Calgary, Alberta–(Newsfile Corp. – July 27, 2022) – Baytex Energy Corp. (TSX: BTE) (“Baytex”) reports its operating and financial results for the three and six months ended June 30, 2022 (all amounts are in Canadian dollars unless otherwise noted).
“During the second quarter, we delivered strong operating results which included significant production growth from our Clearwater assets and record quarterly free cash flow of $245 million. Given the strength of our balance sheet and consistent with our desire to offer direct shareholder returns, we launched our share buyback program in May and repurchased 9.1 million shares during the quarter. I am also excited to announce that upon hitting our $800 million net debt target in late 2022 or early 2023, we anticipate increasing direct shareholder returns to 50% of our free cash flow and accelerating our share buyback program. We continue to view our shares as undervalued in relation to our current operations,” commented Ed LaFehr, President and Chief Executive Officer.
Q2 2022 Highlights
- Generated production of 83,090 boe/d (83% oil and NGL) in Q2/2022, a 2% increase over Q2/2021.
- Delivered adjusted funds flow(1) of $346 million ($0.61 per basic share) in Q2/2022, a 97% increase compared to $176 million ($0.31 per basic share) in Q2/2021.
- Generated free cash flow(2) of $245 million ($0.43 per basic share) in Q2/2022, a 118% increase compared to $112 million ($0.20 per basic share) in Q2/2021.
- Cash flows from operating activities of $360 million ($0.63 per basic share) in Q2/2022, a 109% increase compared to $172 million ($0.30 per basic share) in Q2/2021.
- Reduced net debt(1) by 20% to $1.12 billion, from $1.41 billion at year-end 2021.
- Redeemed the remaining US$200 million principal amount of 5.625% long-term notes at par on June 1, 2022.
- Repurchased 9.1 million common shares, representing 1.6% of our shares outstanding, at an average price of $6.88 per share.
- Generated production from our Clearwater play at Peavine of 7,319 bbl/d in Q2/2022, up from 3,154 bbl/d in Q1/2022. Production during the month of June averaged 9,088 bbl/d from 18 producing wells and we have 14 Clearwater wells to drill during the second half of 2022.
2022 Outlook
We remain intensely focused on maintaining capital discipline and driving meaningful free cash flow in our business. We continue to execute our 2022 plan with production guidance unchanged at 83,000 to 85,000 boe/d and expect to exit 2022 producing approximately 87,000 to 88,000 boe/d.
Our 2022 exploration and development expenditures guidance is unchanged at $450 to $500 million. We continue to experience inflationary pressures in our business, particularly the Eagle Ford, and anticipate full-year capital expenditures toward the high end of our guidance range. Based on the forward strip(3), we expect to generate approximately $700 million ($1.25 per basic share) of free cash flow this year.
(1) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.
(2) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information.
(3) 2022 full-year pricing assumptions: WTI – US$98/bbl; WCS differential – US$17/bbl; MSW differential – US$3/bbl, NYMEX Gas – US$6.60/mcf; AECO Gas – $5.80/mcf and Exchange Rate (CAD/USD) – 1.28.
2022 Outlook (continued)
We have fine-tuned several of our cost assumptions to reflect increased royalties due to higher commodity prices and further inflationary pressures on operating and transportation expenses, related to labor, fuel, electricity and hauling. We are now forecasting approximately 15% inflation on a combined basis for operating and transportation expenses, as compared to 2021.
The following table highlights our 2022 annual guidance.
2022 Guidance (1) | 2022 Revised Guidance | ||
Exploration and development expenditures | $450 – $500 million | no change | |
Production (boe/d) | 83,000 – 85,000 | no change | |
Expenses: | |||
Average royalty rate (2) | 20.0% – 20.5% | 21.0% – 22.0% | |
Operating (3) | $13.00 – $13.50/boe | $13.75 – $14.25/boe | |
Transportation (3) | $1.30 – $1.40/boe | $1.50 – $1.60/boe | |
General and administrative (3) | $43 million ($1.40/boe) | no change | |
Interest (3) | $75 million ($2.45/boe) | no change | |
Leasing expenditures | $3 million | no change | |
Asset retirement obligations | $20 million | no change |
Update to Shareholder Return Framework
With continued operating momentum and strong commodity prices, we reached our initial $1.2 billion net debt(4) target during Q2/2022.
