BKV Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Community Response: Made a $50,000 contribution to the Kerr County Relief Fund and matched employee donations two to one.
• Business Environment: Macro backdrop bullish for natural gas; ERCOT power market shows long-term strength; carbon capture benefited from the 45Q tax credit.
• Upstream: Exceeded production and capital efficiency guidance, increased 2025 production guidance midpoint, reduced corporate capital budget. Acquired Bedrock's Barnett Shale assets to extend leadership in the Barnett and enhance reserves.
• Power: Reserved manufacturing slots for natural gas turbines, active in PPA discussions with data centers to address power needs.
• Carbon Capture: Solidified leadership position with multiple CCUS projects in the pipeline, including new projects in East Texas, and a partnership with CIP energizing the business.
• Deal with Gunvor: Signed a seminal deal for the supply of carbon sequestered gas, demonstrating premium pricing potential.

Segment Performance

• Upstream: Net production in the second quarter was 811 million cubic feet equivalent per day, exceeding the high end of the guidance range. Production guidance midpoint for 2025 was increased to 800 million cubic feet equivalent per day, while the corporate capital budget midpoint was reduced to $320 million. The acquisition of Bedrock's Barnett Shale assets is expected to add over 100 million cubic feet equivalent per day of production and nearly 1 Tcfe of 1P reserves. Development capital spending for the second quarter was $63 million, the low end of the guidance range.
• Carbon Capture: Benefited from the one big beautiful bill act, with a robust deal pipeline including projects reaching FID, permits approved, and a partnership with CIP. The CCUS and other CapEx guidance range is $85 million to $115 million.
• Power: Temple plants delivered a combined average capacity factor of 59% and total generation over 1,900 gigawatt hours. Gross third quarter Power JV adjusted EBITDA is expected $55 million to $75 million, with annual guidance $130 million to $170 million.

Guidance

• Upstream: 2025 production guidance midpoint increased to 800 million cubic feet equivalent per day; corporate capital budget midpoint reduced to $320 million. Third quarter production midpoint expected at 820 million cubic feet equivalent per day.
• Power: Gross third quarter Power JV adjusted EBITDA expected $55 million to $75 million; annual guidance $130 million to $170 million.
• Carbon Capture: CCUS and other CapEx guidance range $85 million to $115 million.

Risks

• Closing of the Bedrock acquisition is subject to customary closing conditions.
• Risks associated with forward-looking statements, including potential differences from actual results due to uncertainties and assumptions.

Question and Answer

Q: Can you guys hear me? Oh, thanks. Great. Obviously, one of the key benefits of purchasing adjacent acreage is improving your ability to lengthen laterals and continue to drive better economics into play. I guess the question in the Barnett is with the producing wells in existence, how much running room do you have to increase laterals? So maybe just some color on kind of long laterals as a percentage of the program today and how that improves with the acquisition?

A: Good morning, Scott. This is Eric and thanks very much for the question. Yes, you're absolutely correct. The lengthening of laterals and the accretion of inventory is certainly one of many advantages of the Bedrock deal that we're very excited about. In addition to it fitting complementary with low decline base, with adding infrastructure scale and contiguous acreage to our portfolio, selling more low nitrogen gas to data centers and to Gulf Coast demand centers, for example. We're also excited about the inventory accretion, as you mentioned. I think we announced 50 kind of equivalent Tier one lateral adds plus another 20 Tier two, so a total of 70 up to 70 equivalent 10,000 foot lateral adds. Of that 50 Tier one, roughly close to half of those are extending existing laterals from our current acreage as you mentioned. And then on top of that, I'll reference the 80 refracs that have been additive as a result. So all told, kind of 70 equivalent 10,000 foot laterals, 80 refracs, it adds another couple of years of inventory and even better capital efficient inventory with the lengthening of laterals and the accretion of those high quality sticks from bedrock acreage.

Q: Good morning. I want to first ask about the CIP partnership now that you're moving forward. What are the initial focus areas of the partnership? Any changes in the project sourcing process and any new development that you could highlight so far?

A: Yeah, I'll start with the partnership. Baer, feel free to chime in on some of the projects. But in terms of the partnership, it's tremendous. As we mentioned in the last earnings call, CIP is a global infrastructure investor. They've got really a global view on carbon capture. Think about things like the carbon offset markets, clearly very active in Europe and they have BKV is their exclusive platform invest in carbon capture here in The U. S. So it's incredibly synergistic in terms of their plans right now in the joint venture. We have two projects, as we mentioned, Barnett 0 and our Eagle Ford project. Clearly, projects mature to the right stage, we bring them into the joint venture. And then as we've mentioned, it's a 51%, 49% joint venture where BKB holds the majority and consolidates. And then there's some reversionary interest over certain return hurdles. So that's the structure that's continuing. You can see that from our financials that they're investing into the joint venture and that will ramp over time. They've committed up to $500 million and so we're excited to be able to deploy that alongside our capital. Eric, maybe give some color on sort of the sourcing and additional projects that we're thinking about there.

Q: Hi, good morning. Thank you for taking my questions. On the power side, in the release, you mentioned working with counterparties to improve capacity factors and realize spark spreads. You mentioned this a bit in the prepared remarks, but wondering if you could just talk through what a potential deal might look like through the PPAs behind the meter solutions or other commercial agreements to help drive those improvements?

A: Yeah, good question, John. So in terms of the power business, right, as you saw, we've got tremendous headroom in the Temple Energy Complex. Today we have a capacity of 1,500 megawatts. We're using our capacity factors we shared is in that 55%. So clearly we've got some running room. Typically a baseload plant like that can run as high as 90% capacity factor. So we think there's pretty substantive headroom and a lot of that is through the evening hours and into the night where generally in the ERCOT market you're offbeat. When you think about sort of partnering or working with hyperscalers or data centers, you're going to be looking at more around the clock type usage, right? And so I think some of that you're going to contemplate as potentially a behind the meter structure where you can deliver power directly. I think we cite Temple as an ideal area to build an additional infrastructure. It's central to country, it's got great access to gas, water, power, and land. And so it puts it in a really ideal position. So you can imagine that as we are in these discussions that a portion of power is buying the meter, there's an ability to also tap into the grid because you need that reliability. And then you're setting up a contract structure which is flexible. So you typically, you will see contract structures out there, everything from more fixed price to sort of a tolling type arrangement. And we'll continue to analyze that in the market, what's the ideal setup. What's unique about BKV and our ability is we produce both gas and power. And so our flexibility on the contract side is incredibly dynamic. We can go at all the whole spectrum from fixed price all the way to tolling arrangements. And so we think it's incredibly competitive. We're obviously going to be excited to continue those discussions and look forward to future announcements in those regard.