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Baytex Energy Corp. (NYSE:BTE)
Q4 2017 Earnings Call
Aug. 31, 2017, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. Second Quarter 2019 Conference Call and Webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press *1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing *0. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.

Brian G Ector -- Vice President of Capital Markets 

Thank you, Ariel. Good morning, ladies and gentlemen. And thank you for joining us today to discuss our second quarter 2019 financial and operating results. With me today are Ed LaFehr, our President and Chief Executive Officer; Rod Gray, Executive VP, and Chief Financial Officer; and Jason Jaskela, Executive VP and 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 today's press release. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified. And with that, I would like to now turn the call over to Ed.

Edward D LaFehr -- President and Chief Executive Officer

Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our second quarter 2019 conference call. Our strong operating performance continued during the quarter with our Eagle Ford, Viking, and heavy oil assets, each delivering robust production and free cash flow. And I'm also excited to announce further success in the East Duvernay shale which has solidified the Pembina area as a highly prospective region for us. I'll touch on this success in a few minutes. For the quarter, we generated production of over 98,000 BOEs per day, exceeding the high end of our annual guidance. We delivered adjusted funds flow of $236 million or $0.42 per basic share, a 7% increase compared to $221 million or $0.40 per basic share in Q1 2019. Our exploration and development capital expenditures totaled $106 million, bringing aggregate spending in the first half of 2019 to $260 million.

Our diversified oil portfolio generated a corporate level operating netback including hedging of $31 per BOE, which is our highest level since 2014, as our operating netback was almost identical in both our Canadian and Eagle Ford operations. Over the past couple of years, I have talked about how we are taking definitive steps to strengthen our balance sheet and reposition Baytex. We delivered another major step on this commitment by generating a record level of free cash flow in the first half of 2019, approximately $200 million. This free cash flow, in combination with the strengthening of the Canadian dollar, led to a $236 million reduction in net debt as of June 30th. Based on this, we intend to redeem the U.S. $150 million senior unsecured notes at par during the third quarter. This is an important step in our debt reduction strategy. And we continue to maintain strong financial liquidity with our credit facility approximately 60% undrawn as of June 30th.

Let's turn our attention to operations, beginning with our light oil, Eagle Ford and Viking assets. In the Eagle Ford, production averaged 40,000 BOEs per day, 70% liquids during Q2 2019 -- 76% liquids during Q2 2019. We commenced production of 29 wells during the second quarter as compared to 36 wells during the first quarter. The wells brought on-stream generated an average 30-day initial production rate of approximately 2,000 BOEs per day per well. In the Viking, production averaged just under 23,000 BOEs per day.

Our capital program in the second quarter includes the seasonal slowdown, which resulted in the completion of 49 wells as compared to 79 wells during the first quarter. We currently have four drilling rigs and one frac crew executing our program, and we remain on track to drill approximately 250 net wells this year. As with all of our core plays, inventory enhancement continues to be a priority, and we have completed multiple deals and swaps year-to-date, adding 116 net unbooked drilling locations.

Moving to our heavy oil assets in Canada, Peace River and Lloydminster produced a combined 30,000 BOEs per day during the second quarter as compared to 29,000 BOEs per day in Q1 2019. With WCS differentials returning to historical levels, the returns associated with continued development of our heavy oil assets are competitive to those of our other plays. We expect to drill approximately 40 net heavy oil wells in the second half of 2019, as compared to 9 net wells in the first half of the year.

Finally, in our Duvernay shale light oil assets, we continued to advance the delineation of this early stage, high netback light oil resource play. During the first half of 2019, we drilled four wells that continued 45 sections of land and further confirmed the perspectivity of our Pembina acreage. Two of these wells were completed, and initial flow rates are very encouraging. The first well, the 14-31 was brought on-stream June 27th and generated a 30-day initial production rate of 1,360 BOEs per day, 76% liquids. The second well, the 3-19 was brought on-stream July 26th and is currently producing 1,063 BOEs per day at 89% liquids. These two wells were fracture stimulated using a plug and perf system and were our first operated wells utilizing fracture diversion technology, which is a completion strategy working favorably in our Eagle Ford assets.

