New Drilling Opportunities Will Increase Future Production

Key Takeaways

• The diversification of gas market access is set to enhance revenue stability and secure better pricing, even during regional price volatility.
  
• Shutdown of select units at Edson plant is projected to lower operating costs, thus potentially increasing net margins.
  
• Potential production declines, market volatility, and pressure from rising costs and debt may challenge Peyto’s profitability, indicating a need for investment and cost management.

Catalysts

An energy company, engages in the exploration, development, and production of natural gas, oil, and natural gas liquids in Deep Basin of Alberta.

• The shutdown of sour gas processing and sulfur recovery units at the Edson plant is expected to yield operating cost benefits starting in Q4 2024, thereby potentially increasing net margins.
  
• Average well productivity on Repsol lands shows a 40% improvement over previous years, doubling production from 23,000 to 46,000 BOEs a day in one year, which is likely to contribute significantly to future revenue growth.
  
• Drilling in legacy areas has led to newly identified opportunities, such as the Falher channel, offering about 20 follow-up locations, thereby providing potential for increased future production and earnings.
  
• A new $75 million private note at 5.64% allows debt management and capital reallocation towards growth initiatives, which could positively influence future net margins and earnings.
  
• The company’s strategic diversification of gas market access, including securing TC mainline transportation to Eastern Canada, could lead to better pricing and revenue stability, particularly during periods of regional price volatility.

Peyto Exploration & Development Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Peyto Exploration & Development's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.2% today to 42.8% in 3 years time.
• Analysts expect earnings to reach CA$603.4 million (and earnings per share of CA$3.04) by about February 2028, up from CA$290.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 10.9x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Peyto Exploration & Development Future Earnings Per Share Growth

Risks

• The company mentioned a higher decline rate expected next year, which indicates a potential for rapidly decreasing production. This could necessitate increased investment just to maintain current production levels, potentially impacting revenue and net margins.
  
• Peyto's success in forecasting relies heavily on its mechanistic hedging program. If there are significant market changes or inaccuracies in hedging execution, this could lead to unexpected financial volatility, affecting predictability of earnings.
  
• The company faces pressure on natural gas prices in the short term, which, despite hedging, could lead to reduced income from operations and increased reliance on cost-cutting measures to maintain profitability, impacting net margins.
  
• Operating costs have been affected by higher interest transport and operating costs and curtailment of production. If these expenses continue to rise, it could pressure overall profitability and margins.
  
• Peyto’s increase in net debt neutrality and the issuance of $75 million in private notes to repay upcoming debt may suggest cash management challenges. This could impact future earnings and raises the potential for financial strain if strategic forecasts are not met.

Valuation

• The analysts have a consensus price target of CA$18.65 for Peyto Exploration & Development based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$22.0, and the most bearish reporting a price target of just CA$16.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.4 billion, earnings will come to CA$603.4 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CA$15.85, the analyst price target of CA$18.65 is 15.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.