PEYUF - Peyto Exploration: Out Of Favor Valued For Potential 20+% Returns

2024-03-19 10:17:27 ET

Summary

• Peyto's low costs and hedging strategy make its high 9.3% dividend yield well protected.
• Peyto successfully acquired Repsol's assets, improving its future growth outlook.
• After the acquisition, the 2P reserves life index is now 30+ years.
• DCF valuation points at C$21.3 per share, suggesting a 50% upside to fair value. I rate the stock as a Strong buy.

Investment Thesis

The whole Canadian O&G sector is valued on the cheap side, with the highest quality companies offering double-digit returns. Gas prices ( NG1:COM ) are bouncing from inflation-adjusted multidecade lows, with future prices pointing to AECO C$3.5 compared with current C$1.6, caused by rising demand for gas due to improved LNG export capacity from NA.

Peyto ( PEYUF ),( PEY:CA ) is Canada's lowest-cost gas producer, which makes its FCF (free cash flow) yield very resilient. The robust hedge book helped Peyto to report great FCF even in the current depressed market....

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