In a huge departure from tradition, Peyto's CEO Jean-Paul Lachance, freshly at the helm, flexed his muscles with the splashy acquisition of Repsol's Canadian assets – consisting primarily of infrastructure and producing acreage in the Greater Edson (Deep Basin, and Wild River) area, a handful of scabby Saskatchewan working interests, and non-producing Frontier assets in the Yukon, Northwest Territories, and Nunavut. While we already see Peyto as on the high end of levered, and the general lack of cashflow from this asset means it's not leverage neutral on our 2024e estimates - we view the transaction very positively, and the company's debt burden as manageable, even if higher than peers, owing to their active hedge-book. 

We take comfort knowing, and think prospective shareholders and bulls alike, should take comfort knowing that Peyto has an exceptional understanding, and familiarity with the acquired assets, and is extremely good at high grading inventory - as they have in the past. Along with the fact there hasn't been a well completed on Repsol acreage since 2018 - there will be positive incremental benefits for Peyto when they shift drilling capital from existing acreage, to Repsol's higher IRR inventory. Peyto will deliver not only a refreshed corporate capital efficiency picture, but should realize additional upside to Repsol's 2018 type curves given new completions design (as Bonavista, and Tourmaline have both derisked). Peyto’s own inventory picture before this deal was becoming increasingly grim; as is the hallmark of Deep Basin resource (its deposition, and repeatability is far inferior to the Montney, or other shale plays); but Peyto largely solves this immediately with this transaction. 

Repsol acreage comes furnished with high return locations that Peyto is intimately familiar with. We model the new-completion Notikewin locations that Peyto can immediately start drilling upon deal-close as producing 12-20MMcf more gas in the first 12 months, per 100m, over their legacy program. Incremental cashflow of ~$0.8MM per well. Peyto is acutely aware of their inventory, and we believe given familiarity with the acquired asset, they'll be able to hit the ground running with immediate high-grading of their drilling program, which should work to move the acquisition into accretive territory, along with lower their operating costs per BOE meaningfully as they can fill out the Wild River and Edson processing facilities (currently at 50% & 30% utilization respectively). If there's an operator we are confident will excel with this asset, it's Peyto.

We really cannot understate how good Peyto is managing their inventory, not only knowing which locations to drill to maximize immediate cashflow, and NPV_10%, but improving recovery and efficiencies without material degradation to frac tonnage, and lateral foot adjusted well performance. While Peyto models their current inventory as having a ~$7MM NPV_10% on average, they model the acquired locations as having a ~$10MM NPV_10% on average, and we see similar numbers from our model - all said, there will be immediate accretion from reworking drill schedules. 

If you’re seeking a well-balanced producer to add pure gas exposure, Peyto is a good option given their fat margins, and "vertically integrated" style, but their capital stack is debt heavy, and their capital return program is dividend heavy. For the same price, growing at the same speed (with a better commodity mix), you can own Hammerhead. For the same price, growing at twice the pace in the "vogue" Montney, you can own Crew. Paramount carries no debt, and retains acquisition flexibility like Peyto, with similar gassy assets across the portfolio (but with more desirable inventory). On a holistic scale, Peyto ranks incredibly high - a business many should be extremely envious of, though we believe on the criterion incremental shareholders are judging energy equities by, Peyto fails to remain notable. Perhaps therein lies the opportunity to buy Peyto even cheaper than today, and given the sheer durability of Peyto's business, we would certainly be buying hand-over-fist at say <3x EV/DACF. But don’t lose sight of the long-term improvement Peyto has delivered today.

There is no arguing that Peyto is a quality issuer - even if it's our view that their traditional business may not make for the hottest stock on the TSX, there aren't many other names where you can find 10% cash yields, and leverage that has a shot at meaningfully improving (and wasn't irresponsibly used to grow production for the sake of it). We are not the first ones that think Peyto should transition away from dividend-based returns, and we likely won't be the last. We also won't be the only ones to be violently validated by management when they do execute. 

It feels right to want to add Peyto on days when the market is down, when you can lock in a 11% or higher yield, and know that the operational team is best in class, and complemented only by a marketing team that will ensure the dividend is likely to be covered. We'd prefer this strategy over a buy-and-hold position for a catalyst-lite, predictable name like Peyto (with really the only major news coming quarterly with deleveraging updates). Given the high dividend, we prefer Peyto for cash yield, rather than a DRIP candidate, and adding $12/sh gives you strong line of sight to a >14% 10-year IRR.