Latest Newltter Lays it Out ClearlyFor all the non-technical type investors, the last newsletter gives a good simple overview of Peyto's hedging program and why it contributes to predictable cashflow, profits and a sustainable dividend. I read the newsletter every month. In my opinion Peyto actually does a great job of keeping investors informed with easy to read updates, something many other pulicy traded companies could learn from.
The actu report is charts, but here is the text.
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Peyto Exploration & Development Corp.
Monthly Report
February 2023 By Jean-Paul Lachance, President and Chief Executive Officer
1. This estimate is based on real field data, not a forecast, and actual numbers will vary from the estimate due
to accruals and adjustments. Such variance may be material. Tables may not add due to rounding.
2. Well related costs including Drilling, Completions, Equip and Tie-in.
3. Other costs include Land, Seismic, and Miscellaneous.
4. Acquisitions include asset and corporate deals.
Revenue Security
Not that long ago I recall hearing a lot of criticism of Peyto’s hedging
policy. Recently, with the drop in natural gas prices the critics have
been a little quieter. Don’t get me wrong, we would prefer that our
hedges were “out of the money” so we would make more revenue on
our unhedged volumes. But why do we believe that active hedging is
so important? It’s not that we think we are smarter than the market,
although Peyto has done quite well over the years relative to AECO as
shown in Figure 1.
Figure 1 -Historical Results of Peyto Realized Price Relative to AECO
We do it because we don’t know what future prices will be. We hedge
for revenue security so we can plan our capital programs, protect our
balance sheet and ensure we can return profits to shareholders in the
form of a dividend (now up to $0.11/share/month starting in Jan).
Peyto uses a mechanistic process to hedge small volumes
systematically throughout the year, like a dollar cost averaging
approach. This smooths out the volatility and avoids speculation. We
target a progressive stepping-down schedule of coverage over the
next three years. Our hedges over the last couple of years have been
“out of the money” because prices rose rapidly (a good thing) but
trends sure can reverse quickly, as we have seen.
Our current hedge position has approximately 70% of our gas
volumes hedged for this winter season, 60% in the summer, and 40%
for next winter. On average, we have 56% of gas production volumes
fixed for 2023, which screens quite a bit higher than our peers as show
in Figure 2. Our hedged volumes, combined with our diversification
to hubs in the US and Canada, and our Cascade power supply deal
(expected onstream late in 2023), combined with zero exposure to
the (often) disconnected AECO market, allows us to forecast a price
very similar to 2022. And Peyto’s mechanistic approach continues,
with approximately 20% of our expected gas volumes in 2024 fixed at
average price of $4.90/mcf.
Refer to www.peyto.com for marketing and diversification updates.
Figure 2 – Peyto Hedging Relative to Peers
It’s this active hedging policy, combined with our diversification to
markets outside of AECO and our low cash costs (that further reduce
with lower prices) that gives Peyto the revenue security for 2023 and
beyond. This provides us with the confidence that we can sustain our
capital program and share our profits with shareholders in the form
of dividends while continuing to reduce debt.
Operational Highlights
We started up four rigs in late December/early January where they
left off before Christmas. These rigs are drilling on multi-well pads for
cost efficiencies and to minimize our surface footprint. Most of the
completions are scheduled for February when the rigs move off to the
next location. We expect production will be more or less flat through
the winter with just four rigs running and the balance of our capital
program will remain nimble as we keep a close eye on natural gas
prices.
As in the past, this report includes an estimate of monthly capital
spending as well as our field estimate of production for the most
recent month (see Capital Investment and Production tables below).