Our improved financial position enabled us to implement the first phase of our enhanced shareholder return framework in May, allocating 25% of our annual free cash flow to a share buyback program. During the second quarter, we repurchased 9.1 million common shares, representing 1.6% of our shares outstanding, at an average price of $6.88 per share. The remainder of our free cash flow continues to be allocated to debt reduction.
As our deleveraging continues at a rapid pace, we are pleased to announce the second phase of our shareholder return framework. Upon hitting a net debt level of $800 million in late 2022 or early 2023, we anticipate increasing direct shareholder returns to 50% of our free cash flow and accelerating our share buyback program. We continue to view our shares as undervalued in relation to our current operations.
We have also established an ultimate net debt target for the company of $400 million, which represents an expected net debt(4) to EBITDA(5) ratio of 1.0x at a US$45 WTI price. We feel this level of net debt will provide us with full flexibility to run our business through the commodity price cycles and generate meaningful returns for our shareholders. At current prices, we expect to achieve this net debt level by the end of 2023 or early 2024, at which point we will consider steps to further enhance shareholder returns.
President and CEO Retirement
Mr. LaFehr has provided the company notice of his intent to retire in January 2023. Mr. LaFehr has had a long and successful career as an oil and gas executive. Over the last six years at Baytex he has stewarded the company through a challenging commodity price environment and positioned the company to deliver meaningful returns to shareholders.
(1) As announced on April 28, 2022.
(2) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information.
(3) Calculated as operating, transportation, general and administrative or cash interest expense divided by barrels of oil equivalent production volume for the applicable period.
(4) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.
(5) Calculated in accordance with the Credit Facilities Agreement.
“With a strong and improving balance sheet, our exciting Clearwater play and the initiation of share buybacks, Mr. LaFehr’s planned retirement comes at a time when Baytex has a solid foundation and is well positioned for the future. Mr. LaFehr will continue to lead the team in the execution of the 2022 plan and 2023 budget preparation, which will include advancing our shareholder return framework. In addition, we will benefit from Mr. LaFehr’s input as we progress through the CEO transition process,” commented Mark Bly, Chair of the Board.
“I am pleased that Baytex is extremely well positioned for the future and, at the same time, I am ready to move to the next stage of my career. I look forward to guiding the company through a smooth transition as we continue to build operational momentum and drive shareholder returns,” commented Ed LaFehr, President and Chief Executive Officer.
Executive development and succession planning are an ongoing process at Baytex and are critical responsibilities of the Board. To help facilitate this process, Baytex’s Board has established a succession committee and engaged an executive search firm to identify and evaluate both internal and external candidates for the role.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2022 | March 31, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||
FINANCIAL (thousands of Canadian dollars, except per common share amounts) |
|||||||||||||||
Petroleum and natural gas sales | $ | 854,169 | $ | 673,825 | $ | 442,354 | $ | 1,527,994 | $ | 827,056 | |||||
Adjusted funds flow (1) | 345,704 | 279,607 | 175,883 | 625,311 | 332,465 | ||||||||||
Per share – basic | 0.61 | 0.49 | 0.31 | 1.10 | 0.59 | ||||||||||
