Morningstar | Hedging Bails Peyto Out Again, but the Company Lowers Production
Record-low AECO prices have dragged on narrow-moat Peyto Exploration & Development, but the company’s hedging program continues to mitigate the headwinds. During the second quarter, natural gas realizations (before hedging) fell to CAD 1.18 per thousand cubic feet of natural gas, a sharp decline from second-quarter 2017 levels of CAD 2.99/mcf. However, the company’s successful hedging program more than doubled netbacks for the quarter. After-hedging netbacks of CAD 2.37/mcf were down 18% from the prior-year period despite a 63% decline in AECO prices over the same time period.Peyto reported second-quarter average production of 91.5 thousand barrels of oil equivalent per day, down 6% sequentially and 13% from the year-ago quarter. Production was also below our expectations, driven by deferred drilling due to lower AECO prices. The company is more optimistic about the second half of the year, with AECO prices up 40% from the second-quarter average. Despite the increase in prices, current AECO prices still remain 45% lower than in the second quarter of 2017. Accordingly, we are skeptical that the company can significantly increase production this year.
We intend to incorporate these financial and operating results in our model shortly, but for now, our CAD 11 fair value estimate and narrow moat rating are unchanged.
Peyto Energy is an unincorporated open-ended limited purpose trust established under the laws of the Province of Alberta. Through its direct and indirect subsidiaries, Co. is engaged in the acquisition, exploration, development and production of oil and natural gas in Western Canada.
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