PEYTO EXPLORATION & DEVELOPMENT CORP. $18.87 - Toronto symbol PEY

PEYTO EXPLORATION & DEVELOPMENT CORP. $18.87 (Toronto symbol PEY; Shares outstanding: 133.1 million; Market cap: $2.5 billion; TSINetwork Rating: Extra Risk; Dividend yield: 3.8%; www.peyto.com) produces and explores for oil and natural gas in Alberta. In response to Ottawa’s income trust tax, Peyto converted from a trust to a dividend paying stock on December 31, 2010.

Peyto’s average daily production of 36,390 barrels of oil equivalent (including natural gas) is 89% gas and 11% oil.

In the three months ended September 30, 2011, Peyto’s cash flow rose 34.8%, to $0.62 a unit from $0.46 a year earlier. The shares trade at 7.1 times the company’s forecast 2012 cash flow of $2.65 a share. Peyto’s long-term debt of $490 million is a low 19.6% of its $2.5-billion market cap.

The company likely spent $375 million on exploration and development in 2011. It hasn’t yet announced its plans for 2012. Exploration success has raised its production by 53.1% in the last year.

Before it converted, Peyto paid a monthly distribution of $0.12 a unit, but it has since cut that to $0.06 a share. It has tax pools that it can use to offset the trust tax until 2014, but the lower payout lets Peyto put more of its cash flow toward raising its production. As well, the payout is now a dividend, so it benefits from the dividend tax credit if you hold your shares outside an RRSP or a RRIF.

Peyto Exploration & Development Corp. is a buy.

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