Baytex Energy Corp.

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp first quarter 2021 financial and operating results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Brian Echter, Vice President, Capital Markets. Please go ahead.

Thank you, Charisse. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our first quarter 2021 financial and operating results. Today, I am joined by Ed LaFerre, our President and Chief Executive Officer. Rod Gray, our Executive Vice President and Chief Financial Officer, Kendall Arthur, our Vice President, Heavy Oil, Chad Kalmakoff, our Vice President, Finance, Chad Lundberg, our Vice President of Light Oil, and Scott Lovett, our Vice President of Corporate Development. While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to the advisories regarding forward-looking statements, oil and gas information, and non-GAAP financial and capital management measures in yesterday's press release. All dollar amounts referenced in our remarks are in Canadian dollars, unless otherwise specified. And with that, I would now like to turn the call over to Ed.

Okay, great. Thanks, Brian. And good morning, everyone. I'd like to welcome everybody to our first quarter 2021 conference call. Last year, as you know, we took decisive steps to adjust our business in the face of extremely volatile crude oil markets. We moved aggressively to shift our operating and capital activities to maintain financial liquidity, minimize capital outlays, and we emphasized cost reductions across all facets of our business to retain long-term value. And those decisions, while not easy, have served us well. And I am very pleased that yesterday we announced strong protocols first quarter results and a five-year outlook that demonstrates our operational and financial strength and our commitment to generating value for our shareholders. Let's talk first about our Q1 results, and then I'll provide some color on our five-year outlook. During Q1 2021, we executed our plan to maximize free cash flow and to reduce debt. We delivered adjusted funds flow of $157 million, or 28 cents per basic share. This resulted in free cash flow of $70 million, which, along with the Canadian dollar strengthening relative to the US dollar, contributed to an $89 million reduction in our net debt. We realized an operating net back of $29.80 per BOE, which is almost double the $15.19 per BOE realized in Q4 2020. Production during the first quarter averaged 78,800 BOEs per day, 81% oil and NGLs, and that's up 12% as compared to 70,475 BOEs per day in Q4 of 2020. The increased production largely reflects the resumption of drilling activity in the Viking and Eagleford, which began in the fourth quarter. Exploration and development expenditures totaled $84 million and included the drilling of 46.5 net wells with 100% success rate. One particular highlight this quarter is our successful exploration well on our Peace River Clearwater Play, which sets up follow-up activity later this year, and I'll expand on that in a few minutes. As a result of our operational momentum and the strength in commodity prices, we have announced an increase in both our production and capital spending guidance. This will position our business for continued strong operating performance and free cash flow generation going forward. Our focus on disciplined returns-based capital allocation is enabling us to generate over $250 million of free cash flow this year. We are now forecasting 2021 exploration development expenditures of $285 to $315 million, up from $225 to $275 million, which was set in a $40 U.S. to $45 U.S. pricing environment. The additional activity will largely occur in the fourth quarter and will be allocated across our portfolio. Our revised production guidance range is 77,000 to 79,000 BOEs per day, up from 73,000 to 77,000 BOEs per day. Approximately 75% of our total capital program will be directed to our light oil assets in Eagleford and Viking. In addition, we are very excited to kick off our heavy oil program in July, including follow-up activity on our Northwest Clearwater exploration discovery. and we plan to drill two wells in the Pembina DuVernay as we hold our acreage and advance the play. As some of you may recall, just over one year ago we executed a strategic agreement with the Peavine Métis settlement in the Peace River area that covers 60 sections of land directly to the south of our existing seal main operations. At the time, we identified significant potential for this exploration play targeting the Spirit River formation, a clearwater formation equivalent. Our initial exploration well was drilled during the first quarter and has shown promising results with a 30-day initial production rate of 175 barrels per day from only two laterals. With this early success, we are planning up to six additional clearwater multilateral wells for the second half of the year. Across our acreage position, we estimate that over 100 sections of our lands are prospective for clear water development. And with over a decade of experience in heavy oil exploration and multilateral development, this play aligns very strongly with our core competencies. So I will now turn the call over to Rob to discuss our balance sheet and risk management.

