PEY hedging blues, extended versionAs a long-term PEY holder (ie >10 years), I've found a lot to like: low costs, good operators, concentrated acreage of good quality and a clear philosophy. In-depth, quality communication is a huge bonus--I've read every single one of Darren Gee's President's Reports and found them valuable and informative, climate-change skepticism warts and all. The lack of clarity around Peyto's hedging issues are therefore disappointing, if perfectly understandable--who wants to show off their missteps in public?
Make no mistake, hedging costs are really bad and getting worse, but there is hope (eventually). Last quarter, PEY's "insurance" cost approximately $328.6 million, and Q2 '22 will add to the carnage, since hedges have only gone further into the red with the rise in oil and gas prices. A breakdown:
Q1 recognized hedging loss = $53.4 million;
Q1 increase in future hedging loss: $348.6 million March 31 '22 - $73.4 million Dec. 31 '21 = $275.2 million;
Total loss in 3 months: $53.4MM + $275.2MM = a giant $328.6MM methane leak, which is much greater today than at quarter's end.
i don't want to pile on after the fact, as I believe that the share price is being over-punished and I'm planning on eventually buying more shares. The worst of the hedges were actually in Q2/Q3 last year, but these can be partially explained by being offside of the original (and subsequently the modified) loan covenants, so it was bankers' choice. My concern is the increase in hedging now that the debt ratios are healthier: overall pre-selling of nat gas equivalent (inc. oil at a 6:1 ratio) is up approx. 12.4% from Dec. 31st ´21 to March 31st '22. In other words more is hedged, if not so poorly, and with the Putin war premium shareholders are being doubly punished. This too shall pass, but until then the news ain't good.