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Baytex Energy Corp (NYSE:BTE)
Q2 2020 Earnings Call
Jul 30, 2020, 11:00 a.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 2020 Results Conference Call. [Operator Instructions] After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Brian Ector, the Vice President, Capital Markets. Please, go ahead.

Brian Ector -- Vice President of Capital Markets

Thanks, Jeff. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our second quarter 2020 financial and operating results. With the COVID-19 situation, still front and center, we continue to prioritize the health and safety of our employees. And with that in mind, today, I am joined remotely by our executive team; Ed LaFehr, our President and Chief Executive Officer; Rod Gray, Executive VP and Chief Financial Officer; Kendall Arthur, Vice President, Heavy Oil; Chad Kalmakoff, our Vice President, Finance; Chad Lundberg, Vice President, Light Oil; and Scott Lovett, our Vice President of Corporate Development.

While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I would refer you to the advisories regarding forward-looking statements, oil, and gas information, and non-GAAP financial, and capital management measures contained in yesterday press release. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified.

And with that, I would now like to turn the call over to Ed.

Edward D. LaFehr -- President and Chief Executive Officer

Great. Thanks, Brian, and good morning, everyone. Welcome to our second quarter 2020 conference call. During the second quarter, we took decisive steps to adjust our business plan in the face of extremely volatile crude oil markets. We moved aggressively to shift our operating and capital activities to maintain financial liquidity, minimize capital outlays and emphasize cost reductions across all facets of our business to retain long-term value.

We shut in some production. We suspended drilling operations in Canada, and we moderated our pace of activity in the Eagle Ford. I'm very pleased to say that we are now starting to benefit from the actions we have taken as we generated positive free cash flow during the quarter and maintained approximately CAD300 million of financial liquidity. As you will recall, we previously announced voluntary production shut-ins of approximately 25,000 BOEs per day. These volumes remained offline for April and May. As operating netbacks improved in June, we initiated plans to bring approximately 80% of these volumes back online.

The quarterly impact of voluntary shut-ins was approximately 20,000 BOEs per day. As a result, production during the second quarter averaged 72,500 BOEs per day. Consistent with our previously announced guidance, production was -- in Canada averaged 37,700 BOEs per day, while production in the Eagle Ford averaged 34,800 BOEs per day. We generated an operating netback of CAD6 per BOE during the second quarter or CAD8 per BOE, inclusive of realized financial derivative gains.

We delivered adjusted funds flow of CAD18 million, and our exploration and development spending totaled a modest CAD10 million. So despite this being one of the most challenging pricing environments we have ever experienced, we still delivered positive free cash flow during the quarter. We continue to forecast annual capital spending of CAD260 million to CAD290 million, an approximate 50% reduction from our original plan of CAD500 million to CAD575 million.

Our production guidance range for 2020 is unchanged at 78,000 BOEs to 82,000 BOEs per day. We also remained intensely focused on driving further efficiencies to capture or sustain cost reductions identified during this downturn. We have now identified approximately CAD98 million of cost reductions for 2020 relating to operating, transportation and general and administrative expenses.

During the second quarter, our operating expense of CAD11.17 per BOE compared favorably to CAD11.66 per BOE in Q1 2020, as we strive to mitigate the costs associated with our field operations. In addition, we realized that approximate 35% reduction in our per BOE transportation expense due to reduced volumes.

General and administrative expense totaled CAD7.4 million in the second quarter, down from CAD9.8 million in the first quarter as we implemented reductions to salaries and annual retainers and benefited from the Canadian emergency wage subsidy.

I want to take a minute and highlight our work on the ESG front. We are committed to managing the environmental and social impacts of our business, and continual improvement is an important element of this commitment. As a reminder, in 2019, Baytex established a GHG emissions reduction target. Our objective is to reduce our corporate GHG emissions intensity by 30% by 2021, relative to our 2018 baseline.

We have just released our 2019 ESG data, which is available on our website. In 2019, we made significant improvements in our emissions profile, achieving a 15% reduction in our GHG emissions intensity as we commissioned our Peace River gas plant in mid-2018 and progressed our Viking Gas Conservation Project. We remain committed to achieving our 30% target by the end of 2021.

I will now turn the call over to Rod to discuss our balance sheet and risk management.

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

Thanks, Ed, and good morning, everyone. As Ed mentioned, given the unprecedented collapse in crude oil prices experienced during the second quarter, our priority quickly shifted to preserving financial liquidity. We reduced net debt by CAD57 million during the quarter as the Canadian dollar strengthened relative to the US dollar, and we generated positive free cash of CAD6 million. Importantly, based on the forward strip, we expect to maintain our financial liquidity and remain on-site with our financial covenants through 2021.

Our credit facilities total approximately CAD1.1 billion and have the maturity date of April 2, 2024. These are not borrowing based facilities and do not require annual or semiannual reviews. As of June 30, 2020, we had CAD363 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital of approximately CAD300 million. In addition, our first long-term note maturity of $400 million is not until June 2024.

