Peyto Exploration & Development Corp.

After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I will now like to turn the conference over to J.P. LaChance, President and CEO. You may begin.

Thanks, Dawanda. Morning folks, and thanks for joining PAYTO's second quarter 2025 conference call. Before we begin, I'd like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in the company's news release issued yesterday. Here in the room with me is Riley Frame, our Chief Operating Officer, Tavis Carlson, our CFO, Todd Burdick, our VP of Production, Mike Collins, our VP of Marketing, and Mike Rees, our VP of Geoscience. Before we discuss the quarter, on behalf of the management group, those that are here and not here, I'd like to thank the entire Paedo team, both in the office and in the field, for their contributions to another strong quarter. Paedo remained active with four rigs during the second quarter through spring breakup. As is typical for Paedo, production falls a little through Q2 as we try not to overspend, fighting through the mud to complete wells and bring them on production. The fires near Fort Mac did cause some oil sands shut-ins that affected demand for natural gas in the province, and there were some NTL maintenance that caused prices to go negative, at least for one day in June. We did shut in some production that day, not because we had to, but to be more opportunistic and essentially get paid to fulfill our physical contracts and save our gas for another day. This had a marginal effect on production for the quarter, but I bring it up because it's something we'll continue to consider as we move through the summer. Corporate production was just under 132,000 BOEs a day, up 8% since second quarter of 2024, and our cash costs were down 13% over the same period to $1.31 per MCFE, as we continue to lead the industry in that regard. Our strong hedge book added $53 million in total gains, which added 75 cents per MCF to our realized gas revenue, and our market diversification contributed 53 cents per MCF, net of transportation costs over and above the monthly ACO pricing. All these factors combined to increase funds from operations by 24% year-over-year as we generated $191 million in the quarter, or 95 cents per diluted share, which was also up 20% from Q2 last year. We did not have much gas exposed to ACO pricing in the quarter since we have Empress Service, which can which can net us better realizations to ACO, particularly when access to storage is restricted, which happened in Q2. In fact, we sold some of our excess EMPRESS service during the quarter, allowing us to collect incremental income along with third-party processing at Brezzo. That added $0.07 per MCFE to our sales revenue in the form of other income. Our operating costs were slightly higher, a penny higher than the prior quarter. While our controllable operating costs were down quarter over quarter, we received our 2025 property tax bill in Q2, and it was higher than anticipated. So that resulted in an adjustment that's reflected in the higher op costs. Despite this, we remain laser focused on continuing to produce the costs that we control, and we're forecasting lower operating costs for the rest of the year. And I might get Todd to elaborate on that later in the call. Ruralties were a lot lower in the quarter than last year because of weak ACO prices and increased gas cost allowance credits, and we expect royalty rates to be around 5% for the remainder of this year based on the current strip. Interest costs were also lower in the quarter as interest rates have come off and we've continued to reduce bank debt. In fact, we've paid down $40 million of net debt in the quarter and $105 million year-to-date. So taking together our cash costs, we're down 11 cents per MCFE quarter over quarter and 19 cents relative to second quarter of 2024. So all in all, we have the lowest cash costs in town, but more importantly, I think one of the highest margins. And as of course you know, our low cost structure and our strong hedging and diversification strategy allow the company to weather volatility in the commodity markets. Switching to operations, We drilled 19 wells in the quarter, completed 19, and tied in 21. Part of the drilling program included follow-ups to the Q1 Cardium wells that were drilled in Brazzo, where we used a different drilling and completion design. We talked about that then. The first two wells we drilled were low working interest, which helped us to test the concept. The next three wells that we followed up with in this past quarter were at 100% to make sure we could repeat the results. At the end of the day, the key takeaway here is that we reduced our drilling and completion cost per meter by about 37%, and that should really help us as we look to improve the economics of future carding locations across our large inventory. Wilrich continues to perform well, as I detailed in the recent monthly letter, having dialed in our most recent design and applying it to the high-quality land we acquired from Repsol. We also completed another well in the Polarific Flare Channel trend in the quarter that we discovered last year in the Greater Sundance area. That well has already produced over a BCF of gas, and it's the best outcome on this trend so far. We have since drilled a follow-up well that we'll be completing shortly, which will help us delineate the trend and give the team more confidence in the 20-plus locations that we see in the play. We started construction of a 30-million-a-day field compressor station in the Greater Sundance area. It will move more liquids-rich gas to the Edson gas plant via the Central Port Hills gas gathering system later in Q3 and into Q4. And again, I might get Todd to elaborate on the details of that project later. That's going to help clear out some existing gathering system for a large-scale development that we have planned in the area that will take gas to Swanson and Old Man. Long-waited LNG Canada facility exported its first cargo right at the end of the quarter, I think it was June 30th. We expect this will be constructed for the basin in the long term, but we should be patient as things ramp up here. In the meantime, we have plenty of production hedged for the summer, about 500 million cubic feet a day, priced at $4 at MCF, and the rest of it is diversified to hubs in eastern Canada and Chicago and the Midwest, where prices are stronger. Our business plan and guidance for 2025 remains unchanged. We plan to spend between $450 to $500 million to generate production ads at a cap efficiency rate of about $10,000 to $11,000 per BOE per day by the end of the year. That should more than offset our annual corporate decline, which we estimate is about 27%. We have a large number of potent non-AQN locations and more of that new flare channel wells planned for the rest of the year. We expect these locations will bring our annual average productivity back to something similar to last year's stellar performance. We also have some blue sky and Viking Wells planned that will follow up on past successes as well. We're not slowing activity per se because we want to keep our crew steady and we want to, as we expect, to ramp up production in Q4, which will coincide with better winter pricing and as LNG progresses to full capacity. But of course, we'll remain flexible with our plans as we always are. At the end of the day, we sell a product the world needs, and we run our business in a way that is sustainable. We keep our costs as low as possible. We diversify our sales points. We hedge in the near term so that we can constantly fund our capital program, reward our shareholders with profits. It's simple, predictable, and maybe perhaps a little boring, but we make no apologies for that. Okay, I imagine there's some questions. So to Wanda, perhaps we can go to the phones first.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press Start11 on your telephone, then wait for your name to be announced. To withdraw your question, please press Start11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Thompson with CIBC. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions.

