Peyto IC - Pitch

KENNETH WOODS
PORTFOLIO MANAGEMENT PROGRAM
All information remains proprietary to the Kenneth Woods Portfolio Management Program and it’s authors
Company (TSX:PEY)
Energy Coverage February 4th 2016
Peyving the way for growth!“ ”
Initiating coverage – BUY Report!
Target Price: C$34.95, representing 23.0% upside!
Current Price : C$28.40!
Investment thesis
Following the decline in the natural gas sector, we are
shifting the portfolio to better perform in this bearish
environment. The company has the lowest cost structure in
the industry and coupled with their counter-cyclical
approach, Peyto is better positioned to outperform its peers
in the next coming years. Also, the company has a best in
class management team that has been able to reduce costs
as well as increase its reserve base in the deep basin
Catalyst
•  Strong Management team: Peyto has a strong
management team that has been effective at keeping
extraction costs low and improving its capital efficiency
•  Low Cost Operations: While natural gas prices may be
approaching historical lows, Peyto has all in cash costs of
$0.86 per Mcfe, primarily a result of two factors: Its
concentrated experience and ownership of wells in the
deep basin and its strategy of chipping away at costs.
•  Resource Growth Potential: Due to its stacked
formations, large undrilled inventory, and potential land
purchases, the company is well positioned to grow its
reserves in this bearish commodities environment
•  Counter-cyclical Approach: Peyto is focused on
executing a counter-cyclical business strategy and
aggressively increase its production during low
commodity prices
Valuation
Our C34.95 one year target price is based on the weighted
average of Peyto’s NAV and DCF valuation
LTM Price Chart
Capitalization Table
Key Data
Price (04-Feb-2016) C$28.40
FD Shares outstanding (m) 159.0
Equity value (C$m) C$4,516.1
(+) Debt 1,479.0.
(-) Cash & equiv. -
Enterprise value (C$m) $5,995.2
FY 2014A 2015F 2016F
Sales (C$m) 782.5 644.7 681
EBITDA (C$m) 649.7 485.9 488.1
EPS (C$) 1.71 0.49 0.64
EV / EBITDA (C$m) 9.2x 11.7x 11.6x
EV / Daily
Production
12.0x 12.3 12.3x
Alvy Mizelle – Fund Manager!
mizellealvy@gmail.com!
+1 514 925-3015!
Carolina Serrat Morra – Fund Manager!
carroserrat@hotmail.com!
+1 514 214-7001!
!
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Feb-‐15
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Feb-‐16

KENNETH WOODS
Table of contents
Company History 3
Reserves and Operating Areas 7
Production and Reserve Growth 11
Drilling Locations and Gas Processing 12
Investment Catalyst – Strong Management Team 14
Investment Catalyst – Low Cost Operations 17
Investment Catalyst – Resource Growth Potential 21
Investment Catalyst – Counter-cyclical Approach 23
Valuation – Operating Model 25
Valuation – DCF 28
Valuation – NAV 30
Risks 32
Appendix – Comparable Companies 34
Appendix – Management Team 35
Appendix – Sources 36

KENNETH WOODS
1998-2004
In 1998, Peyto was founded as a growth company focusing on the Cardium
liquids present at Sundance. The company developed a simple but effective
strategy of being a low cost producer in order to generate sustainable returns for
investors regardless of commodity prices. The company decided to focus on the
Sundance region due to the presence of many fundamentals. The Cardium
liquids in this region was very tight, offering a large resource base and a longer
resource life due to its low decline rates. Furthermore, the Sundance region was
also composed of additional resource opportunities composed of multi-stacked
areas that offered Peyto economies of scale. At the time, investors did not fully
believe Peyto regarding their reserve potential (number of wells) mainly since the
technology to extract the oil was not present at the time (only vertical drilling was
available). Despite investor concerns, from 1998 to 2003, the company
successfully grew from a micro-chip to the lowest cost producer in Western
Canada, producing 15,000 boe/d in 2003, with the Sundance region being their
primary growth driver.
In the fourth quarter of 2003, Peyto converted from a corporation to a Trust for
tax advantages and to provide a balanced approach for investors between
growth and income. This move was favourable for the company since the lower
cost of capital complimented its low cost structure and long reserve life (a small
change in cost of capital has a disproportionate change in full life value). The
second reason for adopting a Trust structure was that their drilling program was
becoming less capital efficient as well densities heightened and since they
experienced lower than average drilling results.
0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan-‐1998
Jan-‐1999
Jan-‐2000
Jan-‐2001
Jan-‐2002
Jan-‐2003
Jan-‐2004

Stock
Price
(C$)

Exhibit 1
1998-2004 Stock Price Performance
Company Overview
History

KENNETH WOODS
The Cardium area still had a large amount of resources and reserves but the
pace at which it could be pulled out of the ground was slower as Peyto was
forced to target areas and layers with tighter and tighter permeability. This
caused them to experience lower returns on invested capital and coupled with
the large inflation of services costs; their capital efficiency was deteriorating
quickly. Therefore adopting a Trust structure was due to a combination of cost of
capital advantage combined with management intent to reduce the focus on
growth at a time where marginal rates of return on invested capital had
increased.
2005-2009
The year 2004 remained one where Peyto posted outstanding growth but
2005-2008 really constituted its “dark period” where the more modest capital
efficiencies/modest returns on invested capital became more obvious.
Following 2004, Peyto’s share price performance was a function of the erosion
that was quietly occurring. The company was biding time, awaiting either an
upward shift in natural gas prices to improve returns on invested capital, a new
layer of development big enough and with better returns or a new technical
innovation to drive a fundamental improvement on capital returns. Out of the
three elements, the latter of these became the driver of Peyto’s growth after
2008.

22,245

22,250

21,134

20,191

19,133

42,100

40,300

26,500

33,100

-‐

7,500

15,000

22,500

30,000

37,500

45,000

17,000

18,000

19,000

20,000

21,000

22,000

23,000

2005A
2006A
2007A
2008A
2009A

Capital
eﬃciency
($/boe/d)

ProducMon
(boe/d)

ProducMon
Capital
Eﬃciency

Exhibit 2
2005-2009 Production and Capital Efficiency
Company Overview
History

KENNETH WOODS
2009-2015
In 2009 Peyto introduced multi-stage development drilling in order to expand its
resource base. The impact of this new technology was almost immediate and
reflected that Peyto’s resource potential was still large but that they needed to
find higher capital returns from higher commodity prices or better capital
efficiency. Horizontal multi-stage fracking delivered significantly better capital
efficiencies and enabled them to grow their production faster as shown by the
graph below:

39,399

49,754

67,296

83,251

85,620

17,500

17,600

15,100

16,800

12,000

-‐

4,000

8,000

12,000

16,000

20,000

-‐

20,000

40,000

60,000

80,000

100,000

2011A
2012A
2013A
2014A
2015F

Capital
eﬃciency
($/boe/d)

ProducMon
(boe/d)

ProducMon
Capital
Eﬃciency

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-‐2004
Jan-‐2005
Jan-‐2006
Jan-‐2007
Jan-‐2008
Jan-‐2009
Jan-‐2010
Jan-‐2011

Stock
Price
(C$)

Exhibit 4
20011-2015 Production and Capital Efficiency
Company Overview
History
Exhibit 3

KENNETH WOODS
0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Jan-‐2009
Jan-‐2010
Jan-‐2011
Jan-‐2012
Jan-‐2013
Jan-‐2014
Jan-‐2015
Jan-‐2016