Per share – diluted | 0.60 | 0.49 | 0.31 | 1.10 | 0.59 | ||||||||||
Free cash flow (2) | 245,316 | 121,318 | 112,486 | 366,634 | 182,981 | ||||||||||
Per share – basic | 0.43 | 0.21 | 0.20 | 0.65 | 0.32 | ||||||||||
Per share – diluted | 0.43 | 0.21 | 0.20 | 0.64 | 0.32 | ||||||||||
Cash flows from operating activities | 360,034 | 198,974 | 171,876 | 559,008 | 292,856 | ||||||||||
Per share – basic | 0.63 | 0.35 | 0.30 | 0.99 | 0.52 | ||||||||||
Per share – diluted | 0.63 | 0.35 | 0.30 | 0.98 | 0.52 | ||||||||||
Net income | 180,972 | 56,858 | 1,052,999 | 237,830 | 1,017,647 | ||||||||||
Per share – basic | 0.32 | 0.10 | 1.87 | 0.42 | 1.81 | ||||||||||
Per share – diluted | 0.32 | 0.10 | 1.85 | 0.42 | 1.79 | ||||||||||
Capital Expenditures | |||||||||||||||
Exploration and development expenditures | $ | 96,633 | $ | 153,822 | $ | 61,485 | $ | 250,455 | $ | 145,073 | |||||
Acquisitions and divestitures | 194 | 32 | (18 | ) | 226 | (221 | ) | ||||||||
Total oil and natural gas capital expenditures | $ | 96,827 | $ | 153,854 | $ | 61,467 | $ | 250,681 | $ | 144,852 | |||||
Net Debt | |||||||||||||||
Credit facilities | $ | 496,917 | $ | 426,858 | $ | 486,623 | $ | 496,917 | $ | 486,623 | |||||
Long-term notes | 643,600 | 873,880 | 1,109,211 | 643,600 | 1,109,211 | ||||||||||
Long-term debt | 1,140,517 | 1,300,738 | 1,595,834 | 1,140,517 | 1,595,834 | ||||||||||
Working capital | (17,220 | ) | (25,058 | ) | 33,795 | (17,220 | ) | 33,795 | |||||||
Net debt (1) | $ | 1,123,297 | $ | 1,275,680 | $ | 1,629,629 | $ | 1,123,297 | $ | 1,629,629 | |||||
Shares Outstanding – basic (thousands) | |||||||||||||||
Weighted average | 566,997 | 565,518 | 564,156 | 566,262 | 563,126 | ||||||||||
End of period | 560,139 | 569,214 | 564,182 | 560,139 | 564,182 | ||||||||||
BENCHMARK PRICES | |||||||||||||||
Crude oil | |||||||||||||||
WTI (US$/bbl) | $ | 108.41 | $ | 94.29 | $ | 66.07 | $ | 101.35 | $ | 61.96 | |||||
MEH oil (US$/bbl) | 112.41 | 96.72 | 67.15 | 104.56 | 63.26 | ||||||||||
MEH oil differential to WTI (US$/bbl) | 4.00 | 2.43 | 1.08 | 3.21 | 1.30 | ||||||||||
Edmonton par ($/bbl) | 137.79 | 115.66 | 77.28 | 126.72 | 71.93 | ||||||||||
Edmonton par differential to WTI (US$/bbl) | (0.47 | ) | (2.94 | ) | (3.13 | ) | (1.68 | ) | (4.28 | ) | |||||
WCS heavy oil ($/bbl) | 122.05 | 100.99 | 67.03 | 111.48 | 62.33 | ||||||||||
WCS differential to WTI (US$/bbl) | (12.80 | ) | (14.53 | ) | (11.48 | ) | (13.67 | ) | (11.98 | ) | |||||
Natural gas | |||||||||||||||
NYMEX (US$/mmbtu) | $ | 7.17 | $ | 4.95 | $ | 2.83 | $ | 6.06 | $ | 2.76 | |||||
AECO ($/mcf) | 6.27 | 4.59 | 2.85 | 5.43 | 2.89 | ||||||||||
CAD/USD average exchange rate | 1.2766 | 1.2661 | 1.2279 | 1.2714 | 1.2471 |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2022 | March 31, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||
OPERATING | |||||||||||||||
Daily Production | |||||||||||||||
Light oil and condensate (bbl/d) | 33,007 | 34,065 | 37,134 | 33,533 | 36,286 | ||||||||||
Heavy oil (bbl/d) | 28,586 | 25,236 | 21,269 | 26,921 | 21,627 | ||||||||||
NGL (bbl/d) | 7,468 | 7,636 | 7,563 | 7,552 | 6,904 | ||||||||||
Total liquids (bbl/d) | 69,061 | 66,937 | 65,966 | 68,006 | 64,817 | ||||||||||
Natural gas (mcf/d) | 84,169 | 83,574 | 91,172 | 83,873 | 90,957 | ||||||||||
Oil equivalent (boe/d @ 6:1) (3) | 83,090 | 80,867 | 81,162 | 81,985 | 79,978 | ||||||||||
Netback (thousands of Canadian dollars) | |||||||||||||||
Total sales, net of blending and other expense (2) | $ | 797,274 | $ | 632,385 | $ | 422,387 | $ | 1,429,659 | $ | 789,969 | |||||
Royalties | (171,559 | ) | (122,720 | ) | (81,531 | ) | (294,279 | ) | (148,481 | ) | |||||
Operating expense | (107,426 | ) | (100,766 | ) | (82,901 | ) | (208,192 | ) | (163,449 | ) | |||||