The other two wells were drilled to a total depth and encountered thick, well-developed shale sections with highly favorable geologic characteristics, including natural fracturing. Unfortunately, both of these wells had to be abandoned due to wellbore stability issues. Having conducted an in-depth review of these two wells, we developed an improved drilling process and will redrill these attractive geologic locations in the future.

Well, costs have significantly improved with our two successful wells drilled and completed for an average cost of approximately $7 million per well. This represents an approximate 20% reduction from the average cost of our previous wells. As the play moves from delineation to development, the efficiency from multi-well pad operations is expected to drive further cost reductions. The success of our drilling program in the Pembina area has significantly de-risked our approximately 38-kilometer long fairway, where we hold 268 sections of 100% working interest Duvernay land.

Let's turn now to risk management. We continue to manage our commodity price risk through an active hedging program. In the second quarter, we realized financial derivative gains of $13 million. For the balance of 2019, we have hedges of approximately 48% of our net crude oil exposure at pricing in the mid-60-dollar range for WTI. We have also hedged 22% of our net natural gas exposure. For 2020, we have entered into hedges on approximately 15% of our net crude oil exposure at pricing in the $60 range for WTI. Additionally, crude-by-rail is an integral part of our egress and marketing strategy for heavy oil. For the second half of 2019, we are contracted to deliver 11,500 barrels per day, approximately 40% of our heavy oil volumes to market by rail, up from 9,000 barrels per day in 2018. You will find the full details of our hedge program in our Q2 press release and the notes to our financial statements.

So, let me now conclude by saying we are well-positioned to execute our business plans focused on free cash flow generation. Given our strong operating performance in the quarter, we are tightening our 2019 production guidance to 96,000 to 97,000 BOEs per day, previously 95,000 to 97,000 BOEs per day, and we're lowering our budgeted exploration and development capital expenditures to $550 million to $600 million, previously at $575 million to $625 million. Based on the forward strip for the balance of 2019, we are forecasting adjusted funds flow of approximately $875 million.

At the midpoint of our guidance, the current forward strip will support up to $300 million of debt repayment. Our year-end 2019 net debt to trailing adjusted funds flow ratio is forecast to be 2.2 times. Over the longer term, as we continue to drive debt levels down, we believe we will be well-positioned to offer returns through a combination of per share growth, dividends, and/or share buybacks. And with that, I will conclude and ask the operator to please open the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Pardy of RBC Capital Markets.

Tom Callaghan -- RBC Capital Markets -- Analyst

Hey. This is actually Tom Callaghan on behalf of Greg. I just wanted to get your thoughts on share buybacks there. Obviously, debt is the priority with respect to the free cash flow you've framed. But, just wondering how you think about allocating a portion of that free cash flow buyback? It sounds like from your comments that it might be something more of a longer-term as opposed to anything this year. But any insight would be great. Thanks.

Edward D LaFehr -- President and Chief

Well, we've been pretty clear, Tom, and I've been pretty clear that our debt to cash flow target is 1.5 times. We're still in $57 pricing world where we are well hedged. So, we've set a debt to cash flow target and believe that 1.5 times is the right number. For $50 oil, we would expect to flex up to 2, and if we're at $60, $60-plus, we'd be at sort of a 1-time. So, the focus here at Baytex is generating free cash flow through strong operations, delivering repayment to debt and then continuing to drive that down into the one handle range. But, 1.5 times, I've been very clear, is our target.

Tom Callaghan -- RBC Capital Markets -- Analyst

Perfect. Thanks.

Operator

This concludes the question-and-answer session. I'd like to turn the conference back over to Brian Ector for closing remarks.

Brian G Ector -- Vice President of Capital Markets 

All right. Thanks, Ariel. Thanks, everyone for participating in our second-quarter conference call and have a great day.

Operator

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

Duration: 13 minutes

Call participants:

Brian G Ector -- Vice President of Capital Markets 

Edward D LaFehr -- President and Chief

Rodney D Gray -- Executive Vice President and Chief Financial Officer

Jason Jaskela -- Executive Vice President and Chief Operating Officer

Tom Callaghan -- RBC Capital Markets -- Analyst

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