Peyto Exploration is cashing in on Repsol

Stock remains deeply undervalued

As readers by now know, I value commodity based stocks primarily as a call option on future commodity prices. This article updates my valuation of Peyto (PEY.TO) given the new information in that company’s Q1 2024 release.

Here is my Black Scholes model.

Repsol added substantially to Peyto’s reserve life index and promises to improve its capital efficiency as the company develops the Repsol lands which were less developed than Peyto’s other Deep Basin assets at the time of the purchase. In parallel, operating costs should fall as Peyto optimizes the load on its facilities and manages whether low-priced ethane finds its way into dry gas or NGL, depending on their relative prices. Peyto rarely misses a trick when it comes to cost control, which is why it is the lowest cost gas producer in the WCSB.

With a solid hedge book through the next year or so, Peyto will have no trouble escapiing the damage from low local natural gas prices now and through the summer, but that protection will come at the expense of missing out on much higher prices if they materialize in a bitter cold winter or as LNG mops up any surplus output and markets tighten.

Those forces tend to cancel out over time, so I ignore them in valuing Peyto stock. At an estimated value of CDN$24 a share at today’s commodity prices, the stock is undervalued. At higher natural gas prices, even if somewhat muted by the hedge book, Peyto’s stock could start moving back towards its all time high in the CDN$50 range per share. I am not saying this will happen, but watch natural gas markets closely so if it seems likely you don’t miss out.