Stock
Price
(C$)

This global improvement in capital efficiency was a positive to all producers in
the beginning but too much of a good thing can also become a bad thing. The
potential for horizontal multistage fracking to improve marginal economics in
virtually all pre-existing resource developments, at the same time fracking
liberated previously trapped resources, created too much resource potential.
This caused the North American market to be flooded with natural gas, causing
natural gas prices to collapse. Now the company is using its proven counter-
cyclical approach to grow reserves aggressively in a depressed natural gas price
environment to generate superior shareholder returns.
Exhibit 5
Company Overview
History

KENNETH WOODS
Peyto’s land base covers 400,000 net acres of land located in the heart of the
Deep Basin of west central Alberta. The company has two core areas of
operations: The Sundance and Brazeau region. In terms of specific operating
areas, Peyto is focused on the Spirit River group including the Wilrich, Notikewin
and Falher, with the Bluesky emerging as the next area of growth. As of
FY2014, approximately 36% of total corporate production comes from the
Wilrich, with 24% from the Falher, 14% coming from the Notikewin and 13% from
the Cardium. Peyto is one of the most active drillers in the Deep Basin and has
amassed an inventory of greater than 1,300 locations. The Deep Basin is known
for its high heat content natural gas and as a result, the company receives a
premium for the natural gas it produces.
Reserves and
Operating Areas
Peyto Lands
Exhibit 6
2014 Total
Production of
76,372 boe/d

KENNETH WOODS
Greater Sundance Overview
The Greater Sundance area, which includes Sundance, Oldman, Wildhay,
Nosehill and Ansell, is Peyto’s largest producing area focused on the stacked
multi-zone potential including the Cardium, Viking, Notikewin, Falher, Wilrich,
Bluesky, and Cadomin formations. The Company currently owns five facilities
in the area with total processing capacity of ~545 Mmcf/d.
Brazeau River Overview
Peyto’s relatively new core area resides at Brazeau River where the
Company has assembled ~116 gross sections (114 net) of land with current
operations focused on the Wilrich formation. Peyto now has over 40 Mmcf/d of
sweet gas processing capacity at Brazeau and, as of October 2014, completed a
23 km gathering line linking Peyto’s Brazeau gas plant to its south acreage.
Highlighted in the map below, Peyto has realized significant drilling results from
the Wilrich with peak IP30 rates averaging 642 boe/d.
Reserves and
Operating Areas
Great Sundance Area Overview
2014
Production of
~70,000 boe/d
Exhibit 7

KENNETH WOODS
Reserves and
Operating Areas
Brazeau River Overview
Exhibit 8
2014
Production
of ~2,000
boe/d
Exhibit 9
Returns and IRR per Region
Sub-Operating Areas
In terms of operating areas, the company classifies tem as the Cardium,
Notikewin, Upper Falher, Middle Falher, Wilrich, Bluesky, Brazeau Falher and
Brazeau Wilrich. As shown in the table below, the company generates a high
lRR for all of its operating areas, with the Bluesky and Upper-Falher
representing the highest IRR’s areas with 43% and 48% IRR respectively
Upper Middle
Brazeau
Brazeau

Cardium Notikewin Falher Falher Wilrich Bluesky Falher
Wilrich
All
Costs (in
C$
mm) 4,650 5,450 5,250 5,350 5,450 5,350 5,750 5,950
IRR (in
%) 22% 28% 48% 22% 23% 43% 32% 20%
NPV10 (in
C$
mm) 1,861 2,930 4,810 2,275 2,676 4,407 3,543 2,168
Peyto
Internal
Full
Cycle
Economics

KENNETH WOODS
Advantage of drilling in the deep basin
The deep basin is known for producing high heat content gas from multiple
producing horizons. Also, the lack of water in the formations is another draw for
producers as it eliminates the need for handling or disposal of water, which
again, helps in reducing operating costs. As gas prices started to rise in the late
1990s and early 2000s, interest in the Deep Basin started to grow. Historically
the play was drilled using vertical wellbores and often targeting more than one
formation; however, many formations were viewed as being too tight to actually
produce. As technology evolved over the past six years, producers started to drill
horizontal wells and applied multi-stage fracture completions. This technology
has been further refined and since 2010, Peyto has moved to the point that all its
wells are now drilled horizontally with multiple fracture stimulations.
Activity levels in the Deep Basin have been relatively high since the late 1990s,
but the evolution of drilling technology has further increased interest in the area.
Where some formations were previously viewed as too tight to be a stand-alone
producer, these are now among the most prolific wells in the area due to the
formations’ relative thickness and the ability to tap incremental gas through
fracture stimulation of horizontal wellbores. Peyto has moved to pad drilling in
the Deep Basin with four formations off of a single pad. The company’s main
focus for 2016 is on the Spirit River. The Spirit River also has less variation in
rates between wells. A typical Peyto well in the Deep Basin will have a 1,200m
long horizontal leg with 150m frac spacing and an 80 ton frac. Average well costs
are between C$4.05 – 4.5 million including facility expenditures, full cycle costs
are C$4.6 – 5.1 million/well.
Reserves and
Operating Areas
Exhibit 10
Deep Basin Geological Overview

KENNETH WOODS
Reserve Growth by Region
As shown in the graph below, since horizontal drilling was introduced, Peyto has
consistently increased its daily production. From 2010 to Q3 2015, the company
increased daily production from ~20,000 Boe/d to ~90,000 Boe/d. The main
areas of growth has been the Wilrich and Falher regions which have shown 38%
and 22% 5 year CAGR growth respectively.
Acreage Growth
Furthermore, the company has also been increasing its acreage in the deep
basin to take advantage of land sales in Alberta. From 2010 to 2014, the
company has successfully increased its net acreage from 200K to 438K acreage.
With potential land expiries in the next years, the company will have further
opportunities to increase its acreage position in the Deep Basin.

820

11,500

13,500

8,000

18,800

33,000

-‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005A
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013A
2014A
2015F

ProducMon
(boe/d

Wilrich

Noitkiwen

Falher

Cardium

Bluesky

Other

Production and
Reserve Growth
Exhibit 11
Reserve Growth by Region

KENNETH WOODS
Drilling Locations and
Gas Processing
Drilling Areas
In 2014, Peyto completed a C$690 million capital program that included
drilling 125 horizontal wells and expanding corporate processing capacity to
over 100 Mmcf/d. On an annual basis, Peyto targets ~15% of its budget to be
invested on facilities. As highlighted in the table below, Peyto has booked 628
future horizontal drilling locations as of December 31, 2014, and identified over
1,700 total future horizontal drilling locations
Drilling Areas and Expected Completions
Exhibit 13
10.0
20.0
40.0
80.0
140.0
180.0
200.0
210.0
220.0
205.0
225.0
260.0
280.0
370.0
410.0
438.0
--
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
1999A 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A
NetLands(in000'sacres)
Exhibit 12
Peyto 1999-2014 Acreage Growth
Asset VT
Wells HZ
Wells
HZ
Locations

Booked
HZ
Locations
Unbooked
Badheart -‐ -‐ -‐ 56.0
Cardium 432.0 63.0 200.0 356.0
Dunvegan 5.0 1.0 5.0 -‐
Peace
River 1.0 -‐ -‐ 14.0
Notikewin 90.0 56.0 87.0 43.0
Falher 7.0 27.0 37.0 23.0
Falher -‐ 27.0 56.0 254.0
Wilrich 14.0 136.0 179.0 192.0
Bluesky 4.0 14.0 47.0 48.0
Gething 12.0 2.0 -‐ -‐
Cadomin 87.0 2.0 16.0 177.0
Total 652.0 328.0 628.0 1,163.0
Completed Remaining

