Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. Second Quarter 2024 Financial and Operation 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 for analysts to ask questions. I would now like to turn the conference over to Brian Ector, Senior Vice President, Capital Markets and Investor Relations. Please go ahead.

Thank you, Brenda. Good morning ladies and gentlemen and thank you for joining us to discuss our second quarter 2024 financial and operating results. Today I am joined by Eric Greager, our President and Chief Executive Officer, Chad Kalmakoff, our Chief Financial Officer, and Chad Lundberg, our Chief Operating Officer. 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 following our prepared remarks, we will be taking questions from the analysts. In addition, if you are listening in today via the webcast, you will have the opportunity to submit an online question, and time permitting, we will try to answer your question. With that, I would now like to turn the call over to Eric.

Thanks Brian. Good morning everyone and welcome to our second quarter 2024 conference call. In the second quarter, we delivered strong results with higher production, disciplined capital spending, and meaningful free cash flow. Importantly, and consistent with our full year plan, we returned CAD97 million to shareholders through our share buyback program and quarterly dividend. As we continue to execute our plans for 2024, our free cash flow is expected to strengthen in the second half of the year, allowing for increased shareholder returns and debt reduction. We increased production per share by 23% in Q2 2024 compared to Q2 2023, with production averaging more than 154,000 BOE per day, 85% oil and NGLs. Our crude oil production comprised of light oil, condensate, and heavy oil increased 4% from Q1 2024 to average over 110,000 barrels per day. We are executing our 2024 development plan with a tightened production guidance range of 152,000 to 154,000 BOE per day. At the midpoint, we continue to target 153,000 BOE per day for the year. Our 2024 exploration and development expenditures guidance is unchanged at CAD1.2 billion to CAD1.3 billion and we expect to generate approximately CAD700 million of free cash flow in 2024, 75% weighted to the second half of the year. We intend to allocate 50% of free cash flow to the balance sheet and 50% to shareholder returns, which includes a combination of share buybacks and a quarterly dividend. Now, I'll turn the call over to Chad Kalmakoff, to discuss our financial results.

Thanks Eric. We remain committed to a disciplined returns-based capital allocation philosophy to drive increased per share returns. In Q2, adjusted funds flow was CAD533 million or CAD0.65 per share, 38% higher than CAD0.47 per share in Q2 2023, and we generated net income of CAD104 million or CAD0.13 per share. During the second quarter, we generated CAD181 million of free cash flow. And as Eric mentioned, we returned CAD97 million to shareholders. We repurchased 16.4 million common shares for CAD79 million and paid a quarterly cash dividend of CAD18 million or CAD0.225 per share. During the last 12 months, we have returned CAD378 million to shareholders, repurchasing 57.5 million common shares for CAD304 million, representing 6.7% of our shares outstanding and paying total dividends of CAD74 million or CAD0.09 per share. On June 26th, 2024, we renewed our normal course issuer bid with the Toronto Stock Exchange, which allows us to purchase up to 70 million common shares during the 12-month period ending July 1st, 2025. As of yesterday, we are proud to say we have repurchased 7.2% of our shares outstanding dating back to June 30th of last year. We touched on this last quarter, so I won't get into the details today, but I do think it's important to note that we have extended our debt maturities. The term structure of our long-term notes and the liquidity on our credit facilities has been greatly improved and positions us well to run our business through the commodity price cycles. Our total debt at June 30th was CAD2.5 billion, which represents a total debt-to-EBITDA ratio of 1.1 times. Our total debt is largely unchanged from year-end as in addition to the free cash flow generated year-to-date, our total debt also reflects the strengthening U.S. dollar relative to the Canadian dollar, which increases the balance in our U.S. denominated notes, the call premium and issuance costs on our notes offering, and the credit facility extension and strategic land acquisitions we did in the first half of 2024. Continuing to strengthen our balance sheet remains a priority and based on our forecast free cash flow and shareholder return profile, we expect a reduction in total debt in the second half of 2022. Now, I'll turn the call over to Chad Lundberg to discuss our operating results.