Transportation expense | (11,758 | ) | (9,215 | ) | (7,486 | ) | (20,973 | ) | (16,274 | ) | |||||
Operating netback (2) | $ | 506,531 | $ | 399,684 | $ | 250,469 | $ | 906,215 | $ | 461,765 | |||||
General and administrative | (11,640 | ) | (11,682 | ) | (10,610 | ) | (23,322 | ) | (19,343 | ) | |||||
Cash financing and interest | (20,474 | ) | (20,427 | ) | (23,554 | ) | (40,901 | ) | (47,957 | ) | |||||
Realized financial derivatives loss | (124,042 | ) | (84,366 | ) | (39,024 | ) | (208,408 | ) | (59,792 | ) | |||||
Other (4) | (4,671 | ) | (3,602 | ) | (1,398 | ) | (8,273 | ) | (2,208 | ) | |||||
Adjusted funds flow (1) | $ | 345,704 | $ | 279,607 | $ | 175,883 | $ | 625,311 | $ | 332,465 | |||||
Netback (per boe) (5) | |||||||||||||||
Total sales, net of blending and other expense (2) | $ | 105.44 | $ | 86.89 | $ | 57.19 | $ | 96.34 | $ | 54.57 | |||||
Royalties | (22.69 | ) | (16.86 | ) | (11.04 | ) | (19.83 | ) | (10.26 | ) | |||||
Operating expense | (14.21 | ) | (13.85 | ) | (11.22 | ) | (14.03 | ) | (11.29 | ) | |||||
Transportation expense | (1.56 | ) | (1.27 | ) | (1.01 | ) | (1.41 | ) | (1.12 | ) | |||||
Operating netback (2) | $ | 66.98 | $ | 54.91 | $ | 33.92 | $ | 61.07 | $ | 31.90 | |||||
General and administrative | (1.54 | ) | (1.61 | ) | (1.44 | ) | (1.57 | ) | (1.34 | ) | |||||
Cash financing and interest | (2.71 | ) | (2.81 | ) | (3.19 | ) | (2.76 | ) | (3.31 | ) | |||||
Realized financial derivatives loss | (16.41 | ) | (11.59 | ) | (5.28 | ) | (14.04 | ) | (4.13 | ) | |||||
Other (4) | (0.60 | ) | (0.48 | ) | (0.20 | ) | (0.56 | ) | (0.15 | ) | |||||
Adjusted funds flow (1) | $ | 45.72 | $ | 38.42 | $ | 23.81 | $ | 42.14 | $ | 22.97 |
Notes:
(1) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.
(2) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information.
(3) Barrel of oil equivalent (“boe”) amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. The use of boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
(4) Other is comprised of realized foreign exchange gain or loss, other income or expense, current income tax expense or recovery and cash share-based compensation. Refer to the Q2/2022 MD&A for further information on these amounts.
(5) Calculated as royalties, operating, transportation, general and administrative, cash financing and interest expense or realized financial derivatives loss divided by barrels of oil equivalent production volume for the applicable period.
Q2/2022 Results
In Q2/2022, we delivered strong operating and financial results and continued to advance our exciting new Clearwater play in northwest Alberta.
Production during the second quarter averaged 83,090 boe/d (83% oil and NGL) as compared to 80,867 boe/d (82% oil and NGL) in Q1/2022. The increased production is consistent with our full-year plan and reflects the success of our first quarter drilling program at Peavine, which more than offset the seasonality associated with spring breakup and wet weather conditions across western Canada.
Exploration and development expenditures totaled $97 million in Q2/2022 and we participated in the drilling of 37 (21.4 net) wells with a 100% success rate.
We delivered adjusted funds flow(1) of $346 million ($0.61 per basic share) and net income of $181 million ($0.32 per basic share). We generated a record level of quarterly free cash flow(2) of $245 million ($0.43 per basic share) and reduced net debt(1) by 12% to $1.12 billion, from $1.28 billion at March 31, 2022.
Operating Results
Eagle Ford and Viking Light Oil
Production in the Eagle Ford averaged 28,170 boe/d (82% oil and NGL) during Q2/2022 and generated an operating netback(2) of $168 million. We invested $45 million on exploration and development in the Eagle Ford during the quarter and brought 20 (3.8 net) wells onstream. We expect to bring approximately 18 net wells onstream in 2022.
