Baytex Energy Corp.

Thank you for standing by. This is the conference operator. Welcome to the BATEX Energy Third 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 Hector, Vice President, Capital Markets. Please go ahead, sir.

Thank you, Claudia. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2021 financial and operating results. Today I am joined by Ed LaFerre, our President and Chief Executive Officer, Rod Gray, our Executive VP and Chief Financial Officer, Chad Lundberg, our Chief Operating and Sustainability Officer, Kendall Arthur, Vice President Heavy Oil, Chad Kalnikoff, VP Finance, and Scott Lovett, our VP 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 everybody to our third quarter 2021 conference call. I'm excited to highlight the momentum we continue to build. During the third quarter, we delivered strong operating and financial results, and we advanced our exciting new Clearwater play in northwest Alberta with the two strongest initial rate wells in the play. I'll expand on our Clearwater development in a few minutes. As you will recall, earlier this year, we made a commitment to maintain capital discipline and maximize our free cash flow. We also made a commitment to allocate 100% of our free cash flow to reducing our net debt and strengthening our business. And I'm very pleased to say that is exactly what we are doing. During the third quarter, we generated $101 million of free cash flow, resulting in year-to-date free cash flow of $284 million. This free cash flow has been applied against our net debt, and our business today is that much stronger as a result. At current commodity prices, we now expect to deliver over $400 million, or 71 cents per basic share, of free cash flow in 2021. This represents a record level of free cash flow for BATEX and is accelerating our debt reduction efforts. We now have line of sight to reaching our initial $1.2 billion net debt target during the second quarter of 2022. We have also taken proactive steps to reduce our outstanding long-term notes which lowers our financing costs and increases our adjusted funds flow. Rod will touch on this in a few minutes. During the quarter, we delivered adjusted funds flow of $198 million, or 35 cents per basic share, and generated net income of $33 million, or 6 cents per basic share. We realized an operating net back of $39 per BOE, which is up from $34 per BOE realized in the second quarter. Production during the quarter averaged 79,900 BOEs per day, 82% oil and NGLs, and reflects strong performance across our light and heavy oil assets in Canada, with volumes up 2% over the second quarter, while our Eagleford volumes were lower due to the number of wells brought on stream. Exploration and development expenditures totaled $94 million and included the drilling of 47 net wells. Last quarter, we highlighted our peavine lands in Northwest Alberta, where we are targeting the Spirit River Formation, a clear water formation equivalent. In August 2021, we executed a second strategic agreement with the Peavine Métis Settlement that covers an additional 20 sections, bringing our total peavine acreage to 80 contiguous sections. We currently have five producing wells on our peavine acreage, and production has increased from zero at the beginning of this year to approximately 1,900 barrels per day currently. Our three eight lateral wells continue to outperform tight curve assumptions and two of these wells rank as the top initial rate wells drilled to date across the play. At current commodity prices, the Clearwater generates among the strongest economics within our portfolio with payouts of less than six months and has the ability to grow organically while enhancing our free cash flow profile. As we continue to progress our development plan, we have committed to drill four additional clear water wells during the fourth quarter. We expect these wells to come on stream late 2021. In addition, as part of our 2022 plan, we are working with the Peavine Métis settlement and are prepared to execute an expanded program of up to 18 wells. To date, we have de-risked 20 sections of land And pending further success, we believe the play holds the potential for greater than 200 locations. In addition to our clearwater development, our heavy oil program kicked off during the third quarter and included drilling two net blue sky wells at Peace River and 14 net wells at Lloyd Minster. On the light oil side, we brought 37 net Viking wells and 3.4 net Eagleford wells on stream. In addition, we drilled two 100% working interest wells in the DuVernay, and initial flowback rates are very encouraging. Our operational execution was excellent across our entire portfolio and sets us up for strong fourth quarter results. 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. Our net debt, which includes our credit facilities, long-term notes and working capital totaled 1.56 billion at September 30th, 2021, which is down from 1.85 billion at December 30th, 2020. As of September 30th, 2021, we had 471 million of undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $454 million. During 2021, we have repurchased and canceled U.S. $200 million of the 5.625% long-term notes due June 2024. This represents 50% of the original U.S. $400 million outstanding and includes the U.S. $85 million repurchased and canceled subsequent to quarter end. These measures demonstrate our commitment to reduce leverage and drive our cost structure lower. We expect to exit 2021 with net debt of approximately $1.4 billion, which represents a very healthy net debt to EBITDA ratio of 1.7 times. At current commodity prices, we expect to reach our initial $1.2 billion net debt target during the second quarter of 2022. To support our business, 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 2022, we have entered hedges on approximately 42% of our net crude oil exposure, utilizing a combination of three-way option structure that provides price protection at US $58 per barrel with upside participation to approximately US $67.50 per barrel. We also have swap options at US $53.50 per barrel. We also have hedges in place on our Canadian light and heavy oil differential exposure. Full details of our hedge program can be found in our Q3 financial statements and are available on our website. And with that, I'll turn the call back to Ed.