Thanks Chad. The strong free cash flow that our business generates is a testament to the efficiency of our exploration and development program and our stable production profile. I'm now pleased to speak to our Q2 operations and highlight the significant efforts of our team. During the second quarter, exploration and development expenditures totaled CAD340 million and we brought 40 net wells on stream. In the Eagle Ford, we continue to deliver strong results across our acreage. We generated production of over 90,000 BOE per day, 82% oil and NGL, and brought 11 operated Lower Eagle Ford wells onstream that were largely focused on the black oil window. Some of you will recall that during the second quarter, we hosted analysts and investors for a tour of our Eagle Ford operations. One of the site businesses was our Pluto pad that was in the midst of completion operations. This pad was brought onstream during the quarter and is now one of our strongest performing oil-weighted pads to date with three wells generating an average 30-day peak initial production rate of over 1,150 barrels per day of crude oil. Due to the efficient drilling and completion activities, in the first half of 2024, we realized an 8% improvement in operated drilling and completion cost per completed lateral foot over 2023. In our Canadian light oil business unit, the first 3-well pad from our 2024 Duvernay program was brought onstream in May and generated an average 30-day peak initial production rate of 890 barrels of crude oil and 1,350 BOEs per day per well. These initial results are consistent with our expectations. The second 4-well pad is expected to be onstream in August. In our Viking light oil and across all our heavy oil operations, second quarter activity is typically lower due to spring breakup. Following the spring breakup, our heavy oil development program has ramped up with four rigs running across our Peavine, Peace River, and Lloydminster regions and two rigs running in the Viking. Peavine continued to outperform expectations with production averaging almost 20,000 barrels per day, up 13% from Q1 2024. We brought four wells onstream at Peavine that generated an average 30-day peak initial production rate of 760 barrels per day per well. With that, I will turn the call back to Eric for his closing remarks.

Thanks Chad. I want to take a moment and circle back to our shareholder return framework. As many of you have noticed, we have gradually stepped up our buyback program and have now reached a consistent buyback level currently set at CAD1.4 million per trading day. We believe this is a prudent approach that allows us to meet our commitment to return 50% of free cash flow to shareholders in the form of share buybacks, quarterly dividends, and improving per share metrics. I am pleased with the strength of our Q2 operating and financial results. As we execute our plans for the second half of 2024, our free cash flow is expected to strengthen, allowing for increased shareholder return and debt reduction. And now operator, we are ready to open the call for questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Greg Pardy from RBC Capital Markets. Please go ahead.

Yes. Thanks. Good morning. And thanks for the rundown. So, I've got a couple of questions, but maybe just on the financial side. Could you give us a sense as to what the trajectory looks like in terms of CapEx and production in the second half? And then just the potential, particularly, I think, for debt reduction and buybacks please?

Yes, Greg, I'll address those two questions first since I may not remember more than two. Regarding CapEx and production trajectory, we're still targeting the midpoint of our CapEx guidance, which is between CAD1.2 billion and CAD1.3 billion. We expect this to be more concentrated in Q3 than in Q4. As for production performance, we are also aiming for the midpoint of our full year estimate, which is 153,000 BOE per day. This suggests a relatively stable second half of the year at our current production levels. Maintaining consistent operations across our footprint enables us to operate more efficiently. Now, I'll hand it over to Chad Kalmakoff to provide a brief update on the debt paydown trajectory, and then feel free to ask another question.

Sure. Thanks.

Thanks Greg. Yes. So, we had free cash flow of a couple of hundred million here in the first half of the year. We're looking at another CAD500 million in the back half of the year. And of that, we should amount a couple of hundred million hitting the balance sheet or paying down debt. So, look to see debt paydown obviously accelerate here in the back half of the year compared to the first half. Obviously, we had the bond refinancing done here in Q2 and some fixed costs and the discount associated with that, which would have impacted our ability to pay down debt this quarter. But at the same time, extending those debt maturities is pretty important to us, again, that lower coupon, that will be impactful in the years to come.

Okay. Thanks for that. And maybe just completely shifting gears. Maybe into the Duvernay, could you frame maybe your learnings and results thus far as you work through your 7-well program? And then is there anything to say maybe about efficiencies or where costs are kind of coming out on that because it's a pretty important program, I guess, going forward?

You bet, Greg. Again, it's Eric Greager here. So, I'm going to give it kind of one minute at a high level, and I'm going to pitch it to Lundberg for the details on efficiency gains. It's a 7-well program, a 3-well pad and a 4-well pad. The 3-well pad came on in May. The results have been in line with our expectations and our model and strong. And so 90% liquids, 65% oil, 1,350 BOE a day on average. We also pushed length on one of the laterals out to 4,000 meters, which feels pretty good. So, lots of good, I think, operational learnings along the way, strong well performance. We should be bringing the 4-well pad on in August and we'll have more to talk about there. Lundberg over to you.

Thank you, Greg. To address the question, we need to examine broad efficiencies, particularly now that we have insights from Eagle Ford and the Duvernay, as well as our ongoing learning process. Regarding the Duvernay, we've achieved drill results and a 5% decrease in drilling days, which has led to a 10% reduction in costs. We are still assessing completion results, but we are noticing a decrease in overall drilling time and an increase in effective hours per well. Delving a bit deeper, our model indicates that year-over-year adjustments related to water use in Duvernay are enhancing water intensities. Additionally, we have a balanced discussion about cluster and stage spacing across the border. We are continuously evolving, leveraging the insights from both plays, and we are seeing positive outcomes in each, indicating that there is still more potential ahead.

