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Peyto (TSX:PEY) is a Calgary-based oil and gas company that participates in exploration, development, and production in Canada. The company currently has a dividend yield of 8.60%, which is substantial.
Peyto’s market capitalization is currently $460 million, and it reports a 52-week high of $11.66 and a 52-week low of $2.57 with a closing price of $2.79 at November 20, 2019.
An interpretation of the numbers
For the nine months ended September 30, 2019, the company reported a strong balance sheet with retained earnings of $70 million, up from $(30) million the prior year. This is a good sign for investors, as it indicates the company consistently generates net income with more cumulative years of net income than net losses.
Total assets are down $101 million, driven by a $66 million decrease in derivative financial instruments, which are used by the company to hedge risk. Total liabilities increased slightly by $30 million driven by an $80 million increase in its long-term debt.
Unsurprisingly, total revenues are down from $353 million in fiscal 2018 to $365 million in fiscal 2019. The company reported a decrease in gains from risk-management contracts from $140 million to $36 million in fiscal 2019. Given total expenses of $309 million (previous year $346 million), the company ended the year with a pre-tax income of $56 million and after-tax income of $56 million (due to a deferred income tax recovery).
The company’s cash flows are strong with operating cash flows of $242 million. The decrease from $384 million in fiscal 2018 is due to a $74 million gain in deferred income tax. Peyto issued $100 million in senior notes, while subsequently paying down the same amount. It also paid down $20 million of its bank debt and continues to pay dividends.
The ending cash balance of $592,000 is not ideal. I will touch on this below.
But wait, there’s more
Looking at the company’s notes to its financials indicates a couple of important items.
Firstly, the company has credit facilities total $1.3 billion, which consists of a $1.26 billion production line and $40 million for working capital. Total outstanding amount as at September 30, 2019, is $510 million, which represents a utilization rate of 39%. Given this utilization rate, the company still has access to $790 million in available credit, which allows it to grow the business and conduct its day-to-day operations. Thus, I am not concerned about its low cash balance.
Secondly, the company derives its revenues primarily from natural gas (62%) and natural gas liquid sales (38%), not including derivatives. Given the current slump in natural gas prices, Peyto’s revenues are unfairly suppressed, as revenues are directly correlated with commodity prices. I am bullish on natural gas prices and believe that investors purchasing shares of the company now will be generously rewarded in the future.
Foolish takeaway
Investors looking to diversify their portfolios and purchase shares of an oil and gas company should consider buying Peyto. The company reports positive retained earnings (which is an impressive feat in the oil and gas industry) coupled with a credit facility that’s 61% unutilized and a company that derives all of its revenues from natural gas and natural gas liquids (which is currently in a slump).
As natural gas prices increase, investors in Peyto will be generously rewarded.
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Fool contributor Chen Liu has no position in any of the stocks mentioned.
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