cibc analyst: target C$ 18, neutralQ3 Update: Dividend Bump, Capex Increase, and 2023 Budget
Our Conclusion
Peyto’s Q3 update was in line on cash flow despite production and capex missing expectations, and is accompanied by a 120% dividend bump and a 20% increase to 2022 capital spending. The company also released its 2023 preliminary budget, which is slightly higher than expectations but production guidance is in line. Peyto is trading at a 2023E free cash flow yield of 23% on strip versus peers at 16% and a 2023E EV/DACF of 2.8x versus peers at 3.0x. While the increased dividend is positive and represents an attractive yield of 10%, we believe the spending increase in 2022 could weigh on the stock in the near term.
Key Points
Cash flow in line with expectations while production and capex missed. Cash flow of $1.13/sh was in line with our estimate of $1.13/sh and slightly ahead of Street at $1.12/sh. Production of 104.1 MBoe/d missed our estimate of 105.3 MBoe/d and Street at 105.8 MBoe/d while capital spending of $140MM was in line with us and ahead of Street at $102MM.
Infrastructure investments and inflationary pressures drive full-year organic spending higher. Spending was guided to $450MM from a midpoint of $375MM prior, which is in line with our estimate of $446MM and higher than Street at $426MM. Peyto noted that its trailing twelve-month capital efficiency as of Q3/22 was $12,500/Boe/d and it expects a 44% increase in its full-year 2022 capital efficiency versus 2021. Part of this is due to increased infrastructure investments (which do not add production) versus prior years, with pipeline and facility capital accounting for 20% of total spending versus 15% in 2021. Inflationary pressures are also impacting capital efficiency, with Peyto’s drill and complete cost inputs increasing 23% year-to-date versus 2021.
2023 budget is slightly higher than expectations with in-line production. Capital spending is expected to be $425MM - $475MM with a $450MM midpoint that is slightly ahead of our estimate of $440MM and Street at $435MM. Production is expected to average 115 MBoe/d, which is in line with our estimate of 114 MBoe/d and Street at 115 MBoe/d. Peyto’s implied capital efficiency assumption is $11,250/Boe/d - $12,850/Boe/d with a midpoint of $12,000/Boe/d, which is in line with our estimate for 2023 and 4% higher than 2022E.
Dividend increasing 120% to $1.32/sh annualized, beginning in January. We were assuming a slightly higher dividend level of $1.44/sh annualized, which mapped to a 26% payout ratio in 2023 on strip with 2023E D/CF of 0.7x. Peyto intends to put excess free cash flow after dividends towards the balance sheet.