cibc analyst - Q1/20 First Look neutral & target $2.00 CACash Flow Miss With Covenant Relief Negotiations Ongoing
With CFPS coming in near the bottom end of consensus expectations, we would call this a miss for Peyto today. Although forward natural gas prices have firmed up substantially in the past two months, our cash flow estimates remain below consensus for the next two quarters. We would be prepared to get more constructive pending certainty on covenant relief, but for the time being we remain Neutral rated on Peyto. Cash Flow Below Expectations: Peyto reported Q1/20 results that were slightly below our estimates and consensus. Although production and capital spending are previously disclosed at the end of each month, CFPS of $0.33 was ~18% below our $0.40 estimate (consensus: $0.39). It’s also worth noting that Peyto took a non-cash impairment charge of $80MM at the end of the quarter, which is minor compared to what some of its peers have reported over the past two weeks. Liquids Pricing Drives Miss: Even though liquids production of 11,585 Bbl/d was more or less in line with our 12,075 Bbl/d estimate, realized liquids pricing of $33.76/Bbl was well below our $39.52/Bbl estimate, and accounted for most of the cash flow miss. Realized natural gas pricing (pre-hedging, but net of “diversification activities”, which have been a major source of variance in recent quarters), was directly in line with our estimate at $1.71/Mcf. Seeking Covenant Relief: With trailing Debt/EBITDA (3.45x as of March 31) bumping up against its financial covenants (3.5x), Peyto indicated it is in discussions with its lenders to seek temporary covenant relief. The company obtained covenant relief in Q4/19, seeing its Debt/EBITDA covenant increased from 3.25x to 3.5x. However, our current estimates show trailing Debt/EBITDA increasing to ~4.5x by YE20, which would imply a more substantial revision this time around.
No Change To Budget: Peyto is currently running two drilling rigs (one in Brazeau, one in Greater Sundance), with plans to add two additional drilling rigs after breakup. Four wells that have been brought onstream subsequent to the end of the quarter include several Notikewin discoveries that have “greatly exceeded management expectations.” There is no change to existing capital spending guidance ($200MM-$250MM) as Peyto gears up for an improvement in natural gas pricing in H2/20.
Price Target Calculation Our 12- to 18-month price target of $2.00 is based on a target 2020E EV/DACF multiple of 6.0x on strip pricing. We estimate strip net debt of $1,181MM in 2020E