RE:RE:Dividend Debate Dumbed DownAs Yasch has suggested, there are a lot of moving parts on the revenue side. The dividend should be sufficiently covered through 2023 unless both dry gas and liquids' prices completely collapse. If the only concern is the viability of paying the dividend, Peyto will likely be able to fully cover 2024 as well, within their cash flow, so long as the strip stays in contango, and they can continue to hedge production at prices north of $3/mcfe. The consideration for me though, as an "anti-diva", is maximizing the value of the entity that is Peyto. The market values companies based on future cash flows. That's a fact. One of the most common ratios used to value a company, especially in the O&G sector, is EV/EBITDA. Enterprise value (EV) is comprised of the value of equity plus the value of debt. Peyto can't control the value of the equity directly, as it were, but they can pay down debt, and lower that numerator. Now if the denominator starts to come under pressure, which is what strip future cash flows are suggesting, and debt remains constant, the equity value of PEY would have to come down by a proportionate amount, assuming the EV/EBITDA multiple doesn't expand, and generally that wouldn't be the case unless sentiment is strong. To be clear, I appreciate dividends, but when they're oversized in percentage terms relative to a SP, that suggests that the market would prefer to see that capital deployed differently. In this case, I think that's probably debt repayment (or perhaps consolidation). No sense in growing production when the market is oversupplied and prices reflect that.
The other side of the viability of the dividend is understanding costs. Keeping that simple, let's just refer to the top right corner on page 15 of Peyto's most recent presentation.
"Our goal is to keep our controllable supply costs to $2/mcfe which should assure continued profits into the future."
Now we have to add royalty costs to that number, as that is the uncontrollable cost that has been left out. Let's assume $0.25/mcfe, though this number could certainly be a bit smaller if prices move lower.
So ~$2.25/mcfe is the baseline for profitability (before dividends). A full year of dividends at the current rate costs Peyto ~$231M (175M shares x $1.32/share). WIth production at 110K BOE/d or 759K mcfe/d (which amounts to 277M mcfe/year), the dividend costs Peyto ~ $0.83/mcfe.
So Peyto ultimately needs to acheive average pricing north of $3/mcfe on its aggregate mix of products to fund the dividend and operate the business as status quo.