Peyto Exploration & Development Corp T.PEY

Solid quarter; Scotia agrees, $22 target price

[Westcoastenergy]

E&P

Peyto Exploration & Development Corp.

• PEY-T: C$14.73
• Target: C$22.00
• Rating: Sector Outperform

Q2/24 Results In Line; Powering Through a Tough Natural Gas Price Environment

OUR TAKE: Neutral. PEY delivered solid Q2/24 results, with cash flows in line. The company put up lower-than-expected opex for the third consecutive quarter, which we see validating the integration of and cost reduction program on the Repsol assets. PEY is taking advantage of the weak natural gas price environment to accelerate work to optimize the Edson processing plant acquired in the deal. Moreover, the company is delaying certain TILs and restricting production from other new wells to avoid increasing volumes in the face of weak summer price. Looking ahead, we see the company well positioned to ride out weak and volatile natural gas prices. We have PEY >60% hedged through 2025, with essentially no AECO exposure until 2026. As a result, we see relatively small changes to the company’s cash flows from US$2.50/mmBtu to US$4.50/mmBtu in 2025 (see our Commodity Price Sensitivities sheet). With this profile, we expect PEY to deliver on its growth (assuming supportive market dynamics and prices) and debt reduction plans over the next few years across a range of commodity price scenarios.

KEY POINTS

Q2/24 results in line. Production of ~122 mboe/d (88% gas) and capex of $101M were pre-released in the most recent Peyto Monthly Report. Post-hedging realizations of $23.69/boe and cash costs of $10.21/boe were in line with expectations. Notably, opex of $3.12/boe was ~3% below expectations, demonstrating PEY’s continued strong progress reducing costs following the Repsol asset acquisition. AFF of $125M ($0.79/share) came in just ahead of the Street, while Free Cash Flow of $52M was in line. See Exhibit 1 for detailed results versus consensus expectations (Neutral).

2024 capital budget and plans reiterated. PEY continues to target the low end of its capex budget of $450M to $500M (vs. just $214M spent during 1H/24), with flexibility to adjust activity in the back half of the year. The company plans to continue drilling and completing wells, but will delay certain TILs until natural gas prices improve. The company also reiterated its expectation to reduce opex by ~10% by the end of 2024 (with a ~5% reduction already achieved in Q2/24). Notably, PEY expects the formal start of its contract to supply gas to the Cascade Power Plant to kick off by the beginning of September (Neutral).

[stockmarket1]

$22!!?? That's a bit extreme imho. In what time frame will that be achieved lol? Not mentioned of course.  That would be ideal but I don't see that target by 12 months time, per say. 

[houbahop]

I might be wrong, but if I recall, Scotia (and many other analysts) have target prices above $20 since 2022. Everybody can be right on their price targets. But timing for the realisation of these claims is another story. Peyto had hedges for over 60% of their 24'Q2 natgas production at  $3.58/Mcf. Peyto average selling price for Natgas in 24'Q2 was $2.50/Gj or $2.88/Mcf. 40% of

[NonCredibleSrc]

Price targets are a 12 month outlook in general - that's pretty standard. The real question is, which analyst do you believe is correct (or most correct) in their target price?

[stockmarket1]

Exactly! Disregard $22.... It's having trouble staying above $15!! Since 2022, Peyto shares hit $15 --what? 4 or 5 times only to dive down below $15. 

[houbahop]

I prefer seeing PEY trade between $13 and $16. Sell $15, buy $13.50 for a 10%+ return and keep those 10% dividends coming in the process. Low risk, good return trade... 

[stockmarket1]

Agree. Keep a core position and trade around it. That's what I do. A 5 year chart reveals a great trading range gap between $11 to $15. Anywhere between that is great dollars!! It can't stay above $15 so it's a no brainer lol.