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

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