Wednesday’s TSX breakouts: This energy stock is benefiting from natural gas price strength

On Tuesday, the TSX index closed the month slightly lower. However, overall, the month was positive with the index rising 0.8 per cent.

Large caps outperformed small caps. The S&P/TSX 60 index advanced 0.7 per cent, while the S&P/TSX SmallCap index declined 0.5 per cent during the month.

Major U.S. markets all ended the month of May with gains. The Dow climbed 0.1 per cent, the S&P 500 advanced 1.5 per cent, and the Nasdaq composite gained 3.6 per cent.

On today's breakout list, there are 38 securities on the positive breakouts list (stocks with positive price momentum) and three stocks, all small caps, on the negative breakouts list (stocks with negative price momentum).

Discussed today is an energy stock with 15 "buy" recommendations from analysts on the Street, Peyto Exploration & Development Corp. (PEY-T). The stock is benefiting from the recent strength in the price of natural gas, which has climbed to levels not seen since January.

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Calgary-based Peyto is an exploration and production oil and gas company, weighted towards natural gas production. The company is a low-cost producer with an extensive inventory of drilling locations that will support future production growth.

Management is forecasting average annual production to increase to 100,000 barrels of oil equivalent per day (boe/d) in 2016, up from 85,700 boe/d in 2015, and expand to 121,000 boe/d in 2017.

The company employs a hedging strategy in order to mitigate risk from commodity price volatility.

In May, the company raised approximately $173-million in a financing, issuing over 5 million shares at $32 per share. The proceeds from the equity offering will be used to reduce its debt, strengthening the balance sheet.

Dividend policy

The company pays shareholders a monthly dividend of 11 cents per share, or $1.32 on a yearly basis. This equates to an annualized yield of 3.8 per cent. Management has maintained the dividend at this level since the end of 2014.

In the first quarter, the funds from operations payout ratio was 38 per cent.

Valuation

According to Bloomberg, the stock is trading at a price-to-cash flow (P/CF) multiple of 10.4 times the 2016 consensus estimate.

Peyto trades at a P/CF multiple of 8.1 times the 2017 consensus estimate, which is nearing its peak multiple over the past three years (at approximately 8.5 times).

Analysts' recommendations

According to Bloomberg, the one year price target is $35.90, which is based on 15 buy recommendations, one hold recommendation, and one sell recommendation. This suggests the share price may potentially rise 4 per cent.

There is a wide range between the target prices, from a low of $28 to a high of $41.75. However, the majority of analysts, 11 in total, have target prices between $35 and $39.

The consensus cash flow per share estimate is $3.30 in 2016, rising 29 per cent to $4.26 in 2017.

Chart Watch

The stock chart is positive. The share price recently completed an inverse head and shoulders formation, reversing its downtrend that was in place since mid-2014.

Peyto is a strong performer in the energy sector, appreciating 38 per cent year to date. The stock price faces initial overhead resistance between $35 and $37, and after that, in the $40 to $42 range.

The stock has downside support around $30 to $31, near its 50-day moving average (at $30.79).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.