PEY.TO - Peyto Exploration & Development

[ABM]

I learned about this company from this blog which provides great observations on the MLP complex, btw. 

 

https://medium.com/@hedgeyeenergy/pey-comment-on-counter-cyclical-e-p-investing-ac7abae14463

 

Management writes monthly shareholder letters that read like value porn. 

 

http://srv-web.peyto.com/PMR.aspx

 

It looks like over the past 10 years they have outperformed the TSE by a hair on a total return basis and I was just wondering what people may be thinking about picking up a higher quality E&P in this downdraft. 

 

Dings on the stock are the DRIP which drives constant dilution, no buybacks, and low insider ownership.  While pluses include outsider type language used by management, somewhat conservative capital structure, and apparent low cost producer (though unverified from my seat). 

[influx]

Don sold nearly ~$20M of PEY.to shares..

Where is he going to allocate? :)

[Guest notorious546]

Don sold nearly ~$20M of PEY.to shares..

Where is he going to allocate? :)

 

when did he sell?

[influx]

https://www.canadianinsider.com/company?ticker=pey

Sep 15th - Oct 7th

931419 shares

Make it C$29 each, though I think the average is more..

~ C$30 million

[influx]

https://www.canadianinsider.com/company?ticker=pey

Sep 15th - Oct 7th

931419 shares

Make it C$29 each, though I think the average is more..

~ C$30 million

 

Another ~C$5M ..

I am mentioning this because it is interesting to follow his thought process which is reflected in his actions.

[Guest wellmont]

https://www.canadianinsider.com/company?ticker=pey

Sep 15th - Oct 7th

931419 shares

Make it C$29 each, though I think the average is more..

~ C$30 million

 

Another ~C$5M ..

I am mentioning this because it is interesting to follow his thought process which is reflected in his actions.

 

Filing

Date Transaction

Date Insider Name Ownership

Type Securities Nature of transaction Volume or Value Price Dec 3/15 Dec 3/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -118,000 $26.49

Dec 2/15 Dec 1/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -120,600 $27.72

Dec 1/15 Nov 30/15 Gray, Don Direct Ownership Common Shares  Amended Filing 10 - Disposition in the public market -79,400 $27.27

Nov 19/15 Nov 19/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -91,300 $27.04

Nov 19/15 Nov 18/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -108,700 $27.47

Nov 17/15 Nov 17/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -50,100 $27.82

Nov 16/15 Nov 16/15 Gray, Don Direct Ownership Common Shares 10 - Disposition in the public market -178,100 $28.61 - See more at: https://www.canadianinsider.com/company?ticker=pey#sthash.JhYmymJj.dpuf

 

thought process is simple. sell at over 2x book. buy at under book.

[Wilson-TPC]

Don Gray bought 533k shares of GXE.TO.

 

And Ingram just bought more today.

 

http://www.gearenergy.com/insider-holdings

[oec2000]

It's been a really long time since my last post. Drifted away from following the forum after the content started to move away from what used to be a more tightly focused value orientation. Not meant as a criticism but just found that it was too time consuming to sift though posts to find interesting gems because I was busy with other stuff. (This is still the best investment forum that I know. :) Thanks, Sanjeev!)

 

Case in point - Peyto.

 

I've been following the collapse in Peyto's price and taking advantage of it to buy a very well managed business at a reasonable (arguably, a cheap) price. This is one situation I thought would spark off a lively discussion on CoBF. A quick search showed that I was wrong - being able only to find this thread which was started to discuss Peyto but which ended up being hijacked by GXE.TO.

 

This provided sufficient impetus for me to end my hiatus on CoBF. :D

 

So, despite the plunge in AECO gas prices, PEY remains profitable and appears to be in good shape heading into 2018. Mr Market thinks that PEY's dividend is at risk and that their debt load is too heavy. Is Mr Market right, or is this a great buying opportunity?

 

I believe this is a rare opportunity to buy PEY at a good price. The two key risks are that they have to trim the dividend and/or reduce capex to reduce debt (and thus cause a decline in production). In his recent PMR's, Darren Gee has discussed the options they have to deal with these issues and it is by no means a certainty they will have to resort to cutting divs or capex. The risks do get higher if gas prices stay low into 2019.

