Peyto Exploration & Development Corp.

Ladies and gentlemen, thank you for standing by. Welcome to PAYTO's second quarter 2026 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. And to withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to J.P. Lachance, President and Chief Executive Officer. Please go ahead.

Thanks, Michelle. Morning, folks, and thanks for joining Pato's second quarter 2026 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 that was issued yesterday.

Here in the room with me, I have most of the management team, including Riley Frame, our Chief Operating Officer, Tavis Carlson, our CFO, Todd Burdick, our VP of Production, Derick Czember, our VP of Land and Business Development, Mike Collins, our VP of Marketing, Chrissy Rafos, our VP of Finance, and Mike Rees, our VP of Geoscience. Before we discuss the quarter, on behalf of the management group here, and as always, I'd like to thank the entire PAYTO team in the office and in the field for their contributions to another strong quarter. It was a wet spring and early summer in the areas that we operate, so we had a lot less activity in the field, especially when you compare that to Q1. Yet we managed to maintain production levels more or less at the same level, thanks to a strong drilling program in Q1. We paid down some more debt, we increased the dividend in May, we drilled more great wells, we added more undeveloped acreage, signed another important natural gas diversification deal as well. I think that's pretty good for a typically quiet quarter. Let's dive into some details with operations first. We slowed drilling activity down as we typically do during the spring breakup. We only spud 10 wells, which is reflected in our capital spend of only $68 million in the well-related costs, and includes some completions that would have spilled over from Q1. The average performance of these wells are tracking closely with the last two years' outcomes, and we're particularly pleased with the latest cardium drills down in Brazzo, We applied the same drilling and completion strategy that worked so well last year in the area just over there in Chambers. This is where we drill a little deeper in what we call the bioturbated zone to increase the drilling speed, and then we complete the longer horizontal with more stages to increase stimulation intensity. The gas rates are better, but most importantly, so are the wellhead liquids. We have initial liquid rates of 400 to 600 barrels per day. and now we're applying our Cardium learnings up in the Sundance area to see if we can repeat those results and improve the internal rates of return up there as well. Cato also invested $14 million in facility projects that include major pipelines, plant optimizations and some maintenance work during the quarter. We completed some plant turnarounds with a minimal effect on production since we plan these, when we plan these we try to redirect volumes to other plants The credit of these efficient turnarounds goes in part to the great execution by our team in the field, but also to the planning that goes into these things in the office. This is an element of our own control strategy that I think is often overlooked. We're not dependent on third parties' performance for these kinds of turnarounds. The majority of our gas, 98% of our gas, is controlled by us. It goes to our plants. The balance of our capital was spent in Q2. The balance of the capital that was spent in Q2 was $2 million. It was used to capture another 26 sections of land through crown sales and direct purchases. That brings new land purchases so far this year up to a total of 53.8 net sections at an average cost of $158 per net acre, which cheaply adds to our unbooked drilling inventory. At the start of Q2, we redirected about 85 million cubic feet a day of sales gas to a third-party deep cut facility to increase our C3 plus or our propane butane recoveries mostly and some condensate which adds to our incremental which adds an incremental 1500 barrels per day and that's helping to bring our corporate liquid content up from 12 to 13 percent and the other part of that is the Cardian program of course that it's adding some more liquids Switching to financials, controllable cash costs in the quarter, that's operating, transport, interest, and G&A, totaled $1.04 per MCFE, which brings us down to the pre-REPSOL levels before Q4 2023, and that speaks to the great effort by the PAYDO team to stay focused and integrate these assets into our low-cost model. Flipping to revenue, another strong quarter where our realized gas price was $3.42 in MCF, and the rest of the game we saw was from 85 cents of hedges. Speaking of diversification, we added another piece to our portfolio in Q2 with the Centrica gas supply agreement that fetches us TTF European TTF-based pricing, less deductions. That starts sometime in 2029 and delivers 50,000 MMBTUs at NIT or at ACO at a very attractive netback. Of course, that agreement is confidential, but it does bring our total unhedged diversified volumes, so that's non-ACO price-related volumes, to 400 million cubic feet a day in 2028 and beyond. Combine the low cost and the great pricing that we got, at least relative to ACO, it meant we generated $228 million in funds from operations, that's $1.11 per share, and adjusted earnings of $150 million, or 50 cents a share, and we have continued to impress with an operating margin of 71%. We announced the monthly dividend increase of 1 cent per share, that's 9% in May, and that was paid out starting in June, and we still paid down debt of still in total net debt by $72 million. There's no rest for the wicked, and we're back up to running four rigs. We expect to hold that there for the rest of the year. We've continued to modify our drilling program going forward to shift even more towards some of the liquid-rich species like the cardium and the flare, and you can refer to the latest corporate presentation for reference to that. I think it's on slide 21. It's your breakdown of the species that we're going to drill this year, the fullness of this year. We remain well protected for the rest of the year with just over 500 million cubic feet a day of gas hedged over $4 in MCF and about 400 million cubic feet a day secured for 2027, at least so far, at $3.30 in MCF, both of which are higher than current strip, which is good and bad. The rest of our production is pointed to downstream markets and essentially with really no summer exposure to spot echo prices through 2027. When combined with our liquid hedges, that secures $485 million for the rest of 26 and another $590 million for 2027. This, along with our industry-leading cash costs, our market diversification, the great well results we're seeing, gives us the confidence to remain committed to our guidance, which is investing $450 to $500 million and drilling 70 to 80 net wells for 2026. We remain constructive for natural gas with the continued tailwinds that are presented from LNG Canada and both, sorry, LNG build-out in Canada and the U.S. And the increased demand from local markets like Power for data centers, Bale's strategy remains the same. We focus on execution, control things that we can control, that's cost, while mitigating the risks on the commodities. You know how we do it. We believe this is a winning recipe and it provides Long-term returns to our shareholders in a very volatile commodity market. Okay, I imagine there's some questions, Michelle, so maybe I'll turn it over first to the phones. I've got some other questions that come in overnight, but maybe Michelle will start with anybody on the phone who wants to ask a question. Go ahead.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. and to withdraw your question, please press star 11 again. At this time, I am showing no questions in the queue.