Thanks, Rod. And let me wrap up with a review of our 2021 guidance and five-year outlook. As a result of our strong operating performance through the first nine months of 2021, we are tightening our production guidance to 79,500 to 80,000 BOEs per day, up from 79,000 to 80,000 BOEs per day previously. And as we have discussed, we are intensely focused on maintaining capital discipline. The Clearwater has emerged as one of the most profitable plays in North America, and our 2021 appraisal program has delivered exceptional results. As a result, we will drill four additional Clearwater wells during the fourth quarter. This includes two wells on the same path as our highest rate well drilled to date and one appraisal well on the recently acquired 20 sections of land to the north. Accordingly, we are tightening our forecast exploration development expenditures range for 2021 to $300 to $315 million as compared to $285 to $315 million previously. We have also fine-tuned several of our cost assumptions, including our interest expense guidance, which is 3% lower due to the early repayment of long-term notes and our lower net debt. Our 2022 capital budget is expected to be released in early December, following approval by our Board of Directors. We will update our five-year plan at that time to include drilling opportunities on our clearwater lands. Our five-year outlook from 2021 to 2025 highlights our financial and operating sustainability and meaningful free cash flow generation. Through this planned period, we remain committed to a disciplined returns-based capital allocation philosophy. Under constant U.S. $65 per barrel and U.S. $75 per barrel WTI pricing scenarios, We expect to generate cumulative free cash flow of approximately $2 billion and $2.6 billion, respectively. Our business is strong, and we have a robust plan in place to deliver meaningful free cash flow. Throughout the plan period, we will 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 reinvestment for growth. 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 one on your telephone keypad. You will 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 start and two. We will pause for a moment as callers join the queue. Our first question is from Phil Skolnick with Eight Capital. Please go ahead.

Yeah, thanks. Good morning. I have a few questions. Just on your last comment with respect to returns to shareholders, you know, kind of, how are the discussions going, you know, your thoughts around dividends versus buybacks, but also in terms of growth because, you know, you are having this accelerated debt reduction and, you know, you are a company that can add more volumes and not really impact the overall macro environment, which is an advantage, obviously. So kind of, you know, what are your thoughts around all that?

Yeah, well, Phil, I think, We've been very clear on our framework, at least verbally, and we haven't come out with an update to our five-year plan with maybe some more specifics. But what we've said is 100% of our free cash flow, at least in 2021, is moving to the balance sheet. We're paying down debt. That will take us to $1.4 billion of net debt by year end. And then early 2022, we'll drive our net debt to $1.2 billion. which is important to us, we think we can do that by 2Q. And then at that point, between $1.2 billion and $1 billion, we've said that that is the place we need to be on our absolute debt levels, which is well within our 1.5 times debt to EBITDA, that would allow us to consider share buybacks, dividends, and or growth. And what I've been saying, and I would continue to say that even today is, is if the market continues to trade as it is, and we're trading at a four-times enterprise value to debt-adjusted cash flow, our free cash yield is high. It's still at 20-plus percent. The commodity prices are still strong. We would be compelled to buy back some shares, right? We want to do that. We want to consider that strongly. I think we're in the early innings of a rotation, and we haven't seen – we're in inning one. Four times EV to DACAP doesn't get us real excited when historically we've been a lot higher than that. So at an absolute or relative level, those are still pretty attractive levels. And when you look at our pre-cash yield, it can't stay there at 20 percent. Our share price has to re-rate, and it has been, but it's only been doing that on the basis of the commodity price rising up to 70 to 80. So we're flexible right now in our thinking. We need to watch the markets and all those things I just mentioned. And then at the time we're at $1.2 billion, we'll have to look at where those considerations are and then make the call. But I would say at this point, share buybacks come before dividends. And then our long-term vision is to move to 10% to 15% returns with a combination of growth and or a dividend.