Okay, terrific. Thanks very much.

The next question comes from Jeremy McCrea from BMO Capital Markets. Please go ahead.

Hi guys. Thanks. Just I got a couple of questions here, too. So, first one, did you guys do anything different with those Eagle Ford wells that came on at some of the best rates you've done? I'm just curious if that's some of the rates that we could expect going forward? And then the second part here is some of the efficiencies you noted in your press release, is any of that built into your guidance and capital cost? And then with some of the results today, particularly in the Duvernay, does it make you look to shift capital around come 2025?

Yes. Hi Jeremy, it's Eric here. Again, I'm going to maybe take one minute off the top and then pitch it to Lundberg for a little bit more around efficiency changes, particularly in the Eagle Ford. So, if we look back, I just want to put some kind of historical context on this. H2 2023, the well performance on the crude oil side was about 700 barrels per day. Now, those were tended to be gassier. So, the BOEs were way up, but let me just focus on oil for the moment. H2 2023, 700 barrels a day average across 22 wells. Then we advanced to the first half of 2024 and 23 wells, that same crude oil average daily on the IP30 went up from 700 to 835 barrels per day on average. And then if you compress that to the second half of the first half of the year, that is Q2, the eight wells we turned in had an average IP30 crude oil only of 871 barrels. So, to your point, that just reinforces that on the oil side of this mix, which is where all the value comes from, we've gone consistently higher and in Q2, eight wells averaging 88%. And so that all feels pretty strong, continuing to be either in the top quartile or the very top of the second quartile in terms of crude oil performance among a strong cohort of performers in the Eagle Ford. In terms of strength and efficiencies around the Eagle Ford, specifically, Chad, why don't you take that? And then I'll come back to the allocation question.

Thanks, Jeremy. I would respond like this. Similar to Greg, we are continuously working to improve our machine learning models and deciding on our next steps. Specifically regarding efficiency, I believe this is a discussion about capital efficiency, not only about production or capital, but how to combine both. On the capital side, we've achieved an 8% reduction in the Eagle Ford, which comes from small improvements throughout the program. We apply these learnings to the Duvernay as well. For example, geo-steering and tighter target stage spacing have improved outcomes, particularly at the Pluto pad. We’ve optimized our stage spacing and how we manage frac valves and connections to the well. All of these small adjustments are significantly reducing costs. On the production front, I would emphasize the importance of intensity. It relates back to our ability to effectively stimulate the rock in the area. We understand this is unconventional and directly tied to the intensity of the fracture stimulation. That's our focus at the Pluto pad. When it comes to efficiencies regarding Ford, we always strive to incorporate those considerations into our budgeting. In closing, I want to highlight our commitment to continuous improvement, and I believe we can achieve even more moving forward. We consistently see enhancements year after year.

Okay Jeremy. I will return to the allocation question. It’s currently late July, and it's a bit too early in the planning cycle for me to have a clear view on allocation. However, I can say that we are consistently focused on directing our capital towards the highest returning opportunities. We remain optimistic about the quality of our Duvernay asset, and our advancing machine learning models give us a lot of confidence in the future development of our Duvernay play. This includes the land extension we executed in the first quarter. You can expect us to continue growing that area, both in its overall production mix within the total portfolio and by increasing the rate at which we allocate capital to it due to advancements in our models. But it’s still too early to provide more specific guidance.

Thanks. Good morning guys. Just had a few quick operational questions for you. Just first on the Duvernay, are you doing anything different on the second 4-well pad? Or is this more just to derisk and delineate the size of what you're sitting on?

Yes. So, the second 4-well pad is going to have many of the same features in terms of cluster and stage architecture, and lengths and how we land in terms of the stack. Where we land in terms of the lithology and resistivity marks along the way and how we steer to stay in the highest-quality reservoir and all the same kind of operational tips and tricks have been made in terms of cementing and casing and drilling. So, all of that's done. But because these models are learning constantly and the 4-well pad is a little bit behind in time of the 3-well pad, it will have a few nuanced hydraulics, chemistry, fluid, and architecture changes in it that the model is suggesting. And so again, you don't waste an opportunity, not a moment, not a day to test new applications and techniques. And so it will have all the same advances that were built into our drilling, casing, and cementing program because it came at the same time. But in terms of stimulation, it's a little further on. And so the model is a little bit more informed. The model is advanced literally every well that's drilled in the whole play, but very specifically relevancy weighted to our own data. So, they advanced fast on our own data. Is there anything, Chad, you'd like to add to that in terms of advancements in the 4-well pad versus the 3-well pad?

