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Baytex Energy First Quarter 2022 Results; Adds $100MM to Budget

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   |    Wednesday,May 11,2022

Baytex Energy Corp. reports its operating and financial results for the three months ended March 31, 2022 (all amounts are in Canadian dollars unless otherwise noted).

Ed LaFehr, President and Chief Executive Officer, said: “We remain focused on capital discipline, generating free cash flow and reducing debt. We also materially advanced our Clearwater development with ten wells drilled at Peavine, including three wells averaging 30-day initial production rates of 1,100 bbl/d per well. These exceptional wells have enabled us to more than double our Clearwater production to 8,000 bbl/d today. As a result, we are pleased to increase our 2022 production guidance and add six new Clearwater wells to our Q4/2022 program. Our focus on delivering substantial free cash flow is unchanged - our updated five-year plan (2022 through 2026) is expected to generate approximately $3 billion of cumulative free cash flow. I am also excited to announce that our board of directors has approved a share buyback program that is expected to commence in May."

Q1 2022 Highlights:

  • Generated production of 80,867 boe/d (82% oil and NGL) in Q1/2022, a 3% increase over Q1/2021.
  • Delivered adjusted funds flow(1) of $280 million ($0.49 per basic share) in Q1/2022, a 78% increase compared to $157 million ($0.28 per basic share) in Q1/2021.
  • Generated free cash flow(2) of $121 million ($0.21 per basic share) in Q1/2022, a 72% increase compared to $70 million ($0.13 per basic share) in Q1/2021.
  • Cash flows from operating activities was $199 million ($0.35 per basic share) in Q1/2022, a 64% increase compared to $121 million ($0.22 per basic share) in Q1/2021.
  • Reduced net debt(1) by 10% to $1.28 billion, from $1.41 billion at year-end 2021.
  • Drilled 10 Clearwater wells at Peavine in Q1/2022 with our first three wells generating an average 30-day initial production rate of 1,100 bbl/d per well, boosting field production to 8,000 bbl/d today.
  • Increasing exploration and development expenditures and production guidance given strong Peavine results and inflationary pressure.
  • We intend to repurchase and cancel the remaining US$200 million principal amount of 5.625% long-term notes at par on June 1, 2022.

2022 Outlook

We remain intensely focused on maintaining capital discipline and driving meaningful free cash flow in our business. Based on the forward strip(3), we expect to generate approximately $700 million ($1.25 per basic share) of free cash flow this year. As part of our previously announced return of capital framework, we expect to allocate approximately 25% of our annual free cash flow to direct shareholder returns through a share buyback program commencing in May of 2022.

The remainder of our free cash flow will continue to be allocated to debt reduction until we achieve a net debt level of $800 million, which represents an expected net debt(1) to EBITDA(4) ratio of 1.0x at a US$55 WTI price. This level of net debt will provide us with 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 in early 2023, at which point we will consider steps to further enhance shareholder returns.

Our operational success, the continued strong economics of our drilling program and the inflationary pressures being experienced throughout our industry caused us to review our capital program for the year. We are now forecasting 2022 exploration and development expenditures of $450 to $500 million, up from $400 to $450 million, which was set in a US$65 pricing environment. The incremental capital reflects additional activity on our Clearwater lands and the Eagle Ford as well as expected capital cost inflation.

With continued strong operating momentum and production growth on our Clearwater lands, we are increasing our production guidance for 2022 to 83,000 to 85,000 boe/d, up from 80,000 to 83,000 boe/d, previously, and expect to exit 2022 producing approximately 87,000 to 88,000 boe/d.

The Clearwater has emerged as one of the most profitable plays in North America and our Q1/2022 drilling program has delivered exceptional results. As a result, we are expanding our 2022 plan to run a full one rig program at Peavine through year-end (previously budgeted plans had our drilling program wrapping up in September) which results in an incremental six wells being drilled in Q4/2022. We also anticipate drilling 2-3 net incremental wells in the Eagle Ford in H2/2022, the highest free cash flow generating asset in our portfolio. This increased activity set will result in $30 million of incremental exploration and development expenditures, which is offset by approximately $10 million of reduced light oil activity.

We have also updated our 2022 plan to reflect an incremental 8% expected capital cost inflation, which increases our exploration and development expenditures by approximately $30 million. This reflects industry cost pressures related to labour, logistics, fuel and tangible items such as steel, frac sand and chemicals. In aggregate, we are now assuming 18% capital cost inflation in 2022, as compared to 2021.

We have fine-tuned several of our cost assumptions to reflect increased royalties due to higher commodity prices and inflationary pressures on operating and transportation expenses related to labor, fuel, electricity and hauling. Offsetting these cost pressures to a certain extent is increased production and a reduction in our interest expense as our net debt is reduced.

Update to Five-Year Plan

We introduced our five-year plan one year ago (April 2021) to highlight our financial and operational sustainability and ability to generate meaningful free cash flow. We continue to benchmark our results to this five-year plan and intend to update as warranted based on the macro-environment (commodity prices, cost inflation) and drilling results and activity across our land base.

We are now rolling our five-year plan forward to capture the period 2022 to 2026. Year one of the five-year plan is based on 2022 guidance and forward strip commodity prices and years two through five (2023 through 2026) are based on a constant US$75 WTI price. Our focus on delivering free cash flow is unchanged - under these pricing assumptions, we expect to generate approximately $3 billion of cumulative free cash flow(1) during the plan period.