Okay, perfect. That's clear. Finally, just with cost inflation, because we keep hearing more and more about it, but, you know, given that you're both in the U.S. and Canada, could you talk a little bit about what you're seeing on both sides of the border? You know, which one maybe has more pressure?

Yeah, I think it's very germane to where we are in the cycle of starting to bid out our programs and look at our cost structure and where we're going into 2022. So it's very critical. It's a critical topic right now. And we've actually made some decisions because we are seeing the early phases of inflation hitting us. I'd say the bottom line answer is we're probably looking at 10% inflation on capital or between 5% and 10%. But having said that, we've already made some decisions to level load our rig activity, which we felt was crucial. We wanted to, for example, the fourth quarter, we've decided to drill four wells, two additional wells in the Peavine. We're kicking off some other activity as well. We're moving to the high side of capital for 2021, but with high ends of production. And we're going to try and not only keep the rigs warm, which is good for efficiencies, but importantly, keep the crews around right to Christmas. and then bring them back right after Christmas so there's not a massive gap there that's threatening not just the iron being warm, but the people and their willingness to come back into this bit of a rollercoaster industry we've been on over the last five years. So we've done some things there as well as on the supply chain. Happy for Chad, our Chief Operating Sustainability Officer, to weigh in. But we've been making decisions as we move towards 4Q and into next year right now. To compare and contrast with the Eagleford, I don't know if you saw the marathon results, but the efficiencies of what they're doing down there are so incredibly strong. They announced their strongest capital efficiencies ever in the third quarter. on the Eagle Fern specifically. So their efficiencies are offsetting whatever inflationary components there are, and there certainly are with respect to fuel, with respect to steel, and other things. But they're more than offsetting those and still driving their D, C, and E costs down. So we're seeing, I would say... you know, tremendous cost performance there, and we're trying to offset our cost performance, our cost inflation in the same way here in Canada. It's challenging.

Chad, do you want to? Yeah, thanks, Ed. I guess, you know, inflation is real. We're starting to see it, and we're starting to see it as we contemplate the buildup of our 2022 plan. What Ed didn't necessarily mention was just the relationship with our service providers, and we believe and want to ensure that we always have an honest, fair, and transparent relationship with them through those relationships. And in some cases, they're long-term, up to a decade with some of the rigs that we've had deployed to the company. The biggest thing they talk about and say that can help is, as Ed mentioned, the level loading of the programs. But the other thing is just having a long-term plan in place and sticking to that plan and doing what we say With that, they're able to go out and procure some of the parts and pieces that they might need, the consumables that they need to be able to service us. But then most importantly is give a longer-term forecast to the precious workers that are out there on a daily basis doing what they need to do to ultimately produce oil for us. So I think I would draw the conversation back to our relationships through those strong relationships, really understanding the cost base and the cost drivers, and then just really working with our service providers to understand what that means through 2022 and really trying to keep the efficiencies that we've gained through 21 through the capital plan.

Yeah, bottom line is we're prepared to hit the ground running with rigs and equipment people, and we're planning for it, and we're ready to go, Phil.

All right, thanks. That's all for me.

Our next question is from Patrick O'Rourke with ATB Capital Markets. Please go ahead.

