Peyto Exploration & Development Q2 Earnings Call Highlights

Key Points

• Q2 financial performance remained solid: Peyto generated C$228 million in funds from operations, reduced net debt by C$72 million and raised its monthly dividend by 9%, despite seasonal field disruptions and weaker gas prices.
• Production and liquids growth initiatives advanced: The company redirected 85 million cubic feet per day of gas to a deep-cut facility, increasing liquids recovery by about 1,500 barrels per day, while Cardium drilling delivered initial liquids rates of 400–600 barrels per day.
• Peyto reaffirmed its 2026 plan: It expects to operate four drilling rigs, invest C$450–C$500 million and drill 78 net wells, with increased focus on liquid-rich targets; extensive gas hedges and diversified pricing agreements support its outlook.

Peyto Exploration & Development TSE: PEY said its second-quarter operations were affected by wet spring and early-summer conditions that reduced field activity, but production remained broadly consistent with the prior quarter due to a strong first-quarter drilling program.

President and Chief Executive Officer JP Lachance said the company reduced debt, raised its dividend in May, added undeveloped acreage and entered a new gas-marketing agreement during what he characterized as a typically quieter period for field work.

Capital spending, drilling and land additions

Peyto spudded 10 wells during the quarter as it slowed drilling during spring breakup. Well-related capital spending totaled C$68 million, including completions that carried over from the first quarter. The company also invested C$14 million in facility projects, including pipelines, plant optimization work and maintenance, while spending C$2 million to acquire 26 sections of land through Crown sales and direct purchases.

Those purchases brought Peyto’s year-to-date land additions to 53.8 net sections at an average cost of C$158 per net acre, Lachance said. The company said the acquisitions add to its unbooked drilling inventory.

The company’s Cardium drilling program in Brazeau produced initial liquids rates of 400 to 600 barrels per day from recent wells, according to Lachance. Peyto has been drilling deeper in the bioturbated zone, extending horizontal well lengths and increasing stimulation intensity to improve well economics.

Chief Operating Officer Riley Frame said those changes have resulted in a 37% improvement in drilling cost per meter of horizontal length in Brazeau. Peyto is applying aspects of that approach in Sundance, where it recently drilled its first pad since 2022. The initial Sundance pad increased horizontal lengths by roughly 50%, while drilling costs per horizontal meter have declined about 10%, Frame said. The wells were completed late in the week before the call, and he said it was still early to assess their results.

Production infrastructure and liquids strategy

Peyto completed three plant turnarounds during the second quarter, two in Sundance and one in Brazeau. Vice President of Production Todd Burdick said the company’s interconnected gathering systems and processing plants enabled it to redirect volumes and limit production interruptions.

The Sundance turnarounds resulted in an estimated 400 barrels of oil equivalent per day of production loss for the quarter, while the Brazeau turnaround accounted for about 100 BOE per day, Burdick said. Peyto has one additional turnaround planned in the third quarter at its Swanson plant and expects to keep roughly half of that plant operating during the work.

At the start of the second quarter, Peyto redirected approximately 85 million cubic feet per day of sales gas to a third-party deep-cut facility. The arrangement increased propane and butane recovery, mostly in the form of condensate, by about 1,500 barrels per day. Lachance said the initiative, together with the Cardium program, is helping raise corporate liquids content from a range of 12% to 13%.

Financial results and marketing agreements

Controllable cash costs—including operating expenses, transportation, interest and general and administrative costs—were C$1.04 per Mcfe during the quarter. Lachance said that level returned the company to costs seen before its Repsol asset acquisition in the fourth quarter of 2023.

Peyto realized a natural-gas price of C$3.42 per Mcf, compared with an average AECO monthly price of C$1.64 per Mcf after adjusting for heat content, according to Lachance. The company attributed C$0.93 per Mcf of value to market diversification and C$0.85 per Mcf to hedges.

Funds from operations totaled C$228 million, or C$1.11 per share, while adjusted earnings were C$150 million, or C$0.50 per share. Peyto reported a 71% operating margin and reduced total net debt by C$72 million despite increasing its monthly dividend by C$0.01 per share, or 9%, in May.

Chief Financial Officer Tavis Carlson said the company introduced adjusted earnings as a non-GAAP measure because its new Centrica gas supply agreement contains an embedded derivative that must be marked to market each quarter. The measure excludes unrealized gains or losses related to that non-cash item, which the company said could create volatility in reported earnings.

The Centrica agreement, scheduled to begin sometime in 2029, will provide European TTF-based pricing less deductions for 50,000 MMBtu at NIT or AECO. Lachance said the contract brings Peyto’s total unhedged, non-AECO-priced diversified volumes to 400 million cubic feet per day for 2028 and beyond.

Outlook and capital allocation

Peyto has returned to operating four drilling rigs and expects to maintain that level for the remainder of 2026. The company reaffirmed guidance to invest C$450 million to C$500 million and drill 78 net wells during the year, with a greater share of activity directed toward liquid-rich Cardium and Falher targets.

The company said it has more than 500 million cubic feet per day of gas hedged above C$4 per Mcf for the remainder of 2026, along with about 400 million cubic feet per day secured at C$3.30 per Mcf for 2027. Including liquids hedges, Peyto said it has secured C$485 million for the rest of 2026 and C$590 million for 2027.

On capital allocation, Lachance said Peyto has reached its soft debt-to-EBITDA target of about one times and has already raised the dividend. However, he said the company will remain mindful of weaker forward natural-gas prices and will only pursue fixed dividend increases when it is comfortable they are sustainable. He added that further debt reduction also represents a return of capital to shareholders.

Lachance said Peyto remains constructive on natural gas because of Canadian and U.S. LNG development and potential demand from power generation for data centers. The company has access to data-center-related opportunities, he said, but will be selective and seek agreements that offer acceptable pricing and returns.

About Peyto Exploration & Development (TSE:PEY)

Peyto Exploration & Development Corp (Peyto Exploration & Development) is an oil and gas company that involves in the exploration and development of natural gas. The company acquires, explores, develops and produces crude oil and unconventional natural gas reserves.

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