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Monthly Dividend Stock In Focus: Peyto Exploration & Development Corp.


Updated on October 18th, 2024 by Aristofanis Papadatos

Energy stocks oftentimes offer highly attractive income yields, since they are not spending a lot on growth. Instead, many energy stocks keep their production more or less stable while returning a large portion of their cash flows to their investors.

This is why many retirees and other income investors like to invest in energy stocks and their above-average dividend yields. Most energy stocks make quarterly dividend payments, but there are outliers.

Peyto Exploration & Development Corp. (PEYUF) is one such outlier, as it makes monthly dividend payments.

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Peyto Exploration & Development (PEYUF) offers a dividend yield of 8.8% at current prices. This is a very high yield, which, in combination with the monthly dividend payments, provides for a huge and very smooth income stream.

These dividend properties make Peyto Exploration & Development look attractive to income investors. This article will discuss the investment prospects of Peyto Exploration & Development in detail.

Business Overview

Peyto Exploration & Development, which was once known as Peyto Energy Trust, is a Canada-based upstream energy company. Peyto engages in the exploration, development, and production of both oil and natural gas. The company was founded in 1998 and is headquartered in Calgary, Canada.

Today, its market capitalization is US$2.2 billion, meaning it is not among the largest oil companies in Canada or the world. Still, at least in the natural gas space, Peyto is among the top five producers in Canada by production volumes.

Source: Investor Presentation

Peyto is focused on the Alberta Deep Basin region, where it holds a sizeable asset base with vast proven reserves. These reserves give Peyto a long reserve life, meaning the company could produce from its existing assets for a long period of time. But since Peyto adds to its reserves constantly via new exploration, it can be expected that its reserve life will remain on the rise.

Importantly, Peyto is the lowest-cost producer in the region in which it is active. As a result, Peyto will generate above-average margins in all market environments, and it might still be profitable in a commodity price environment where many of its peers are not profitable any longer.

The low breakeven costs help avoid losses in bad times and make Peyto a less risky investment, relative to higher-cost producers, which will more easily be forced to generate net losses during bad times.

Growth Prospects

While many energy companies do not invest a lot for growth, Peyto has a pretty strong growth track record. In part, this was made possible by the fact that Peyto was still a pretty small company in the past, which made it easier to maintain a strong relative growth rate for a longer period of time.

Source: Investor Presentation

As shown above, over the last 23 years, Peyto has managed to grow its production per share, its reserves per share, its FFO-per-share, and its net present value per share at a double-digit average annual rate. While there are temporary ups and downs in all of these metrics, depending on the prices of oil and natural gas during every single year, the long-term trend is clearly upwards and to the right.

Some of Peyto’s past growth has been driven by acquisitions, such as the 2021 PrivateCo acquisition, which added 20 wells to Peyto’s portfolio, while the Property acquisition, which was made in 2022, added 12 wells to Peyto’s business.

Nevertheless, Peyto has also been investing in organic growth. It is likely that the company will continue to pursue a combination of organic and inorganic growth in the future.

We believe that increased regulation by governments and regulatory bodies will make growth harder to achieve, while the larger production and earnings base will also make it harder to maintain a high relative growth rate.

Future business growth and earnings growth will thus likely be lower compared to the double-digit pace we have seen in the past, but Peyto should be able to maintain meaningful growth going forward.

Dividend Analysis

Like many other energy stocks, Peyto is seen as an income investment by many individual investors. And rightfully so, since the company offers a very attractive dividend yield of 8.8%, based on a monthly dividend payout of CAD$0.11 and a current exchange rate of CAD$1.37 per USD, with Peyto trading at US$11.00 right now.

Based on the earnings-per-share of US$1.12 that Peyto is forecasted to earn in 2024, the payout ratio is 87%. This is a high payout ratio, particularly given the high cyclicality of the oil and gas industry. Therefore, the dividend is not safe.

On the bright side, Peyto has a healthy balance sheet. Its net debt is standing at $1.9 billion, which is 86% of the market capitalization of the stock and hence it is manageable.

In addition, the company has a strong interest coverage ratio of 6.0, despite the nearly 23-year high interest rates prevailing right now. As a result, the dividend appears safe in the short run, in the absence of a downturn of the energy sector.

Peyto has a history of returning a large portion of its profits to shareholders over time, thereby proving its shareholder-friendliness. Peyto has generated profits of CAD$3.4 billion in the past (cumulative), and CAD$2.8 billion of that was paid out to investors via dividends.

Since Peyto hedges a large portion of its production, it somewhat mitigates the swings of its profits caused by the cycles of the prices of oil and gas but it remains sensitive to these cycles.

Final Thoughts

Peyto Exploration & Development Corp. is not very well known, but the company has a highly successful track record. That holds true when it comes to production and earnings growth, but also when it comes to returning cash to the company’s owners via dividends.

Peyto trades with a very high 8.8% dividend yield today, and that dividend is covered based on the forecasted earnings for the current year. Since Peyto makes monthly dividend payments, investors get almost 0.75% of their principal per month at current prices, which is very intriguing for retirees and other income investors that live off their dividends.

Peyto is currently trading at 9.9 times this year’s expected net profit, which is a reasonable valuation for an energy stock. It would not be surprising to see Peyto’s valuation somewhat expand over the coming years, which would add to Peyto’s total return outlook.

Thanks to its exceptionally high dividend yield, some business and earnings growth potential, and its potential for some expansion of its valuation level, Peyto could deliver highly compelling total returns going forward.

Of course, investors should remember that Peyto is still an E&P company and is thus exposed to commodity price movements.

While its low break-even costs make it more resilient than most peers, Peyto is still greatly affected by oil and natural gas price movements and hence it carries a significant amount of risk.

The stock is suitable only for the investors who can stomach the dramatic cycles of the oil and gas prices.

Don’t miss the resources below for more monthly dividend stock investing research.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

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