Hey, guys. Good morning. I apologize. I'm calling from the car, so hopefully it doesn't sound like I'm on the moon here. But just a couple of quick questions. Number one, in terms of the clear water and how you're sort of viewing that in terms of the five-year plan, Are you guys approaching it from a perspective where you're looking at keeping sort of what you've put out there on the production front static and the Clearwater would draw capital away from other plays, you know, based on being, you know, probably the most capital efficient play in the portfolio and reducing capital spend? Or are you looking at it from a perspective where it's just it stands up on its own? Obviously, you've got the fast payouts there. and its incremental capital spend and production.

Yeah, we don't have a 2022 plan approved yet, Patrick, but I think we're leaning towards Clearwater is an add-on. Some of the things that we've got going in the heavy oil areas in Lloydminster and Peace River proper, for example, believe it or not, are just as competitive and very, very strongly attractive economics. So, we haven't made the call yet, but in the five-year plan, as it's published in our IR deck, we show $370 million of capital. And if you add on, that's with no Clearwater, if you add on $30 million for a Clearwater program, which is roughly the number of wells we're talking about, up to 18 wells, then that takes us to $400 million. Then you add on the inflation that we talked about, at least on the components of the program that would inflate, You know, that takes us to $400 to $420 million. And we think we can generate more free cash flow with that approach than sticking to a more harvest mode and bumping some of that other high-quality activity. So it's early days, Patrick, but I would say, you know, we pointed to $400 million in our five-year plan, and I think that's kind of where we're headed. and it'll drive our production very strongly as well, and cash flow, and free cash flow, because it is largely Clearwater.

Okay, exciting to watch for that at the start of December. And then in terms of the debt repayment and sort of liquidity management, these liquidity management events that you've been having here, you know, obviously there's been a focus on the 2024s. However, you know, through time you guys have been pretty thoughtful about terming out and laddering And I just wonder how you think about that going forward with your free cash flow, at least between now and when you might start returning a little bit to shareholders. Is the focus going to continue to be on those 2024s?

Sure, Patrick, I can answer that. It's Rod. I think historically we've seen those bonds trade at a slight discount, but I think they, along with share prices and commodity prices, have all moved up. Our focus is probably going to stay on the 2024s, which is the near-term maturity. Our break-even actually buying those and paying the premium right now is just two months. And they become callable at par in June of next year. So I think the focus will be there unless we see something different in terms of the trading. But ultimately, so the 2024s or that US $400 million, we don't see that being part of our long-term structure, so wouldn't be refinancing around that. But we will monitor markets to see if there is an opportune time to, you know, once we do fix the balance sheet, our view is that we can refinance those 2027s at a much lower rate. And so we'll look for an opportune time to do that and term that out as well.

Okay, thank you very much.

Our next question is from Jeremy McCree with Raymond James. Please go ahead.

Hi, guys. This question relates to your Clearwater here a little bit more. I know you guys have been active in Key Vine, but I see you guys just spud another Clearwater well quite a bit more north here again. I'm just wondering, when you look at your entire Clearwater potential acreage, just from a lot of the old legacy seal assets, how prolific do you think Clearwater exists throughout all of this land? Is there more than just Key Vine here as well, too? And just... as a bit of a follow-up, just given where oil prices are, you know, what's the strategy in terms of paying down debt as opposed to, you know, kind of the thing, you know, make hay while the sun's shining here and going to accelerate a lot more of this drilling?