Thanks, Ed, and good morning, everyone. As Ed mentioned, we made great strides during the first quarter to enhance our liquidity as we reduced our net debt by $89 million. As of March 31, 2021, we had $401 million of undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $381 million. These facilities are not borrowing-based facilities and do not require annual or semi-annual reviews. At current commodity prices, we expect to increase our financial liquidity to over $550 million in 2021. Our long-term notes, which total U.S. $900 million, comprise of two outstanding issues. One, a U.S. $400 million tranche due 2024, and a second, U.S. $500 million tranche due 2027. With our continued focus on deleveraging, we expect our liquidity and leverage ratios to improve over time. Now turning to risk management, we maintain a consistent approach to risk management and marketing, utilizing various financial derivative contracts and crude by rail to reduce the volatility in our adjusted fund flow. For the remainder of 2021, we have entered hedges on approximately 47% of our net crude oil exposure, largely utilizing a three-way auction structure. that provides WTI price protection at US $45 per barrel with upside participation to US $50 per barrel. We have also WTI to MSW differential hedges on approximately 50% of our expected 2021 Canadian light oil production at US $5 per barrel and a WCS differential hedge on approximately 55% of our expected 2021 heavy oil production at a WTI to WCS differential of approximately US $13 per barrel. For 2022, we have entered into hedges on approximately 33% of our net crude oil exposure, utilizing a combination of swaptions at US $53.50 per barrel and a three-way option structure that provides price protection at US $50 to $5 per barrel with upside participation to approximately $65 per barrel. We also have WCS differential hedges on approximately 35% of our expected 2022 heavy oil production at a WTI to WCS differential of approximately US $12.50 per barrel. Full details of our hedge program can be found in our Q1 financial statements and are available on our website. And with that, I'll turn the call back to Ed to discuss our five-year outlook.

Thanks, Rod. Along with our Q1 results yesterday, we also announced a five-year outlook, which demonstrates our operational and financial strength in the U.S. $55 WTI pricing environment. This plan all starts with our disciplined and returns-based capital allocation philosophy and has been constructed to maximize our free cash flow, improve our leverage ratios, and enhance returns to shareholders. Assuming a constant U.S. $55 per barrel WTI price, we will target capital expenditures at less than 70% of our adjusted funds flow while optimizing our production in the 80,000 to 85,000 BOE per day range. We project annual capital spending of approximately $400 million from 2022 to 2025 and expect to generate over $1 billion of cumulative free cash flow over the five-year period. Our leverage ratios are expected to improve materially as we target a net debt to EBITDA ratio of under 1.5 times. And throughout the planned period, we will continue to monitor our leverage position and assess market conditions to determine the best methods or combination thereof to enhance shareholder returns. These could include share buybacks, a dividend, or reinvestment for organic growth. For additional details, I would refer you to our updated investor relations presentation available on our website. The key message that I would like to leave you with is that our business is strong and we have a robust plan in place to deliver meaningful free cash flow and enhance shareholder returns during the plan period. We are off to a great start in 2021 and we look forward to continuing to communicate with you as we execute on our plans for value creation. And with that, I will ask the operator to please open the call for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you were using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Patrick O'Rourke with ATB Capital. Please go ahead.

Oh, hey, guys. Good morning. I'm just curious in terms of the Clearwater Eclosaland or Spear River, I think, as you're calling it here. well that you drilled. I know in the new slide deck you have a presentation that shows kind of the production profile over the five-year plan and I'm just kind of curious in terms of and I appreciate that it's early and you've only got the one well but just kind of what scale and scope you're thinking about for that particular asset and you know what percentage of heavy oil in there it will make up at the end of the five years?

Yeah well It's early on the Clearwater discovery that we've announced, but we did show 175 barrels per day on two legs, so we're going to immediately offset that and expand the activity this year to drill up to six additional wells, which is part of the reason for our capital raise and our production raise. Having said that, a number of those are appraisal wells further to the north. Three or four are in the Peavine area specifically, and we'll start to boost production. So what we've said about the scope and scale of this resource is that it's approximately 100 sections of perspective area for us, we believe, right now. But it's early in terms of our mapping and understanding. So if half of that works at 50 sections and you've got four to six wells a section, but it's early on what that will look like, it's hundreds of wells. Having said all of that, there's no clear water development explicitly in our five-year plan. What we've done is we've said that there's some heavy oil growth in there for sure. It's 70% Eagleford and Viking light oil, but 25, 30% in heavy oil. But that's our traditional, known, bankable heavy oil asset set in Lloyd and Peace River proper. that we can go ahead and develop now knowing what we know now. So if Clearwater works and works as well as we think it could, it would do one of two things. It would substitute existing activity and make our returns look much, much higher and better because of the high rates of return and very fast paybacks on that play. Or it would be we could offer supplemental growth and free cash flow without spending any more capital. So I think I'd just leave you with that right now. It's early, though, Patrick, on Clearwater and what it all means, but it's very exciting that we and other operators see potential to the northwest. It's not just going to be a Martin Hills Nipissi development. It's coming to the northwest, and we're very excited about it.