Okay, maybe I'll give some time for people to think and I will turn this, I have one question that came in about a little more information about what we're doing with this Cardium play and how we might be applying that up in Sundance. So maybe I'll ask Riley to maybe expound upon that a little bit with respect to how we're doing and what we're doing in the Cardium these days.

Sure, yeah. So, you know, like we've talked about mostly over the last little while here, we've been active in the Brazzo area. You know, we're going longer, sort of help fix, amortize the fixed cost of our wells, drilling in the bio-optimated zone to increase our ROPs. And then, obviously, we're increasing our stimulation intensity to try to improve on our per meter performance. So like we talked about in the press release, that's translated into, you know, a 37% improvement in our drilling cost per meter horizontal, which is a huge improvement. But we still think there's room to work on the completion side of that. So one of the things that we did here just recently with the last pad we drilled was we tried to coil shiftable sleeve system. There's some significant advantages to that system as we start talking about cemented liner systems. So we just finished up those completions here recently, so it's still early, but Everything's looking pretty positive there. We've actually been able to move costs in the right direction there. So we're on track to see an even larger cost reduction on a per meter basis as we go forward. So translating that over to the Sundance area, we recently drilled our first pad in Sundance since 2022. You know, really trying to take what we've learned from BRAZ and apply that as best we can. It's not completely translatable. There's a few differences, but the main goal here was to try and drive horizontal lengths longer. So this first pad, we were able to increase horizontal length by about 50%, which is pretty meaningful. The big difference up in Sundance would be that we don't really have the bioactivated zone to chase. So going low and improving that ROP in that bioactivated zone isn't really an option. But that length increase is still meaningful as and the other part of it would be increasing the stimulation intensity and driving that tonnage per meter number up a bit to try and get higher per meter rate. So overall, the first couple wells we drilled here, it looks like we've been able to reduce our horizontal per meter cost by about 10% on the drill side, which is a good starting point. I think we'll continue to try and move that further down. Those wells were completed just sort of again late last week here, so it's still early time. Overall, it's very encouraging and I think it will really help us to drive improved economics in Sundance, Cardiff and across the board where we have obviously a lot of reserves booked as well as a lot of locations. So, stay tuned on that as far as where we go with that one.

