Peyto Exploration & Development Corp.

Simply a great company year after year.

PEY : TSX : C$30.82
HOLD 
Target: C$32.00

COMPANY DESCRIPTION:
Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
TURNING ON THE VALVES
Investment recommendation
Peyto released third quarter results which were generally neutral as Q3/13 volumes and capital spending were pre-released. It has eclipsed its previous exit rate guidance ahead of schedule and increased its exit target this year to 71,000 boe/d; however, in doing so it has also increased its 2013 capital spending by ~$65 million. Using the midpoint of its initial 2014 capital budget provides YoY growth (Q4/14 over Q4/13) of ~17% on our forecasts. The higher capital spending profile maintains D/CF at year-end 2014 below 2.0x on our estimates and 74% utilized on its bank facility. We maintain our HOLD rating and C$32.00 target price based on 1.2x NAV and 11.1x 2014E EV/DACF.
Investment highlights
Surpasses exit rate guidance in November as expected. It expects to grow production from 70,000 boe/d currently (up from the Q3 average of 56,300 boe/d) to 71,000 boe/d by year-end on higher 2013 capital spending of $565 million (up $65 million). Despite higher spending, its implied cost of adding production in 2013 is ~$17,000/boepd.
Another aggressive year in 2014 spending ~$600 million. It forecasts adding production in 2014 at a cost of $18,000/boepd in line with our prior forecasts, resulting in Q4 average growth on our estimates of 17% YoY. Its D/CF reduces to 1.9x (from 2.2x) next year on our forecasts.
No Brazeau well update but spending in 2014 implies positive results. Results from its new wells are still not public; however, its intention to expand processing capacity by 20 MMcf/d implies positive results.
Valuation
Peyto currently trades at a 1.2x multiple to CNAV, a10.7x EV/DACF multiple, and $77,000/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.4x EV/DACF, and $71,800/BOEPD.

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