Peyto Exploration & Development Corp. (PEY $19.53)

Sector Outperform

Target 12 MO $23.00

Operations Update

Acquisition of Open Range

Peyto announced the acquisition of Open Range for total consideration of ~$180 MM, resulting in acquisition metrics of $30,300 per flowing BOE and $13.48 per P+P BOE (including FDC). This is a positive transaction for Peyto, as Open Range’s asset base at Ansell provides an extension of Peyto’s existing Deep Basin multi-zone development in the Greater Sundance area, and the transaction was ~8% accretive to our forecast 2013 EV/DACF multiple. Total consideration includes 5.2 MM Peyto shares, assumed net debt of $69.5 MM, and $10 MM of transaction costs. Each Open Range shareholder will receive 0.0696 of a Peyto share which, based on yesterday’s closing price for Peyto ($19.24), equates to $1.34 per Open Range share. The acquisition includes ~110 net sections of land, primarily at Greater Sundance, as well as two natural gas plants, which will facilitate future step-out development and growth on the combined asset base. Open Range had historically operated with a very low cost structure, and the integration into Peyto will likely result in some additional operational efficiencies. Further, Peyto has identified ~100 liquids rich drilling locations on the acquired lands.

 

In conjunction with the acquisition, Peyto announced an increase to its 2012 capital program, with an additional $50 MM of spending planned in late 2012, increasing its total capital budget to $450 MM. The company currently has six rigs operating, which is expected to increase to eight rigs in August, with the additional two rigs to be dedicated towards liquids rich drilling (Cardium, Falher, Bluesky) on the newly acquired lands. We had previously only estimated 2012 capital spending of $350 MM due to the weakness in natural gas prices. Our revised estimates include 2012 and 2013 capital spending of $450 MM and $400 MM, respectively. With the acquisition and higher spending level, the company is on track to exit 2012 with production of ~57 MBOE/d. Peyto is forecast to generate 2013 production and cash flow per share growth (debt and dividend adjusted) of 28% and 19%, respectively, which compare favourably to the Intermediate peer group medians of 10% and 4%. Further, its low cost structure and exposure to the most profitable natural gas plays in the WCSB remains a key advantage in the current natural gas price environment. We are maintaining our recommendation of Sector Outperform with an increased 12-month target price of $23.00 per share. Our target is based on a 15% premium to PAV over the peer group median.