cibc analyst: target neutral C$ 13.00 up from $8.25In-line Q3/21 Result Comes With Dividend Increase
Our Conclusion The company reported Q3/21 results that were in line with expectations, although capital spending was much lighter than our estimate and the Street. Major takeaways from the quarter include a US$40MM note issuance, a confirmation of the company’s existing $950MM credit facility, and a preliminary 2022 budget. The company has also increased its dividend from prior $0.01/sh quarterly to $0.05/sh monthly. We expect the increased dividend will be positive for the stock, and based on what we have seen with peers, the spending increase for 2022E should be taken favourably as well. With this update, we are increasing our price target from $11.00 to $13.00.
Key Points Production and cash flow in line, capital spending much lighter than expected. Production of 90.0 MBoe/d was in line with our estimate of 89.6 MBoe/d and the Street at 89.9 MBoe/d. Capital spending of $90.2MM was much lighter than our estimate at $119.5MM (-25%) and below the Street at $102.0MM (-12%), while adjusted FFO per share of $0.63 came in slightly ahead of our estimate of $0.62 (+2%) and the Street at $0.61 (+3%).
Dividend increased from $0.01/sh quarterly to $0.05/sh monthly. The company reinstated its previous monthly dividend of $0.05/sh which, when combined with a $375MM capital program, computes to a 64% total payout ratio on the CIBC price deck in 2022E.
ESG initiatives intriguing with methane reduction targets in focus. The company has set a target of reducing methane emissions intensity by 75% from 2016 levels by 2023. Methane has increasingly become a target for global GHG emissions reductions, which we outline in detail in our recent report on methane emissions in the energy sector.
Credit facility amended and extended, while senior secured notes issued to retire existing debt. The company’s credit availability was left unchanged at $950MM and the maturity date was extended to October 2023. The company also issued a US$40MM senior secured note with a coupon rate of 3.98% due October 2028. On the CIBC deck, we estimate PEY will have ~$265MM in free cash flow available for debt repayment in 2022E.
Preliminary budget for 2022 contemplates higher spending and production growth of ~12%. Production guidance for 2022 was not disclosed; however, the implied 2022 exit rate is 109 MBoe/d-114 MBoe/d (midpoint 111.5 MBoe/d) which compares favourably with our exit 2022 estimate of 103.0 MBoe/d (+8.3%). Capital spending of $350MM-$400MM (midpoint $375MM) is higher than our estimate of $323MM (+16%) and the Street at $343.2MM, but consistent with the proposed production growth.
Price Target Calculation Our 12- to 18-month price target of $13.00 is based on a target 2022E EV/DACF multiple of 3.7x on strip pricing. We estimate strip net debt of $768MM in 2022E.