Okay, that sounds good. So, essentially we're trying to pull up both leaders, both the cost side and the production side because of course what matters most is returns, not just Other question that came in was this new term we've introduced in our press release or in our MD&A as well called Adjusted Earnings. I just wanted maybe Tavis to give you a chance to sort of explain that maybe in layman's terms a little bit more. What do we mean by this Adjusted Earnings?

Thanks. Mainly stems from our new Centric Gas Supply Agreement. The PTF component of this contract is viewed as an embedded derivative, and we have to separate that from the underlying ACO component of the contract and count for it as a derivative financial instrument. What that means is we have to mark-to-market this component every quarter, record that change in value in P&L. And this mark-to-market change is going to cause quite a bit of volatility in our earnings going forward, or it could potentially cause quite a bit of volatility. So we've decided to add a new non-gap measure to our disclosures that's going to take earnings, and we're just going to back out that unrealized gain or loss per quarter. And we believe that's going to give investors a clearer picture of our current operating performance without the noise of this non-cash item.

Excellent. Okay, thanks for explaining that for folks. That's good. And one last question that came in about turnarounds. Maybe, Todd, you can, I mentioned it in my opening remarks, you could expand a little bit more on how we do this because I think it's something, you know, we think we're proud of and how we manage our business and how we keep production on. The uniqueness, I guess, or potentially uniqueness of our way our gathering systems and plants are all connected. that allows us to do this. Maybe you can expand on that a little bit more too. Yeah, sure.

And yeah, thanks for recognizing the planning that goes into turnaround, the execution from our asset integrity group, our field foreman, our operators who are out there doing the work when turnarounds are happening. So they do a great job. Sometimes they have to pivot mid turnaround because we're going into vessels and we're looking and doing and that sort of stuff and all of a sudden we see something needs to be repaired and so they do a great job of minimizing the downtime but but yes given given the interconnectivity especially down in Bras we've got three plants that are essentially interconnected and then obviously in Sundance we've got many plants nine in total that are interconnected you know we're able to move gas from plant to plant We've still seen some production losses, but it's mitigated substantially. We did three plants in the quarter, two were in Sundance, and out of those two plants we only saw for the quarter, about a 400 BOE a day loss on the quarter. And then the third plant was Brazzo. We were able to divert gas to Chambers and to Aurora, and that only accounted for 100 BOEs on the quarter. The other part is the modularity of our plants. So, you know, we might have two inlets at a plant, and we've got multiple processing trains. In a lot of situations, we're able to keep part of the plant running and just focus on the part that needs to be inspected. We've got them usually in five-year intervals, so you might have one inlet that's five years and the other inlet that's opposite or other vessels. We're able to keep part of the plant running, not always, but we try that. We do it by design to minimize the impact on a particular plant at one time. We did one plant at the beginning of Q1. Caquaz is a small plant that went really quick and good, but we've got one more here in Q3 starting next week in Swanson. Same thing, we'll keep about half the plant running. We'll be able to push a little bit more through one train and then we'll have gas going up to Nose Hill, down to the Edson plant, over to Old Man and Old Man North to try and minimize the downtime.

Easier with five turnarounds. Yeah, okay. Well, thank you. Again, thanks to the team in the field and everyone that's involved in that. I hear most folks in the office have to make sure all this runs the way it does. So it looks like no questions. Is that correct, Michelle?

That's correct.

Okay. Well, I think we'll end it here. I guess it was a somewhat expected in-line quarter, maybe a little bit boring, but We won't apologize, certainly, for boring. Oh, wait a minute. Sorry, there is one question now that showed up on our queue. Do you want to take that call?

