“As the global supply and demand picture continues to unfold, crude oil prices have strengthened from their lows in April and we are now starting to benefit from the steps we have taken. We have restarted approximately 80% of the previously announced shut-in volumes, which will have a positive impact on our adjusted funds flow. At current commodity prices, we expect to generate positive free cash flow over the remainder of 2020 and maintain over $300 million of financial liquidity,” commented Ed LaFehr, President and Chief Executive Officer.
We continue to forecast capital spending for this year of $260 to $290 million, which represents an approximate 50% reduction from our original plan of $500 to $575 million. With this revised capital program, we suspended drilling operations in Canada and expect to see a moderated pace of activity in the Eagle Ford.
We previously announced that we had voluntarily shut-in approximately 25,000 boe/d of production. These volumes remained off-line for April and May. As operating netbacks improved in June, we initiated plans to bring approximately 80% of these volumes back on-line. At current commodity prices, the resumption of production from these previously shut-in barrels will have a positive impact on our adjusted funds flow and improve our financial liquidity. For the second half of 2020, we currently project about 5,000 boe/d of heavy oil production to remain shut-in.
Taking into account the production brought back on-line, we are revising our production guidance range for 2020 to 78,000 to 82,000 boe/d, from 70,000 to 74,000 boe/d previously. We expect production in the second quarter to average approximately 72,000 to 73,000 boe/d. Should operating netbacks change, we have the ability to shut-in additional volumes or restart wells in short order.
As operations resume, we remain intensely focused on driving further efficiencies to capture or sustain cost reductions previously identified during the downturn, while protecting the health and safety of our personnel.
Based on the forward strip(1), we expect to maintain our financial liquidity and remain onside with our financial covenants through 2021.
|(1)||2020 full year pricing assumptions: WTI – US$37/bbl; WCS differential – US$14/bbl; MSW differential – US$6/bbl, NYMEX Gas – US$1.95/mcf; AECO Gas – $2.00/mcf and Exchange Rate (CAD/USD) – 1.36. 2021 full year pricing assumptions: WTI – US$40/bbl; WCS differential – US$14/bbl; MSW differential – US$7/bbl, NYMEX Gas – US$2.65/mcf; AECO Gas – $2.25/mcf and Exchange Rate (CAD/USD) – 1.36.|
Our credit facilities total approximately $1.1 billion and have a maturity date of April 2, 2024. These are not borrowing base facilities and do not require annual or semi-annual reviews. As of March 31, 2020, we had $417 million of undrawn capacity on our credit facilities resulting in approximately $315 million of liquidity net of working capital. 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 March 31, 2020.
|Covenant Description||Position as at March 31, 2020||Covenant|
|Senior Secured Debt (1) to Bank EBITDA (2) (Maximum Ratio)||0.8:1.00||3.50:1.00|
|Interest Coverage (3) (Minimum Ratio)||8.6:1.00||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 March 31, 2020, the Company’s Senior Secured Debt totaled $694.9 million which includes $678.7 million of principal amounts outstanding and $16.2 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 March 31, 2020 was $923.8 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 March 31, 2020 were $107.2 million.|
To manage commodity price movements, we utilize various financial derivative contracts and crude-by-rail to reduce the volatility in our adjusted funds flow. The following table summarizes our crude oil hedges in place for the balance of this year.
|WTI Fixed Hedges|
|Fixed Price (US$/bbl)||$31.03||$36.41||$42.78|
|WTI 3-Way Option (1)|
|Baytex Receives (2)||WTI plus US$7.60||WTI plus US$7.60||WTI plus US$7.60|
|Total Volumes (bbl/d)||41,183||48,232||32,500|
|(1)||WTI 3-way options consist of a sold put, a bought put and a sold call. Baytex’s average sold put, bought put and sold call are US$50.44/bbl, US$58.04/bbl and US$63.06/bbl, respectively. Baytex receives WTI plus US$7.60/bbl when WTI is at or below US$50.44/bbl; Baytex receives US$58.04/bbl when WTI is between US$50.44/bbl and US$58.04/bbl; Baytex receives WTI when WTI is between US$58.04/bbl and US$63.06/bbl; and Baytex receives US$63.06/bbl when WTI is above US$63.06/bbl.|
|(2)||Based on the forward strip for the balance of 2020, Baytex will receive WTI plus US$7.60/bbl.|
For the remainder of 2020, we also have WTI-MSW basis differential swaps for 6,944 bbl/d of our light oil production in Canada at US$5.87/bbl and WCS differential hedges on 7,944 bbl/d at a WTI-WCS differential of US$15.03/bbl.
Crude-by-rail is an integral part of our egress and marketing strategy for our heavy oil production. For Q2/2020, we delivered approximately 5,250 bbl/d of our heavy oil volumes to market by rail.
The following table compares our revised 2020 guidance to our previous guidance.
|2020 Previous Guidance (1)||2020 Revised Guidance|
|Exploration and development expenditures||$260 – $290 million||no change|
|Production (boe/d)||70,000 – 74,000||78,000 – 82,000|
|Royalty rate||~ 20%||~ 18.5%|
|Operating||$11.75 – $12.50/boe||no change|
|Transportation||$0.80 – $0.90/boe||$0.95 – $1.05/boe|
|General and administrative||$40 million ($1.52/boe)||$38 million ($1.30/boe)|
|Interest||$120 million ($4.57/boe)||$112 million ($3.84/boe)|
|Leasing expenditures||$7 million||no change|
|Asset retirement obligations||$10 million||no change|
|(1)||As announced on May 7, 2020.|