Earnings call transcript: Peyto Exploration Q2 2025 misses earnings expectations

Peyto Exploration & Development Corp. reported its second-quarter 2025 earnings, revealing a significant miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.43, falling short of the expected $0.515, marking a 16.5% negative surprise. Revenue was reported at $307 million, below the forecasted $347.14 million, resulting in an 11.56% shortfall. Consequently, Peyto’s stock price declined by 1.78% to $19.05 in after-hours trading.

Key Takeaways

• EPS of $0.43 missed the forecast by 16.5%.
• Revenue fell short by 11.56%, totaling $307 million.
• Stock price decreased by 1.78% following the earnings release.
• Funds from operations increased by 24% year-over-year.
• Hedging strategies contributed $53 million in gains.

Company Performance

Peyto Exploration & Development Corp. demonstrated robust operational performance despite missing financial expectations. The company achieved a 24% year-over-year increase in funds from operations, reaching $191 million. Core production rose by 8% to 132,000 barrels of oil equivalent per day, supported by strategic drilling and cost management efforts. Peyto’s proactive management of cash costs, which decreased by 13% year-over-year, underscores its competitive positioning in the natural gas sector.

Financial Highlights

• Revenue: $307 million (↓11.56% from forecast)
• Earnings per share: $0.43 (↓16.5% from forecast)
• Funds from operations: $191 million (↑24% YoY)
• Core production: 132,000 BOEs per day (↑8% YoY)
• Cash costs: $1.31 per Mcfe (↓13% YoY)

Earnings vs. Forecast

Peyto’s earnings per share of $0.43 fell short of the forecasted $0.515, resulting in a 16.5% negative surprise. Revenue was also below expectations, at $307 million compared to the anticipated $347.14 million. This performance contrasts with the company’s historical trend of meeting or exceeding earnings expectations, highlighting a challenging quarter.

Market Reaction

Following the earnings announcement, Peyto’s stock price dropped by 1.78%, closing at $19.05. This decline reflects investor disappointment with the earnings miss and revenue shortfall. InvestingPro data shows the stock generally trades with low price volatility, with a beta of 0.73, and is currently trading near its 52-week high of $23.22. The stock has demonstrated resilience with a positive YTD return of 1.12%. Access detailed valuation metrics and Fair Value analysis through InvestingPro’s comprehensive research reports, available for over 1,400 US stocks.

Outlook & Guidance

Despite the earnings miss, Peyto maintains its capital spending guidance for 2025, ranging between $450 million and $500 million. The company aims to add 10,000 to 11,000 BOEs per day in production efficiency and targets a soft debt-to-EBITDA ratio of 1x by 2026. Management anticipates a production ramp-up in the fourth quarter, aligning with favorable winter pricing. InvestingPro’s Financial Health Score indicates a "FAIR" overall rating, with particularly strong momentum metrics. The company maintains a healthy current ratio of 1.0 and has demonstrated strong returns over the past five years.

Executive Commentary

CEO JP Lachance emphasized the company’s strategic focus, stating, "We sell a product the world needs and we run our business in a way that is sustainable." He highlighted Peyto’s commitment to cost management and market diversification, noting, "We keep our costs as low as possible. We diversify our sales points. We hedge the near term." Lachance affirmed the stability of the company’s business plan and guidance, saying, "Our business plan and guidance for 2025 remains unchanged."

Risks and Challenges

• Market volatility impacting natural gas prices.
• Higher than anticipated property tax expenses.
• Potential production disruptions from regional fires and maintenance activities.
• Macroeconomic pressures affecting energy demand.
• Strategic execution risks in expanding drilling operations.

Q&A

During the earnings call, analysts inquired about improvements in Cardium well design and explored opportunities for third-party gas processing. Discussions also covered future capital allocation strategies and the company’s hedging approach for 2027. These inquiries reflect investor interest in Peyto’s operational efficiencies and long-term strategic planning.

Full transcript - Peyto Exploration&Development Corp (PEY) Q2 2025:

Towanda, Conference Call Operator: Hello, and welcome to Peyto’s Second Quarter twenty twenty five Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. I would now like to turn the conference over to JP Lachance, President and CEO. You may begin.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Thanks, Towanda. Good morning, folks, and thanks for joining Peyto’s second quarter twenty twenty five 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, Travis Carlson, our CFO, Todd Burdick, our VP of Production, Mike Collins, our VP of Marketing, and Mike Reese, 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 Peyto team both in the office and in the field for their contributions to another strong quarter.

Peyto remained active with four rigs during the second quarter through spring breakup. As is typical for Peyto production falls a little through Q2 as we try not to overspend fighting through the mud to complete wells and bring them on production. Fires near Fort Mac did cause some oil sands shut ins that affected demand for natural gas in the province. And there were some NGL maintenance that caused prices to go negative at least for one day in June. We did shut in some production that day not 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 by I bring it up because it’s something we’ll continue to consider as we move through the summer. Core production was just under 132,000 BOEs a day up 8% since second quarter of twenty twenty four. 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 $53,000,000 in total gains, which added zero seven five dollars per Mcf to our realized gas revenue and our market diversification contributed $0.53 per Mcf net of transportation costs over and above the monthly AECO pricing. All these factors combined to increase funds from operations by 24% year over year as we generated $191,000,000 in the quarter or $0.95 per diluted share which was also up 20% from Q2 last year.

