Personal note : my daughters went to college on the money I made tracking Peyto from $ 8 to $30
TSX : C$34.92
HOLD Target: C$39.00
COMPANY DESCRIPTION: Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted
Oil and Gas, Exploration and Production GOING LONGER IN 2014
Peyto announced fourth quarter results which were largely in line given pre- announced production and capital expenditures. Its infrastructure remains highly utilized and requires further expansions this year to accommodate growth; Peyto remains poised to do that given ~100 MMcf/d of capacity expansions planned this year. It has noticeably moved to longer lateral horizontals given licenses to date and we see the potential for a 10% improvement in IRR and capital efficiencies from ERH development. Peyto remains one of the highest quality natural gas producers in the Basin and a go-to name for exposure. We maintain our HOLD recommendation and C$39.00 target; however, we will continue to monitor the share price for any improvement in valuation (all other factor being equal).
Investment highlights Envision little change to 2014 budget despite firmer gas prices. Despite higher natural gas prices, we see a low probability of any meaningful increase to its $600 million budget given lead time and infrastructure planning. Additionally, PEY has hedged ~55% of 2014 production at ~C$3.70/Mcf, so it has a relatively modest upside participation.
Going longer in 2014. Peyto has noticeably shifted its licensing and 2014 well program to extended reach horizontal (ERH) wells. Its average well length in 2013 increased by 7% or 100 meters YoY; we see the potential for a material increase in 2014. It is still early in terms of results and costs for Peyto-operated ERH wells; however, we believe ERH wells could provide a +10% improvement in capital efficiency and +10% uplift in IRR per well, which are not captured in current forecasts.
Valuation Peyto currently trades at a 1.1x multiple to CNAV, 11.3x EV/DACF multiple, and $83,400/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 8.1x EV/DACF, and $77,000/BO