KENNETH WOODS
Drilling Locations and
Gas Processing
Fully Owned Gas Plants
Infrastructure has played a significant role in Peyto’s strategy from the beginning.
The company started with the ownership of its Sundance gas plant and today,
the company owns seven gas processing facilities with 730 Mmcf/d net capacity.
The company maintains operatorship of 98% of its production and processes
96% of those volumes. Early in the company’s history, there was a significant
amount of concern/criticism surrounding the concentration of the company’s land
base and its reliance on a sole gas plant at Sundance. By staying focused, the
company has been able to maintain best in class operating costs, enabling them
to generate superior netbacks. Through the construction of additional plants, the
company has not been reliant on a single processing facility for over a decade,
but has managed to maintain higher operatorship of its production and
processing as displayed below.
Gas Plants and Ownership
Exhibit 14
(in
mmcf/d) 2014
YE 2015
YE 2016
YE WI
Oldman 125.0 125.0 125.0 100%
Nosehill 125.0 125.0 125.0 100%
Wildhay 90.0 90.0 90.0 100%
Galloway 60.0 60.0 60.0 100%
Oldman
North 80.0 120.0 120.0 100%
Kakwa 35.0 45.0 35.0 100%
Swanson 65.0 120.0 150.0 100%
Brazeau 40.0 60.0 120.0 100%
Cubank 10.0 5.0 5.0 100%
Total 630 730 825 98%
Peyto
Gas
Plants

KENNETH WOODS
0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Jan-‐1998
Jan-‐2001
Jan-‐2004
Jan-‐2007
Jan-‐2010
Jan-‐2013
Jan-‐2016

Stock
Price
(C$)

Investment Catalysts
Strong Management focused
on Shareholder growth
Strong Management focused on Shareholder growth
Peyto has a strong management team led by Darren Gee who has been the
CEO since January 2007. Over the years, management has been effective at
preserving the company’s capital by keeping extraction costs low, increasing its
capital efficiency as well as by applying a counter-cyclical approach. In the
industry, due to the depleting nature of an E&P company’s assets many
producers feel the pressure to pursue growth and add production and reserves
without focusing on costs and as a result generate lower returns. However,
Peyto’s management has a completely different approach to managing its E&P
assets as described by its CEO: "At Peyto, we have always relied on an estimate
of the IRR of a project to determine whether or not we proceed and also to look
back at the success of that decision. Our strategy has always been to focus on a
select type of investment that we feel yields the most predictable and repeatable
returns and is accompanied by the lowest cost structure so as to be the least
sensitive to commodity price variability. These opportunities also deliver the
production stream over a very long period of time so as not to expose the entire
resource to any one time price."
Therefore, the company develops and produces assets when service costs are
low, and is comfortable putting the brakes on growth when it's not profitable.
From 2006 to 2010 daily production was roughly static/declining slightly, which
was the result of a conscious decision to limit capex since they weren't seeing
the returns they wanted (capital efficiency was over $40,000 in 2005 and 2006,
comparatively was around $17,400 from 2010 onwards, with management
guidance set for $12,000 in 2015). This is expressed by CEO Darren Gee: "It
was diminishing returns and capital efficiency that caused us to curtail our capital
program which resulted in smaller production adds and declining corporate
production. In other words, exercising capital discipline was the real reason". The
company has stuck to this strategy since its creation and has enabled the
company to generate 95% Shareholder IRR and a 50% CAGR since inception
as displayed below
Peyto Share Performance since Inception
Exhibit 15

KENNETH WOODS
Contrary to industry practices of growing for the sake of growth, the company
has been able to grow its reserves and production. This has enabled the
company to increase its cash flow per share significantly from C$1.80/share in
2009 to a forecasted C$3.99 in 2015
Dividends
By applying its low cost strategy, the company has generated superior levels of
cash flow, allowing them to increase the amounts of dividends paid to
shareholders. Peyto currently distributes a monthly dividend of C$0.11/share
which equates to an annual cash commitment of ~C$203 million. In
November 2014, Peyto increased its monthly dividend by 10% to $0.11/
share which was the third dividend increase for Peyto in the last two
years. The company is also able to sustain its dividend payout by generating
superior cash flows during the depressed natural gas environments in the past
few years. As shown in the graph below the company has been able to
significantly increase its dividends paid as earnings increased.
Cash Flow Growth per Share
Exhibit 16
Dividend Growth
Exhibit 17
0.04

0.05

0.06

0.07

0.08

0.09

0.1

0.11

0.12

Mar-‐2011
Mar-‐2012
Mar-‐2013
Mar-‐2014
Mar-‐2015

Dividend
per
Share

1.80

1.85

2.18

2.02

2.74

4.19

3.99

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2009A
2010A
2011A
2012A
2013A
2014A
2015F

Cash
Flow
per
Share

KENNETH WOODS
Focus on ROE and ROCE
Management centers all its capital allocation decisions on the potential IRR the
company could generate. By keeping production and development costs at low/
decreasing levels, the company has been able to generate higher than industry
averages in terms of ROE and ROCE. As shown below, in every year, the
company has been able to generate higher than industry levels of ROE and
ROCE. Due to the depressed commodities environment, service costs are
expected to remain at all-time lows in the coming years, allowing the company to
further develop its reserves at low costs, and to maintain high levels of ROCE
and ROE
Peyto 2008-2014 ROE and ROCE Performance
2008A 2009A 2010A 2011A 2012A 2013A 2014A
Peyto
Comps
ROE -‐ 26% 28% 14% 8% 12% 19% 16% 4%
ROCE -‐ 14% 17% 10% 6% 8% 11% 10% 5%
Peyto
ROCE
&
ROE
vs.
Peers
5-‐Yr
Average
Exhibit 18

KENNETH WOODS
Low cost operations
Stable/declining Low All in Cash Costs
While natural gas prices may be approaching historical lows, Peyto has healthy
margins and a strong balance sheet. Over the past five years, the company has
generated average EBITDA margins of 81% and 83% in 2013 and 2014
respectively. The company is able to generate higher margins and all in cash
costs of $0.86 per Mcfe, primarily a result of two factors: Its concentrated
experience and ownership of wells in the deep basin and its strategy of chipping
away at costs.
By concentrating its operations in the Deep Basin, the company has been able to
gain experience in developing wells at low costs. They have been operating in
this formation for over 15 years, and because they operate almost all of their
production (instead of sharing responsibilities with partner companies or
pursuing inorganic growth), the simple compounding of experience and trial and
error has allowed them to become very specialized operators in the region,
essentially developing a wealth of knowledge in drilling Deep Basin formations.
This gives Peyto a large advantage in the industry since understanding how to
drill a formation is a nuanced process; understanding the formation's
permeability, getting the right frac solution mix and understanding how to frac the
formation are some points where heavy experience in a specific set of layers
help.
Also, over the years, the company has been “chipping away” at costs. Through
the President's Monthly Reports you can pick up on a culture of continuously
looking for and making marginal cost improvements that add up. The company is
willing to cut back production to capture better royalty rates, switching drilling rigs
and transport trucks from diesel to gas-based by providing filling stations,
developing drilling pads that save money and boost IRRs and the installation of
its own processing and deep-cut facilities are some of the initiatives CEO Darren
Gee discusses. They've also managed to control G&A costs pretty effectively by
keeping the management team surprisingly small for a company of their size (50
employees), producing 1,589 boe/d/employee for FY2014, five times more
efficient than the 309 boe/d/employee median for peers (does not include field
employees)
Peyto Operating Costs
Exhibit 19
(in
C$
mm) 2008A 2009A 2010A 2011A 2012A 2013A 2014A
Extraction
Costs
(royalties,
opex,
transport) 2.36 1.15 1.12 1.01 0.75 0.78 0.84
PDP
NPV-‐0
Recycle
Ratio 2.1x 5.4x 3.5x 2.4x 1.6x 1.5x 1.5x
Peyto's
Lean
Cost
Structure

