Peyto Exploration & Development Corp T.PEY

Scotia increases target to $22

[Westcoastenergy]

Peyto Exploration & Development Corp.

• PEY-T: C$15.22
• Target: C$22.00
  Old: C$20.00
• Rating: Sector Outperform

Solid Q1/24 Results; Strong Setup for a Challenging Summer

OUR TAKE: Slight Positive. PEY delivered solid Q1/24 results, with cash flow in line (ahead before cash taxes). The company put up lower-than-expected opex for the second consecutive quarter, which we see as a positive indicator of progress integrating the Repsol assets. PEY plans to swing gas being processed through a third-party deep cut into one of its own facilities during Q2/23 to reject ethane (prices are very low) and sell higher heat content gas. We see this as a key benefit of PEY’s infrastructure ownership and integrated asset base. Looking ahead, we see the company well positioned to ride out weak and volatile AECO prices (we have PEY with essentially no AECO exposure through 2026 - see Exhibit 1) and deliver on its growth and debt reduction plans over the next few years across a range of commodity price scenarios. We have raised our Target Price to $22/share on our updated financial and NAV estimates.

KEY POINTS

Q1/24 AFF in line; pre-tax results beat expectations. Production of ~125 mboe/d (87% gas) and capex of $114M were pre-released in the most recent Peyto Monthly Report. Post-hedging realizations of $29.50/boe were ~4% ahead of expectations, while pre-tax cash costs of $11.77/boe were ~11% above expectations on higher-than-expected cash taxes. Notably, opex of $3.29/boe was ~4% below the Street. We see this as a positive given that this was the second quarter with the temporarily higher-cost Repsol assets in the portfolio. AFF of $205M ($1.05/share) was in line with consensus (pre-tax AFF beat the Street by ~5%), while free cash flow of $91M was ~11% above expectations (consensus was higher than the pre-released number). See Exhibit 2 for detailed results versus consensus expectations (Slight Positive).

2024 Capital budget and plans reiterated. PEY continues to target the low end of its capex budget of $450M to $500M, with flexibility to adjust activity in the back half of the year. The company plans to manage production during the summer and avoid adding volumes into a congested market. We expect ~flat volumes (net of a ~2 mbbl/d reduction to NGLs on the ethane rejection plan) for the next two quarters, with a ramp in Q4/24 on strong natural gas prices. The company continues to target material cost reductions on the Repsol assets, with the goal to reduce unit costs from their Q1/24 level by ~10% by the end of the year (Slight Positive).