Peyto Exploration – Q3 results, slightly below expectation but still good.

[Petroleum economist]

Peyto Exploration is a Canadian mid cap (market value US$ 2.4 B), operating conventional gas fields in the Deep Basin in Alberta. Production is gas + NGL, no oil. Peyto is the 5th largest gas producer in Canada.

Q3 results were slightly below expectation, due to slightly lower production and realized gas prices, but still good. Production should pick up in Q4 with winter demand and a new power plant contract. The balance sheet is a reasonably shape and the profitability is good. A considerable part of the revenues comes from hedging. Shareholder returns are high.

Production
• Q3 production (120.3 K BoE/d) was 1.9% below Q2 (122.9 K BoE/d). This is part of the normal summer/winter cycle. Production was just below my expectation (123 K BoE/d). Peyto did not provide a Q3 production outlook.
• Gas production should pick-up Q4 with increased winter demand.
• Q4 production also should pick-up with 30-50 MM scfe/d (=6-8 K BoE/d) due the start of a gas supply contract with the Cascade power plant.
• I expect a Q4 production of 132 K BoE/d. Peyto did not provide a specific Q4 outlook, but predicts 2024 exit rates of 135 K BoE/d. October production was 130 K BoE/d.
• Peyto provided the cryptic 2025 outlook of “43-48 K BoE/d new production to offset 26-28% decline”. This should work out as 138 K BoE/d. I am using a conservative 2025 forecast of 132 K BoE/d.
• Production is expected to pick-up in H2 2025 with the start of Canadian LNG exports
• From 2025 onwards production can gradually grow with 1.5-2.5%/year to 136-138 K BoE/d in 2028.

Balance sheet
• The balance sheet is a reasonably shape.
• The equity ratio (=equity/balance sheet total) in Q3 of 48.9% was a bit below Q2 (50.0%).
• The equity ratio should recover to 49.1% in late 2024 and to 52.5% in late 2025.
• Net debt (C$ 1,235 M) was C$ 112 M below Q2 (C$ 1,337 M).
• The 2024 debt/EBITDA ratio will be around a highish 1.40.
• With higher production and gas prices, the debt/EBITDA ratio can improve to a good 0.86 in 2025.
• The balance sheet in 2024 can do with some reinforcement.
• The balance sheet allows moderate shareholder returns.

Profitability
• Q3 net profit of C$ 51.0 M (eps C$ 0.26) was similar to Q2 (C$ 51.4 M, (eps C$ 0.26).
• Realized Q3 gas prices (C$ 2.29/MM Btu) were similar to Q2 ($ 2.30/MM Btu) but below expectation. The gas price reflects the weak Canadian summer gas market.
• Royalties are a reasonable 7-9%.
• Hedging profits added C$ 77 M (=41%) to the C$ 84 M oil and NGL revenues.
• Peyto has also hedged a considerable part of its future gas production. 30.1% of the gas production in Q4 and 26% of the 2025 gas production is hedged at Nymex prices of US$ 3.80-3.89/MM Btu.
• For 2024, I expect an eps of C$ 1.19 (PE=10.1)
• For 2025, with higher production and gas prices I expect the eps to increase to C$ 2.88 (PE=5.8). The eps can increase to $ 3.37 (PE=5.0) by 2028.
• Peyto is a profitable company

Shareholder returns
• Peyto paid in Q1-Q3 a quarterly dividend of C$ 0.33. I expect this to continue in Q4 and 2025.
• Peyto does not buy back shares.
• Shareholder returns in 2024 are equivalent to a high 8.1%. 2025 returns will be at the same level.
• After 2025 with the balance sheets restored, shareholder returns can increase to 10-11%.

Conclusions
Q3 results were slightly below expectation, due to slightly lower production and realized gas prices, but still good. Production should pick up in Q4 with winter demand and a new power plant contract. The balance sheet is a reasonably shape and the profitability is good. A considerable part of the revenues comes from hedging. Shareholder returns are high.

Peyto ranks a high 8th out of 82 in my oil and gas company ranking. If you believe in the recovery of Canadian gas prices in 2025, then Peyto Exploration can be a good investment. Peyto Exploration is the highest-ranking gas producer in my list.

[ChuckGeb]

October Monthly Report

Operational Highlights
In September, Peyto safely completed the second (and final) phase of
the Edson Gas Plant turnaround. We were able to mitigate some of
the associated downtime by redirecting gas to other interconnected
facilities; however, with low gas prices during the month we
prudently curtailed approximately 5,500 BOE/d, including shut-ins
when AECO’s gas price traded near negative territory. Peyto will
continue to manage production to avoid exposure to low gas prices
during the fall until prices recover. We caught up on some
completions in August to prepare for winter prices. With an increase
in facility projects in the back half of the year, Peyto remains on track
to spend to the low end of guidance of $450 – $500 million in 2024.

Well managed, shareholder friendly company that has stood the test of time.

Thanks for the coverage.