Baytex Energy Corp.

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp second 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'll 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.

Good morning, ladies and gentlemen, and thank you for joining us today to discuss our second quarter 2021 financial and operating results. Today, I'm joined by Ed LaFerre, our President and Chief Executive Officer, Rod Gray, Executive VP and Chief Financial Officer, Chad Lundberg, Chief Operating and Sustainability Officer, Kendall Arthur, our Vice President Heavy Oil, Chad Kalmakoff, our Vice President Finance, 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.

Thanks, Brian, and good morning, everyone. I'd like to welcome all of you to our second quarter 2021 conference call. I'm very pleased to highlight our strong operating and financial performance as we continue to build momentum following an increase in activity late last year. Our free cash flow profile continues to improve as we benefit from our diversified oil-weighted portfolio and our commitment to allocate capital effectively. And we are taking proactive measures to reduce our net debt with the repurchase and cancellation of U.S. $106 million representing approximately 25% of our outstanding long-term notes due in 2024. At current commodity prices, we now expect to deliver over $350 million of free cash flow this year, or 62 cents per basic share, which will accelerate our debt reduction efforts. During the second quarter, we delivered adjusted funds flow of $176 million, or 31 cents per basic share. This resulted in substantial free cash flow of $112 million on the quarter, which along with Canadian dollar strengthening relative to the U.S. dollar contributed to a $129 million reduction in our net debt. We realized an operating net back of $34 per BOE, which is up from $30 per BOE realized in the first quarter. Production during the second quarter averaged 81,200 BOEs per day, 81% oil and NGLs. up 3% as compared to 79,000 BOEs per day in Q1 2021. The increased production reflects the timing of completion activity in the Eagle Fork and the strong performance across our light and heavy oil assets in Canada. Exploration and development expenditures totaled $61 million and included the drilling of 19.7 net wells with a 100% success rate. As a result of our strong performance through the first half of 2021, we are increasing our production guidance to 79,000 to 80,000 BOEs per day, up from 77,000 to 79,000 BOE per day previously. At the midpoint, this represents a 2% increase. There is no change to our capital guidance. We continue to forecast exploration development expenditures of $285 million to $315 million for 2021. Last quarter, we highlighted the strategic agreement we executed in 2020 with the Peavine-Métis settlement that covered 60 sections of land directly to the south of our existing seal operations. At the time, we identified significant potential for this exploration play targeting the Spirit River Formation, a Clearwater Formation equivalent. Adding these 60 sections to our existing seal acreage, we estimate over 100 sections of our lands are prospective for clear water development. As you will recall, our initial exploration well drilled on the peavine lands during the first quarter delivered a 30-day initial production rate of 175 barrels per day from only two laterals. We have now followed up our initial success with four additional wells. The first of these follow-up appraisal wells is another two-lateral well with a lower cost drilling mud. This well has also demonstrated a 30-day initial production rate of 175 barrels per day. We have also drilled two eight-lateral wells, which are showing promising early results. These two wells were brought on stream during the month of July, so we are not yet in a position to report 30-day initial production rates. We are currently drilling the fourth follow-up well, which is also an eight-lateral appraisal well located three miles to the east. In total, we plan to drill up to seven net appraisal wells in 2021 across our Clearwater acreage, with five of these wells on our peabine lands. I am very excited to say that our appraisal program continues to yield encouraging results, and pending continued success sets the stage for an increased activity program in 2022. We also introduced our five-year outlook last quarter, which is grounded on a $55 WTI price. In our investor relations materials, we have updated year one of our five-year outlook, in other words 2021, to reflect year-to-date commodity prices and the forward strip for the balance of this year. The remaining years 2022 to 2025 continue to be based on a constant US $55 WTI price. Under the plan, we expect to generate over a billion dollars of cumulative free cash flow as we target capital expenditures at less than 70% of our adjusted funds flow, while optimizing production in the 80 to 85,000 BOE per day range. Based on the strong pricing environment and free cash flow forecast for 2021, we have accelerated our debt repayment strategy by approximately one year over the base plan presented last quarter. And for those with a more bullish outlook on oil, we provide a couple of sensitivities. Under constant US $60 a barrel and US $65 a barrel WTI pricing scenarios, we expect to generate in excess of $1.5 billion and $2 billion of cumulative free cash flow, respectively, over the planned period. In the context of our current $1.2 billion market capitalization, this is pretty extraordinary. I will now turn the call over to Rod to discuss our balance sheet and risk management.

