Reply #35 on: November 28, 2019, 12:34:55 AM »
Does anyone have a bear case for Peyto? If so I'd love to hear it.

I feel like I am among like minded people in seeing it undervalued but if there's a contrarian out there with reasons for instance why AECO prices will go low and stay low or why the debt is a major danger to the company or anything like that I'd love to hear that side of the story if there is one.

Agreed I would love to hear from a bear. I think the debt is much less of a danger now declines are in the low 20's (meaning less capex needed for maintenance and more FCF) than it was when declines were 35%.

awindenberger

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Re: PEY.TO - Peyto Exploration & Development
« Reply #36 on: November 29, 2019, 11:23:44 AM »
Does anyone have a bear case for Peyto? If so I'd love to hear it.

I feel like I am among like minded people in seeing it undervalued but if there's a contrarian out there with reasons for instance why AECO prices will go low and stay low or why the debt is a major danger to the company or anything like that I'd love to hear that side of the story if there is one.

Agreed I would love to hear from a bear. I think the debt is much less of a danger now declines are in the low 20's (meaning less capex needed for maintenance and more FCF) than it was when declines were 35%.

The bear scenario is that current prices continue forever, or even decline more due to lower demand. My day job is in the solar industry, and I fully expect renewables such as solar and wind to replace fossil fuels at a much faster rate than most think over over the next couple decades. Oil will feel the largest brunt as EVs replace combustion engines, but significantly higher secular long term prices on fossil fuels are very unlikely in my mind (cyclical price increases will still occur and could be strong over the next 2-5 years).

Natural gas will be the last fossil fuel to be hurt, as it is cleanest burning and higher electric demand will be good for its growth until renewable costs decline enough to fully overtake it. Thats why I like Peyto as the lowest cost producer in one of the most depressed markets. They will be last man standing if bear market in gas continues another couple years.

mcliu

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Re: PEY.TO - Peyto Exploration & Development
« Reply #37 on: November 29, 2019, 11:34:05 AM »
Devil's advocate:
Is Peyto still the lowest cost? The other producers have all reduced cash costs over the last 3 years and larger players like TOU, VII, CNQ have much better balance sheets.
The industry is also being kept alive by low interest rates, so unless we see more bankruptcy, production cuts, it might be a while before prices can recover. Meanwhile, west-coast export potential is up in the air and US production is still going strong.

SharperDingaan

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Re: PEY.TO - Peyto Exploration & Development
« Reply #38 on: November 29, 2019, 12:12:40 PM »
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.

Locality matters.
We might hate environmentalists, but in the WCSB it means burning large quantities of cleaner gas to extract bitumen &/or produce electricity, under a lower carbon footprint. A close user, and limited US ingress, that should support local pricing. We also have repetitive cold winters clearing inventory.

Lowest cost production is great - but only temporary. Shale gas by-product costing will be a challenge.
The obvious solution is a future consolidation within 'spent' shale fields - become the dominant enough producer to impose supply restrictions in support of higher local prices.

SD

Nelg

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Re: PEY.TO - Peyto Exploration & Development
« Reply #39 on: December 02, 2019, 07:30:18 PM »
Devil's advocate:
Is Peyto still the lowest cost? The other producers have all reduced cash costs over the last 3 years and larger players like TOU, VII, CNQ have much better balance sheets.
The industry is also being kept alive by low interest rates, so unless we see more bankruptcy, production cuts, it might be a while before prices can recover. Meanwhile, west-coast export potential is up in the air and US production is still going strong.

I'd personally compare Peyto with VII and TOU which as you note are also quite well run.

I measure "low-cost" by comparing netback % margins excluding hedging, which generally gives me a sense of how much they'll hurt if commodity prices fall further. (Netback % margins because I don't really care whether they are "liquids-rich" or "oily" or "gassy" or "<insert lingo>", I just care about margins. I exclude hedging because hedges eventually run out. I recognize you should also compare capital costs, which I still look at closely but it's somewhat burdensome to calculate it for every company, and high-margin production is usually correlated with low F&D costs.)

Not sure how to post tables/pictures here but below are the 3Q 2019 comparisons, all in $/boe and all excluding hedging:
TOU (81% gas): Realized Prices $15.74 vs Field Netback $8.32 (53% margins) and Corporate Netback $7.18 (46% margins)
VII (42% gas): Realized Prices $32.16 vs Field Netback $18.90 (59% margins) and Corporate Netback $16.13 (50% margins)
PEY (86% gas): Realized Prices $12.79 vs Field Netback $9.58 (75% margins) and Corporate Netback $7.43 (58% margins).
(and for other reference)
OBE (33% gas): Realized Prices $38.64 vs Field Netback $18.15 (47% margins) and Corporate Netback $10.17 (26% margins)
BNP (69% gas): Realized Prices $12.11 vs Field Netback $4.82 (40% margins) and Corporate Netback $2.37 (20% margins)

TOU/VII have cleaner balance sheets as you noted, which is why Peyto's field netback margin outperformance > corporate netback margin outperformance. This is generally due to TOU/VII's (1) historical willingness to issue common equity to fund growth, with TOU and VII increasing share count since 2015 by 23% and 32%, respectively (vs +4% for Peyto), and (2) lack of historical dividend payouts with only TOU recently starting to pay a modest dividend (vs Peyto historically paying out ~$200m/year during the heydays).

In hindsight, Peyto would have been FAR better off to raise some equity in ~2016 (a ~10% dilution at the time would now be enough to cut current debt levels in half!), and I am personally surprised they've allowed leverage to get this high (3x vs 3.25 covenant, as of 3Q 2019) though at the current forward curve they should be deleveraging to ~2.5x in the next couple quarters, by my calculations. 

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. What I don't understand, is if they're comfortable with their leverage as they say they are, why they choose to maintain the 10% dividend yield instead of using that capital to repurchase shares. After capex (which it sounds like they'll be increasing now) buying back shares must surely be a more efficient use of capital vs paying out $40m/year in dividends. Maybe I should just switch my PEY for VII which is doing just that...but then I will miss reading Darren's monthly letters!  :-\
« Last Edit: December 02, 2019, 07:32:31 PM by Nelg »