We also continue to manage our commodity price risk through an active hedging program. We realized financial derivative gains of CAD14 million in the second quarter. For the remainder of 2020, we have entered into hedges on the majority of our net crude oil exposure. This is comprised of WTI fixed price swaps on approximately 16,000 barrels a day at $38 per barrel and a three-way option structure on 24,500 barrels a day that at current oil prices give Baytex WTIs plus $7.60 per barrel.

We also have WTI at the MSW basis differential swaps on 8,000 barrels a day of our light oil production in Canada at $5.80 per barrel and WCS differential hedges on 8,700 barrels a day at a WTI to WCS differential of approximately $14.50 per barrel. We have started to layer in hedge production for 2021 as forward markets have improved. To date, we have protection at $45 WTI on approximately 10% of our expected 2021 exposure. For full details of our hedge program can be found in our second quarter financial statements.

And with that, I'll turn the call back over to Ed for some concluding comments.

Edward D. LaFehr -- President and Chief Executive Officer

Thanks, Rod. I believe our second quarter results demonstrate our commitment to succeed in a low price environment. We have responded decisively to dramatically reposition operating activity, to maximize our cash flow and minimize the draw on our liquidity. And we remain intensely focused on driving further efficiencies to capture or sustain cost reductions identified during this downturn while protecting the health and safety of our personnel.

And with that, I'll ask the operator to please open the call for questions.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question will come from Phil Skolnick with Eight Capital. Please go ahead.

Phil Skolnick -- Eight Capital -- Analyst

Yes. Thanks. Good morning. The two Duvernay wells that you drilled earlier this year, what do you need to see to complete them?

Edward D. LaFehr -- President and Chief Executive Officer

Yeah. Really good question. We've got two wells drilled, but not completed as you say, in the first quarter. They're right in the core of our play, and we've got about 250 sections in the area. So it's very important to us to move beyond where we are now, where we believe we've derisked 125 sections of land to fully, I guess, you'd say, gaining confidence in our production rate deliverability and the cost structure of the two wells.

So, we need to get the completions done for those tactical reasons, but also for strategic reasons, it really helps us position ourselves as the leading public company in the basin and perhaps the leading company in the Pembina sub basin. So what do we need to see to get there? First of all, we needed to see a stable $40 WTI on half cycle economics, where you've got the drill costs sunk, it only takes about $40 to $45 WTI to pay these wells out in a year. And that's not necessarily on the high case curve with the 14-31 well that we drilled, completed and brought on production at some of the highest rates in the entire basin, around 1,300 BOEs per day.

So, I think we're very, very close, Phil, to answer the question to making a call on whether we spend the additional frac costs this year to bring on those two wells by the end of the year versus holding them until around just after breakup next year. We'll make that decision in August. And if we do frac the wells, you'll see them come on roughly October. And that they'll be very tactically important, but also strategically important for us as well. And we're in a place where we've got free cash flow for the full year, but it's very tight on strip.

We'll be free cash positive and maintain our CAD300 million of liquidity, and that remains our number one priority. So, we have to see the prices are stable or that we can hedge them in, which we can talk further about. We're pretty well hedged this year. And as Rod says, we've just started to layer in some hedges for next year.

Phil Skolnick -- Eight Capital -- Analyst

Yeah, thanks. Yes, it actually segues in my second question then with hedging because you did enter in some in 2021. What is your philosophy as you do approach 2021? And how do we think about -- or how are you thinking about the hedging with respect to activity levels for 2021 in spending?

Edward D. LaFehr -- President and Chief Executive Officer

Well, for '20, let's start with 2020. As we brought back on production, we wanted to ensure that production, those positive cash flows were going to be stable in a very volatile environment. So we did layer on the hedges in 2020. What that did is it protected our ability to have confidence in that liquidity that Rod talked about. And also that we wouldn't reach any covenants for this year or next year on strip pricing. So that was step one.

Step two then was thinking about 2021, and we had been targeting $45 as the place to come in and start layering in some hedges to further protect positive, if not free cash flow in the following year. And so what we've done is we've put about 10% of our crude oil on three-way options, $35, $45, $55. And as Rod says, it gives us a floor at $45 and upside participation with the investor up to $55.

And we think we see the markets leveling out there, but we'll layer in hedges now as we start to see prices moving into that $45 range, but also that you can attract some very reasonable other kind of derivatives like two-way and three-way collars, where we can participate in the upside. So that's kind of at a high level. Rod, did you want to elaborate?

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

No. I think Ed's covered it. I think, Phil, one thing, when we think about 2021, I think we'd like to have more protection on as the year goes here. And so we'll be looking to layer in positions. Our track record would say that we like to layer them in as the market moves, as opposed to making one big move. So our anticipation is that we'll be pretty active in the second half of 2020 here looking to secure a decent hedge book by the end of 2020 or 2021.

Phil Skolnick -- Eight Capital -- Analyst

Okay, great. That's it from me. Thanks.

Operator

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Ector for any closing remarks.

Brian Ector -- Vice President of Capital Markets

All right. Thanks, Jeff. Thanks, everyone, for participating in our second quarter conference call. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 16 minutes

Call participants:

Brian Ector -- Vice President of Capital Markets

Edward D. LaFehr -- President and Chief Executive Officer

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

Phil Skolnick -- Eight Capital -- Analyst

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