I took the time to listen to the Peyto (OTCPK:PEYUF) Conference Call yesterday. As a long time shareholder, it was the same old news…working hard to generate maximum returns on every dollar spent.
I took three notes away from this call. The third is another competitive advantage that they focus on.
1) Taxes and converting back to a corporation. Peyto is converting back to a corporation at the end of the year. They have approximately $850mm in tax pools that will shelter income for three years. Obviously, they will be spending more capex during that time and they estimate that will further push the tax problem out another 2-3 years.
2) I quote Darren Gee, “when I meet with investors I tell them we don’t want gas prices to go up.” Now, that is incredibility ironic. You will never hear another O&G CEO make that statement. Obviously, Darren wouldn’t mind the additional cashflow from the higher prices, but it will increase competition. Essentially, the low gas prices have created a monopoly for Peyto. They don’t have to worry about service cost inflation and they are earning very good returns at current prices.
3) Peyto not only wants to earn high return on capital, but they want to turn the capital expenditures around as fast as possible. Now, a lot of energy investors could learn something here. Spending huge amounts of money on land doesn’t generate any return till the first well starts producing. The strategy of buying up the hottest play (at huge prices), and screwing around for a few years doesn’t work and is a huge cost. If you can have the shortest turn around from capex to cash generation, you minimize the period where capital is not earning, but costing you.
Anyway, Peyto should be a case study for Harvard MBAs. With their clear focus on maximizing returns while continually minimizing costs, what more can you ask from your management team?
As Warren Buffett has said, the best management teams don’t show up for work one day and decide to cut costs. It should come naturally to them, just like breathing. At Peyto, they continually strive to cut costs in order to maximize returns.
They also just announced they are raising $125 million in equity to accelerate their drilling opportunities. While I am not a huge fan of any company I own raising equity (unless grossly overvalued), I have full faith in Darren Gee (the CEO) and Don Gray (the Chairman & Founder) in managing the business.
Disclosure: Long PEY-UN.TO