PEY.TO - Peyto Exploration & Development

[finetrader]

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Nah.. they have debt, but, being the lowest cost producer, too many will go bankrupt before them.

[petec]

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Nah.. they have debt, but, being the lowest cost producer, too many will go bankrupt before them.

 

Unless there’s enough associated gas at zero cost...

 

[awindenberger]

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Nah.. they have debt, but, being the lowest cost producer, too many will go bankrupt before them.

 

Unless there’s enough associated gas at zero cost...

 

There isn't, particularly not up in Alberta.

[petec]

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Nah.. they have debt, but, being the lowest cost producer, too many will go bankrupt before them.

 

Unless there’s enough associated gas at zero cost...

 

There isn't, particularly not up in Alberta.

 

Hope not...

[bizaro86]

One factor for mid term associated gas supply in AB is the diluent recovery units. Gibsons and Cenovus are both working on them. Oil sands crude is too heavy to flow, so its mixed with diluent, which is mostly condensate.

 

A DRU recovers the diluent from the blends before it goes into a railcar. That allows more crude in the railcar because the diluent isnt taking up space. But it also will dramatically increase supply (or reduce demand, depends how you look at it) for condensate.

 

If the price of condensate in AB goes down as a result, the huge condensate drilling operations (7 gen et al) will slow down. These wells have huge associated gas production.

[ValuePadawan]

Hmm quite a price drop was wondering how you guys thought the recent drop in oil prices would effect Peyto? AKA why the steep drop? Is it just selling in the energy sector more broadly or is it because NGL prices will fall along with oil?

[petec]

Hmm quite a price drop was wondering how you guys thought the recent drop in oil prices would effect Peyto? AKA why the steep drop? Is it just selling in the energy sector more broadly or is it because NGL prices will fall along with oil?

 

Both. Especially NGL/propane, which at points recently was propping up a lot of the cash flow.

 

However as always in cyclical industries bad=good. This will flush out a lot of more expensive production and associated gas production, and stimulate demand. Low cost survivors will win. The only question is whether Peyto survives or has too much debt maturing too soon.

 

I’m betting on survival, but there’s risk.

[ValuePadawan]

I’m betting on survival, but there’s risk.

 

Interesting I was wondering if you thought if it got really bad if Peyto could sell assets to pay down debt? Or in this market would there be no buyers?

[petec]

I’m betting on survival, but there’s risk.

 

Interesting I was wondering if you thought if it got really bad if Peyto could sell assets to pay down debt? Or in this market would there be no buyers?

 

Asset prices are low (they commented on the call that they've never seen Crown land auctions so low), so no, my guess is if they have to sell then the equity is a 0. In fact, they are in buying mode.

 

The key is that after several years of not investing to grow, decline rates have come down a ton and are now likely in the low 20% range (depending how much they invest this year. That really helps with cash generation. They can also cut the divi. So if they really wanted to pay down debt they could do so at a serious rate, without letting go of any assets that might be valuable in the future.

 

 

[ValuePadawan]

I’m betting on survival, but there’s risk.

 

Interesting I was wondering if you thought if it got really bad if Peyto could sell assets to pay down debt? Or in this market would there be no buyers?

 

Asset prices are low (they commented on the call that they've never seen Crown land auctions so low), so no, my guess is if they have to sell then the equity is a 0. In fact, they are in buying mode.

 

The key is that after several years of not investing to grow, decline rates have come down a ton and are now likely in the low 20% range (depending how much they invest this year. That really helps with cash generation. They can also cut the divi. So if they really wanted to pay down debt they could do so at a serious rate, without letting go of any assets that might be valuable in the future.

 

Gotcha thanks for sharing your opinion I appreciate it

[mcliu]

I would be surprised if they have capacity to buy. They're over-levered as is, and nobody's lending in this environment. They'll need to focus on rolling over debt.

[petec]

I would be surprised if they have capacity to buy. They're over-levered as is, and nobody's lending in this environment. They'll need to focus on rolling over debt.