Yeah, and I agree. The Martin Hills Nipissi analog is very exciting. Just maybe in another way, in terms of infrastructure capacity there, anything that you would have to do if it is going to become meaningful?

Well, that's our base of operations, and it's where the company was founded in Peace River, really, when you look at the history of the company. So we have a lot of infrastructure. Our operations base is there, both at Harmon Valley and the – the base that we run with our main battery at Seal. So we have a lot of infrastructure, both human and infrastructure in place. We will truck the oil. We're very good at gas conservation up in that area as well, as we've demonstrated that up in the main part of our field. So we don't have any infrastructure constraints or egress constraints out of the area. It's one of the reasons it's such a nice layer on to what we do. But no, we're good on infrastructure up there.

That's sort of what I suspected. Okay, thanks, Ed.

The next question comes from Jason Mandel with RBC Capital Markets. Please go ahead.

Hi, guys. Nice performance. Appreciate you taking the question as well. Just wanted to spend a moment on the five-year plan, looking to step up the spending from, I guess, this year about $300 to kind of a base rate of $400 over the next few years. Do we think about that spending level as I don't know, more or less flat over those four years at $400 million, or is it going to be rising from the $300 over time to average $400, if you follow what I'm asking?

Yeah, it's a bit of a ramp up to $400, and maybe we go to $410 or $420. We're not sure yet, but the annual plan will be set here in September. But I would say $400 is a good average number across those years. But we'll have to ramp up to it, and we're starting that ramp up right now with the capital increase. that we're talking about along with the production increase. And what I'd say about that and part of the driver here is we always said that we were going to look at where we were during breakup and that we were also pointing to high end of current guidance at $275 million to deliver high end of production guidance at 77,000 barrels a day. What we saw from Q4 to Q1 was a nice rebound on production of 78,000 barrels a day. And that was with a historic weather event in Texas that while people say we benefited from pricing, actually we would have rather not had that storm and delivered some fantastic additional barrels from Eagleford. So it's with that. There's a little bit more activity coming into Eagleford. There's more clear water coming into our plan. So now we're up to 300. Maybe you see next year go to 350 and then we move to 400 beyond that. But I think it's in the IR deck. You'll see the numbers that are notional at this point, but you'll see that ramp up from the 300 today to 350 next year to 410, I think, for the last two or three years of the plan. But I would say it's scoping right now, but it's a good shape and it's a good outline for our future. We're absolutely 100% committed to it.

Okay, that's great. Really helpful. And then Maybe a similar question on the production, getting from the high 70s now into the low 80s on a production basis. That was sort of given for that rough plan. When do you kind of think that you'll be, I don't know, 80-plus on a run rate basis? Is that by late this year? And then just the last follow-up question, at the higher level of production, can you give us a sense as to what the sort of new level of maintenance capital spending would be? Thanks, guys.

Yeah, I think we'll see an exit rate now, thanks to what we're doing at around 77,000 barrels a day.

That compares to 70,000 barrels a day last year.

And so I just talked about the bounce up, the nice rebound we had from 70 to 78. If we exit at 77,000 barrels per day, and we typically have a strong Q1, as we always do, you could very quickly see us moving to the bottom end of the range of that 80 to 85,000 barrels a day. at the early part of our five-year plan. And I believe those numbers, again, are outlined in the IR slide. I don't have the number of the slide in front of me, but production should be very close to 80,000 barrels a day. If we're exiting this year at 77, strong Q1, and if we exceed WTI at $55 plus, there's no reason we shouldn't get into that range much more quickly. And then on the question around sustaining capital, I think we plan to hold that 80 to 85 pretty flat. This is not a growth plan here. Remember, you know, we came down through the pandemic. So this is not a growth plan. I would look at something like $375 billion as sustaining capital to keep us in that 80 to 85,000 barrel a day range. So the 400 kind of drives us up there, but you don't need it to stay there. But I would look at this as a new, optimized plan faster deleveraging, maximization of free cash flow plan. Still, our mantra has been, but it's where the assets and the capital efficiencies want to take the business from an optimization standpoint.