Thanks, Ed, and good morning, everyone. As Ed mentioned, we have taken proactive measures to reduce our debt levels. On May 4th, we repurchased and canceled U.S. $5.8 million principal amount of 5.625% long-term notes. And subsequent to the quarter, we used free cash flow generated in the first half of 2021 to repurchase and cancel an additional U.S. $100 million principal amount of the 5.625% long-term notes at the call price of approximately $101 plus accrued interest. These measures demonstrate our commitment to reduce our leverage and drive our cost structure lower. Following these repurchases, we continue to maintain in excess of $400 million of liquidity. As of June 30th, our net debt totaled $1.63 billion, down from $1.76 billion on March 31st, 2021. We are currently targeting a net debt of $1 to $1.2 billion, which under our base plan at $55 US WTI, we will reach by the end of 2023. At higher commodity prices, the timeframe to achieve our debt targets will be accelerated. Now turning to our 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 funds flow. For the remainder of 2021, we have entered into hedges on approximately 45% of our net crude oil exposure, largely utilizing a three-way option structure that provides WTI price protection at US $45 per barrel with upside participation to US $52 per barrel. For 2022, we have entered into hedges on approximately 42% 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 $58 per barrel with upside participation to approximately US $67.50 per barrel. For 2021 and 2022, we have also entered hedges on our Canadian light and heavy oil differential exposure. Full details of our hedge program can be found in our Q2 financial statements and are available on our website. And with that, I'll turn the call back to Ed.

Thanks, Rod. I would like to also highlight our just-released 2020 Environment, Social, and Governance Report. This is our fifth biennial report and demonstrates our commitment to transparency and accountability and our progress in managing the environment and social impacts of our businesses. I'm also pleased to announce the appointment of Chad Lundberg as Chief Operating and Sustainability Officer. Chad will retain his existing responsibilities as head of the light oil business and will spend more time explicitly linking our sustainability priorities and efforts to our capital allocation and strategic planning processes. We know that our ESG efforts are essential to our long-term viability and relevance. As we plan for the future, we have set the bar higher by setting new goals. Having surpassed our first GHG reduction target, we want to further decarbonize our operations, and we have committed to reduce our GHG intensity by 65% from our 2018 baseline. Additionally, to reduce the environmental footprint of our operations, we have set a bold new target to reduce our inactive well count of 4,500 wells to zero by 2040. And we're also evaluating and testing methods to reduce our freshwater intensity. Our ESG report is available on our website, and I would encourage all investors to review the report and reach out if you have any questions. And with that, I will close with this key message. Our business is strong, and we have a robust plan in place to deliver meaningful free cash flow. 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, and or reinvesting for organic growth. We're off to a great start to 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.

Certainly. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first caller is Phil Skolnick with Aid Capital. Please go ahead.

Yeah, good morning. Just on questions on the clear water, I mean, I know it's only two wells, but, you know, using in terms of two laterals, you're getting better results than maybe we're seeing with some of your peers in other parts of clear water. You know, is that repeatable, do you think? I mean, what do you think is kind of differentiating where you are in a clear water versus maybe where others are?