KENNETH WOODS
Low cost operations
For example, in one of their biggest operating areas, the company has been
slowly chipping away at costs. In the Sundance region, the company has been
able to reduce average drilling costs from ~C$3.1 million per well in 2009 to ~C
$2 million per well in Q3 2015. The company has been able to decrease average
drilling costs all the while increasing its number of wells from 2 in 2009 to 30 in
Q3 of 2015. Also, the company has also reduced its number of days to reserve
replacement from 34.5 days to 17.8 days.
Operating Costs vs. Industry
The company has done an excellent job of keeping all-in cash costs at low/
declining levels by accelerating production in a period where service costs are
low. The company’s drilling and completion (D&C) costs declined from C$4.5
million a few years ago to closer to C$3.0 million. The company maintains the
lowest operational expenses compared to its peers and is the only producer
below $2.00/boe. Given depressed natural gas prices, maintaining the lowest
operating cost structure in its peer group gives Peyto an advantage in delivering
economic returns. As previously mentioned, the low operating costs can be
attributed to its concentrated asset base and ownership of its facilities. As shown
in the graph below, Peyto was by far the lowest cost (operating + transportation)
natural gas producer in the WCSB, with only Advantage Oil & Gas currently
reaching a similar cost structure. What is also important to highlight is that Peyto
has executed its low operating cost structure business model for over 15 years
and was the lowest cost producer in all of those years.
2009-Q3 2015 Greater Sundance Region Drilling Costs
Exhibit 20
3,193

2,926
2,804
2,752
2,792
2,681

2,443

1,939
2,070

4,066
3,999

4,152
4,155
4,268
4,299

4,409

4,227
4,252
34.5

29.3

23.6

21.6
22.5

21.8

20.6

16.7

17.8

0

5

10

15

20

25

30

35

40

-‐-‐

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2009A
2010A
2011A
2012A
2013A
2014A
Q1
2015
Q2
2015
Q3
2015

Drill
&
Case

Cost
/
Depth

Avg
Drill
Cost

Avg
Days
to
RR
Avg
TD

KENNETH WOODS
Low cost operations
By utilizing a low cost natural gas approach, the company has been able to
deliver a 1.8x recycle ratio (measured as netback/F&D costs) over the last three
years, which is impressive in the context of weak gas prices. This translates into
better‐than‐average returns on investment and should continue in the coming
years.
Exhibit 21
Industry Operating Costs
Exhibit 22
2006-2014 Peyto FD&A costs and Recycle Ratios
0

2

4

6

8

10

12

14

16

2000A
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013A
2014A
2015F

OperaMng
Costs
incl.
Transp.
($boe)

Trilogy

Perpetual

Paramount

Tourmaline

Bonavista

Advantage

Birhcliﬀ

Average

Peyto

Flat for the past 8 years
17

9

23

8

13

11
11
10
9

25

18

22

20

22

23

24

23
23

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

0

5

10

15

20

25

30

2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013A
2014A

All-‐in
Recycle
RaMo

OperaMng
netback

(in
C$
/
boe)

All-‐in
FD&A
Cost
Peer
Group
Median
FD&A
costs
All-‐in
Recycle
RaMo

KENNETH WOODS
Low cost operations
Even with growing Production, the company has been able to increase its
capital efficiency
From 2005-2008, high service costs and drilling less economical areas
significantly decreased the company’s capital efficiency. As previously
mentioned, Peyto established the company to control infrastructure and in turn
keep costs low; however, by 2005/2006, the model started to be tested. Although
operating costs were still best in class, its production addition costs were
escalating. The company’s drill bit production addition costs rose from C$24k/
Boe/d in 2004 to C$46k/Boe/d in 2005 and $48k/Boe/d in 2006. During this time,
Peyto recorded production addition costs that were higher than its Royalty Trust
peers on a both a drill bit and all-in basis. Following 2008, the company was able
to significantly decrease its capital costs with the introduction of horizontal
drilling. This enabled the company to drill more economical wells and coupled
with the decline in service costs, the company’s capital efficiency improved
significantly. Their capital efficiency improved significantly from 34k/Boe/d in
2008 to 18k/Boe/d in 2009 and is expected to be at 12k/Boe/d at the end of
2015. At the same time, the company has been able to increase its production
from 30,600 Boe/d in 2010 to a forecasted ~86,620 boe/d in 2015. Even with the
company expected to increase its production significantly as natural gas prices
remain low, the company is forecasted to maintain/increase its capital efficiency.
Exhibit 23
2010-2015 Capital Efficiency and Production

28,197

39,399

49,754

67,296

83,251

85,620

17,300

17,500

17,600

15,100

16,800

12,000

-‐

4,000

8,000

12,000

16,000

20,000

-‐

20,000

40,000

60,000

80,000

100,000

2010A
2011A
2012A
2013A
2014A
2015F

Capital
eﬃciency
($/boe/d)

ProducMon
(boe/d)

ProducMon
Capital
Eﬃciency

KENNETH WOODS
Resource Potential
Large resources potential concentrated and stacked that can be developed
with modern horizontal MSF.
Peyto’s land base is one of the most concentrated for an intermediate company
of this size, the drilling inventory is much greater than the acreage position would
suggest due to the stacked potential in the Deep Basin. The multi-zone potential
is consistent throughout the majority of Peyto’s acreage with the potential to
increase the liquids yield, decrease cost further as well as drilling optimization. In
most instances, Peyto will produce both natural gas and liquids from a
combination of formations within a particular play. The multi-zone offers
management the ability to divert capital in an attempt to capitalize on commodity
trends/economics within different core areas. The company currently counts
more than 1,300 horizontal drill locations, of which two‐thirds are unbooked. To
put this into perspective, the company expects to drill ~100–115 net locations in
2014. Due to the company’s low‐cost asset base, the resulting capital
efficiencies are attractive at less than C$18,000/boe/d. .
Exhibit 24
Stacked Formations

KENNETH WOODS
Ability to purchase more land due to depressed prices and land expiries
In Alberta 2010 and 2011 were record land sales. However, successful bidders
have two–five years, depending on the region of the province, to satisfy
“License and Lease Continuation & Validation” requirements to evaluate or prove
productivity of hydrocarbons. If companies are not able to meet these
requirements, the land is surrendered and returned to the Crown land bank for
future sale. Due to the current depressed commodity price environment,
Peyto will have the opportunity to accumulate significant acreage additions
from Crown land sales over the next 24 months at attractive prices
Resource Potential
Exhibit 25
Undrilled Locations
Exhibit 26
Asset VT
Wells HZ
Wells
HZ
Locations

