Today’s G&M Touting its low cost structure and seeing “improved runway for growth, ATB Capital Markets analyst Amir Arif initiated coverage of Peyto Exploration & Development Corp. (PEY-T) with an “outperform” recommendation on Friday.
“Our thesis on PEY revolves around three key points,” he said in a research report. “First of all, the low cost structure positions PEY at the low end of the gas supply cost curve. This allows the Company to be better positioned than most gas weighted producers in generating positive margins regardless of the natural gas price cycle. Secondly, the recent acquisition of Repsol enhances the near-term and long-term outlook. The better capital efficiencies on the acquired asset will allow for less capex needed to achieve similar near-term production growth. The underutilized facilities allow for longer-term growth without requiring meaningful incremental infrastructure capex. Finally, the eventual expected improvement in natural gas outlook (as reflected in the futures curve) positions the Company well heading into 2025 as North American gas production begins to reflect the impact of the reduced U.S. gas rig counts while, at the same time, new U.S. and Canadian LNG projects improve the structural demand.”
Mr. Arif said the Calgary-based company faces only a “limited” near-term impact from the current low natural gas prices, pointing to its high level of fixed price hedges. Accordingly, he thinks its dividend yield is “fully sustainable” and faces no risks.
“PEY maintains one of the lowest operating cost structures in the industry .. This ensures that PEY has a greater ability to maintain positive margins relative to other gas weighted producers regardless of the cyclical nature and volatility of natural gas prices,” he added.
He also touted the impact of last year’s acquisition of Repsol SA’s assets in Alberta’s Deep Basin for US$468-million, noting: “The inventory provides additional running room and longevity to the resource base. The relatively low level of drilling activity on the acquired lands provides the opportunity to drill better well locations. The associated infrastructure allows operating costs to remain low as utilization and facility throughput is improved over time with higher volumes. One key negative relative to the acquisition is a higher operating cost structure on the acquired assets along with ARO liabilities that are being assumed by PEY.”
Expecting structural improves in natural gas fundamentals by late 2024, Mr. Arif set a target of $15 per share. The average target is $15.68.
“The long-term running room and ability to improve capex efficiency relative to PEY standalone has been improved,” he said. “The improved capex efficiencies and increased inventory following the acquisition, the sustainability of the dividend down to US$1.50/mmbtu Henry Hub, the limited CF sensitivity to current weak gas prices in 2024 due to the hedge book, along with the Company’s solid track record on opex and value creation, are the key reasons behind our Outperform rating. In addition, the contango in the gas futures market suggests an eventual improvement coming for gas.”