Yeah, very good question. We've had a lot of interest in what we're doing in the Clearwater. And let me take a step back before I answer the question, Phil. The first thing I would say is we've been evaluating this play for a couple of years, and we landed the deal with the Peavine Métis Settlement a year and a quarter ago. And also I want to give a big shout-out or support to the Peavine Métis Settlement, who are doing a great job integrating with us and working with us to do what we're doing up there. We are a multilateral exploration and development company. Everybody knows that we run this probably as well or better than anyone. So we are actually drilling our fifth well right now in the Peavine settlement, and it's further to the east. All results so far I would say are generally confirming the mapping, the geology, and the reservoir that the team had anticipated through the course of the last couple of years. So it's just, this is not a big surprise to us. We are pleasantly surprised, I think, with some of the results, but in general, we're confirming expectations. And so we announced 175 barrel a day, two lateral discovery well in Q1. We're now saying we've got a second drilled on a water-based, a cheaper, less expensive water-based mud system at the same level of 175 barrels per day. We've got two eight-leg multilaterals that you can see in the press release, which you're referring to, I think, Phil, that were brought online in July. And the one that was brought on July 10th had about 10 days of oil-based mud flowback and is now in roughly its 10th day of initial production. And I can tell you right now, it's very early. We don't know for sure what the IP30 will be, but our 10-day early initial results are greater than 500 barrels a day. So that's kind of where we're sitting. It will be variable across this reservoir, like all of these things are in cold flow, and it will depend where we are. The second eight-legger is still producing back the drilling mud, and we don't have any early results on that to report. But all is going according to plan. And we're sitting now drilling in the third or fourth leg of the next eight leg well out to the east. And that's another important test. So these are all important tests. It's just a step in the process of us appraising and developing these lands. But we're very encouraged. We're very excited, Phil. And hopefully that, as I said in the script, that would lead to increased activity next year. But let's see where we get around September timing.

Yeah, for sure. And you just mentioned that the east one is another important test. What exactly are you testing and expecting to see out there?

Yeah, well, we knew we were drilling this first well down dip. The discovery well is down dip. has further risks associated with us, and that's the one we got 175 barrels a day. We're on that pad now with four producing wells. The fifth well, as I said, is three miles to the east. So what we believe happens out there is that the structure moves up-dip, and we're seeing that from the laterals we're drilling off of the discovery pad that extend to the east. So it's confirming our view of structure. As we move up structure, there's a potential for lighter oil, and as you see lighter oils, mobility's improved. So it's a little bit closer to the settlement, and we're managing that with the logistics of our trucks and rigs and supply equipment, but everything is going well so far. But that's really what we're testing is further acreage to the east, up structure, and hopefully some lighter fluids, but we will see.

Okay, great. Thank you.

The next question is from Jeremy McKay from Raymond James. Please go ahead.

Yeah, hi. This is a bit of a follow-up from Phil's question there, too. Like, what are you guys wanting to see from the Clearwater before you really start putting some more capital into the play and just directing capital from other areas, and where do you see this Clearwater play going into over the next two, three, four, five years here? How does this play interact with your five-year plan here, just given these initial results that 500 barrels a day here for the first 10 days there?

Well, we've got about 100 sections of prospective land in the Clearwater, and about 60 of that is in the Peavine, as I said. So 40 sections to the north in our seal main and beyond area. So that's kind of the scope of the play. If we've got four wells a section, that's quite a lot of inventory. So what I would do is risk weight that, which we've done. And 50 sections work at four wells a section. That's a couple hundred wells. If we've got on one rig year, we can drill 18 to 20 wells per year. So that's about a 10-year inventory of prospect inventory. So the beauty of this is that if it's what we think it is and benchmarks to similar areas, we believe it grows within its own cash flow. And that's the beauty of Clearwater that very few other places can do. And if it does, then it doesn't put a burden on the corporation as we go into development mode. The economics are very strong. There are 100% to 200% returns. less than a year paybacks, two to three times recycle ratios. So at our base, our IP expectation was about 300 barrels a day, IP 30, and 150 to 170,000 barrel EURs. We would expect to generate those economic results and to grow it. So what could it mean? I think I've kind of subtly alluded to, it would be very straightforward to, if we have success on this program, into September, we will know the answer to that. I could see us very clearly going to a rig year program in that 18 to 20 well level for next year. But we've got to make those calls in the fall as we set up the 2022 budget and move on from there. We're thinking about that quite hard. Okay.

That's perfect. Thanks.

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

All right. Thanks, Gaylene. Thanks, everyone, for participating in our second 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.