Yeah, well, let me take the Clearwater question, then we'll go to your further questions. But we, in the four wells that we announced that we're adding to the 4Q program, One of those was that Spirit River well that's up, it's really quite close to our seal main battery up in the main field. And then the other three are on Peavine. And that one well has been drilled, completed, and is being brought on stream. It's a six-legger. It's in a little bit thinner rock. It could be probably not the same type of permeabilities that we see in other areas, but I think You know, what we're seeing in that area is it has the potential to be on the 150 barrel a day, 150,000, 100 to 150,000 VOE EUR. So kind of the core of not necessarily Martin Hills, but the average Clearwater well does about that. And that's what we're hoping for. It's very early up there. We have said we've got 100 to 120 sections of land that are attractive or potentially attractive for Clearwater. What I'd say about that is just the southern area alone looks like it could grow to potentially 10,000 barrels a day over time. Then if you add some of the stuff in up north that might work, some will work, some won't, I would say that's more infilling and holding flat our Peace River business at around 13,000 to 15,000 barrels a day. I wouldn't – you know, it's going to add a ton of value for sure, but it's early, and we'll announce those results probably in early December. We'll have an IP30 around that time. And then on the question about debt versus growth, it goes back to the shareholder return framework that I just mentioned earlier. We think we can actually grow a little bit and generate free cash flow at the same time, and that's the optimum point for us right now in the cycle where we are, where the world is not quite yet clamoring for growth. It may well be by mid-2022, but it's not today, and nor is the market. But we have talked about a five-year plan and put out a five-year plan that does grow optimize us in that 80,000 to 85,000 barrel a day range, moves us up to the top end of that range fairly quickly on pretty disciplined capital. So I would say we're going to stick to that plan until we update it in early December, and you'll get a better feel potentially for where we are in debt versus growth. But I think the two go hand in hand, and we want to deliver our five-year plan, and that's the core of what we're trying to do.

Thanks. Perfect. Thank you.

There are no further questions registered at this time. I would like to turn the conference back over to Brian Hector for any closing remarks.

All right.

Thanks. I'm sorry. We actually have one more question. Sorry about that.

Let's take one more question, please.

Thank you, sir. It's from Josh Young from Bison. Please go ahead, sir.

Hey, guys, great results. I wanted to ask two quick things. One, on the Eagleford, it sounded like there were fewer wells that came online and that drove slightly lower volumes. Do you guys expect that to – there to be increased activity there, or is that kind of a lower production rate expected going forward?

Well, it was 30,000 barrels a day, roughly. We expect to deliver about 30,000, so it was on expectations. But we have our annual meeting, Josh, down in Houston next week, and that's where we set the budget for next year and look at activity going forward, et cetera. But this quarter looks very much in line with 3Q. 4Q looks in line with 3Q, and then we'll get together with the partner and partners and look at 2022. But I would say... You know, we don't expect anything any different in Eagleford. We expect really disciplined capital generating free cash flow off of these prices in excess of $300 million in free cash flow at an asset level on the Eagleford. And we expect it to stay about those levels going forward. I think that's what we showed in our five-year plan.

Great. That's helpful, and that makes sense. And I did notice that you added some inventory in the presentation, which has been kind of consistent with what you guys have done. And the one other question is on the DuVernay, which is maybe your least favorite topic, but you guys, it looks like, had some good additional early well performance on these next two wells. What are your thoughts, kind of medium to longer term, on the DuVernay, given your success at Clearwater and elsewhere. Where does that fit into the portfolio, and how do you guys think about it from a strategic perspective?

Well, it's the biggest potential growth engine in the company, the biggest physical growth engine. We've already said that it can go to 20,000 barrels a day. We have a contiguous land position of 200 sections, and we've de-risked now with these two wells all the way to the south. So these are our furthest southerly wells. One's in its 15th day of the flow back, the other's in its first end of the first week of the flow back or 10 days possibly. And it's early, but this second well is producing at the highest oil rates and probably BOEs that we've ever seen in the play. So we're honing the formula, we're de-risking the land, we're holding the land. And we're honing our execution formula to get a breakthrough in rate and productivity, but also in capital and cost delivery. And we haven't yet fully delivered on those two things, but we'll certainly continue to hold it and de-risk it. As I've said before, there's probably a commercial opportunity for some consolidation in the basin, but we would expect that As I said earlier on one of the other questions, if the world or if the market or if the investors are looking for growth, we have not just in the DuVernay but across our heavy oil portfolio and the Peavine and the way we do land, bolt-ons and tuck-ins, we have ample inventory to grow this company. but we're not ready for it now, so we're de-risking, we're holding the land, and we're honing our execution formula. But we're very excited about these wells, and we'll announce IP30s in early December on those, Joshua.

Great. Thank you very much.

And this concludes the question and answer session. Back over to you, Brian.

All right. Thanks, Claudia. Thanks, everyone, for participating in our third quarter conference call today. Great day.

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