TD's Report November 15 Peyto reported Q3/13 results in line with our expectations, and disclosed preliminary 2014 guidance on track with our estimates, but higher than consensus. The guided 2014 budget of $575-625 million represents a 10% increase in capital expenditures y/y (assuming $625), to grow production by 24% on an absolute basis. We continue to be drawn to Peyto’s low-cost structure and extensive inventory of prolific natural gas opportunities, and maintain our price target of $36.00 and BUY rating.
Positives - Facility capacity continues to grow, as expansions come on as planned. Initial 2014 guidance indicates significant production growth of 24.2% (21.0% DAPPS) y/y. Significant growth continues from the Bluesky and Falher formations. Current production is already in excess of the guided 2013 exit rate.
Negatives - Q3 production was down q/q as production was curtailed until AECO pricing saw some modest recovery.
Details - In our view, Peyto continues to demonstrate best in class capital allocation within our coverage, and is why we believe Peyto can generate returns in both low and high cycles of the commodity environment. This was wisely demonstrated during the third quarter, with $140 million spent to drill and complete 34 economic wells across the Deep Basin. Production was restricted to about 60.0 mBOE/d through much of the quarter due to the low gas price environment. 2014 looks set to be another strong year of growth, supported by current production volumes of over 70.0 mBOE/d. Based on our unchanged capital budget forecast of $625 million (in line with management’s $575-625 million), we expect 2014 production will grow by 24.2% (21.0% DAPPS). The year should look similar to 2013 from a rig count perspective, with plans to run 9-10 rigs, however it sounds as if most of the drilling will take place through the summer to help save on costs. In total, Peyto is budgeting to drill about 115 net wells and exit 2014 at 78.5-81.5 mBOE/d.
Since 2012, the Falher and Bluesky have been the largest growth drivers within Peyto’s asset base, and have grown to represent about 21% of current volumes. Based on the company’s future drilling locations across its portfolio, we expect this growth to continue. During the third quarter the company drilled 8 Falher and 2 Bluesky wells, predominantly at Sundance. The recent commissioning of the Oldman North plant (initial capacity of 30 mmcf/d, with potential of 50 mmcf/d) will play an important role in facilitating the development of these two zones. Facility expansions continue across Peyto’s core assets, as needed given the growth profile. At Brazeau, Peyto will meet a total 40.0 mmcf/d during 2014 (effectively 20.0 mmcf/d today). At Ansell, the company will build to capacity of about 65.0 mmcf/d by the middle of next year. As mentioned above, earlier this month Peyto finally commissioned the Oldman North plant which it expects to be full by year-end; however, just as the company has worked through compression enhancements to expand capacity elsewhere, we expect the same initiatives here. Come the end of next year, management plans to have about 600 mcf/d of the processing capacity, up from 510 mmcf/d.
TD Investment Conclusion - Continued strong operating and financial results, coupled with an active second-half, set up for a robust start to 2014 (based on our estimates). We are reiterating our BUY rating and $36.00/share target price and highlight Peyto as core natural gas growth investment. The company continues to post some of the strongest cash flow netbacks among its natural gas based peers and management remains focused on maintaining a low-cost structure.