Peyto Exploration & Development Corp T.PEY

With no surprises, Scotia remains bullish on PEY; target $22

[Westcoastenergy]

Peyto Exploration & Development Corp.

• PEY-T: C$15.25
• Target: C$22.00
• Rating: Sector Outperform

Q3/24 Largely In Line; Preliminary 2025 Guidance Hits the Mark

OUR TAKE: Neutral. PEY delivered solid Q3/24 results, with Adjusted Funds Flow (AFF) modestly ahead on a non-recurring condensate realization adjustment. The company remained active during the quarter by building productive capacity and completing the shut down of the sour gas capabilities and a major turnaround on the sweet gas units at the Edson gas plant, setting the stage for improved operating efficiencies and cost savings. PEY reiterated its 2024 capex and exit production guidance, and released preliminary 2025 guidance that is in line with our expectations and consensus. Looking ahead, we see the company well positioned to thrive in a volatile natural gas price environment. We have PEY >65% hedged through 2025, with essentially no AECO exposure until 2027. 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

Q3/24 largely in line. Production of ~120 Moe/d (89% gas) and capex of $126M were pre-released in the most recent Peyto Monthly Report. The pre-released capex was ~10% above expectations at the time. Post-hedging realizations of $23.60/boe beat expectations by ~3% on higher-than-expected condensate realizations resulting from a component balancing adjustement (+$4.50/bbl). Cash costs of $9.85/boe were down ~2% q/q, but moderately higher than consensus on higher opex, G&A (including $2.5M of cash performance bonuses), and cash taxes. AFF of $152M ($0.77/share) beat expectations by ~3% on the higher revenues, while free cash flow of $23M was behind on the higher capex. See Exhibit 1 for detailed results versus consensus expectations (Neutral).

2024 plans reiterated; Preliminary 2025 guidance hits the mark. PEY continues to target the low end of its 2024 capital budget of $450M to $500M (vs. ~$341M spent during the first three quarters), with exit production of ~135 mboe/d (October production averaged ~130 mboe/d). The company’s preliminary 2025 guidance calls for the same capital budget range and exit production of ~144 mboe/d (range of 140 mboe/d to 148 mboe/d; based on guided additions of 43 mboe/d to 48 mboe/d and a decline rate of 26% to 28%), with growth weighted to 2H/25. This compares to us at $470M and ~143 mboe/d (Q4/24 and Q1/26 average as a proxy for 2025 exit) and the Street at $460M and ~143 mboe/d. During 2025, PEY plans to drill 70 to 80 wells (80% of the budget; four rigs), add field compression at Sundance to shift volumes to the Edson plant for higher liquids recoveries, and complete a turnaround at the Oldman gas processing plant (Neutral).