cibc analyst: Price Target (12-18 mos.): C$17.00Q1/23 Results: Steady Update
Our Conclusion
Peyto’s Q1 numbers were pre-released, with production and spending in line with our estimate, but cash flow was slightly below consensus. The company shut down two gas plants in Brazeau due to nearby wildfires but noted that its assets had not been directly impacted. Peyto expects a 1 MBoe/d – 2 MBoe/d impact to Q2/23 production as a result. There were no other changes to guidance, but the company is targeting the low end of its original $425MM - $475MM capital budget. Despite the in-line update, we expect consensus estimates on production and cash flow could be revised lower for the second quarter due to the wildfire impacts. The stock is trading at 4.2x 2023E EV/DACF on strip versus peers at 4.4x.
Key Points
Production and capital spending in line as previously released, slight miss on cash flow. Production of 102.9 MBoe/d was in line with our estimate of 103.0 MBoe/d and below Street at 105.0 MBoe/d. Capital spending of $122MM was in line with our estimate of $122MM and ahead of Street at $113MM, while cash flow of $1.02/sh was in line with our estimate of $1.02/sh and missed Street at $1.07/sh. Natural gas realizations were $3.91/Mcf versus our estimate of $4.01/Mcf.
Peyto has 57% of 2023E gas production hedged at $4.49/Mcf. This compares to recent strip pricing of $2.44/Mcf AECO on a full-year basis. We believe the company’s hedge book offers decent protection from a further softening in gas prices, and on recent strip Peyto is trading at a 9% free cash flow yield versus peers at 5% in 2023E. The company has a 2023E total payout ratio of 105% (peers 103%) and we estimate 2023E D/CF of 1.4x versus peers at 0.5x.
Drilling and completion costs per lateral metre up 14% Y/Y, but Q1/23 did show signs that inflation is slowing, with annualized Q/Q D&C costs up 9%. That said, this rate of inflation is higher than our Y/Y changes in capital efficiency and overall capital spending, which we have assumed to be -9% and -6% respectively. This could signal that capex estimates for the industry as a whole need to move higher if inflation assumptions continue to track below actual results.