Peyto Exploration: Far-Fetched Explanations

Looking at Peyto, for instance, it was suggested that because our capital expenditures in 2017, plus our dividend, exceed our projected funds from operations, that this was, or is, a bad thing. That type of thinking struck me as illogical (much the same way that half-cycle economics do) and not because leveraged returns can be very powerful but more because if you carry that thinking through the logical conclusion, I don’t think that’s actually where investors want to end up.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

As you can see, for Peyto’s (PEY) CEO, the high dividend doesn’t matter. There are two points of interest presented in June’s Report:

Firstly, capital investments are ultimately funded from cash flows […]

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

In other words, if you borrow money, overspend your cash flow, and pay the bank the next year, your capital expenditures are funded from cash flow. But it’s not what’s happening at Peyto’s, because debt isn’t repaid.

[…] and secondly, that material profits are generated.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

However, if generating material profits isn’t possible, and you can’t have high earnings, you need to make your stock trade on the basis of cash flow instead.

When E&P companies are fully taxable they generally don’t trade on before tax cash flow multiples, they trade on after tax earnings multiples. But if you don’t generate very much in the way of earnings, as illustrated in the example above, you won’t be trading on much. So like I said, I don’t think this is where investors actually want to end up. I suspect they would much rather companies continue to trade on before tax cash flow multiples, which requires tax shelter or pools that can only be generated from capital expenditures well in excess of cash flow. Thus the flaw in the concept of free cash flow only.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

Lastly, the CEO lists a couple more reasons in July. Those aren’t more convincing.

Perhaps one of the single greatest reasons we pay a dividend is out of respect for the rightful owner of the money. As a management team, we invest our shareholder’s capital. True, the vast majority of the Peyto team are also shareholders, but it doesn’t change the fact that this is not Peyto’s money – it’s your money.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

A steady dividend or distribution also broadened our investor base, as those investors that required a dividend could now invest in Peyto. The broader the investor base, the more liquidity we provide for all shareholders. A variable or sporadic dividend doesn’t accomplish this.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

A steady dividend or distribution also broadened our investor base, as those investors that required a dividend could now invest in Peyto. The broader the investor base, the more liquidity we provide for all shareholders. A variable or sporadic dividend doesn’t accomplish this.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

Not for republication on Seeking Alpha.

Point Loma Resources: Insider Ownership

Here are the current holders of Point Loma Resources (PLX).

IndividualRoleCommentsShares
Evenergy Company Ltd.InvestorJianjun Cui, Director of Dayou Energy Ltd., the parent company of Evenergy Company Ltd., is on the Board of Directors8,375,000
Terry MeekDirector, CEO1,922,691
Doug DafoeDirectorCEO of Ember Resources Inc.115,690
Steve DabnerDirector, ChairmanVP Exploration of Madalena Energy Inc.60,000
Jay ReidDirector0
Donald BrownDirector1,171,244
Kevin BakerDirectorDirector at Calfrac Well Services Ltd.6,052,011
Al KroontjeInvestorOwner of Kasten Resources Inc.4,410,291
Richard YurkoInvestor3,981,535

Insiders own 22% of outstanding shares.

Disclosure: I am long PLX. Not for republication on Seeking Alpha.

Painted Pony: Making Sense Of The Guidance

Fellow contributor Dutchtender made me realize there is something wrong from Painted Pony Petroleum’s (PONY) guidance of January 2017 and May 2017.

Painted Pony - January 2017 & May 2017 Guidance

Guidance2017 Production (boe/d), Liquids Pourcentage2018 Production (boe/d), Liquids Pourcentage2017 Leverage (YE Net Debt/CFO)2018 Leverage (YE Net Debt/CFO)
May 201748,400 (8%)84,800 (7%)1.51.2
January 201748,000 (10%)72,000 (11%)1.31.2
August 201646,00070,0001.91.4

Source: Corporate presentations

Something is going on. Leverage is increasing considerably despite AECO prices being somewhat stable and despite adding over 60 million new shares. More surprisingly, leverage fell from the August 2016 guidance to the January 2017 guidance, despite lower AECO prices. Let’s find out what is causing this.

Painted Pony - 2017 & 2017 Capital Expenditures

Guidance2017 Capex (C$M)2018 Capex (C$M)Total (C$M)Production Growth (boe/d)Efficiency (C$/boe/d)
May 201734830164961,60010,536
January 201731938570449,00014,367

Source: Corporate presentations

The company is more efficient. The additional leverage was not because of higher capital expenditures.

Painted Pony - Cash Flow From Operations

Guidance2017 CFO/Mcf (C$/Mcf)2018 CFO/Mcf (C$/Mcf)
May 20171.411.55
January 20171.621.85

Part of the problem is that less cash will go into Painted Pony’s coffers. The changes are staggering: cash flow per unit decreases 13% in 2017 and 16% in 2018.

Lastly, I think the biggest reason is the new way leverage is calculated in these presentations. In the recent presentations (January and May 2017), leverage is taken as year-end net debt to Q4 CFO annualized. Because Painted Pony’s production growth is achieved primarly at year-end, the cash flow is substantially higher in Q4 than the average in the rest of the year.

As such, the substantial increase in leverage is due to the way leverage is calculated, to 20% higher costs, and, to a lesser extent, slightly lower realized prices and slightly lower liquids production.

Disclosure: I am long PONY. Not for republication on Seeking Alpha.

Corridor Resources: The Numbers

Here is what happened since we know that Hydrocarbons Anticosti LP is negotiating with the government.

CDH StockCharts.com April 12

Source: StockCharts.com

Corridor’s (CDH) stock went from C$0.42 to close at C$0.45/share at 5.5X average volume for total upside of C$2.7M.

PEA StockCharts.com April 12

Source: StockCharts.com

Petrolia’s (PEA) stock went from C$0.14 to close at C$0.18/share at 7.0X average volume for total upside of C$4.3M.

These gains have evaporated since.

Disclosure: I am long CDH. Not for republication on Seeking Alpha.

Must-Read: Canadian Natural Gas Producers And The OPEC Deal

Alliance offers natural gas producers more access to the east as West Coast LNG prospects fadeFinancial Post

TransCanada’s natural gas pipeline deal with producers just saved the industry from losing US$25 billionFinancial Post

OPEC’s misleading narrative about world oil supplyBelfer Center

Saudis are right back where they startedBloomberg Gadfly

Not for republication on Seeking Alpha.