BKV Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Power Business: Announced definitive agreement to acquire 50% of Banpu Power's interest in the Power JV, increasing BKV's ownership to 75% with an expected close in Q1 2026. ERCOT's long-term fundamentals remain strong with load growth from AI data centers, industrial expansion, and residential demand.
• Carbon Capture Progress: Strong interest from potential PPA customers, projects advancing, including the Barnett Zero facility with over 99% uptime and on track to reach 1 million tons/year by 2027. Louisiana's temporary moratorium on CCUS project permits is viewed as constructive for BKV's existing permit applications.
• Upstream Operations: Upstream business delivered excellent results with production beating guidance, cost efficiencies, and the Bedrock acquisition integrated seamlessly. Drilled 8 new wells, completed 8 wells, and performed 11 refracs in the third quarter.
• Financials: Strong net income of $76.9 million or $0.90 per diluted share, adjusted EBITDAX up 50% from the third quarter of 2024. Successful bond offering of $500 million of 7.5% senior notes and a strong balance sheet with $868 million in total liquidity.

Segment Performance

• Power: Pending acquisition of a 75% stake in the Power joint venture, expected to close in Q1 2026, giving BKV over 1.1 gigawatts of low heat rate equity power generation in the ERCOT market. Third quarter Power JV adjusted EBITDA was below guidance, but operational performance remained strong. Power prices averaged $46.29 per megawatt hour during the quarter, with natural gas costs averaging $2.87 per MMBtu.
• Carbon Capture: Experiencing strong momentum with significant interest from PPA customers interested in gas-fired generation and carbon capture. On track to reach an injection rate of 1 million tons per annum by year-end 2027, with existing projects advancing and 2 more operational projects expected in the first half of 2026.
• Upstream: Barnett and NEPA assets outperformed, with production up 9% year-over-year and 2% sequentially. The Bedrock acquisition was completed, materially expanding the operational footprint in the Fort Worth Basin. Year-to-date Barnett D&C cost average was $545 per lateral foot, a 3% reduction from the second quarter.

Guidance

• Power: Fourth quarter gross power JV EBITDA expected to be $10 million to $30 million.
• Upstream: Fourth quarter production expected to average 910 million cubic feet equivalent per day with a range of 885 million to 935 million cubic feet equivalent per day. Full year corporate capital guidance remains $290 million to $350 million.
• Carbon Capture: On track to reach an injection rate of 1 million tons per annum by year-end 2027, with related capital requirements manageable within cash flow under the existing capital plan.

Risks

• Risks associated with the closing of the acquisition of a majority control position in the Power JV, including approval by at least 75% of disinterested shareholders of Banpu Power.
• Integration of upstream assets from the Bedrock acquisition into the existing portfolio.
• Non-GAAP financial measure reconciliations.
• Regulatory changes, such as Louisiana's temporary moratorium on CCUS project permits, which though viewed as constructive, could impact project timelines.

Question and Answer

Q: Congratulations with the acquisition of a controlling stake in the Power business. So can we just start from there and talk to how gaining control of the power unit going forward would change your conversation or how you have that conversation with hyperscalers and growing the Power business over time?

A: Yes, Betty, thank you. So first of all, we're really pleased with the acquisition. It's clear to us that the power markets in Texas are poised for very strong growth and our move into buying 50% of Banpu Power's position is a signal of our optimism in the market. I think the ability to kind of control the JV and consolidate does a number of things for our discussions. Number one, it allows us to bring together in a very seamless way the energy solutions that we uniquely provide between power, gas and carbon capture so that we can structure commercial agreements in a singular holistic energy solution package that a lot of these hyperscalers and data center companies are very interested in. So that's the first thing. The second thing is it positions us to really provide the transparency around our financials that investors are looking for. And I think also that allows us to be able to disclose a lot more information financially around what we're doing with the JV. And then the third angle is the way we've set it up from a growth or strategic flexibility engine for investments or additional opportunities, acquisitions, et cetera, in this 75:25 structure really is the right mix in our minds for long-term growth, and that allows us to deploy capital. When you think about expansions under the back of additional commercial agreements or additional acquisitions, it really does position us ideally. And that's a key part of these discussions with hyperscalers as well and potential data center companies.

Q: Look, BKV has been able to put together quite the position in the Barnett relatively quickly as well as work down well costs and improve margins on the assets. So bringing back to the consolidation of the Power JV, the company is now trading at an expanded multiple and looking at it simplistically, this should ease further consolidation of the basin. So would you agree with that comment? Or are there certain dynamics of the Barnett M&A market that just may not be as clear to those of us on the outside looking in?