Booked
HZ
Locations
Unbooked
Badheart -‐ -‐ -‐ 56.0
Cardium 432.0 63.0 200.0 356.0
Dunvegan 5.0 1.0 5.0 -‐
Peace
River 1.0 -‐ -‐ 14.0
Notikewin 90.0 56.0 87.0 43.0
Falher 7.0 27.0 37.0 23.0
Falher -‐ 27.0 56.0 254.0
Wilrich 14.0 136.0 179.0 192.0
Bluesky 4.0 14.0 47.0 48.0
Gething 12.0 2.0 -‐ -‐
Cadomin 87.0 2.0 16.0 177.0
Total 652.0 328.0 628.0 1,163.0
Completed Remaining
Potential Land Sales

KENNETH WOODS
Counter-Cyclical Approach
Peyto is focused executing a counter-cyclical business strategy, which is
only executable due to its low operating cost structure as discussed in its
corporate presentation “history has shown us that when natural gas and oil
prices rise, so too do service costs and industry activity levels. This results in
much greater development costs and effectively the same rates of return being
generated for higher natural gas prices. The problem is that prices tend to be
cyclical and do not necessarily stay high to justify higher development costs.”
Part of the reason they're able to execute this strategy is because even in really
low gas price environments, Peyto is still making healthy IRRs and a good level
of operating cash flow to fund part of their capital program.
Peyto employs a counter-cyclical investment strategy and invests aggressively
when gas prices are low, ensuring costs are also at their lowest and returns are
at their highest. With its counter-cyclical strategy, Peyto drilled a record number
of wells in Q3 2015(40), leading the company to hit the 100,000 boe/d mark for
the first time in its history. With 104 net wells drilled in the first 9 months of 2015,
Peyto has already drilled more wells than in all of 2013 (99) and has done so at
an average D&C cost savings of 22%. This is expressed by Thomas Gee: "So
Peyto's low costs mean we're well insulated from commodity price volatility. What
does that really mean though? If we slow down and behave in a very defensive
manner during periods of low commodity prices, much like everyone else in the
industry, having that insulation doesn't really do much for us. Where it becomes a
significant advantage, however, is if it allows us to take the opposite tactic. If we
aggressively deploy capital in the low commodity environment, much like we've
being doing for the last few years, then we are levering off this low cost
advantage to improve the returns on that capital. Things will cost less, dollars will
go further, and the returns we generate on the same kind of well will be even
better at a lower capital cost.” As shown by the graph below, the company has
significantly increased its production as natural gas prices have been declining.
As natural gas prices declined by more than 20%, annual production went from
39,399 boe/d in 2010 to a forecasted 85,620 boe/d in 2015.
Exhibit 27
0

2

4

6

8

10

12

14

-‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013A
2014A
2015F

AECO
Natural
Gas
Price
($/GJ)

ProducMon
(boe/d)

Natural
Gas
ProducMon
/boe/d)
Liquids
ProducMon
(boe/d)
Aeco
Price
($/GJ)

2001-2015 Production and Natural Gas Prices

KENNETH WOODS
Counter-Cyclical Approach
Peyto also distinguishes itself with a counter‐cyclical approach to the
development of its asset base to optimize the return on capital employed. As gas
prices rise, the company directs a higher proportion of the incremental cash flow
to dividends and debt repayment, opting to minimize the impact of the associated
increase in drilling and service costs as activity levels pick up across the basin.
The combination of low costs and premium pricing translates into better‐than‐
average netbacks for Peyto as a gas producer which, when combined with its
top‐quartile F&D costs, allows the company to achieve a benchmark recycle
ratio of 2.0x at current gas prices.
Profitable despite decline in prices
Even if natural gas prices have been severely depressed over the past couple of
years, Peyto has been able to generate healthy margins and netbacks. The
company has been able to generate netbacks of C$4.19/mcfe and C$3.65/mcfe
in the past in 2013 and 2014. This is a direct result of the company's low cost
structure as well as its counter cyclical approach which takes advantage of low
service costs. As commodity prices are expected to remain depressed in the
coming years, we see this trend continuing as well as increased investments to
increased production and reserves.

KENNETH WOODS
Production Profile
In order to forecast the company’s production profile, an analysis was completed
based on the company’s projected capital expenditures, decline rates and
management expectations for future years production. The company currently
produces mainly natural gas and is expected to increase its daily production from
~500 Mmcfe/d in 2014to 853 Mmcfe/d at the end of 2020.
Commodity Price Projections
Commodity price projections were based on current strip forward prices for the
years 2016-2020. An important element to note is that Peyto sells its natural gas
at a 30% premium to AECO natural gas prices due to its higher heat content OF
gas
Valuation
Operating Model
Exhibit 28
2015-2020 Forecasted Production Profile
Exhibit 29
2015-2020 Forecasted Commodity Prices
Peyto Exploration - Production Profile
Projected Fiscal Years Ending December 31st
2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Days in Year 365 365 365 366 365 365 365 366
Average Daily Production
Gas (MMcf) 361.9 451.0 474.7 561.4 575.6 641.3 744.8 785.0
Oil and NGL's (MBbls) 7.0 8.1 6.5 7.9 9.0 10.1 10.6 11.4
Total Daily MMcfe 403.8 499.5 513.7 608.6 629.6 701.7 808.1 853.4
Total Annual Production
Gas (Bfce) 132.1 164.6 173.3 205.5 210.1 234.1 271.9 287.3
Oil and NGL's (MMBbls) 2.5 2.9 2.4 2.9 3.3 3.7 3.9 4.2
Total Bcfe 147.4 182.3 187.5 222.7 229.8 256.1 295.0 312.3
Reserves
Proved Producing 1,251.9 1,200.0
Total Proved 89.9 2,085.0
Probable Additional 77.9 1,104.0
Total Reserves (Bcfe) 167.8 3,189.0
Total Reserves (MMBOE) 376.5 3,389.0
Reserve Life Ratio (Years) 1.1 17.5
Proved Reserves % Oil 20.7% 32.6%
Peyto Exploration - Resource Price, Hedging and Revenue Profile
($ as Stated) 2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Average AECO Prices
Gas ($ Per Mcf) 3.25 3.50 2.5 2.5 3.0 3.8 3.8 3.8
Oil and NGL's ($ Per Bbl) 70.97 70.68 40.00 40.00 50.00 50.00 50.00 50.00