Just looking at bound versus unbound well spacing. It's another opportunity for us. That’s it.

Okay. I appreciate the color. And then just on to the Peavine. Field-level production continues to get better, better than the 15,000 that we were thinking about a while ago, is 20,000 a number to think about? Is it a sustainable rate? Or is there a potential to even get that a little higher than those levels on a field-level production?

Yes. No, it's a great question, Amir. And I was always trying to be, I think, prudent in my guidance given what you know and don't know about conventional reservoirs over time. As I think I've said before to you and publicly to others, the wells just continue to surprise to the upside as we moved our pads to the south, in late 2023 and into 2024. The pads came on stronger. They stayed stronger for longer. The pads and the team continues to surprise to the upside. And we're facing today a 20,000 barrel a day play here in Q2. I think that it can probably hold this for a little while, but I'm not going to suggest a new normal that's meaningfully above 15,000. But what I would say is maybe Peavine could exit the year around 17,000 and that probably means that it heads towards 15,000 over the longer arc of time. But again, if well staying stronger for longer and continue to surprise to the upside, that could be a while out. So, I feel bad for having said 12,000 to 15,000 for so long, but I am going to say over the long arc of time, we should continue to be in these kind of mid-teens, and I'll continue to say 15,000 until we know a whole lot more about the aerial extent. But it feels really, really good and just the whole thing is performing very well.

Yes. No, that helps. And then just on the aerial extent part of it there, Eric, I know you moved to the south from the core. Any plans to move to the Northeast area? Or is that more of a 2025, 2026 event?

Yes, Amir. Over time, we will continue to expand to the east and northeast, but this will take some time. We are very mindful of our social license to operate with the Peavine Metis, which goes beyond legal obligations; we aim to follow through on our commitments. Additionally, maintaining a compact geographical focus is a highly efficient use of capital. By keeping developments tight, we enhance capital efficiency regarding pipelines and rights of way. As a result, our investments will yield better efficiency over time. We will gradually move east and northeast as we progress.

Makes sense. And then just finally shifting to the Eagle Ford there, Eric. I know as you move to the black oil, it's got lower overall rates with better oil cuts, so the total oil rates aren't significantly different. But I believe it's also shallower. Can you just give us a sense of what the well cost differences are from the volatile oil windows you stepped into the black oil window? And then also just second half plans, do you plan to stay in the black oil window? Or do you believe you can move around your acreage position?

Yes. So, one of the reasons we move around is partly to take advantage of gathering system room. So, that is to say, you build a CDP at some point in time and then you fill it. But as the wells that justified that central production facility decline off, they leave available capacity and that available capacity through the CDP and through the gas gathering and oil gathering system is effectively free. And so one way to manage capital efficiency on the facilities part of the business is to move around and what I call knife into that available capacity. And so, one of the reasons we move around is, A, to continue to inform our models and keep them very current in terms of stimulation designs and optimizing that. But B, to also ensure that we are making maximum use of the available system space. So, in terms of capital, it's all very much in line with our expectations. Our AFEs have come in to expectation. Our capital budget is coming into expectation and everything is running in line. And so, as I mentioned earlier, in terms of our current budget reiteration, it all feels quite good and we're going to continue to move around a bit to ensure that we take maximum advantage of available space. But the wells are going to continue to perform well according to the stimulation designs. And I would say with confidence, almost no matter where we go, we'll be able to get the best out of the rock using the machine learning models.

Okay. Can you just quantify the well cost difference? I think it's CAD10.5 million on average across the Eagle Ford? Is it different in the black oil window?

Yes, my apologies, Amir, I didn't address that earlier. The performance tends to decrease slightly in the black oil window due to lower pressure. One reason for the reduced gas output is its lower thermal maturity. Factors like thermal maturation time, temperature, and burial depth significantly influence gas production. Since it is not as deep or under high pressure or thermally mature, you can expect some relief regarding kit tolerance and casing shoe depth. However, you often need to implement more intense stimulation in areas with lower thermal maturity. The model accounts for these variations. In general, it aligns with expectations, though costs may be slightly lower per foot. Chad, would you like to add anything or reinforce that?

Well, yes. So, the only other significant difference is they are generally cooler reservoir temperatures, so as you get deeper in gas condensate area, we run higher temperatures but in some cases, it pushes us into different bottom-hole assembly. Just in terms of quantifying, we're in the CAD0.5 million range to drill these black oil wells versus in the gas area.

