Questerre 2Q 2026 Financial Statements & MD&A
President’s Message
This quarter, we advanced the three core assets in our portfolio.
The successful HCCOTM test in Brazil is a major proof point for our oil shale refining technology. In May, we demonstrated the homogeneous charge of low-temperature oxygen in our working gas using a commercial-scale vessel. An extended test is the next step to establish the commercial parameters required to implement our HCCO process in the existing Petrosix refinery. We expect the process could materially reduce internal fuel usage, which currently represents nearly 15% of our production.
In June, our preferred shares, representing defined economic rights linked to our Quebec assets under either a settlement or development scenario, were listed on Euronext Growth in Oslo under the ticker QGAS. Depending on the outcome, these rights provide shareholders with 95% of the net proceeds from a settlement or a 50% carried interest in the future development of our Utica discovery. Shortly after the shares started trading, as noted below, the Quebec government formally recognized the strategic importance of natural gas. This supports our efforts to work with government and industry toward a commercial solution for developing the discovery.
We also completed the sale of our minority working interest at Kakwa Central. Consideration for the assets, which were producing approximately 650 boe per day, was $23.5 million in cash and the assumption of associated reclamation obligations. The proceeds will primarily fund future development at Kakwa North and the expansion of our operated assets in Saskatchewan.
Highlights
• Successful HCCO test using a commercial-scale vessel at the PX Energy facility • Preferred shares listed for trading on Euronext Growth under the ticker QGAS • Sale of the Kakwa Central assets for $23.5 million in cash • Like for like average production increased in the second quarter to 5,700 boe per day from 5,530 boe per day last quarter (overall production reduced from 6,180 boe per day following the Kakwa disposition of 650 boe per day) • Adjusted funds flow from operations of $18.3 million, including $6.9 million related to deferred sales revenue, compared to net cash from operating activities of $9.4 million • Working capital deficit reduced to $19.1 million at June 30, 2026 from $49.6 million at March 31, 2026 including cash and cash equivalents of $44.2 million
Oil Shale
The successful HCCO test advances both our long-term technology strategy and our efforts to improve the near-term profitability of PX Energy.
Low-temperature oxygen is key to the patented Homogeneous Charged Continuous Oxidation or HCCO process. Conventional processes, including the one currently used by PX Energy, generate heat externally to the main processing vessel, known as a retort. HCCO instead generates heat internally as injected oxygen reacts with residual carbon on the spent shale and with lighter hydrocarbons.
This eliminates the need for external heat-generation facilities, reducing capital costs by an estimated 40% per barrel. It also create a pure stream of carbon dioxide that can potentially be used for sequestration or enhanced oil recovery.
This was the first demonstration in a commercial-scale vessel measuring more than 10 metres in diameter and 30 metres tall. The largest previous test was conducted in a vessel measuring less than one metre in diameter and four metres tall. Supported by Red Leaf Resources, our team in Brazil designed, implemented and safely completed the test in less than two months. Over a two-week period, we precisely controlled the rate of oxidation, experienced no runaway temperatures and achieved even, homogeneous heat distribution without hot spots.
We believe this test will improve the Technology Readiness Level of the HCCO process from 4 to 6 on a scale where 9 represents ready for commercial use. We are incorporating the results into the design of a commercial-scale HCCO test.
Our next step is an extended test with continuous oxygen injection to establish commercial operating parameters and determine how much internal fuel consumption can be reduced. We estimate the reduction could be as high as 15% of existing usage, split approximately equally between fuel oil and gas.
Another priority for the team has been restoring the efficiency of the existing retort. Retort efficiency declined during the current quarter to just over 75% from a historical level of approximately 90%. The decline reflects agglomeration, or a buildup of shale on the vessel walls, following an improper restart after scheduled maintenance. This remedial maintenance work is underway during the shutdown.
Higher oil prices, while increasing revenue, have also made it more difficult for some customers to meet their minimum volume commitments under our take-or-pay contracts, as cheaper, lower-quality fuel oil has competed for market share in southern Brazil. We continue to collect cash for shortfall volumes but have incurred additional transportation and storage costs as a result. We are working with the affected customer to recover these costs and help them meet their contractual commitments, although arbitration may ultimately be required to resolve the issue. Of note our customers met 100% of their minimum contract volumes in the month of July as oil prices fell from their highs in April and winter demand increases.
Quebec
The Government of Quebec has formally acknowledged that natural gas will remain important to the province’s energy needs through 2050.