 

They are buying land. It’s on the call.

[mcliu]

I would be surprised if they have capacity to buy. They're over-levered as is, and nobody's lending in this environment. They'll need to focus on rolling over debt.

 

They are buying land. It’s on the call.

 

Okay, my bad, yes land purchases can be done. I meant they probably don't have the balance sheet to acquire other companies.

[petec]

I would be surprised if they have capacity to buy. They're over-levered as is, and nobody's lending in this environment. They'll need to focus on rolling over debt.

 

They are buying land. It’s on the call.

 

Okay, my bad, yes land purchases can be done. I meant they probably don't have the balance sheet to acquire other companies.

 

Agreed although interestingly they didn't rule it out on the call, which I found odd.

[ValuePadawan]

If NGL prices drop from where they were last year $43-$44 to $28-30 this year and volumes of liquids remain similar to last year they would make $50M less from NGLs and with already low profits that 50M is critical to repay debt. I think they should cut the dividend wholesale and focus on debt and if things turn around maybe small amounts of buybacks.

[bizaro86]

I would be surprised if they have capacity to buy. They're over-levered as is, and nobody's lending in this environment. They'll need to focus on rolling over debt.

 

They are buying land. It’s on the call.

 

Okay, my bad, yes land purchases can be done. I meant they probably don't have the balance sheet to acquire other companies.

 

Agreed although interestingly they didn't rule it out on the call, which I found odd.

 

That IS interesting. Everyone I've ever talked to at Peyto is always so proud about how they never do acquisitions (only 1 small one very early on in entire corporate history)

[NewValueinvestor]

If NGL prices drop from where they were last year $43-$44 to $28-30 this year and volumes of liquids remain similar to last year they would make $50M less from NGLs and with already low profits that 50M is critical to repay debt. I think they should cut the dividend wholesale and focus on debt and if things turn around maybe small amounts of buybacks.

 

I just Bought this stock a few days ago after looking at it's statements and thought it was a great buy at 1.04$ but if their revenues drop so much it could be a huge hit and possibly breach their debt covenants and create forced selling of assets into a down market.

 

In this market sentiment I'm not even sure if they can issue equity without massively diluting the equity at a firesale.

 

I thought it was a great opportunity but reading replys here I'm kind of antsy. It looks like PEY is pretty much a call option on natural gas.

[petec]

If NGL prices drop from where they were last year $43-$44 to $28-30 this year and volumes of liquids remain similar to last year they would make $50M less from NGLs and with already low profits that 50M is critical to repay debt. I think they should cut the dividend wholesale and focus on debt and if things turn around maybe small amounts of buybacks.

 

I just Bought this stock a few days ago after looking at it's statements and thought it was a great buy at 1.04$ but if their revenues drop so much it could be a huge hit and possibly breach their debt covenants and create forced selling of assets into a down market.

 

In this market sentiment I'm not even sure if they can issue equity without massively diluting the equity at a firesale.

 

I thought it was a great opportunity but reading replys here I'm kind of antsy. It looks like PEY is pretty much a call option on natural gas.

 

It’s a levered gas E&P. What else would it be?

[petec]

Balance sheet review for those interested; summary is that October 2022 is the key date and we need cash flows to be up by then and refinancing windows open.

 

- Net current assets -33m, mainly receivables and payables - little cash and no current debt.

 

- Net debt down by 60m y/y.

 

- 705m of gross debt is from a $1.3bn revolver maturing Oct 2022 but described as "extendible". Rate is floating and no covenants are mentioned. NB $600m undrawn.

 

- 415m of gross debt is senior unsecured notes which rank equally with the bank facility. Remaining maturities are $50m 9/22, $100m 10/23, $65m 5/25, $100m 1/26, $100m 1/28. Rates vary from 3.7% to 4.88% and the rate rises 100bps in any fiscal quarter where debt/ebitda exceeds 3x, or 150bps if it exceeds 3.25x. $170m of notes were repaid in 2019. This may be why they are repaying notes with the revolver.

