Peyto Exploration and Development Corp. (PEY.TO) has been one of the best performing energy names, developing unconventional natural gas in Alberta's Deep Basin. The company receives a lot of credit from investors, with Hedgeye Risk Management energy analyst Kevin Kaiser chiming in this morning, "It’s one of the most shareholder-friendly management teams in the entire sector…focused on returns on capital and full-cycle economics, super-low G&A, transparent, communicative, etc…" The chart speaks for itself:

PEY Chart

PEY data by YCharts

Peyto President Darren Gee is out with his latest monthly letter (Download), cautioning investors on the variability of well results. Here is an excerpt:

To Err Is Human...

“I never made a mistake in my life; at least, never one that I couldn’t explain away afterwards.” Rudyard Kipling

They say that we learn more from our mistakes than our successes. But in this business we never seem to talk about the mistakes or problems that happen in pursuit of our goals. Instead we assume that those costly mistakes are always a thing of the past with no mind to future consideration.

Nowhere in a company’s investor presentation materials is there consideration that mistakes may happen in the selection of a drilling location or the operations of drilling, completion, tie in, or producing a well. And yet we all know that they happen. And when they happen, it results in higher costs that inevitably erode returns for investors. So it is misleading to suggest that hypothetical economic returns can ever be achieved over and over again without error.

Darren Gee

Darren Gee

It is more truthful to explain that in the execution of any operation, there are risks. The effective mitigation of those risks is what really differentiates successful companies from unsuccessful ones. As I have said many times in the past, it’s not what assets or lands you own, it’s what you can do with those assets or lands that determines your success or failure..."

Continue reading: Peyto Exploration and Develpoment Corp. - Monthly President's Report - January 2014