As Hydro-Québec rations electricity allocations for major industrial users, the Quebec Integrated Energy Resource Management Plan 2026-2050 – Our Plan for Quebec’s Energy Future, or “PGIRE,” confirms that electricity alone cannot meet Quebec’s growing energy demand. Released in early July, the PGIRE states that natural gas will remain part of Quebec’s energy mix and play a strategic role as the province gradually decarbonizes its energy system.(1)
The PGIRE also notes that Énergir, the provincial natural gas distribution company, sources its supply almost entirely from Canadian producers under existing contracts. Physically, however, close to half of the gas consumed in Quebec originates in the United States, reflecting the flow of supply from Western Canada and the United States through Ontario and into Quebec.
Our Utica discovery remains a shovel-ready solution to Quebec’s emerging energy challenges. It is positioned to provide reliable energy for baseload industrial demand and peak winter heating while relieving pressure on the electricity grid. It could also reduce Quebec’s reliance on imported natural gas and high-cost renewable natural gas while supporting economic growth. Designed with a low-emissions footprint, locally produced natural gas from the Utica could reduce greenhouse gas emissions compared with imported natural gas at a cost of less than one-third to one-fifth that of imported renewable natural gas(2).
We look forward to resuming discussions with the Government of Quebec following the provincial election this October.
We are also proactively advancing our legal action to protect shareholder rights. At a case management hearing in May, we pushed for an expedited path to a trial on the merits of our case and the quantum of economic damages. The Court established deadlines for the next pre-trial motions, which should allow a hearing date to be scheduled next year.
Operating and Financial
Production averaged 5,700 boe per day in the second quarter, compared to 6,180 boe per day in the first quarter with the disposition completed in May. This reflects the lower volumes from Canada following the Kakwa Central disposition, partly offset by a modest increase in production from Brazil.
Higher oil prices contributed to revenue increasing to $50 million for the quarter and $93 million year to date.
Operating costs in Brazil were approximately $3 million higher than in the previous quarter. This includes $2 million for additional energy costs and an additional $1 million was incurred for increased purchases of waste oil as feedstock to supplement our production due to the lower efficiency of the retort in the quarter. Costs were also incurred for the transportation and storage of under-lifted oil volumes under our sales contracts.
The net finance income for the quarter was $5.9 million and year to date was an expense of $4.6 million. Most of these amounts are non-cash and relate to interest expense and changes in the embedded derivative of the secured bonds that are ring-fenced to PX Energy and its assets. Our cash interest expense in the quarter was $8.5 million including $5 million in accrued interest on the bonds. Interest expense on the bonds in 2026 is added to the principal and not payable in cash until next year. We have the option to continue to add interest to principal in 2027 if oil prices fall below US$65 per barrel.
We reported net income of $27.8 million for the quarter, including a $17.5 million gain on the Kakwa Central disposition. Year-to-date net income was $10.0 million, including a first-quarter loss of $17.8 million. Adjusted funds flow from operations was $18.3 million for the quarter and included $6.9 million related to minimum sales contracts. Year to date, our adjusted funds flow from operations was $39.1 million and included $13.7 million related to minimum sales contracts.
Our working capital deficit at the end of the quarter was $19.1 million, compared with $49.6 million at the end of the first quarter. In addition, the long term debt on our balance sheet is solely the PX Energy secured bonds. These bonds mature in April 2028, and we can extend it until April 2030 for an additional fee.
Outlook
Improving the profitability of PX Energy remains our near-term priority.
The current maintenance will restore plant operations and should increase our production volumes by over 10%. We expect to be fully operational by the end of August, or three to four weeks since the shutdown. During this time, we are managing our oil inventory to satisfy current sales and our contractual commitments.
We are on track to realize $11 million in cost savings this year and are targeting a further $11 million through a second round of cost reductions. On the revenue side, our goal is to diversify our market exposure. Potential new markets include marine fuel supply, which may be better suited to the characteristics of our product. These and other initiatives are intended to build a $10 million reserve to fund the scheduled plant turnaround next spring that will take about a month to complete.
The successful HCCO test advances both our efforts to improve the near-term profitability of PX Energy and our long-term technology strategy. This technology is key to unlocking the significant oil shale resources under our licenses but we must remain profitable in the interim.
The proceeds from the Kakwa Central disposition will support the future development of Kakwa North and the expansion of our operated assets in Saskatchewan.
The release of Quebec’s long term energy plan marked an important turning point. The discussion is no longer whether natural gas has a role in Quebec’s future, but where that gas should come from. Polling conducted by the Quebec Energy Association confirms that Quebecers prefer locally produced natural gas to imports when it is developed using best production practices. We believe our Utica discovery represents the best opportunity to provide that supply while strengthening Quebec’s economy, improving energy security and supporting lower-emission development.
Michael Binnion
President and Chief Executive Officer
Forward Looking Advisory Please refer to the section Forward Looking Statements in the Management Discussion and Analysis regarding the forward-looking information provided in this President’s Message.