RE:RE:RE:Dividend Debate Dumbed DownSimilar to Mikey. I am pro-diva but not this way so currently anti-diva at the $011 rate.
It comes down to why we are hedging. If the purpose of hedging is to give security to capital investments and debt holders, then it does not make sense to use a hedges to fund a dividend to return cash to shareholders that the business needs.
Peyto needs prices a little above $3 HH and a reasonable basis at AECO to make the current dividend sustainable with current capex and inflation pressures.
I do not agree with JPL that contango is a positive here. While contango does mean that someone putting on hedges in the future will get paid more than someone getting spot, that is a myopic view. What contango really means to industry is that the market is currently over supplied. It is telling you to defer capex, and put gas into storage. It is a signal of lower strip prices in general and an unbalanced market. Backwardation is at the other end of the spectrum, where it signals to market participants to take out of storage and accelerate capex plans.
This current shift from backwardation to contango from Dec to Jan, especially in the AECO market tells me that the capex plans announced were too high (TOU subsequently reduced) and that the draw from the US in the current injection season will be lower than expectations.
Where does that leave us? We have Peyto UNABLE to fund both the capex and the dividend, at strip pricing and using one time gains to reward shareholders. We can't have it both ways guys, when prices were skyhigh, the story was "well Peyto is hedged and that will protect the balance sheet by making smoothing out revenues when prices decline" to now when prices are low "Let's use the money to support higher dividends".
Base dividends should be paid out of operational earnings, not one-time financial transactions. Wind-falls from falling prices, should go into reducing financial leverage as when the hedges fall off; you will be left with high Debt/Ebitda and large percentage of FCF going to debt financing.
We basically had the same chat back in 2018/2019 about how secure the dividend was, when Peyto underfunded their business and increased debt just to pay out a dividend. If you want a debt funded dividend, just borrow against your shares. Whether you pay interest or the company pays interest, the same dollar value gets paid. At least this way you avoid taxes.
The situation in 2020 when prices were under a $1, was probably the most unprudent time to invest. They were in debt covenant violation, and at threat of forced divestitures, marriage or equity dilution (How else would the Market Cap of the company end up for less than the sustaining capital cost of the business). Bellatrix and Painted Pony were unlucky casualties and their investors got killed. They did not participate in any rally. The real gift was in August 2020 when all that cleared up, when the stock was trading at $2 and gas futures were solidly backwardated over $2. They got their waiver and all the clouds were gone. By December, the strip was over $3 and showing major signs of underinvestment and tight markets. Peyto was in the low $2, and they had FCF yields over 30% even with their lackluster forced hedges. That was free money.
Where we are today, and what I am hearing makes little sense. 2022 - We are madly profitable, lets prioritize deleveraging. 2023 - Things have changed quickly. We are not madly profitable, lets give away money to shareholders and kick the can on debt. We are operationally one of the most leveraged O&G companies in Canada. What could go wrong?