Natural gas – some see it as a dirty fossil fuel energy source that’s on its way out. But the reality is quite different. The world needs energy and this need is growing rapidly and consistently. And energy stocks are benefitting from this demand.
Environmental goals are seen as conflicting with this need, but natural gas is in a league of its own. It replaces the dirtiest energy source, coal, and it enables electrification of the energy grid. In short, it’s here to stay as it acts as a fuel of choice in what will be a slow transition to increasingly clean energy.
Peyto Exploration and Development Ltd. (TSX:PEY) is one of Canada’s lowest cost natural gas producers that’s set to benefit from this trend. In fact, it already is benefitting. But this energy stock is down 43% in the last 10 years, in what has been a volatile natural gas market.
Without further ado, let’s look further into this.
An energy stock with a strong dividend history
When investors think of energy stocks, Peyto is not one that usually comes to mind. This means that it’s undervalued and underappreciated, with investors failing to give it the credit (and valuation) it deserves.
With a current dividend yield of 6.9%, Peyto looks interesting. Importantly, this dividend is backed by strong cash flows and earnings and a strong dividend history. In fact, in the first three months of 2025, Peyto reported funds from operations of $1.12 per share, 7% higher than the same period last year. Also, earnings per share increased 12% to $0.57. This was a function of higher production, higher realized prices, and lower costs.
Taking a bigger picture view of the company, Peyto’s dividend has been paid out every month for more than 20 years. While this dividend has been somewhat volatile, this has been a reflection of volatile natural gas prices, and not of the performance of the company.
The future looks bright for Peyto
One of the most positive aspects of Peyto’s story is the underlying natural gas market. This is because natural gas is experiencing a secular trend that’s driving increased use and demand. As I touched on earlier in this article, natural gas has become a fuel of choice for energy needs. It’s rapidly replacing coal around the globe, and it’s enabling the electrification of the energy grid.
Furthermore, liquified natural gas (LNG) has seen rapid growth in recent years. And this growth is expected to accelerate in the coming years. North America’s natural gas is cheap, abundant, easy to access, and politically safe and secure. The ability to transport natural gas across the globe has translated into new markets opening up for our natural gas producers like Peyto.
This will enable Peyto to continue to reward its shareholders with a monthly dividend, and to continue to grow it. In fact, in the last five years, the dividend has grown at a compound annual growth rate (CAGR) of more than 60%. This has been a reflection of the strengthening natural gas market and the growing LNG industry.
The bottom line
Peyto is an energy stock that’s certainly overlooked, in my opinion. This is reflected in its valuation – it currently trades at eight times this year’s expected earnings and a mere 5.6 times trailing cash flow.
In my view, Peyto’s exposure to the rapidly growing LNG market, along with its continued operational successes, will result in a higher valuation for the stock and higher dividends for shareholders.