We did not have much gas exposed to AECO pricing in the quarter since we have Empress service which can net us better realizations to AECO particularly when access to storage is restricted, 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 Brazeau that added $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 over 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 was 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. Royalties were a lot lower, in the quarter than last year because of weak AECO 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 continue to reduce bank debt.

In fact, we paid down $40,000,000 of net debt in the quarter and $105,000,000 year to date. So taken together, our cash costs were down $0.11 per Mcfe quarter over quarter and $0.19 relative to 2024. So all in all, have, you know, we have the lowest cash cost in town, but more importantly, think one of the highest margins. 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 Brazeau 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 see and 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 carting locations across our large inventory. Wilridge 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 prolific 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 us give the team more confidence in the 20 plus locations that we see in the play.

We started construction of a 30,000,000 a day field compressor station in the greater Sundance area. It will move more liquids rich gas to the Itson gas plant via the Central Puerto Hills gas gathering system later in Q3 and into Q4. Again, And 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 go to we’ll take gas to Swanson and Old Man. Long way to LNG Canada facility exporting its first cargo right at the end of the quarter.

I think it was June 30. We expect this will be constructive for the basin in the long term, but you know, we should be patient as things ramp up here. In the meantime, we have plenty of production hedged for the summer about 500,000,000 cubic feet a day priced at $4 an Mcf. And the rest of it’s diversified to hubs in Eastern Canada and Chicago and Midwest where prices are stronger. Our business plan and guidance for 2025 remains unchanged.

We plan to spend between $450,000,000 to $500,000,000 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 had a large number of potent non QM 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 crews steady and we want to you know 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 product to the world needs and you know, 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 the near term and we so that we can confidently fund our capital program, reward our shareholders with profits.

You know, it’s simple, predictable, maybe perhaps a little boring, but we make no apologies for that. Okay, imagine there’s some questions. So Tawanda perhaps we can go to the phones first.

Towanda, Conference Call Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question Our first question comes from the line of Chris Thompson with CIBC. Your line is open.

Chris Thompson, Analyst, CIBC: Just to start out, talked about some of the recent successes at Chambers in the new wellbore design. Just wondering how does that compare to other competitors in the area? Is Peyto 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?

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Yeah, as far as the I mean obviously you know we mentioned that and I think last quarter that this isn’t something that isn’t something new in 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 bio turbidated zone just helps us with penetration rates. We talked about this last quarter. And so I wouldn’t you know we I don’t know there’s a lot of gas guys doing this per se.

I’m looking at Mike and Riley here and they’re down their heads no. We might be you know there may be a couple other companies doing it so I don’t know that we lead we lead but it’s certainly an improvement for us and it’s important for our long term you know Cardium inventory to get those costs down right.

Chris Thompson, Analyst, CIBC: Okay and then I guess just sticking to that Chambers and Brazos area can you maybe expand a bit on the third party gas that you’re bringing in there? I think you mentioned $07 an Mcfe. Was that specific to Brazeau?

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: That’s a combination of us selling some excess Empress service and the Brazeau processing fee income that we would have received but it’s not just Brazeau maybe I could get Todd to elaborate on some of the other sort of sources of our fee income our third party fee income. Todd do you want to comment on that a little bit It’s just that area though just to be clear Chris.

Todd Carlson, CFO, Peyto Exploration & Development Corp.: Yeah for sure. Definitely some opportunities and further opportunity in the Brazeau area. We I think we mentioned last quarter when we commissioned that pipeline that we built it so that we can add and we’ve been our team’s been busy talking to others in the area and then you know up in in Greater Sundance we’ve got we’ve had some 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’s pretty active.

We’ve got a little bit up in Kakwa. So you know, it’s kind of spread out all the way from Kakwa down to Braz. So it’s definitely not just happening in Braz and you know, we’re always working with other producers who may be looking to shut down plants other things and helps it helps them on their OpEx and helps us on our on the other income part of the balance sheet.

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

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Well, we still believe that you know we’re gonna put money into the drill bit to grow modestly over the next two years. You know we don’t have we haven’t come out with a formal plan for ’26 yet. Certainly that’s it probably is going look a lot similar to the last two years from what I can you know from what we can predict at this point in time. You know we’ll see where prices and everything goes from here but and we you know we’ll continue to make debt repayment a priority but you know we have a soft debt to EBITDA target of one times trailing twelve month EBITDA of one times and so that hasn’t changed and when we get there which we expect will be sometime in 2026 that we’ll relook at that capital allocation strategy, that depends on where prices are at. Know, LG Canada came on and things, know, it go in price, know, 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 where, 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 the way it is right now, but we’ve got a fairly comfortable dividend level right now that we feel is very sustainable and we’re going to continue to grow and nothing really has changed from what we’ve been messaging all the way along Chris.