 

- Key covenants:

1) Debt/ebitda can't exceed 3.5x until YE21 and 3.25x thereafter. YE19 2.99x so highly likely to breach this as hedges roll off?

2) Debt/ebitda can't exceed 55% of debt+equity. YE19 40%.

3) Ebitda/interest can't fall below 3x. YE19 7x.

 

Set against 1) likelihood of supply response to low oil & gas prices and 2) Peyto's ability to generate cash as the decline rate drops to 20%.

 

[petec]

Amazing what cutting a dividend can do...

[ValuePadawan]

Amazing what cutting a dividend can do...

 

It's not the dividend it's the fact that US frackers will have to shut in production due to oversupply of oil. A side effect is that the gas that is produced along with the oil in the same well will also be shut in. Nat gas supply will drop but demand won't drop nearly to the same extent. Therefore North America gas prices will improve for as long as the US shale industry is in the decline which will probably be for at least 1.5 years.

[petec]

Amazing what cutting a dividend can do...

 

It's not the dividend it's the fact that US frackers will have to shut in production due to oversupply of oil. A side effect is that the gas that is produced along with the oil in the same well will also be shut in. Nat gas supply will drop but demand won't drop nearly to the same extent. Therefore North America gas prices will improve for as long as the US shale industry is in the decline which will probably be for at least 1.5 years.

 

I suspect that is right. This dynamic has always been in the back of my mind when analysing the stock. The worst scenario for them is low gas prices and high oil prices, which is what they've had for several years now, and hopefully it is changing.

 

That said I do think cutting the dividend and capex will have given the market some comfort around the debt situation.

[mloub]

Bump.

 

Peyto is looking very interesting. They are one of the lowest NG cost producers anywhere in North America when you normalize out some of the fudge items other NG producers throw into the mix. They also own all their processing and collecting facilities outright, and have a processing capacity of 740mmcfe/d relative to their current gas/ngl production of 460mcfe/d. So incremental growth in production will come at a lower capex cost than growth in the past, which required spending to build out all that processing capacity.

 

They seem out of favour because of their leverage relative to their peers, but here too, not all is at it seems. For example, Advantage Oil & Gas, another well-run gas heavy producer in the Western Canadian Basin, recently signed a take-or-pay arrangement with Topaz, for 50mmcf/d @ $0.66/mcf of processing capacity for an upfront payment of $100m (and paid down debt by the same amount). Other players have done the same, but Peyto has not.

 

So if needed, Peyto could pull that lever too and lower debt on the balance sheet and push it out into other long-term commitments tied to their actual gas flows.

 

As I see it, the current state of the NG market is a case of a bear strolling into camp. You don't have to outrun the bear, you just have to outrun the other campers, and Peyto seems to have a pretty good chance of doing that with it's low operating costs, great asset base, and significant capacity in terms of unencumbered processing and distribution assets.

 

There are few other nuggets in the foot notes, but none major enough to tip the scales.

 

I would set the IV based on a full-cycle AECO gas price of $2.50 at $15 per share.

 

Hat tip to those who were ready to strike when it hit ~$1 in March.

 

M.

 

[petec]

I would set the IV based on a full-cycle AECO gas price of $2.20 at $15 per share.

 

Could you share your maths behind the $15 number, and your thinking behind $2.20?

[mloub]

Sorry, just caught a typo there. Meant to say full-cycle AECO gas price of $2.50/mcf.

 

That full-cycle price is just my rough guess of the average price over a peak to trough AECO cycle in the next few years.

 

As for the rest of the math, it is even less scientific. I just plug in the dry gas price, times my expected daily production (which I expect to rise modestly over the next 1-2 years) add in the NGL's price estimate and production, minus opex, and capex, and then slap a multiple on the FCF based on historic multiples.

 

M.