 

But, even if the cuts occur, they result in a temporary valuation loss for investors, not a permanent loss. The cure for low gas prices is low gas prices and PEY with its super low cost structure will survive the downturn and benefit from the subsequent recovery in gas prices. Meanwhile, investors will get paid with attractive dividends (even if cut) while waiting. What's not to like?

 

Contrary views, please.

 

 

 

[StevieV]

I believe this is a rare opportunity to buy PEY at a good price. The two key risks are that they have to trim the dividend and/or reduce capex to reduce debt (and thus cause a decline in production). In his recent PMR's, Darren Gee has discussed the options they have to deal with these issues and it is by no means a certainty they will have to resort to cutting divs or capex. The risks do get higher if gas prices stay low into 2019.

 

But, even if the cuts occur, they result in a temporary valuation loss for investors, not a permanent loss. The cure for low gas prices is low gas prices and PEY with its super low cost structure will survive the downturn and benefit from the subsequent recovery in gas prices. Meanwhile, investors will get paid with attractive dividends (even if cut) while waiting. What's not to like?

 

I initiated a small long position in Peyto a couple weeks ago.

 

I think the risk is that Canadian natural gas is simply not a good business for an extended period of time.  It hasn't been for a while and I think that can continue.  First, there is a lot of natural gas in North America and it is relatively quick to bring it online.  Secondly, Canada has not been friendly to the infrastructure needed to bring the Canadian gas to market.  Also, there can be competition from liquids-rich producers.  So, even if you are the cheapest dry gas producer, you can be undercut by producers who make money on the liquids.  I think Peyto is a good name in the space, but the space itself may be in the garbage pile.

 

Of course, all that being said, I started a small position.  Why?  As you point out, the company is not in financial distress.  With some improved pricing and optimism, I think that Peyto can double from recent prices.  If it hits $30 USD in the next 3 years, then that is a great return.  The sooner it does, the better the CAGR.

 

It could certainly take a significant hit on the downside in the shorter or medium term, but I don't expect them to go out of business.

[Uccmal]

Hi oec2000, nice to see you back.

 

I think Cdn. Nat. gas, at the moment, is a crappy industry.  I am unsure is it ever gets better in the near term.  This is despite the continuous building of nat. gas plants and conversion of Coal to nat. gas projects (See Tampa Electric for an example). 

 

Right now many operators in Western Canada treat gas as a toss off. 

 

It always seems like there is more supply than demand, no matter how much demnd increases.  It is pure speculation whether this ever ends at least in our time horizons. 

 

I have no opinion on Peyto, except to say that when yields get that high there is almost always a dividend cut coming.  Management gains nothing by punishing the balance sheet in the face of adversity.  I have had this lesson repeated to me several times. 

[oec2000]

Hi oec2000, nice to see you back.

 

I think Cdn. Nat. gas, at the moment, is a crappy industry.  I am unsure is it ever gets better in the near term.  This is despite the continuous building of nat. gas plants and conversion of Coal to nat. gas projects (See Tampa Electric for an example). 

 

Right now many operators in Western Canada treat gas as a toss off. 

 

It always seems like there is more supply than demand, no matter how much demnd increases.  It is pure speculation whether this ever ends at least in our time horizons. 

 

I have no opinion on Peyto, except to say that when yields get that high there is almost always a dividend cut coming.  Management gains nothing by punishing the balance sheet in the face of adversity.  I have had this lesson repeated to me several times. 

 

Thanks for your comments, uccmal and StevieV.

 

I agree the natgas outlook is bleak but bleak environments should be the playgrounds of value investors. Many people on this board made out like bandits buying FFH and then the US banks (and their preferreds too) when it looked like Armageddon.

 

Not saying that PEY is at the same degree of undervaluation but it seems to me an opportunity that bears a closer look. I know that the resource industry has caused a lot of heartache for investors because of the insane way that most of the companies in the sector are managed. But, therein lies the opportunity because the market is so fearful and PEY management is not typical of the sector.

