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Peyto Exploration
& Development Corp:
Favorite bet, company is ideally positioned to capitalize on increased transportation capacity for Alberta gas and NGLs.

A favorite bet now, for Roger Conrad and Elliott Gue, Energy & Income Advisor, is a more leveraged play on improving transportation capacity: Alberta-based Peyto Exploration & Development Corp. (TSX: PEY; OTC: PEYUF). Investors seemed to lose faith in this company earlier this year when it cut its monthly dividend from 11 to 6 cents Canadian. And as a result, its shares are lower by 33 percent so far in 2017.

The current share price, however, almost certainly marks a nadir for Peyto’s fortunes. For one thing, management has never recorded an impairment of reserves in 19 years, a period of extraordinary price volatility.

That’s at the same time it’s consistently increased reserves and production, up 4 percent on a per share basis the past 12 months.

This is as sure a testament as is possible in this business that the company takes care of shareholders’ money when it comes to investment. And importantly, Peyto is now self-funding its capital spending, with funds from operations more than twice the sum of dividends plus CAPEX.

Outlays are currently focused on liquids-rich opportunities (27 percent of revenue), which combined with effective hedging (80 percent of gas is pre sold for 2018) has resulted in higher realized prices for output.

Peyto’s greatest advantage is on cost. All-in cash costs are expected to be just 85 to 90 cents Canadian per Mcfe for all of 2018 (60 to 68 US cents at the current exchange rate).

That provides an extraordinary cushion so long as Alberta gas prices stay depressed, as well as leverage to the day when improved transport capacity cuts their discount to the North American benchmark Henry Hub (Texas).

Peyto is a buy for patient, aggressive investors up to USD10. The current dividend yield of nearly 7 percent is covered with cash flow by a 5-to-1 margin. It’s ideally positioned to capitalize on increased transportation capacity for Alberta gas and NGLs.

The next debt maturities are in 2021, by which time the company will have to roll over or pay off the CAD650 million drawn on its CAD1.3 billion credit line. But with the 4.26 percent bonds of May 2025 trading at a premium and yielding just 3.66 percent to maturity, the company can definitely access low cost debt capital.

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