TD Notes Exploring Full-cycle Costs & Margins of Canadian E&Ps
TD Investment Conclusion
With year-end 2022 reserves freshly reported, now is an opportune time to explore our expectations for full-cycle supply costs and full-cycle margins of the Canadian E&Ps within our coverage universe.
For purposes of this analysis, we have used two-year simple average trailing PDP F&D costs to normalize for one-year technical revisions, 2023E cash costs, and a strip-pricing scenario. We have also provided full-cycle cash flow margin sensitivities to both natural-gas and oil prices.
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Which Companies Have the Lowest Full-cycle Costs? Peyto is the lowest-cost producer within our coverage universe, which is closely followed by Advantage. Both are efficient operators with the most natural-gas-weighted production mix. The lowest-cost oil-weighted producers are Crescent Point and Whitecap. [Exhibit 1]
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Which Companies Have the Highest Margins Regardless of Commodity Mix? If we look at full-cycle margins as a percentage of revenue, those with the most attractive margins are Peyto (cash expense advantage), Spartan Delta (F&D cost and tax savings advantage), and Crescent Point (realized price and tax savings advantage). ARC is a close fourth place. [Exhibit 3]
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Comparison of Like-company Margins: In our view, the best comparisons can be made among like-company groups. Of the natural-gas-weighted producers under coverage, Peyto has the highest 2023E full-cycle margin of ~40%, outpacing Birchcliff (29%). [Exhibit 4]
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Of the oil-weighted producers (>60% oil), TD's 2023E full-cycle margin of ~37% for Crescent Point is best-in-class. This outpaces Whitecap of ~27%. The delta between the two can largely be attributed to Crescent Point's higher realized- pricing per BOE and lack of near-term income tax.