 

The dividend issue is a red herring imo. What should matter are owners' earnings and I think shareholders of PEY would be better served if they didn't pay any dividends because of the high incremental IRRs/ROEs they continue to generate on capex.

 

The fundamental question is whether free market economics will work to bring the natgas market in Canada back to equilibrium where producers can earn a reasonable return. I would argue that this is more likely to happen in a negative environment where investors/bankers are much more reluctant to let promoters destroy their capital than in bullish times when the "grow at any price" craziness was so in vogue. Free markets worked when WCS oil spreads to WTI and Brent blew out a few years ago and it's logical to think that it will happen again with gas.

 

I'm paying attention to capex plans among the gassy producers. When we start to see more drastic cuts to capex is when it's an indication of markets working. Meanwhile, low gas prices will only stimulate demand.

 

 

 

[influx]

Hi oec2000, nice to see you back.

 

I think Cdn. Nat. gas, at the moment, is a crappy industry.  I am unsure is it ever gets better in the near term.  This is despite the continuous building of nat. gas plants and conversion of Coal to nat. gas projects (See Tampa Electric for an example). 

 

Right now many operators in Western Canada treat gas as a toss off. 

 

It always seems like there is more supply than demand, no matter how much demnd increases.  It is pure speculation whether this ever ends at least in our time horizons. 

 

I have no opinion on Peyto, except to say that when yields get that high there is almost always a dividend cut coming.  Management gains nothing by punishing the balance sheet in the face of adversity.  I have had this lesson repeated to me several times. 

 

Thanks for your comments, uccmal and StevieV.

 

I agree the natgas outlook is bleak but bleak environments should be the playgrounds of value investors. Many people on this board made out like bandits buying FFH and then the US banks (and their preferreds too) when it looked like Armageddon.

 

Not saying that PEY is at the same degree of undervaluation but it seems to me an opportunity that bears a closer look. I know that the resource industry has caused a lot of heartache for investors because of the insane way that most of the companies in the sector are managed. But, therein lies the opportunity because the market is so fearful and PEY management is not typical of the sector.

 

The dividend issue is a red herring imo. What should matter are owners' earnings and I think shareholders of PEY would be better served if they didn't pay any dividends because of the high incremental IRRs/ROEs they continue to generate on capex.

 

The fundamental question is whether free market economics will work to bring the natgas market in Canada back to equilibrium where producers can earn a reasonable return. I would argue that this is more likely to happen in a negative environment where investors/bankers are much more reluctant to let promoters destroy their capital than in bullish times when the "grow at any price" craziness was so in vogue. Free markets worked when WCS oil spreads to WTI and Brent blew out a few years ago and it's logical to think that it will happen again with gas.

 

I'm paying attention to capex plans among the gassy producers. When we start to see more drastic cuts to capex is when it's an indication of markets working. Meanwhile, low gas prices will only stimulate demand.

 

 

To be honest, I don't like when the no insider is buying. Not red flag per se, but definitely not good

[petec]

I've owned a small amount of this for a few months and I thought I'd bump it up the list as it is only getting cheaper and is heading towards deep value, I think. There is a structural supply vs takeaway issue but on a 3-year horizon LNG/pipe/propane projects may provide some relief. In the meantime an excellent management team is generating cash and (slowly) paying down debt.

[awindenberger]

I've owned a small amount of this for a few months and I thought I'd bump it up the list as it is only getting cheaper and is heading towards deep value, I think. There is a structural supply vs takeaway issue but on a 3-year horizon LNG/pipe/propane projects may provide some relief. In the meantime an excellent management team is generating cash and (slowly) paying down debt.

 

I've been following Peyto since last winter but haven't bought in yet. Agree with you that it seems to be getting into deep value territory. Would love to see them stop drilling and allocate most FCF to buybacks right now until supply eases up.

[petec]

I wouldn’t. Their decline rate is over 30% and they have debt. Under some assumptions that’s an existential threat to the equity. If they stop drilling I’d like to see them slash the debt.