KENNETH WOODS
Revenue Forecast
Overall, the company should see its revenue growing from ~C$783 million in
2014 to C$1.59 billion in 2020. Royalties paid will also increase proportionally
over the next years and grow from ~C$61 million in 2014 to ~C$109 million in
2020.
Expense Projections
Operating and production expense projections were calculated on a per Mcfe
basis and based on 5 year historical averages.
Valuation
Operating Model
Exhibit 30
2015-2020 Revenue Forecast
Exhibit 31
2015-2020 Expense Forecast
Peyto Exploration - Revenue Forecast
($ in Millions ) 2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Oil and Gas Sales 561.6 910.4 641.9 763.7 960.1 1,292.1 1,480.0 1,569.2
Realized gain on hedges (loss) 14.2 (66.6) 68.4 (4.8) 62.4 69.5 80.0 84.8
Royalties (40.5) (61.3) (65.6) (78.0) (80.4) (89.6) (103.2) (109.3)
Total Revenue 535.4 782.5 644.7 681.0 942.0 1,272.0 1,456.8 1,544.6
Revenue Grow th % 40.7% 46.1% (17.6%) 5.6% 38.3% 35.0% 14.5% 6.0%
Peyto Exploration - Expense Projections
($ in Millions or Per Mcfe) 2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Expenses Per MMcfe of Production
Operating 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Transportation 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
G&A 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market and reserves bonus 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2
Accretion of decommissioning 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Depletion and depreciation 1.5 1.6 1.8 1.6 1.6 1.6 1.6 1.6
Royalties 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4
Total Expenses Per MMcfe 2.1 2.2 2.5 2.7 2.7 2.7 2.7 2.7
Total Expenses Per Mmcfe excluding depreciation0.6 0.6 0.7 1.1 1.1 1.1 1.1 1.1
Total Production-Linked Expenses ($ in Millions)
Operating 45.2 57.6 54.6 72.0 74.3 82.8 95.3 100.9
Transportation 16.2 21.9 26.2 31.1 32.1 35.7 41.1 43.6
G&A 5.2 5.8 6.0 10.5 10.8 12.1 13.9 14.7
Market and reserves bonus 16.3 19.2 22.4 53.4 55.1 61.4 70.7 74.8
Royalties 40.5 61.3 65.6 78.0 80.4 89.6 103.2 109.3
Total Production-Linked Exp 309.5 398.1 109.2 166.9 172.2 191.9 221.1 234.1

KENNETH WOODS
Income Statement Forecast
Overall, the company should see its net income growing form ~C$262 million in
2014 to ~C$545 million in 2015.
EBITDA Projections
Since certain expenses on the income statement such as depletion and
depreciation are non-cash, EBITDA is a better proxy of how much cash the
company generates. As shown below, the company’s EBITDA should grow from
~C$ 650 million to 1,260 million in 2020.
Valuation
Operating Model
Exhibit 32
2015-2020 Income Statement Forecast
Peyto Exploration - Income Statement
($ in Millions Except Per Share Data) 2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Revenue
Oil and gas sales 561.6 910.4 641.9 763.7 960.1 1,292.1 1,480.0 1,569.2
Realized gain on hedges 14.2 (66.6) 68.4 (4.8) 62.4 69.5 80.0 84.8
Royalties (40.5) (61.3) (65.6) (78.0) (80.4) (89.6) (103.2) (109.3)
Total Revenue 535.4 782.5 644.7 681.0 942.0 1,272.0 1,456.8 1,544.6
Expenses
Operating 45.2 57.6 54.6 72.0 74.3 82.8 95.3 100.9
Transportation 16.2 21.9 26.2 31.1 32.1 35.7 41.1 43.6
G&A 5.2 5.8 6.0 10.5 10.8 12.1 13.9 14.7
Reserves based bonus 16.3 19.2 22.4 53.4 55.1 61.4 70.7 74.8
Performance based compensation 5.6 0.9 9.6 6.8 9.4 12.7 14.6 15.4
Interest 31.0 34.4 32.1 34.0 42.4 50.9 58.3 61.8
Total Expenses 346.0 433.4 472.3 566.5 594.2 668.0 769.0 814.4
Operating Income 189.4 349.0 173.8 114.4 347.8 603.9 687.8 730.2
Income tax expense (benefit) 46.7 87.3 72.8 11.4 88.0 152.8 174.1 184.8
Net Income 142.6 261.8 101.0 103.0 259.8 451.1 513.7 545.4
Earnings Per Diluted Share 0.96 1.71 0.63 0.64 1.59 2.73 3.08 3.23
Average Diluted Shares 148.7 153.2 160.5 162.2 163.8 165.4 167.1 168.7
Exhibit 33
2015-2020 Income Statement Forecast
Peyto Exploration - Non-Cash and One-Time Expenses and EBITDA
($ in Millions) 2013A 2014A 2015E 2016F 2017F 2018F 2019F 2020F
Operating Income 189.4 349.0 173.8 114.4 347.8 603.9 687.8 730.2
Plus DD&A 225.0 291.7 317.1 356.3 367.6 409.7 471.9 499.7
Plus Asset Retirement Accr. 13.0 8.0 10.0 10.5 10.8 12.1 13.9 14.7
Plus Performance based comp. 5.6 0.9 9.6 6.8 9.4 12.7 14.6 15.4
EBITDA 432.9 649.7 511.1 488.1 735.7 1,038.5 1,188.2 1,260.1

KENNETH WOODS
Unlevered Free Cash Flow Projections
Peyto’s projected unlevered free cash flows was based on the aforementioned
production, commodity price and expense projections. The company is expected
to generate ~C$591 million in unlevered free cash flow in 2020.
Terminal Value and Discount Rate
The standard 10% O&G discount rate was applied as well as an 8.0x (current
multiple is 11.7x) 2020 exit multiple was used.
Valuation
DCF
Exhibit 34
2015-2020 Unlevered Free Cash Flow Projections
Peyto Exploration - Unlevered Free Cash Flow Projections
Projected Fiscal Year Ending December 31st
2015E 2016F 2017F 2018F 2019F 2020F
Normal Discount Period 1.0 2.0 3.0 4.0 5.0 6.0
Mid-Year Discount 0.25 1.25 2.25 3.25 4.25 5.25
Annual Production 187.5 222.7 229.8 256.1 295.0 312.3
Revenue 644.7 681.0 942.0 1,272.0 1,456.8 1,544.6
EBITDA 485.9 488.1 735.7 1,038.5 1,188.2 1,260.1
Operating Income (EBIT) 149.2 114.4 347.8 603.9 687.8 730.2
( – ) Taxes (37.8) (11.4) (88.0) (152.8) (174.1) (184.8)
EBIAT 111.4 103.0 259.8 451.1 513.7 545.4
( + ) DD&A 317.1 356.3 367.6 409.7 471.9 499.7
( + ) Asset Retirement Accretion 0.5 2.3 2.4 2.5 2.8 3.2
( + ) Future performance based compensation 9.6 6.8 9.4 12.7 14.6 15.4
( + ) Deffered Income Tax 70.4 11.4 88.0 152.8 174.1 184.8
( – ) Change in Netw orking Capital (19.3) (20.4) (28.3) (38.2) (43.7) (46.3)
( – ) Capital Expenditures (600.0) (615.0) (650.0) (690.0) (710.0) (715.0)
Unlevered Free Cash Flow (71.6) (114.7) 105.6 377.0 510.8 579.9
Present Value of Free Cash Flow (69.9) (101.8) 85.2 276.6 340.7 351.6

KENNETH WOODS
Implied Share Price Calculation
With a 8.0 terminal EBITDA multiple and by using a 10% discount rate, Peyto’s
implied equity value amounts to ~C$5.7 billion, implying a C$34.8 share price
and 22.4% upside.
Valuation
DCF
Exhibit 36
Terminal EBITDA Multiples and Discount Rate Sensitivity Analysis
Exhibit 35
DCF Share Price Calculation
DCF Implied Share Price
Present Value of Terminal Value 5,690.4
Sum of PV of Free Cash Flows 882.36
Enterprise Value 6,572.7
( – ) Net Debt 1,047.0
Implied Equity Value 5,525.7
Diluted Shares Outstanding 159.0
Implied Share Price 34.8
% premium / (discount) over market share price 22.4%
Peyto Exploration - Net Present Value Sensitivity - Terminal EBITDA Multiples
34.76$ 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0%
10.0 x 52.6 49.4 46.5 43.7 41.1 38.7 36.4
9.0 x 47.3 44.4 41.8 39.2 36.9 34.6 32.6
8.0 x 42.0 39.4 37.0 34.8 32.6 30.6 28.7
7.0 x 36.7 34.4 32.3 30.3 28.4 26.6 24.9
6.0 x 31.4 29.4 27.6 25.8 24.2 22.6 21.1
5.0 x 26.2 24.5 22.8 21.3 19.9 18.6 17.3
Discount Rate
TerminalEBITDAX
Multiples