A: Yes, Michael, it's a good question. So if you look at what's happening in the Barnett, I think, one is when you ever look at a deal, for me and for the team here, it's about fundamental economics, right? Multiples are helpful but it's about what is the hold to maturity return as the last owner. And so we're looking at deals that will be accretive from both the purchase price perspective, the strip, but also what can you do with those assets from a optimization, a synergy, a dropping costs, enhancing the development. You saw what we were able to do in the Bedrock transaction that we closed recently. And I think there's nearly a Bcf plus of opportunities in and around the Barnett. We believe that at our current multiple and with our position in the Barnett that we can continue to acquire accretive transactions in the market and we're very optimistic about continuing to be able to do that.

Q: Nice quarter. Chris, my first question -- just really interested on capital allocation, specifically. Could you maybe, David, speak to how you all are thinking about managing all your opportunities throughout the closed-loop strategy? What I'm getting at is you all seem to have more opportunities when you look at the upstream opportunities. I mean, how do you think about managing this or the power opportunities along with potential shareholder return and maintaining a solid balance sheet?

A: Yes. First off, let's talk about near term, right? 2026 is going to be a strong year as far as free cash flow generation. Obviously, Eric and his team right on the upstream side, we have that cash flow engine that's been there. I think once we consolidate the power results and people start to see those show up in the numbers, that's another source of funding that more than covers CCUS and any spend needed there. So we do have significant free cash flow that we have options with, right? To your point, do you delever, do you use that for strategic investments on the power side. But we do have options with that cash. And if you think about additional flexibility in '26. One, we do have the power debt that's going to be available to refinance midyear. We have additional flexibility now with the -- as Chris mentioned in his prepared remarks and I did as well, the bond and the upside to the RBL. So a number of avenues, triggers, and levers to pull as we think about financing. then finally, as it relates to power, obviously, if you start thinking about some type of commercial opportunities, that gives you financial flexibility depending on the level of counterparty you engage with, and we expect that to be a very solid counterparty if and when we get to that point. So a lot of flexibility, significant free cash flow generation and still levers to pull if you think about '26, '27. And we look at our current structure of how we have our debt and capital structure of each entity, if you will, lined up. And they're all taken with the life cycle and the maturity of each of the respective business units. So we feel very good actually about where we're at today as we head into '26. Does that answer your question, Neal?

Q: Chris, I was wondering if you could spend some time talking about the incremental autonomy that the increase in the stake in the Power JV will give you, maybe less so about pursuing the closed-loop strategy with customers, but really specifically on capital allocation to the power segment as a whole.

A: Yes, Jake, it's a good question. So as you know and we shared in our press release, the governance has changed, right, on the JV. And so pro forma for close, that would give us a majority control. That allows us to there -- very efficiently decide how much capital goes into the Power business how quickly we want to grow that business while also diversifying 25% of that capital to our partner, Banpu Power. So I think what it does for us is it gives us very strong control of the ability to flex. Clearly, we're going to work with our partner in the joint venture in terms of how much capital we deploy or how much debt we pay down. Right now, the power plant is delevering debt. It's generating cash. And so we're excited about that. And then as we look to grow into commercial agreements, increase the capacity factor and potentially add additional generation capacity through -- on the back of commercial arrangements, we're going to have a lot of ability to kind of time, optimize and size that capital in a way that fits with our overall portfolio capital allocation strategy.

Q: I'm wondering if there's a possibility of future power investments or spin-ups or inorganic opportunities that might come to the business outside of this JV?

A: Yes. So we're really happy with the JV structure today. I think the way we've restructured it in that 75:25 setup really does give us the vehicle for growth. Jake, if you look at how we've set up our business, we've got the upstream and midstream business, 100% owned by BKV Corporation. We're 51% of the carbon capture business in our joint venture there with CIP. And then in the Power business, we're 75% owners pro forma for the close and 25% Banpu Power. That gives us an ability to grow both the power and the carbon capture alongside of the upstream, which is our cash engine but to do it accretively. And so as we think about additional acquisitions, which we believe are there on the market and we'll be evaluating very closely and about some potential additional organic new generation assets on the back of commercial arrangements, we believe that the joint venture is the right structure for us to utilize because it does give us that capital allocation optimization and it gives us a platform that's already working and winning in the marketplace. So we see that as the right vehicle for growth, and then we'll obviously evaluate that from time to time going forward.