That's the difference between the two.

Okay, appreciate the insights. Thanks.

This concludes the question-and-answer session from the phone line. I'd like to turn the conference back over to Brian Ector for any questions received online.

All right, thanks, operator. And we have had a number of questions come in. I feel like we've addressed the majority of the operational questions that have come in on the webcast today as we've discussed the efficiencies across the portfolio and our guidance being unchanged. The one common question coming in, Eric, does relate to the share price performance and the reaction to the results today. What is your takeaway or thoughts on the market reaction today?

I'm disappointed anytime the share price declines. However, this is a strong quarter for us. We exceeded consensus estimates for production and AFF per share. We are also actively reducing our share count and have adjusted our share repurchase strategy to ensure it results in dollar cost averaging, which should minimize the volume weighted average price over time using our free cash flow. While we cannot control the share price, we can manage our capital allocation, capital efficiency, and to a lesser extent, our cost of capital. If the share price falls, we will buy back more shares, which will ultimately enhance our intrinsic per share metrics. Over the last year, we've increased our production per share by 23% while managing the same number of shares and continuing to buy back shares. I appreciate a good bargain, and we will keep repurchasing our shares at a discount, which will be compelling in the long run. This strategy works best when we generate strong and reliable cash flows.

Thank you, Eric. We received a question from an investor which seems to be both a statement and a query. It pertains to today's performance, highlighting that the market may be misfocused on the lower sequential BOE per day rate in the Eagle Ford. The remark suggests that the market overlooked the higher oil cuts and reduced costs in that region, which facilitated an increase in oil production per well during the second quarter, contributing positively to cash flow generation. Eric, while we've discussed the Eagle Ford extensively, do you have any final thoughts on improving oil production rates and performance in that area?

No, I think that statement is accurate, Brian. I would simply reiterate that we have eight wells, with 88% in the Duvernay and a 3-well pad that's 90% liquids. We're focused on being an oil company. Our Q2 results showed an 85% focus on high-value liquids, and we plan to maintain that direction. Regarding our free cash flow yield, when the share price decreases in relation to our free cash flow generation, it strengthens the impact on our per share metrics. I appreciate the mechanism, though I'm not pleased with the share price. However, we can take advantage of this situation, and we will continue to repurchase shares according to our NCIB, aiming to keep the VWAP as low as possible.

And the other comment coming in on the financial side does relate to the debt repayment and the timing we addressed it in our prepared remarks, Chad addressed it. Any comments on the importance of continuing to delever across the Board?

Well, yes. No, it's extremely important. And I know folks are frustrated and have pointed to that. Our total debt-to-EBITDA is 1.1 times and that is a strong position to be in today in terms of the total debt to the cash-generative capacity of the business. And that will get better over time. But we thought it was within the first half of the year to take advantage of these record type spreads to prepare a more defensive posture with regard to our long-term debt structure. And so both reducing the coupon and extending the term of our long-term debt, made a lot of sense to us and then not allowed us to push our credit facility out another two years. And so the term debt structure within our business is very strong and very defensive. And you have to do that when you can because you can't control the timing, but these are record type spreads for high-yield energy and we took advantage of it. And we think it's the right thing to do. And we think when our debt paydown does begin to happen in Q3 and Q4 and continue from there, folks will begin to take advantage of and realize the benefit of all of this.

Thanks Eric. At a higher level, portfolio-wise, any thoughts on asset sales, dispositions, the overall portfolio where you see the business going over the next two to three years?

Yes, I can't really comment specifically on asset sales or dispositions. What I would say is every asset in our portfolio is investable. Every asset is being invested in and that all feels pretty good. But we're always looking at this through each planning cycle and making sure that if there are assets that we're allocating our capital to the highest returning assets possible running all of our assets within the bands of maximum operational efficiency. And if there are assets we cannot invest in, then those are the assets that moved to sale against a retention value expectation. Yes, it's absolutely heartbreaking to read about Jasper and anyone who's lost their homes or their businesses, it's absolutely heartbreaking to see and to witness. We've had no impacts and have no wildfires within close proximity to our operations. So, we're sort of better off this year than we were last year in terms of proximity of fires. We remain on high alert. We're always looking and watching and reading and lending a hand to our peers and our friends, any place that we can. So, that's about all I would say, Brian, on that.

Sure. Great. Thanks Eric. So, thanks everyone. As we reach the end of today's call, I would just like to thank everyone for participating. For those who submitted questions via the webcast, if your question was not addressed, please reach out to our Investor inbox and we will be sure to respond. With that, thank you, operator and thanks to everyone for participating in our second quarter conference call. Have a great day.

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