cibc analyst: target neutral C$ 8.25Q2/21 First Look: Cash Flow Misses Expectation
Our Conclusion
Despite production and capital spending that were pre-released, Peyto announced surprisingly weak cash flow this quarter, missing consensus by 17%. The miss looks to be due to a weaker revenue line, including weakerthan-expected realized gas pricing and higher realized hedging losses, along with higher-than-expected transportation costs. The company experienced some drilling delays in Q2 and has contracted an additional rig through the summer, plus will look to construct a new gas plant in H2/21. We continue to see the setup as being favorable for natural gas pricing and expect Peyto will benefit over the coming 12 to 18 months, but see the cash flow miss as likely to be perceived negatively.
Key Points
Production and capex were pre-released, but cash flow missed on weaker price realizations and higher transportation costs. Production of 88.7 MBoe/d (consisting of 458.7 MMcf/d of gas and 12.3 MBbl/d of liquids) came up slightly short of our estimate of 89.0 MBoe/d (consisting of 466 MMcf/d of gas and 11.3 MBoe/d of liquids) and Street of 89.4 MBoe/d while capital spending of $57MM was slightly ahead of our estimate of $56MM but lower than Street at $59MM. Cash flow of $0.50/share was 12% below our estimate of $0.57/share and 17% below Street at $0.60/share. Realized gas pricing before hedging but after diversification activities was $2.39/Mcf versus our estimate of $2.56/Mcf. We estimate the bulk of the $11.3MM cash flow miss to our estimate comes from an -$8.8MM variance in gas revenue and a -$2.3MM variance in transportation expense to our estimates.
Drilling delays in Q2/21 spur need for additional rig. Peyto noted upgrades to rig equipment delayed some activity in the quarter while June heat caused efficiency issues across Peyto’s facilities which ultimately softened production growth. As a result, Peyto has contracted a fifth drilling rig which began operations in August and the company maintained its 100 MBoe/d target for 2021E exit production.
New gas processing plant announced at Chambers. With success at Peyto’s Brazeau area, the company announced it is designing a new 50 MMcf/d gas plant with expansion capability to 100 MMcf/d at Chambers (in the Brazeau area). Construction will begin in the fall of 2021 with commissioning in Q1/22. No capital costs were announced in conjunction with the project, as management expects to utilize existing surplus inventory and repurpose assets from existing gas plants. In combination with the additional drilling rig being contracted however, we would not be surprised to see consensus capital spending estimates drift higher as a result.
Price Target Calculation
Our 12- to 18-month price target of $8.25 is based on a target 2022E EV/DACF multiple of 3.2x on strip pricing. We estimate strip net debt of $790MM in 2022E.