Production in the Viking averaged 16,487 boe/d (87% oil and NGL) during Q2/2022 and generated an operating netback of $140 million. We invested $15 million on exploration and development in the Viking during the quarter and brought 9 (8.2 net) wells onstream. We expect to bring approximately 130 net wells onstream in 2022.
Heavy Oil
Our heavy oil assets at Peace River and Lloydminster (excluding our Clearwater development program) produced a combined 23,683 boe/d (90% oil and NGL) during Q2/2022 and generated an operating netback of $122 million. We invested $16 million on exploration and development during the quarter and brought onstream 3 net Bluesky wells at Peace River and 5.8 net wells at Lloydminster. In 2022, we will drill approximately 9 net Bluesky wells at Peace River and 31 net wells at Lloydminster.
Peace River Clearwater
Production in the Clearwater averaged 7,319 boe/d (100% oil) during Q2/2022 and generated an operating netback of $48 million. Production during the second quarter was curtailed by approximately 650 bbl/d due to spring break-up and road maintenance that led to the shut-in of our 4-25 pad for two weeks in May. Production during the month of June averaged 9,088 bbl/d from 18 producing wells.
We followed up our 2021 appraisal program on our Peavine acreage with an exceptional Q1/2022 drilling program. During the second quarter, the remaining four wells from our 10-well Q1/2022 drilling program were brought onstream and all ten wells have now established 30-day initial production rates. The average 30-day initial production rate per well for these 10 wells is 772 bbl/d. Initial well performance continues to outperform type curve assumptions and we now hold nine of the top ten initial rate wells drilled to date across the play.
Our second half drilling program kicked off in July and we expect to drill 14 additional Clearwater wells, including 13 wells at Peavine and one well at Seal that follows up a successful exploration well from 2021. The first two wells from the H2/2022 drilling program are scheduled to be onstream mid-August.
At current commodity prices, the Clearwater generates among the strongest economics within our portfolio with payouts of less than three months and has the ability to grow organically while enhancing our free cash flow profile. To-date, we have de-risked 50 sections (of our 80-section Peavine land base) and believe the lands hold the potential for greater than 200 locations. When combined with our legacy acreage position in northwest Alberta, we estimate that over 125 sections of our lands are highly prospective for Clearwater development.
(1) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.
(2) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information.
Pembina Area Duvernay Light Oil
Production in the Pembina Duvernay averaged 1,756 boe/d (81% oil and NGL) during Q2/2022.
We continue to advance the delineation of the Pembina Duvernay Shale, an early stage, high operating netback light oil resource play. During the second quarter, we completed a three-well pad that was drilled during the first quarter. All three wells are now flowing back and initial results are encouraging and tracking to type well forecast. The wells flow to a Baytex operated oil battery with solution gas being processed at a third party deep cut facility. The three wells, each drilled to a vertical depth of 2,400 metres with a horizontal lateral of 1.85 miles, were drilled and completed on budget at approximately $8.1 million per well. Across our Pembina acreage, we hold 200 sections of 100% working interest lands.
Financial Liquidity
On June 1, 2022, we redeemed the remaining US$200 million principal amount of 5.625% long-term notes due 2024 at par. Following this, our net debt(1), which includes our credit facilities, long-term notes and working capital, totaled $1.12 billion at June 30, 2022, down from $1.41 billion at December 31, 2021.
As of June 30, 2022, we had $582 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital, of $599 million.
Risk Management
To manage commodity price movements, we utilize various financial derivative contracts and crude-by-rail to reduce the volatility of our adjusted funds flow.
For the second half of 2022, we have entered into hedges on approximately 40% of our net crude oil exposure utilizing a combination of a 3-way option structure that provides price protection at US$57.76/bbl with upside participation to US$67.51/bbl and swaptions at US$53.50/bbl. We also have WTI-MSW differential hedges on approximately 25% of our expected net Canadian light oil exposure at US$4.43/bbl and WCS differential hedges on approximately 70% of our expected net heavy oil exposure at a WTI-WCS differential of approximately US$12.28/bbl.
For 2023, we have entered into hedges on approximately 18% of our net crude oil exposure utilizing a 3-way option structure that provides price protection at US$78.37/bbl with upside participation to US$96.12/bbl
A complete listing of our financial derivative contracts can be found in Note 16 to our Q2/2022 financial statements.
(1) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.