cibc analyst: Price Target (12-18 mos.): éC$17.50Steady Q1/24 Results: Downgrading To Neutral Following Strong Share Price Performance
Peyto reported in-line cash flow after pre-releasing production and capital spending. The company expects to spend at the low end of its guidance range for 2024 but sees no change to exit production rates for the year. Given ~70% and ~64% of its respective 2024E and 2025E gas production is hedged at fixed natural gas prices, we see downside risks to cash flows as being reasonably mitigated. That said, we do not anticipate further multiple expansion versus peers that have more torque to stronger gas pricing next winter and lower relative debt levels. Our positive cash flow revisions drive an increase to our price target to $17.50 from $16.00 prior, which is based on a 5.9x 2024E EV/DACF multiple (unchanged from prior). The return to our price target of 24% is below the peer average of 30%; hence, we lower our rating to Neutral from Outperformer. On our revised estimates, the stock is trading at 5.4x 2024E EV/DACF versus peers at 5.8x.
Key Points
Headline metrics in line. The company reported Q1/24 cash flow of $1.05/sh which was ahead of our estimate of $0.92/sh and in line with consensus of $1.04/sh. Production and capital spending were pre-released at 125 MBoe/d and $114MM, respectively. The variance to our estimates was driven by lower-than-expected royalties, operating costs, and interest expenses, offset by higher-than-expected transportation costs, G&A, and cash taxes.
Operating synergy guidance drives improvements to our cost assumptions. Peyto indicated that it expects operating costs to fall by 10% versus Q1/24 levels. Our model changes include a 2% increase to production volumes, driven by an earlier cadence of capital spending versus prior, and a 10% reduction in operating costs, offset by higher transportation costs consistent with Q1/24 levels. We estimate 2024 net debt to cash flow of 2.0x versus peers at 0.7x.
Drilling and completion costs showing signs of deflation. Peyto indicated that Q1/24 drilling and completion costs averaged $4.85MM, up 10% quarter over quarter and 2% year over year, but lateral lengths also increased by 14% sequentially and annually. The net result is a 4% and 11% decrease in overall DCET per lateral metre quarter over quarter and year over year, respectively. On a year-over-year basis, completion costs, which were down 7% on a per-lateral-metre basis, drove the improvement. Sequentially, completions costs per metre increased 4% but were offset by a 3% reduction in drilling costs per metre.
EQUITY RESEARCH May 14, 2024 Earnings Update PEYTO EXPLORATION & DEVELOPMENT CORP. S