KENNETH WOODS
Assumptions
Decline rates of 35% was used for the company’s natural gas and liquids
production and the aforementioned production forecast was used as well as the
companies reserve information. Operating expenses were forecasted for the first
five years and maintained constant thereafter. Also, development expenses of C
$1.2 billion over 10 years was subtract from each years' cash flow calculations
and cash taxes of 1of 15% was also applied.
NAV Build-up
In order to calculate the company’s NAV, its proven and drilled risked
undeveloped reserves was added . In terms of risked drilled undrilled reserves,
the four main regions was the Notikewin, Wilrich, Falher and Bluesky region was
accounted for and their respective Net Asset Value was risked by 75% in order to
find the value of undeveloped reserves.
By applying a 10% discount rate, the discounted cash flows from the company’s
proven reserves amounted to ~C$3.9 billion and the undeveloped reserves
amounted to ~C$2.7 billion. The Enterprise Value amounted to ~C$ 6.5, implying
a share price of C$35.1 and 23.5% upside.
Valuation
NAV
Exhibit 37
Peyto Exploration Risked Valuation
Unrisked $/Share Probality Risked $/Share
Notikwen 405 2.5 75% 304 1.9
Wilrich 1,239 7.8 75% 929 5.8
Falher 1,493 9.4 75% 1,120 7.0
Bluesky 426 2.7 75% 320 2.0
Total 3,563 22.4 2,672 16.8
Undeveloped Reserves
Exhibit 38
NAV Implied Share Price Calculation
NAV Buildup
Price Assumptions 2015 Gas Price LT Nat Gas price LT Oil Price
3.2$ 4.50$ 50.00$
Probability Risked Value ($M) $/Share
PDPReserves Cash Flow Undiscounted 6,199 39.0
PV-10 PDPCash Flow 100% 3,767 23.7
Land Value 100% 97 0.6
Total Proved Reserves 3,864 24.3
Undeveloped Reserves 2,672 16.8
Net Asset Value (Enterprise Value) 6,536 41.1
Net Debt 960 6.0
Implied Equity Value 5,576 35.1
Diluted Shares Outstanding 159.0
Value/ Share 35.1
%premium / (discount) over market share price 23.5%

KENNETH WOODS
Valuation Summary
The weighted average of the DFC and NAV valuation was used in order to
determine target share price. Based on the implied shared price of C$34.8 for
the DCF and C$35.1 for the NAV, the implied one year target price of C$34.95
Valuation
NAV
Exhibit 39
Natural Gas Prices and Discount Rate
Peyto Exploration - Net Present Value Sensitivity - Natural Gas Prices
35.08$ 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0%
5.75 41.5 40.1 38.7 37.5 36.4 35.3 34.3
5.00 39.7 38.4 37.2 36.1 35.0 34.0 33.1
4.25 38.0 36.8 35.6 34.6 33.6 32.7 31.8
3.50 36.2 35.1 34.1 33.1 32.2 31.4 30.6
2.75 34.4 33.4 32.5 31.7 30.8 30.1 29.4
2.00 32.7 31.8 31.0 30.2 29.5 28.8 28.2
NaturalGasPrices
($/Mcfe)
Discount Rate
Exhibit 40
Natural Gas Prices and Discount Rate
Peyto Exploration - Valuation Upside
0.23$ 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0%
5.75 46% 41% 36% 32% 28% 24% 21%
5.00 40% 35% 31% 27% 23% 20% 16%
4.25 34% 29% 25% 22% 18% 15% 12%
3.50 27% 24% 20% 17% 13% 10% 8%
2.75 21% 18% 14% 11% 9% 6% 3%
2.00 15% 12% 9% 6% 4% 1% -1%
OilPrices
Discount Rate

KENNETH WOODS
Reliance on Natural Gas
Peyto's production is predominately skewed toward natural gas. As such, the
company's cash flow and profitability are highly exposed to the price of natural
gas. While the company is doing a good job of protecting cash flows with its
hedging strategy, continued low gas prices will limit Peyto's upside potential.
Need to reduce CO2 emissions
The newly elected government in Alberta is eliciting strong opinions in terms of
tax and emissions policies. While tax discussions are still under way, Peyto said
the new regime has tasked it to reduce CO2 emissions per unit of gas
processed. As an example, Peyto's Oldman gas processing plant needs to
reduce emissions by 15% by 2015 and 20% by 2017 or else it will be paying
penalties of $20 and $30 a ton for 2016 and 2017 and thereafter. However, Peyto
says it sees an "extremely strong alignment" between CO2 emissions and
business costs performance. For example: at the Oldman plant, Peyto expects to
reduce fuel gas consumption by over 20% by way of process modifications that
are currently maintained so that the facility falls back to or below the 100,000 ton
emissions level. The result is that Peyto is going to save about $1 million in fuel
gas cost per year. So not only is Peyto producing a fuel that is cleaner and
cheaper than either coal or oil sands crude, it is able to reduce fuel costs in order
to meet the tougher emission standards coming down the road. As a matter of
fact, increased awareness of CO2 emissions will likely lead to a reduction in coal
consumption and an increase in demand for the natural gas Peyto produces.
Natural gas burned for electrical power generation releases 30% less CO2 than
does coal, and 100% less of the toxic particulate emissions that coal leaves
behind.
Third-Party Pipeline Constraints – TransCanada
Like most gas operators in the region, Peyto's Production for the quarter (81,208
boe/d) was negatively impacted by capacity constraints on the TransCanada
Nova Gas Transmission Network (NGTL). The NGTL system has been
undergoing maintenance and expansion work throughout the year. Peyto
reported that service interruptions and curtailments on the NGTL system
deferred an average of 65 MMcfe/d (10,750 boe/d) in Q3. This is significant, as
the deferred production was some 13% of Q3's reported total production. After
the end of the quarter, Peyto said production had reached ~104,000 boe/d.
NGTL is forecasting that the capability of their system should not only return to
previous levels, but increase to over 9 BCF/d by November 2015 when all of
these issues have been resolved and work completed. With only a few producers
drilling and adding new production in this part of the province (PEY, TOU,
Progress, etc.) it is unlikely that total throughput will be back to where it was last
winter at just over 8 BCF/d. This means there should be ample room for all
volumes plus some additional growth, assuming there isn’t a large amount of
contracted but unused capacity. Recently, TransCanada announced an
additional $570 million expansion to the NGTL system, supported by 2.7 Bcfe/d
of new firm natural gas transportation service contracts. Commenting on the new
contracts, Russ Girdling, TRP's President & CEO, said: "Our NGTL System is
sitting on top of extensive natural gas supplies, making it well-positioned to
unlock the resource and reliably and efficiently link it to growing markets.
Risks