Chris Thompson, Analyst, CIBC: Got it. And then just last question from me, JP. You touched on AECO improving. How are you thinking about marketing strategy here? 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 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?

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: We still believe that diversification is important and diversification doesn’t mean not AECO, SOECO is part of that. And in fact, our exposure to AECO is in the fact that we would like to hedge some of that in the future, right? So as we move closer to ’27 we’ll build that up. There’s nothing’s changed in our hedging strategy plan, right? When we get to ’27 we’re going to be any season there in ’27 we’re going to be minimum to 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 right now prices in ’27 a day 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 echo a little bit everything else too. We think that’s important not to have just one market.

So we’re not we’re not we think it’s good. We want it to improve, but we’re not counting on it as it were.

Chris Thompson, Analyst, CIBC: So it doesn’t sound to me like having additional exposure to AECO is compared to where you’ve historically been in the last couple of years is something that you’d be really looking for?

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Yeah, we’re only look remember we only hedge two and three years out. You know to the extent that AECO improves we have a whole lot of reserves that would be exposed to that in the future should AECO really start to run it becomes say a premium market or something different than what it is today right. So this is about you know short managing things in the short term. So I don’t think I don’t see us changing our strategy in that regard.

Chris Thompson, Analyst, CIBC: Okay. That’s all for me. I’ll hand it back. Thank you.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Okay. Thanks, Chris.

Towanda, Conference Call Operator: Thank you.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: To Wanda?

Towanda, Conference Call Operator: Yes.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: I have some questions here from coming overnight. So maybe I’ll just, if it’s okay, I’ll ask a couple of those here of the team.

Towanda, Conference Call Operator: All right, I’ll hand it back to you.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Todd we did talk about earlier about you know the whole bed compressor that we’re going to install you’ve already started construction on it here. Some questions around okay what’s you know what is can you elaborate a little bit more where is this and how is it going to help us?

Todd Carlson, CFO, Peyto Exploration & Development Corp.: Sure. So the compressor is I guess best described as the sort of the heart of the original Peyto 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, lot of horizontals and Cardium Nauticumans, Polaris, Wilridge. 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 you know 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 Belairs and Nauticumans as I mentioned that’s the bulk of it.

So and with the pipeline infrastructure that we bought along with the Repsol asset acquisition it allowed us to tie that gas in with some modest pipeline expenditures down to the Edson gas plant where we can get a lot better liquid recovery from especially the Cardium’s 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. We’re going to collect about 30 to 35,000,000 a day initially. We built the plant so that we can expand it to that 60 to 70,000,000 cubic feet a day just with another dehai 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 it in the press release you take 30 or 35,000,000 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. And as well all that 30,000,000 a day gas that you’re sending to Edson is now going to be at a much lower line pressure probably half. So that helps the economics of those wells long term. So a lot of little parts that come into play into the advantage of building this compressor station.

Things are going really well. We’ll, you know we’re probably a month out maybe a little bit longer until commissioning. We’re the guys have been despite the rain we’ve been shut down a little bit and had some delays but things are moving along really really well.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Good, thanks. Another question was about the well 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 the year. Can you talk about the kind of species we’re going to be drilling? Can you elaborate a little more?

Can you us a little more color on that? You bet. So when we’re looking at the

Riley Frame, Chief Operating Officer, Peyto Exploration & Development Corp.: 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.

Todd Carlson, CFO, Peyto Exploration & Development Corp.: If you guys recall ’24.

Riley Frame, Chief Operating Officer, Peyto Exploration & Development Corp.: We had a much more Wilridge centric program in the first half of the year and a much more non human flair centric program in the second half of the year. So very similar to ’24. I think what we’ll see is that that curve improve as we move forward through the second half of the year. And you know when we distill it down to what’s really important here looking at you know what we’re spending for what we’re getting I think we’re right on track with 2024. So I would expect us

Todd Carlson, CFO, Peyto Exploration & Development Corp.: to be in line with those outcomes as we do the second half of the year.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Okay, we talked about in his press release and I mentioned it here earlier we’re following up on some past successes not a place to couple of place that we haven’t done it recently. One of the questions was the Viking the blue sky. Not something that people I guess you know the investors hear a lot about so maybe I get Mike to elaborate a little bit on what we’re pursuing there in the Viking blue sky here this year later later part of this year.

Mike Collins, VP of Marketing, Peyto Exploration & Development Corp.: You bet JP. 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 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 the 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 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.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: K. Thanks, Mike. I don’t know if there’s any more questions from from the phone lines tomorrow. As

Towanda, Conference Call Operator: a reminder, ladies and gentlemen, that’s star one one to ask the question. I’m showing no further questions in the queue.

JP Lachance, President and CEO, Peyto Exploration & Development Corp.: Okay. Well, for tuning in folks. We’ll see you on the next call in November.

Towanda, Conference Call Operator: Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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