Peyto Exploration and Development (TSE:PEY) is a mid-sized Canadian natural gas company operating primarily in the Alberta Deep Basin.
I suppose investing in natural gas right now is probably considered contrarian – but if you’re bullish on the longer term prospects of natural gas, then right now could be a great time to invest with production shutting in from the supply side, the coal to natural gas shift from the demand side, as well as the growing natural gas/ngl infrastructure – the key would be to invest in a company that can easily sustain these very low natural gas prices, so that when natural gas prices rebound (as they will eventually, the vast majority of natural gas plays are currently losing money) they will be in a good position to capitalize on that.
This amateur “analysis” is almost solely geared towards the big picture for Peyto and natural gas.
I believe that with less than a 100 year supply left of oil, the rise of China and South East Asian, as well as Latin America, and Africa developing quite rapidly, that before we figure out an economically viable “renewable” form of energy it’s plainly obvious that we’ll have to start switching some of our energy needs from oil to natural gas and nuclear. I believe the ngl infrastructure will be built, cars will start to take the cleaner-burning natural gas, etc, partly due to necessity – but also due to the fact that countries all around the world (US, China, Russia, Poland, Israel, Turkey, Canada, etc) are all finding massive natural gas reserves. China found enough shale gas to power its economy for the next hundred years! A cheap, clean-burning energy source in high abundance? This seems like a no-brainer to me.
The problem is, it could take 5, 10, even 15 years to see some of the fruits of this reasoning. So how would one go about investing in natural gas right now? What kind of company would you want to buy?
Well, a few key elements to look for all centre around the company’s ability to survive the current record-low natural gas price environment. These include a solid balance sheet, line of credit, and very high profit margins/efficiency.
I believe that Peyto satisfies all of these criteria. They have a revolving credit line of $700 million, a healthy and flexible balance sheet, and are one of the most efficient natural gas companies in all of North America.
These guys are seriously obsessed with efficiency. Back when natural gas prices were high, Peyto was the laughing stock of the industry because they sacrificed rapid expansion/growth rates for efficiency. If natural gas prices are at $10, most companies would be more than happy to pick up cheaper assets that can bring 1GJ to market for, say, $5 (still a good profit margin). But not Peyto. These guys sat and waited for only the most efficient assets to pounce on.
So while the majority of the industry is losing money during this period of depressed natural gas prices, Peyto is actually making money (though not very much!) The key point about this company, however, is that this early focus on efficiency means they will not only survive this low priced environment – but they’ll thrive in it. It gives them the ability to be counter-cyclical (and indeed they are). While everyone else is shutting in production and selling off their assets, Peyto has its highest capital program ever this year to buy up natural gas assets for pennies on the dollar, and to take advantage of the pricing to lay the groundwork so that if/when prices rebound, they’ll be positioned well for rapid expansion and raking in the cash hand over fist – while maintaining their efficiency as well. For instance, they’ve recently entered into an agreement to acquire Open Range Energy which is located by some of Peyto’s current projects in the Deep Basin, and will also be highly efficient assets.
I believe they have 40% of their natural gas hedged through 2013 as well, and are also paying a ~3.5% dividend at the moment, which is around a 30% payout ratio I believe, which they cut in half from ~last year.
I added 175 shares of Peyto to my portfolio for an average cost of $17.38, and I’m planning on holding them for a long, long time.
Disclaimer: I’m still new to investing, and I’m long Peyto! So DYODD and look into the company more deeply yourself before making any decisions!