That's great. Thanks so much for the detail. Appreciate it.

The next question comes from Phil Skolnick with 8 Capital. Please go ahead.

Yeah, thanks. Just how would we how would you think about, you know, kind of timing? You talk about 2022 and to the end of the five year outlook that you can look at dividend and and share buybacks and organic growth. How do you think about those three buckets in terms of free cash flow and, you know, what kind of a payout ratio? I'm sure it's too early, but I guess you probably maybe have some kind of high level thoughts on that as well.

Yeah. I've been doing a lot of thinking about that, and clearly 2021 is still going to be primary focus on deleveraging. And so I would look to all of that $250 to $300 million of free cash flow on STRIP today moving to the balance sheet. And we've got to stay steadfastly focused on that objective in the near term. That moves us down to a pretty interesting place, though, with respect to our liquidity. Our financial liquidity moves to $550 to $600 million. And we then have no issues with, as we look ahead to the 2024 bonds, we can manage our way through that in a timely and prudent manner. In 2022, if we see the macro environment where we are now, Phil, where we're substantially above $55, I think you could see us start to implement a program that up to $55, all that free cash flow moves to the balance sheet. But if we're in the environment we're at today and we have surplus free cash flow to the plan, then that is when you would see us If we're trading where we are right now at three times EV to DACA, then I would think we would look strongly to share buybacks. But we're also, with our board, we're being challenged quite a bit around at what point, as long as we believe this future, why don't we consider layering on dividends starting sooner rather than later? So we'll have that debate. And then, of course, We've got tremendous growth potential in the company. We've got tremendous 10-year inventory in our core plays.

We've got the DuVernay, which is not really included in any of those numbers.

And we've got the Clearwater, which we're not including in any of those numbers. We've got some other projects that are not included in any of the numbers. Tremendous organic growth. But the macro environment, the market sentiment, and we ourselves are not ready yet to contemplate real growth in our asset base beyond 80 to 85,000 barrels a day. But that would also be considered because the returns are so strong. And as I said, you know, we allocate to our strongest return. But I would look at it that way, Phil. Free cash flow to the balance sheet in the near term through 2021. If we see greater than 55 WTI next year, look for some shareholder-friendly initiatives coming sooner rather than later. And then, you know, let's get to the longer-term debate on whether we grow or not beyond 885 later.

Okay, perfect. Just one last question. I guess then, given, you know, the amount of organic growth potential and with Duvernay and Clearwater not being included in the five-year outlook, I guess then you don't really see a need to do any kind of acquisitions, even if it's tuck-ins.

Yeah, I would say we're always looking at acquisitions. And we always do tuck-ins. We've probably done 10 inorganic deals this year, acreage acquisitions, acreage swaps. We've added over 100 net locations with a substantial amount of value. A lot of that's in the biking. Some of it's in our core areas of heavy oil. But there are still people who are positioning out of those areas. So we'll always do the tuck-ins and little bolt-ons that are circa $5 to $10 million of of cash every year or capital every year. We'll always do that. I think in terms of mergers, it would have to be something that would be substantially accretive to our cash flow. It would have to compete for capital, which is a very high bar when we're looking at $15,000 to $16,000 a flowing barrel. capital efficiencies for the mid to longer term, this is a very high bar to compete with. So we see a lot of it going on. I've always been an advocate of consolidation. We've done one ourselves with Raging River and Baytex coming together, and I think that was prudent from a deleveraging standpoint. But the company and the position and our asset base is in a different place now, and we would just have to see something that made a tremendous amount of industrial logic and accretive to our shareholders to even contemplate going there. Okay, great. Thanks.

This concludes the question and answer session. I would like to turn the conference back over to Brian Echter for any closing remarks.

Thanks, Sharice. Thanks, everyone, for participating in our first quarter conference call. Have a great day.

This concludes today's conference call. you may disconnect your lines. Thank you for participating and have a pleasant day.