All right.

Just to start out, you talked about some of the recent successes at Chambers and the new well-designed. Just wondering, how does that compare to other competitors in the area? Is Pato... sort of at the leading edge of this approach, or is this something that you've seen other operators do and now you're adopting?

Yeah, as far as the, I mean, obviously, you know, we mentioned that, I think, last quarter, that this isn't something new in the industry. It's something that others are already doing, at least in the oil part of the play. So the concept of going, you know, drilling a bit lower into the bioturbated zone just helps us with penetration rates. We talked about this last quarter. I don't know if there's a lot of gas guys doing this, per se. I'm looking at Mike and Riley here, and they're on their heads no. There may be a couple of other companies doing it, so I don't know that we lead, but it's certainly an improvement for us, and it's important for our long-term carting inventory to get those costs down.

Okay, and then I guess just sticking to that Chambers and Brasso area, can you maybe expand a bit on the third-party gas that you're bringing in there? I think you mentioned $0.07 an MCFE. Was that specific to Brasso?

That's a combination of us selling some excess Empress service and the Brasso processing fee income that we would have received, but it's But it's not just Brazzo. Maybe I could get Todd to elaborate on some of the other sort of sources of our third-party fee income. Todd, do you want to comment on that a little bit more? It's not just that area, though, just to be clear, Chris.

