Investors cheer as Peyto re­vamps gas strat­egy

Shares rise on plan to di­ver­sify mar­kets

National Post (Latest Edition) - - FINANCIAL POST - Ge­of­frey Mor­gan Fi­nan­cial Post gmor­gan@na­tion­al­post.com

• Amid a sharp drop in Al­berta nat­u­ral gas prices, Peyto Ex­plo­ration and De­vel­op­ment Corp. is im­ple­ment­ing ma­jor changes, in­clud­ing div­i­dend and spend­ing cuts, to en­dure the next year.

Cal­gary- based Peyto an­nounced a 45 - per- c e nt monthly div­i­dend cut to 6 cents per share af­ter mar­kets closed Thurs­day and said it would slash its cap­i­tal bud­get to be­tween $200 mil­lion and $ 250 mil­lion, from a pre­lim­i­nary es­ti­mate of $300 mil­lion to $450 mil­lion.

The com­pany noted that its de­ci­sion to cut spend­ing was made “in light of the re­cent 40- per- cent de­cline in near- term nat­u­ral gas prices.”

Peyto is among the low­est­cost pro­duc­ers in the Western Cana­dian Sed­i­men­tary Basin so its moves are of­ten em­u­lated by smaller com­pa­nies — and by some of its larger com­peti­tors.

“Hope is not a good strat­egy. We’re tak­ing ac­tion now and fo­cus­ing on the things that we can con­trol,” Peyto pres­i­dent and CEO Dar­ren Gee said Fri­day of the com­pany’s strat­egy fol­low­ing the drop in nat­u­ral gas prices.

Gee said he ex­pected other gas pro­duc­ers would also re­duce spend­ing over the course of the next year be­cause gas prices are lower than the in­dus­try’s av­er­age sup­ply costs.

“If they don’t, I think they’re ex­pos­ing their bal­ance sheets to some sig­nif­i­cant dan­ger in the fu­ture,” he said.

“I don’t’ think Peyto will be alone in mod­er­at­ing cap­i­tal spend­ing,” GMP FirstEn­ergy an­a­lyst Robert Fitz­mar­tyn said.

Shares in the com­pany surged six per cent by midday Fri­day in Toronto af­ter the mar­ket di­gested Peyto’s plans.

Peyto’s re­lease con­tained other an­nounce­ments, in­clud­ing the re­tire­ment of its chief op­er­at­ing of­fi­cer Scott Robin­son and the be­gin­ning of a share buy­back pro­gram. But among the most sig­nif­i­cant is a change in the way it mar­kets its nat­u­ral gas.

The com­pany had pre­vi­ously sold 100 per cent of its pro­duc­tion into Al­berta’s AECO nat­u­ral gas mar­ket, which is over­sup­plied and ham­pered by pipe­line con­straints and out­ages that have at times pre­vented gas com­pa­nies from ac­cess­ing stor­age.

Now, Peyto will work to sell 40 per cent of its pro­duc­tion into the AECO hub, to link an­other 40 per cent of its pro­duc­tion to the NYMEX price — which is a pre­mium price over AECO — and to sell the re­main­ing 20 per cent di­rectly to in­dus­trial cus­tomers within Al­berta.

“We’ve come to mis­trust the AECO hub a lit­tle bit,” Gee said of the mar­ket­ing strat­egy, adding it is “a medium-to longer-term strat­egy to break our­selves away from this AECO mar­ket.”

At mid-day Fri­day, NYMEX prices were up close to three per cent to US$3.20 per gi­ga­joule. By com­par­i­son, AECO closed at $ 2.10 per GJ on Thurs­day and fu­tures con­tracts put its longterm price at $1.35 per GJ.

Fitz­mar­tyn said the new strat­egy likely would be wel­comed by investors be­cause of Peyto’s large ex­po­sure to the AECO mar­ket and Tran­sCanada Corp.’s nat­u­ral gas pipe­line sys­tem within the province, which has been crit­i­cized for out­ages and pinch points along im­por­tant de­liv­ery routes.

“They might have lost a lit­tle cred­i­bil­ity for not do­ing so ear­lier,” Fitz­mar­tyn said of Peyto’s di­ver­si­fi­ca­tion strat­egy.

Still, Fitz­mar­tyn said he ex­pects Peyto would be suc­cess­ful in di­ver­si­fy­ing its mar­kets and in find­ing in­dus­trial cus­tomers to take its nat­u­ral gas, es­pe­cially given that util­i­ties will burn more gas as coal- burn­ing power plants in Al­berta are re­tired.

HOPE IS NOT A GOOD STRAT­EGY. WE’RE TAK­ING AC­TION NOW.

LEAH HEN­NEL / POST­MEDIA NEWS

Peyto CEO Dar­ren Gee says with the re­cent drop in nat­u­ral gas prices, the firm is now em­bark­ing on a “strat­egy to break our­selves away from this AECO mar­ket.”

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