[petec]

Peyto have cut capex and the dividend and announced a 3-year plan: http://www.peyto.com/Files/News/2019/2019StrategyNewsRelease.pdf

 

This looks like a smart move to me. They are going to be able to continue to pay down debt while investing in midstream assets such as liquids deep cut capacity (to improve netbacks on liquids-rich gas production) and gas storage (to smooth out the incredible volatility at AECO). They also expect to be able to buy more land at good prices. They seem confident that by the end of the 3-year period local pricing will be heading for a better period on the back of NGTL expansion, local demand growth, and progress on LNG export terminals.

 

I have expected a dividend cut for a while and I hope it is the last shoe to drop. Of course it is possible commodity prices will be cut futher but at some point that has to impact production and Peyto, as one of the most efficient producers, will be one of the last men standing when the market rebalances.

 

[WayWardCloud]

I have a small position in Peyto as well. Same story: Very competent management and lowest cost producer stuck in the midst of a temporary (?) macro nightmare. Lost tons of money :( What prevents me from adding to it is that if they're such good stewards of shareholder's capital then why on earth haven't they cut the dividend completely and started buying back shares already a while ago? Also no insider purchases.

[petec]

The buyback issue doesn’t bother me greatly. Apart from tax there’s not much difference between buying back shares and paying a dividend so shareholders can buy more. I always think we overstate the importance of buybacks, and anyway I think derailing by paying down debt is more important. Their mistake was taking on debt when they did.

 

Insider purchases - very fair point.

[Guest 50centdollars]

I have a small position in Peyto as well. Same story: Very competent management and lowest cost producer stuck in the midst of a temporary (?) macro nightmare. Lost tons of money :( What prevents me from adding to it is that if they're such good stewards of shareholder's capital then why on earth haven't they cut the dividend completely and started buying back shares already a while ago? Also no insider purchases.

 

insiders have been selling all the way down.

[petec]

Obviously production decline rates are high with assets like these. However, the decline rates also drop fairly rapidly. That means that if a company like this chooses to hold production flat rather than grow it, they start generating FCF fairly quickly unless commodity prices are unsustainably low.

 

In that context I think it's quite significant that guidance for Peyto's decline rate has fallen from 35% for 2018 and 32% for 2019 to 25% for 2019 and 21% for 2020. The reason for the drop is that the original guide assumed production growth and the new guide assumes a significant production drop in 2018, a smaller one in 2019, and slight growth in 2020 (so declines might be even lower in 2020 if they only hold production flat).

 

I'm pleasantly surprised at how fast the decline rate is tapering off. Assuming 21%, Peyto generate enough cash to keep production flat and continue paying down debt assuming they sell all their production at current depressed strip and earn no other revenues - and of course if they do hold production flat the decline rate will keep falling so the rate at which they pay down debt will accelerate. On top of that the leverage to commodity price upside is enormous and a lot is being spent on improving demand and access to it ($9bn on NGTL, more on LNG, more on coal-to-gas conversion, and yet more on liquids plants and the Ridley export terminal).

 

I'm starting to think there is deep value here.

[petec]

Well if there was deep value then, there certainly is now  :(

[WayWardCloud]

Any particular reason for the recent drop?

[bizaro86]

There was a big spike down in AECO prices, although it has now recovered today. Maybe that's it?

[Guest 50centdollars]

It probably is because of the AECO drop. They have 2019 exposure tied 63% to AECO (72% sold forward), 25% to Henry hub and 12% to Dawn/Vuntura.

 

At prices down here, you would think insiders would be buying. Anyone have any ideas why they haven't? They have been selling all the way down.

[Cardboard]

If you guys truly want exposure to Canadian natural gas I would recommend BIR and nothing else: low cost, low decline rate and they have highly profitable condensates. Very good CEO IMO. Everything else has been a disaster.

 

Similar multiple per flowing as PEY, same price to book, quite a bit cheaper on reserves per boe, 75% of PDP NAV vs 90% cheaper on EV/DACF, better balance sheet.

 

If you want to make a straight call on natural gas then you have more exposure with PEY but, you are paying more than a safer BIR. And if you really want to make that call on AECO, then buy futures.

 

Cardboard