Yeah, for sure. Definitely some opportunities, some further opportunity in the Brazzo area. I think we mentioned last quarter when we commissioned that pipeline that we built it so that we can add, and our GED group has been busy talking to others in the area. Up in Greater Sundance, we've had some producers that have been sending third-party gas to our Swanson plant for quite some time. We've been talking to others up there. The JV group is pretty active. We've got a little bit up in Kakwa. You know, it's kind of spread out all the way from Cackwell down to Brass. So it's definitely not just happening in Brass. And, you know, we're always working with other producers who may be looking to shut down plants or other things. And it helps them on their effects and helps us on the other income part of the balance sheet. Right.

Got it. And then just this next one for JP, how are you thinking about capital allocation as we think out 2026 and beyond between organic growth and M&A and then as you approach your debt targets, potential shareholder return increases?

Well, we still believe that we're going to put money into the drill bit to grow modestly over the next two years. We haven't come out with a formal plan for 26 yet. Certainly, it probably is going to look a lot similar to the last two years from what we can predict at this point in time. We'll see where prices and everything goes from here. We'll continue to make debt repayment a priority but we have a soft debt to EBITDA target of one times, trailing 12-month EBITDA of one times and so that hasn't changed and when we get there, which we expect will be sometime in 2026, we'll re-look at that capital allocation strategy but that depends on where prices are at. LG Canada came on and things echoed price, the differential or the basis between that improves, all those things happen and we'll start looking and depending on our diversification and all those things, we'll look at how we see the market and how the business is and we'll decide then how we change that allocation, if we change that allocation to where it is right now. We've got a fairly comfortable dividend level right now that we feel is very sustainable and we're going to continue to grow. all the way along, Chris.

Got it. And then just last question from EJP. You touched on ACO improving. How are you thinking about the marketing strategy here? It looks like your 2027 book has pretty sizable exposure to domestic benchmarks and relatively light on the fixed, which we expect will increase over time, but... But how are you thinking about that? And which hubs do you see as having attractive pricing on the strip that you'd be looking at?

We still believe that diversification is important. And diversification doesn't mean not ACO. So ACO is part of that. And in fact, our exposure to ACO is in the fact that we would like to hedge some of that in the future. So as we move closer to 27, we'll build that up because nothing's changed in our hedging strategy plan. When we get to 27, we're going to be any season there in 27, we're going to be minimum 50% hedged because we know this volatility in commodities is real. As we move forward, we're going to continue to bring up the hedge book in 27. And when we do that, and right now prices in 27, they go pretty good. So as we take some of that off the table and we see maybe the effects of LNG Canada narrow that basis, which improves that even more, then we'll take some more of that off the table. And then we'll have similar exposure, you know, going forward as we have today. You know, some echo, a little bit of echo, a little bit of everything else too. We think that's important not to have just one market. So we're not – we think it's good. We want it to improve, but we're not, you know, we're not counting on it as it were.

So it doesn't sound to me like having –

additional exposure to to echo is compared to where you've historically been in the last couple years is something that you'd be really looking for yeah we're only look remember we only had you two and three years out so you know to the extent that echo improves we have a whole lot of reserves that would be exposed to that in the future should echo really start to run it becomes say a premium market or something different than what it is today right so uh this is about you know short managing things in the short term uh So I don't think, I don't see us changing our strategy in that regard. Okay.

That's all for me. I'll hand it back. Thank you. Okay. Thanks, Chris.

Thank you. As a reminder, ladies and gentlemen, let's start one, one to ask the question.

To Wanda.

Yes.

I have some questions here from, from coming overnight. So maybe I'll just, uh, It's okay. I'll ask a couple of those here of the team.

All right. I'll hand it back to you.

Todd, we did talk about earlier about the compressor that we're going to install. You've already started construction on it here. Some questions around, okay, can you elaborate a little bit more? Where is this and how is it going to help us?