KENNETH WOODS
The system has been operating at capacity, and more capacity is needed in
these key areas that support the growth of the prolific gas resource in the
Western Sedimentary Basin." And, of course, Peyto is lowest-cost gas producer
in the prolific Deep Basin and one of the largest producers in the region. As a
result, there is a good chance Peyto was one of the companies signing new
transportation service contracts with TransCanada for additional NGTL pipeline
capacity.
While service restrictions continued into October, Peyto was able to secure
temporary service for the last 11 days of the month for all previously restricted
production. As a result, Peyto said it increased production from the start of
October (83,500 boe/d) to an estimated average of 102,000 boe/d by the end of
the month. TRP is currently forecasting additional constraints for the first 3
weeks of November prior to increasing system capacity which should alleviate
restrictions in Peyto's production toward the end of the year and into 2016.
Risks

KENNETH WOODS
Appendix
Comparable Companies Analysis
Exhibit 41
Comparable Company Production Metrics
Capitalization EBITDAX Proved Reserves Daily Production Proved Developed Gas
Company Name Mkt. Cap ($M) EV ($M) 2015 2016 (Bcfe) (Mcfe) / Proved Mix %
Antero Resources 6,632 10,535 1,239 2,667 10,535 1,494 31.2% 81.0%
Cabot Oil and Gas 8,123 10,230 897 790 7,082 1,644 61.3% 94.0%
Chesapeake 2,712 15,123 2,479 2,853 10,692 3,600 80.6% 72.0%
EQT 8,903 10,536 1,484 2,509 9,776 1,662 43.5% 91.0%
Memorial Resources 3,063 5,726 418 93 1,740 348 44.4% 77.0%
Rice Energy 1,369 2,726 440 779 1,307 534 49.3% 99%
Soutw estern 3,456 8,239 1,681 1,873 9,809 2,682 57.9% 92%
Tourmaline 5,890 8,613 1,002 1,595 2,417 930 43.0% 87%
Maximum 8,903 15,123 2,479 2,853 10,692 3,600 80.6% 99.0%
75th Percentile 7,005 10,535 1,533 2,548 9,991 1,917 58.7% 92.5%
Median 4,673 9,422 1,120 1,734 8,429 1,569 46.9% 89.0%
25th Percentile 2,975 7,611 783 787 2,248 831 43.4% 80.0%
Minimum 1,369 2,726 418 93 1,307 348 31.2% 72.0%
Peyto Exploration 4,516 5,995 486 488 3,189 514 0.0% 90%
Exhibit 42
Comparable Company Trading Multiples
Capitalization EV/ EBITDA EV/ EV/ D/CF
Company Name Mkt. Cap ($M) EV ($M) 31/12/2015 31/12/2016 Proved Reserves Daily Production 2016E
Antero Resources 6,632 10,535 8.5 x 7.9 x 1.0x 7.1x 3.7
Cabot Oil and Gas 8,123 10,230 11.4 x 25.9 x 1.4x 6.2x 9.4
Chesapeake 2,712 15,123 6.1 x 10.6 x 1.4x 4.2x 11.1
EQT 8,903 10,536 7.1 x 8.4 x 1.1x 6.3x 1.5
Memorial Resources 3,063 5,726 13.7 x 122.7 x 3.3x 16.5x 7.5
Rice Energy 1,369 2,726 6.2 x 7.0 x 2.1x 5.1x 4.1
Soutw estern 3,456 8,239 4.9 8.8 0.8x 3.1x 8.7
Tourmaline 5,890 8,613 8.6 10.8 3.6x 9.3x 13.2
Maximum 8,903 15,123 13.7 x 122.7 x 3.6x 16.5x 13.2
75th Percentile 7,005 10,535 9.3 x 14.6 x 2.4x 7.6x 9.8
Median 4,673 9,422 7.8 x 9.7 x 1.4x 6.3x 8.1
25th Percentile 2,975 7,611 6.2 x 8.3 x 1.1x 4.9x 4.0
Minimum 1,369 2,726 4.9 x 7.0 x 0.8x 3.1x 1.5
Peyto Exploration 4,516 5,995 12.3 x 12.3 x 1.9x 11.7x 2.5

KENNETH WOODS
Appendix
Management
Management and Ownership
Institutions hold approximately 40% of the outstanding shares of PEY while
insiders represent 5.4% of the total shares.
Management:
•  Darren Gee, Director, President and CEO: Mr. Gee has over 23 years of
experience working in the oil and gas industry. Mr. Gee joined Peyto in 2001
as the VP Engineering before entering his current position as President and
CEO.
•  Scott Robinson, Director, Executive VP and COO: Mr. Robinson brings
with him over 30 years of experience in the oil and gas industry, he has been
with Peyto since 2004 when he first joined as VP Operations. In 2006 Mr.
Robinson became Executive Vice President and COO at Peyto.
•  Kathy Turgeon, VP Finance and CFO: Ms. Turgeon joined Peyto as the
Controller in 2004. Since then Ms. Turgeon held the role of VP Finance before
becoming the VP Finance and CFO in 2007.
•  Timothy Louie, VP Land: Mr. Louie has over 25 years of experience in the oil
and gas industry. Prior to joining Peyto, Mr. Louie was a Land Manager at
Daylight Energy Ltd.
•  David Thomas, VP Exploration: Mr. Thomas brings 21 years of experience
in the oil and gas industry. Mr. Thomas first joined Peyto as a Senior Geologist
before entering his current position as VP Exploration
•  Jean-Paul Lachance, VP Exploitation: Mr. Lachance has over 21 years of
experience working in the oil and gas industry. Previously, Mr. Lachance was
VP Engineering at ProspEx Resources, a company that explores, develops
and produces oil and natural gas in western Canada.
•  Stephen Chetner, Director, Corporate Secretary: Mr. Chetner has been the
Corporate Secretary at Peyto since 2000. Mr. Chetner is a partner at Burnet,
Duckworth & Palmer LLP, a legal services firm.
Directors
•  Donald Gray, Chairman: Mr. Gray co-founded Peyto in 1998 and held the
position of CEO for 8 years. Currently, Mr. Gray is Chairman of the Board a
Peyto
•  Rick Braund, Director: Mr. Braund is a co-founder of Peyto and has been
Director since 1998. Mr. Braund is a Director at Gear Energy Corporation and
Petrus Resources Ltd, private oil and gas companies
•  Brian Davis, Director: Mr. Davis brings with him over 17 years of oil and gas
industry experience. Mr. Davis has been a director at Peyto since 2006 and is
currently a Managing Partner at an oil and gas engineering consultancy firm.
•  Michael MacBean, Director: Mr. MacBean has been a director at Peyto since
2003 and brings over 13 years of experience in the oil and gas industry. Mr.
MacBean is currently a Managing Director of TriWest Capital Partners and
previously held the position of CEO at Diamond Energy Services LP.
•  Gregory Fletcher, Director: Mr. Fletcher brings with him over 14 years of
experience working in the oil and gas industry. Mr. Fletcher has been a
Director at Peyto since 2007 and is currently the President of Sierra Energy
Inc, a private oil and gas company.

KENNETH WOODS
Sources
1.  Company Reports
2.  GeoScout
3.  Canada International Energy Agency
4.  Altacorp Equity Research – Q3 2015
5.  BMO Equity Research – Q2 2015
6.  CIBC Equity Research – Q2 2015
7.  Haywood Equity Research – Q1 2015
8.  Barclays Equity Research – Q1 2015
9.  RBC Equity Research – Q1 2015
10. GMP Equity Research – Q4 2014
11.  UBS Equity Research – 2014 Initiating Coverage

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