Okay. One moment. And the question is going to come from Chris Thompson with CIBC. Your line is open.

Hey, apologies. I got my hand raised late there, but thank you for still taking my question, guys. Just on capital allocation, JP, you already raised the dividend once this year, maybe alluded to potential for additional raises going forward. So just maybe walk us through, you know, how are you thinking about capital allocation now that you're below your debt targets and, you know, pre-cash flow generation has been pretty strong?

Yeah, that's actually, we did have some questions overnight on that too, so I'm glad to do bring it up. We've essentially, as we mentioned, we've essentially met our soft target of debt to EBITDA by approximately one times, and we've increased the dividends slightly last quarter, recognizing that we made it there. That leverage target's backward-looking, of course, and so we're looking forward now, and I've always said that as we look forward, we're looking at the business environment and be mindful of where the business environment is. Prices are Gas prices have weakened, certainly, in the forward shift, so we're going to be mindful of that. We'll remain prudent on our capital returns. We certainly want to give our shareholders confidence that these dividends are sustainable, and that's just the way we run the rest of the business, too. We'll see as things transpire. We certainly are, obviously, still paying down some debt, but we're going to be mindful of the business environment going forward now. We've never paid a variable dividend, and we don't think we get credit for a variable dividend in the market, so I don't see us starting that this time. Any dividend increase we make will be a fixed dividend increase, and we'll continue to do that when we're comfortable with what forward strip presents to us. That's kind of it in a nutshell, Chris, if that answers your question.

Sure, yeah, so then, you know, excess free cash flow, I guess, would be allocated to the balance sheet in the interim. At what point do you, you know, can you give us a bit of color on how low you'd be willing to let leverage go before you find that you have to make a different kind of capital allocation decision?

Well, as we get closer to that, that would be great. That would be a great problem, wouldn't it be? I would argue that I would argue that net debt is a reduction of capital to shareholders as well, so I'm not sure that either one is a way of returning capital to shareholders. We could go lower. I'll tell you what, when we get closer to that level, we'll talk about it.

Got it. Okay. No problem. And then maybe just a question on the marketing side. Looking forward, starting in late 27 and more so in 2028, there's more exposure to the WCSB, Empress, Emerson markets. Wondering how you're thinking about that, just given where your outlook is on natural gas.

Yeah, we're going to... Nothing's really changed for us in the way we run the business and our strategy to take risk off the table. Those markets can trade, you know, at times can trade just the same as ACO or ACO Plus and that's fine. And so, you know, depending on the season, we might take that down or not. We might move those to downstream markets and make arrangements so we can do that as well. So there's flexibility there over the next, I'd say, year and a half. And we've built this position such that we don't need to react quickly to make these decisions. We obviously don't want to hedge something say below $2 and so we're mindful of that too. Our strategy is to continue to add to the hedge book as we see it, as we have a mechanical program that we prescribed and we will continue to do that in a mindful way, of course. So nothing really changes for us. Like I said, we have 400 million cubic feet a day, which is a substantial portion of our future gas out in 28 and others. If prices really peel away across the board entirely, then we'll slow down, clearly. Okay. And then last question, if I can sneak in one more.

Just on the data center side, we've seen the conversation amongst your peers quite active in the last few months. Just wondering if you can give us a bit of color on what you're seeing in that market, and is that kind of the opportunity that PAYTO might have access to as well?

We certainly have access to it, to answer that question. We weren't the first ones to jump onto a LNG deal either. If you recall, we took our time to find the right deal. So we'll be prudent in anything on data centers. I will remind you that we already have a power deal, right? We already sell our gas, you know, a pretty good deal, actually, where we sell our gas to a power plant. So it's not like we are desperate for that. Those opportunities, if they present themselves, will have to make sense to us. So we're not going to sign anything just for the Thanks for taking my questions. Yeah, thanks, Chris. Thanks for asking them. Okay. I'll turn it back to you. That's good. We'll see you everyone next quarter. Thanks for tuning in.

This concludes today's conference call. Thank you for participating and you may now disconnect.