Sure. So the compressor is, I guess, best described as sort of the heart of the original Pato Sundance area. Geographically, Township 5321, West 5, for those who are familiar with the area. There's a lot of vertical penetrations in the area, a lot of horizontals and cardium, Nauticumens, Falares, Wilrich. a lot of depletion, and with the Repsol acquisition, obviously as JP mentioned, there's a development plan in the area, and when we looked at it, we said there's a lot of production here that needs to be protected from higher line pressures when you're bringing on these bigger wells. So after doing some sensitivities, it made a lot of sense to take and build a compressor collect that older gas, which is a lot of cardiums and flares and not a humans, as I mentioned, that's the bulk of it. So, and with the pipeline infrastructure that we bought, uh, along with the, with the reps, all acid acquisition, it allowed us to tie that gas in, uh, with, with some modest pipeline, uh, expenditures down to the Edson gas plant, where we can get a lot better liquid recovery from, uh, especially the Cardiums versus Old Man or Old Man North. Old Man obviously had the deep cut, but Edson had much better recoveries, and some of this gas went to Swanson. So we're going to collect about $30 million to $35 million a day initially. We built the plant so that we can expand it to that $60 million to $70 million cubic feet a day just with another dehyde and some more compressors. We're expecting to see somewhere around a 10 barrel per million uplift on the gas moving either from Swanson, Old Man, Old Man North down to Edson. Could be better. It'll depend on the species. And then along with that, as I mentioned, you know, you take, and I think JP alluded to the press release, you take 30 or 35 million a day out of the gathering system that's going to Edson or to Old Man and Swanson, you're going to free up room. You're going to see some flush until we backfill that production with new production. As well, all that 30 million a day gas that you're sending to Edson is now going to be at a much lower line pressure, probably half. That helps the economics of those wells long term. A lot of little parts that come into play into the advantage of building this compressor station. Things are going really well. We're probably a month out, maybe a little bit longer until commissioning. The guys have been, despite the rain, we've gotten shut down a little bit and had some delays, but things are moving along really, really well.

Okay, good. Thanks, Tom. Another question was about the whale outcome so far this year. Maybe I'll get Riley to address that, just to, okay, so we expect some improvements on the back half of the year. Can you talk about the kind of species we're going to be drilling? Can you elaborate a little more? Can you give us a little more color on that?

Yeah, you bet. So when we're looking at the performance for the first half of the year here, we're actually very happy with where we're tracking relative to where we were last year. If you guys recall, 2024, we had a much more whale-rich-centric program first half of the year in a much more non-human, Polaris-centric program than the second half of the year. So very similar to 24, I think what we'll see is that curve improve as we move forward through the second half of the year. And when we distill it down to what's really important here, looking at what we're spending for what we're getting, I think we're right on track with 2024. So I would expect us to be in line with those outcomes as we do the second half of the year.

we talked about in the press release and i mentioned it here earlier we're following up with some past successes not a place a couple plays that we haven't done in uh recently and one of the questions was the viking the blue sky it's not something that people i guess you know the investors hear a lot about so maybe maybe i get mike to elaborate a little bit on what we're what we're pursuing there in the viking the blue sky here this year later later part of this year thank you so it has been a little while since we

dipped our toe into the Viking. We drilled our first Viking well about two years ago. And that was a fairly successful first test for us on our lands. And we're looking to wrap up actually the second well and do all that in the Viking right now. So you see a material amount of upside on our land base in the Viking and also on the blue sky. We haven't actually drilled a blue sky for a while. I think that goes back about five years to 2020. We did inherit as part of the Repsol acquisition a blue sky well that Repsol had drilled that I believe we completed. And that turned out to be quite a good well. So again, material upside in the blue sky on our existing land position. So we are drilling the first blue sky well currently, and we have a couple more planned for the remainder of the year. But should the results come in as expected in these two zones, we will be more aggressive with them in the future.

Okay, thanks, Mike. I don't know if there's any more questions from the phone lines.

As a reminder, ladies and gentlemen, that's star 11 to ask the question. I'm showing no further questions in the queue. Okay.

Well, thanks for tuning in, folks. We'll see you on the next call in November.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.