We have also updated our five-year plan to include expected inflationary cost increases along with increased drilling on our Clearwater lands that has us drilling approximately 120 net wells through 2026. With this updated view of our land base, we expect Clearwater production to increase from zero at the beginning of 2021 to approximately 10,000 bbl/d while generating over $400 million of cumulative free cash flow. With continued success, we believe the play ultimately holds the potential for over 200 drilling locations that could support production increasing to over 15,000 bbl/d.

Through this plan period, we are committed to a disciplined, returns based capital allocation philosophy, targeting exploration and development expenditures at less than 50% of our adjusted funds flow. We expect to generate annual production growth of 2% to 4%, with production reaching approximately 95,000 boe/d in 2026.

Normal Course Issuer Bid

Given the strength of our balance sheet and consistent with our desire to offer direct shareholder returns, the Board of Directors has approved the filing of a Normal Course Issuer Bid ("NCIB") application with the TSX for a share buyback program of up to 56 million common shares, representing approximately 10% of our public float.

In Q1/2022, we delivered strong operating and financial results and continued to advance our exciting new Clearwater play in northwest Alberta.

Production during the first quarter averaged 80,867 boe/d (82% oil and NGL) as compared to 80,789 boe/d (82% oil and NGL) in Q4/2021. Exploration and development expenditures totaled $154 million in Q1/2022 and we participated in the drilling of 81 (66.7 net) wells with a 100% success rate.

We delivered adjusted funds flow(1) of $280 million ($0.49 per basic share) and net income of $57 million ($0.10 per basic share). We generated free cash flow(2) of $121 million ($0.21 per basic share) during the quarter with 100% being allocated to debt repayment, reducing net debt(1) by 10% to $1.28 billion, from $1.41 billion at year-end 2021.

Operating Results

Eagle Ford and Viking Light Oil

Production in the Eagle Ford averaged 27,482 boe/d (81% oil and NGL) during Q1/2022 and generated an operating netback(2) of $133 million. We invested $28 million on exploration and development in the Eagle Ford and brought 15 (4.7 net) wells onstream. We now expect to bring approximately 16-17 net wells onstream in 2022, up from our original budget of 14 net wells.

Production in the Viking averaged 17,865 boe/d (89% oil and NGL) during Q1/2022 and generated an operating netback of $128 million. We invested $56 million on exploration and development in the Viking and brought 58 (56.5 net) wells onstream. We now expect to bring approximately 135 net wells onstream in 2022, versus our original budget of 145 new wells.

Heavy Oil

Our heavy oil assets at Peace River and Lloydminster (excluding our Clearwater development program) produced a combined 24,283 boe/d (91% oil and NGL) during Q1/2022 and generated an operating netback of $99 million. We invested $36 million on exploration and development and participated in the drilling of 3 net Bluesky wells at Peace River and 11 (10.8 net) wells at Lloydminster. In 2022, we will drill approximately 9 net Bluesky wells at Peace River and 38 net wells at Lloydminster.

Peace River Clearwater

Production in the Clearwater averaged 3,154 boe/d (100% oil) during Q1/2022 and generated an operating netback of $17 million.

We followed up our 2021 appraisal program on our Peavine acreage with an exceptional Q1/2022 drilling program. We now have all 10 wells drilled during the first quarter onstream and production has increased from zero at the beginning of 2021 to approximately 8,000 bbl/d today. During the first quarter, we successfully executed our first six extended reach horizontal ("ERH") multi-lateral wells, which are utilized to provide appropriate set-backs to residents and environmentally sensitive areas. These ERH wells are among the first of their type to be drilled in western Canada and consist of four two-mile long laterals versus a more traditional well design comprised of eight one-mile laterals. Our first three ERH wells (4-25 pad) have established average 30-day initial production rates of 1,100 bbl/d per well and are the strongest Clearwater wells drilled to date in the play. In addition, four wells (5-33 pad) were brought onstream in March/April and are expected to generate 30-day initial production rates of 300 to 400 bbl/d per well. Initial well performance continues to outperform type curve assumptions and we now have seven of the top ten initial rate wells drilled to date across the play.

As we continue to progress our development plan, we have committed to drill six additional Clearwater wells during the fourth quarter. We now intend to run a full one rig program at Peavine through year-end (previously budgeted plans had our drilling program wrapping up in September). As a result, we expect to drill 24 net wells in 2022, up from our original budget of 18 net wells. Maintaining a consistent one rig program and level loading activity in the second half of 2022 will drive further efficiencies and set the stage for continued strong operating momentum heading into 2023. Development plans going forward will be comprised of both our traditional 8-lateral well design and ERH wells.

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 are highly prospective for Clearwater development.

Pembina Area Duvernay Light Oil

Production in the Pembina Duvernay averaged 2,172 boe/d (82% oil and NGL) during Q1/2022. We invested $11 million on exploration and development in the Duvernay and drilled a three-well pad which is expected to be onstream in Q3/2022.

Financial Liquidity

Our net debt(1), which includes our credit facilities, long-term notes and working capital, totaled $1.28 billion at March 31, 2022, down from $1.41 billion at December 31, 2021. As of March 31, 2022, we had $576 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital, of $601 million.

On April 1, 2022, we announced that we had received strong support from our lending syndicate to extend and amend our bank credit facilities. The revolving credit facilities have been extended by two years, from April 2024 to April 2026, and have been increased to US$850 million. Previously, the credit facilities totaled approximately US$815 million and were comprised of US$575 million of revolving credit facilities and a C$300 million term loan. The revolving credit facilities are not borrowing base facilities and do not require annual or semi-annual reviews.

On June 1, 2022, we intend to repurchase and cancel the remaining US$200 million principal amount of 5.625% long-term notes due 2024 at par.

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 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


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