TD Report
March 4, 2021 TD Action Notes PEY-T HOLD C$6.50
Q4/20 Largely a Formality; 2021 Looking Much Better than 2020
Reports Q4/20 Results; Production, YE Reserves, and 2021 Capex Pre-released.
Most Key Data Points Pre-released; CFPS Slightly Less than Expected:
Peyto previously released a field estimate of Q4/20 production, YE-2020 reserves, and
2021 guidance. Last night's release was largely a formality, with the only new data point being Q4/20 financial results. Specifically, CFPS of $0.46 fell modestly shy of both TD/consensus expectation of $0.49. Relative to our estimate, the lower-than-
anticipated CF can largely be attributed to slightly weaker realized pricing, higher
royalties and higher interest expense. This was partially offset by lower-than-forecast
operating and transportation costs.
Covenant Issues of 2020 Now Passed; Go-forward Leverage Metrics Materially
Improved: Recall that Peyto required two covenant relaxations over the past ~18
months. As we look ahead, the combination of higher natural-gas prices and
increasing production/CF in 2021 (versus 2020) should see leverage metrics improve
as the year progresses. Specifically, we forecast Peyto to exit 2021 with Total Debt
to TTM EBITDA of 2.5x (versus the covenant of 4.5x) and exit 2022 with Total Debt
to TTM EBITDA of 2.1x (versus the covenant of 4.0x).
Well-hedged Through 2021+; Limits Downside Risk and Locks in CF:
As companies have adopted diverse marketing/hedging programs, distilling the
proportion of volumes hedged to a simple percentage is no longer particularly
useful. However, we estimate that a $0.50/mcf increase (assuming all regional basis
unchanged) results in an 8% change in 2021E CF. Based on our estimate, natural
gas (HH) could fall to US$1.99/mcf before Peyto's 2021 all-in payout ratio exceeded 100%
Net Debt ($mm) 1,176.3
Net Debt/Total Cap 41.0%
NAVPS $6.34
TD Investment Conclusion
Peyto's share price has performed strongly, gaining >100% YTD. In our view,
this reflects a combination of materially improved natural-gas price fundamentals
entering the year and Peyto's high-beta exposure to the commodity, given its
leverage. Looking ahead, we believe that the company is on a significantly better
footing for 2021+ than a year ago. However, based on an unchanged $6.50 target
price, we reiterate our HOLD rating