Morningstar | Lowering Peyto Exploration & Development's Fair Value Estimate, but Stock Looks Oversold
After taking a fresh look at Peyto Exploration’s first-quarter results, we are lowering our fair value estimate to CAD 7 from CAD 8 to reflect our lower near-term price realizations due to pipeline shortages. The stock has tumbled over 20% this year, as the market is also aware of the declining price realizations as pipeline shortages plague Canada. However, we think the stock looks oversold at current levels. We expect price realizations to normalize to higher levels when crude and natural gas pipelines are built within the next five years. As such, we think that the sell-off has been over exaggerated, and we see some upside at current level. Furthermore, we are maintaining our narrow moat.As a reminder, Peyto’s hedging continues to provide little upside. First-quarter daily average AECO prices increased almost 70% from the fourth quarter, but Peyto’s natural gas realizations only increased 2% to CAD 2.48 per thousand cubic feet. Without the hedging benefits, pricing realizations only improved by 13% from the fourth quarter, and the company only recognized a CAD 0.12 hedging gain in the first quarter compared with CAD 0.34 in the fourth quarter and CAD 0.99 in the third quarter of 2018.
Peyto also reported first-quarter average production of 87.1 thousand barrels of oil equivalent per day, up 1% sequentially but down 16% from the year-ago quarter. Production was slightly below our expectations, driven by lower-than-expected drilling even with the increase in AECO prices.
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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