CALGARY, Alberta – Baytex Energy Corp. (“Baytex”)(TSX, NYSE: BTE) announces a 50% reduction to its 2020 capital budget to $260 to $290 million, from the original $500 to $575 million announced on December 4, 2019.
“As an industry, we are facing an unprecedented challenge due to the significant degradation and volatility in global crude oil prices. During this time, our priority is to preserve financial liquidity. As a result, we are immediately suspending drilling operations in Canada and expect to see a moderated pace of activity in the Eagle Ford. In addition, we are proactively shutting-in low or negative margin heavy oil production in order to optimize the value of the resource base and maximize our adjusted funds flow. Our 2020 program will remain flexible and allows for adjustments to spending and production based on changes in the commodity price environment,” commented Ed LaFehr, President and Chief Executive Officer.
We are immediately suspending drilling operations in Canada. As a result, we expect to forgo drilling 43 net heavy oil wells and 151 net light oil wells over the balance of this year. In addition, we expect a moderated pace of development in the Eagle Ford with 16 to 18 net wells brought on production (previously 22 net wells).
We now anticipate 2020 exploration and development expenditures of $260 to $290 million. At the mid-point, this reflects an approximate 50% reduction in capital spending for 2020 relative to our initial expectation of $500 to $575 million. For Q1/2020, exploration and development expenditures are expected to be approximately $190 million, down $10 million from our original plan. Our 2020 program will remain flexible and allows for adjustments to spending based on changes in the commodity price environment.
We are also proactively shutting-in approximately 3,500 boe/d of low or negative margin heavy oil production in order to optimize the value of our resource base and maximize our adjusted funds flow. Should operating netbacks change, we have the ability to shut-in additional volumes or restart wells in short order.
Taking into account the shut-in heavy oil volumes and a reduced capital program, we have revised our production guidance range for 2020 to 85,000 to 89,000 boe/d, from 93,000 to 97,000 boe/d previously, representing an approximate 5% reduction to our original guidance, excluding the impact of shut-in volumes.
During this period, we will remain focused on driving further efficiencies in our operations. As a continued cost control measure, all full-time employee salaries and all annual retainers paid to our directors will be reduced by 10% effective April 1, 2020.
The situation around the COVID-19 virus continues to evolve. We are focused on protecting the health and safety of our personnel while striving for business continuity. We have implemented a number of measures to foster resilience through these unpredictable times, including a work-from-home program. To date, we have had no operational or supply chain impacts from COVID-19.
We recently extended the maturities of our credit facilities to April 2, 2024. The credit facilities are not borrowing base facilities and do not require annual or semi-annual reviews. Our facilities total approximately $1.1 billion and include US$575 million of revolving credit facilities and a $300 million term loan. Our credit facilities are approximately one-third undrawn with $300 million of liquidity. In addition, our first long-term note maturity of US$400 million is not until June 2024.
The following table summarizes the financial covenants applicable to the credit facilities and Baytex’s compliance therewith as at December 31, 2019.
|Covenant Description||Position as at
December 31, 2019
|Senior Secured Debt (1) to Bank EBITDA (2) (Maximum Ratio)||0.52:1.00||3.50:1.00|
|Interest Coverage (3) (Minimum Ratio)||9.42:1.00||2.00:1.00|
(1) “Senior Secured Debt” is defined as the principal amount of the bank loan and other secured obligations identified in the credit agreement. As at December 31, 2019, the Company’s Senior Secured Debt totaled $521.7 million which includes $506.5 million of principal amounts outstanding and $15.2 million of letters of credit.
(2) Bank EBITDA is calculated based on terms and definitions set out in the credit agreement which adjusts net income or loss for financing and interest expenses, income tax, non-recurring losses, certain specific unrealized and non-cash transactions (including depletion, depreciation, exploration and evaluation expenses, unrealized gains and losses on financial derivatives and foreign exchange and share-based compensation) and is calculated based on a trailing twelve month basis including the impact of material acquisitions as if they had occurred at the beginning of the twelve month period. Bank EBITDA for the twelve months ended December 31, 2019 was $1,011.9 million.
(3) Interest coverage is computed as the ratio of Bank EBITDA to financing and interest expense, excluding accretion of debt issue costs and asset retirement obligations, and is calculated on a trailing twelve month basis. Financing and interest expenses, excluding accretion of debt issue costs and asset retirement obligations, for the twelve months ended December 31, 2019 were $107.4 million
To manage commodity price movements we utilize various financial derivative contracts to reduce the volatility in our adjusted funds flow.
For 2020, we have entered into hedges on approximately 53% of our net crude oil exposure. This is comprised largely of a 3-way option structure on 24,500 bbl/d that at current oil prices will see Baytex receive WTI plus US$7.60/bbl and WTI-based fixed price swaps on 3,500 bbl/d at US$57.40/bbl.
The following table compares our revised 2020 guidance to our original budget guidance.
|2020 Original Guidance (1)||2020 Revised Guidance|
|Exploration and development expenditures||$500 – $575 million||$260 – $290 million|
|Production (boe/d)||93,000 – 97,000||85,000 – 89,000|
|Royalty rate||18.0 – 18.5%||19.0 – 19.5%|
|Operating||$11.25 – $12.00/boe||$11.75 – $12.50/boe|
|Transportation||$1.20 – $1.30/boe||$1.10 – $1.20/boe|
|General and administrative||$45 million ($1.30/boe)||$45 million ($1.42/boe)|
|Interest||$112 million ($3.23/boe)||$115 million ($3.62/boe)|
|Leasing expenditures||$7 million||$7 million|
|Asset retirement obligations||$19 million||$10 million|
(1) As announced on December 4, 2019.