Capital Investment ($C millions)1
Q1
21
Q2
21
Q3
21
Q4
21
2021 Q1
22
Q2
22
Q3
22
Oct
22
Nov
22
Dec
22
Q4
22
2022
D,C,E&T2
57 47 76 90 271 95 80 98 36 41 21 98 371
Facilities 16 8 12 14 50 47 21 16 6 5 5 16 100
Other3 37 1 2 5 44 1 8 1 10
Acquisitions4 22 26 48
Total 109 57 90 109 365 166 108 140 43 46 26 115 529
Production (mboe/d)1
2021 Q1
22
Q2
22
Q3
22
Oct
22
Nov
22
Dec
22
Q4
22
2022 Jan
23
Sundance 70 78 76 75 75 75 75 75 76 73
Brazeau 17 19 23 24 25 26 26 26 23 27
Other 4 5 5 5 4 4 5 4 5 5
Total 91 101 104 105 105 105 106 105 104 105
Liquids % 13% 11% 13% 13% 13% 12% 12% 12% 12% 12%
Source: Peters & Co. Limited estimates and Company Reports. Realized price estimates include hedging gains/losses
and remaining unhedged volumes to other markets less diversification costs based on $US 3.15/mcf Nymex and
$C3.03/mcf AECO for 2023. Peers include: AAV, ARX, BIR, CR, KEC, KEL, NVA, PIPE, PNE, PMT, POU, SDE, TOU.
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Peyto Exploration & Development Corp.
Monthly Report
February 2023 By Jean-Paul Lachance, President and Chief Executive Officer
FORWARD LOOKING STATEMENTS
Certain information set forth in this monthly report, including
management's expectation of future natural gas prices and the
reasons therefore and management's estimate of monthly capital
spending, field estimate of production, production decline rates and
forecast netbacks, contains forward-looking statements. By their
nature, forward-looking statements are subject to numerous risks and
uncertainties, some of which are beyond Peyto's control, including the
impact of general economic conditions, industry conditions, volatility
of commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other industry
participants, the lack of availability of qualified personnel or
management, stock market volatility and ability to access sufficient
capital from internal and external sources. Readers are cautioned that
the assumptions used in the preparation of such information, although
considered reasonable at the time of preparation, may prove to be
imprecise and, as such, undue reliance should not be placed on
forward-looking statements. Peyto's actual results, performance or
achievement could differ materially from those expressed in, or implied
by, these forward-looking statements and, accordingly, no assurance
can be given that any of the events anticipated by the forward-looking
statements will transpire or occur, or if any of them do so, what
benefits that Peyto will derive there from. The forward-looking
statements contained in this monthly report are made as of the date of
this monthly report. Except as required by applicable securities law, we
assume no obligation to update publicly or otherwise revise any
forward-looking statements or the foregoing risks and assumptions
affecting such forward-looking statements, whether as a result of new
information, future events or otherwise.
All references are to Canadian dollars unless otherwise indicated.
Natural gas liquids and oil volumes are recorded in barrels of oil (bbl)
and are converted to a thousand cubic feet equivalent (mcfe) using a
ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural
gas volumes recorded in thousand cubic feet (mcf) are converted to
barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic
feet to one (1) barrel of oil (bbl). Boe may be misleading, particularly if
used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based in an
energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead.
In addition, given that the value ratio based on the current price of oil
as compared with natural gas is significantly different from the energy
equivalent of six to one, utilizing a boe conversion ratio of 6 mcf:1 bbl
may be misleading as an indication of value.
Certain measures in this monthly report do not have any standardized
meaning as prescribed by International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board.
These measures may not be comparable to similar measures presented
by other issuers. Non-IFRS measures are commonly used in the oil and
gas industry and by Peyto to provide potential investors with additional
information regarding Peyto's liquidity and its ability to generate funds
to conduct its business. Non-IFRS measures used herein include
netback and funds from operations.
Netbacks are a non-IFRS measure that represents the profit margin
associated with the production and sale of petroleum and natural gas.
Netbacks are per unit of production measures used to assess Peyto's
performance and efficiency. The primary factors that produce Peyto's
strong netbacks and high margins are a low-cost structure and the high
heat content of its natural gas that results in higher commodity prices.
Funds from operations is a non-IFRS measure which represents cash
flows from operating activities before changes in non-cash operating
working capital and provision for future performance -based
compensation. Management considers funds from operations and per
share calculations of funds from operations to be key measures as they
demonstrate Peyto's ability to generate the cash necessary to pay
dividends, repay debt and make capital investments. Management
believes that by excluding the temporary impact of changes in noncash
operating working capital, funds from operations provides a
useful measure of Peyto's ability to generate cash that is not subject to
short-term movements in operating working capital. The most directly
comparable IFRS measure is cash flows from operating activities.