Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Third Quarter 2021 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there’ll be an opportunity to ask questions. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead, sir.

Thank you, Claudia. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2021 financial and operating results. Today, I'm joined by Ed LaFehr, our President and Chief Executive Officer; Rod Gray, our Executive VP and Chief Financial Officer; Chad Lundberg, our Chief Operating and Sustainability Officer; Kendall Arthur, Vice President, Heavy Oil; Chad Kalmakoff, VP Finance; and Scott Lovett, our VP 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 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 with that, I would now like to turn the call over to Ed.

Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our third quarter 2021 conference call. I'm excited to highlight the momentum we continue to build. During the third quarter, we delivered strong operating and financial results, and we advanced our exciting new Clearwater play in Northwest Alberta with the two strongest initial rate wells in the play. I'll expand on our Clearwater development in a few minutes. As you will recall, earlier this year, we made a commitment to maintain capital discipline and maximize our free cash flow. We also made a commitment to allocate 100% of our free cash flow to reducing our net debt and strengthening our business. And I'm very pleased to say that is exactly what we are doing. During the third quarter, we generated CAD101 million of free cash flow, resulting in year-to-date free cash flow of CAD284 million. This free cash flow has been applied against our net debt, and our business today is that much stronger as a result. At current commodity prices, we now expect to deliver over CAD400 million or CAD0.71 per basic share of free cash flow in 2021. This represents a record level of free cash flow for Baytex and is accelerating our debt reduction efforts. We now have line of sight to reaching our initial CAD1.2 billion net debt target during the second quarter of 2022. We have also taken proactive steps to reduce our outstanding long-term notes, which lowers our financing costs and increases our adjusted funds flow. Rod will touch on this in a few minutes. During the quarter, we delivered adjusted funds flow of CAD198 million or CAD0.35 per basic share, and generated net income of CAD33 million or CAD0.06 per basic share. We realized an operating netback of CAD39 per BOE,…

Thanks, Ed, and good morning, everyone. As Ed mentioned, we have taken proactive measures to reduce our debt levels. Our net debt, which includes our credit facilities, long-term notes and working capital, totaled CAD1.56 billion at September 30, 2021, which is down from CAD1.85 billion at December 30, 2020. As of September 30, 2021, we had CAD471 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital of CAD454 million. During 2021, we have repurchased and canceled US$200 million of the 5.625% long-term notes due June 2024. This represents 50% of the original US$400 million outstanding and includes the US$85 million repurchased and canceled subsequent to quarter end. These measures demonstrate our commitment to reduce leverage and drive our cost structure lower. We expect to exit 2021 with net debt of approximately CAD1.4 billion, which represents a very healthy net debt-to-EBITDA ratio of 1.7 times. At current commodity prices, we expect to reach our initial $1.2 billion net debt target during the second quarter of 2022. To support our business, we maintain a consistent approach to risk management and marketing, utilizing various financial derivative contracts and crude by rail to reduce the volatility in our adjusted funds flow. For 2022, we have entered hedges on approximately 42% of our net crude oil exposure utilizing a combination of three-way option structure that provides price protection at $58 per barrel with upside participation to approximately $67.50 per barrel. We also have swaptions at $53.50 per barrel. We also have hedges in place on our Canadian light and heavy oil differential exposure. Full details of our hedge program can be found in our Q3 financial statements and are available on our website. And with that, I'll turn the call back to Ed.

Thanks Rod. And let me wrap up with a review of our 2021 guidance and five-year outlook. As a result of our strong operating performance through the first nine months of 2021, we are tightening our production guidance to 79,500 to 80,000 BOEs per day, up from 79,000 to 80,000 BOEs per day previously. And as we have discussed, we are intensely focused on maintaining capital discipline. The Clearwater has emerged as one of the most profitable plays in North America, and our 2021 appraisal program has delivered exceptional results. As a result, we will drill four additional Clearwater wells during the fourth quarter. This includes two wells on the same pad as our highest rate well drilled to-date and one appraisal well on the recently acquired 20 sections of land to the norm. Accordingly, we are tightening our forecast exploration and development expenditures range for 2021 to $300 million to $315 million as compared to $285 million to $315 million previously. We have also fine-tuned several of our cost assumptions, including our interest expense guidance, which is 3% lower due to the early repayment of long-term notes and/or lower net debt. Our 2022 capital budget is expected to be released in early December following approval by our Board of Directors. We will update our five-year plan at that time to include drilling opportunities on our Clearwater lands. Our five-year outlook from 2021 to 2025 highlights our financial and operating sustainability and meaningful free cash flow generation. Through this planned period, we remain committed to a disciplined, returns-based capital allocation philosophy under constant $65 per barrel and $75 per barrel WTI pricing scenarios, we expect to generate cumulative free cash flow of approximately CAD2 billion and CAD2.6 billion, respectively. Our business is strong, and we have a robust plan in place to deliver meaningful free cash flow. Throughout the plan period, we will monitor our leverage position and assess market conditions to determine the best methods, or combination thereof, to enhance shareholder returns. These could include share buybacks, a dividend, and/or reinvestment for growth. And with that, I will ask the operator to please open the call for questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Phil Skolnick with Eight Capital. Please go ahead.

Yeah. Thanks. Good morning. I have a few questions. Just on your last comment with respect to returns to shareholders. Kind of how are the discussions going? Your thoughts around dividends versus buyback, but also in terms of growth, because you are having this accelerated debt reduction and you are a company that can add more volumes and not really impact the overall macro environment, which is an advantage, obviously. So kind of what are your thoughts around all that?

Yes. Well, Phil, I think, we've been very clear on our framework, at least verbally, and we haven't come out with an update to our five-year plan with maybe some more specifics. But what we've said is 100% of our free cash flow in -- at least in 2021 is moving to the balance sheet. We're paying down debt. That will take us to $1.4 billion of net debt by year-end. And then early 2022, we'll drive our net debt to $1.2 billion, which is important to us. We think we can do that by 2Q. And then at that point, between $1.2 billion and $1 billion we’ve said that, that is the place we need to be on our absolute debt levels, which is well within our 1.5 times debt to EBITDA, that would allow us to consider share buybacks, dividends and/or growth. And what I've been saying, and I would continue to say that even today is, if the market continues to trade as it is, and we're trading at a 4 times enterprise value to debt adjusted cash flow, our free cash yield is high, its still 20-plus-percent. The commodity prices are still strong. We would be compelled to buy back some shares, right? We want to do that. We want to consider that strongly. I think, we're in the early innings of a rotation, and we haven't -- we're in inning one. 4 times EV to DAC doesn't get us really excited, when historically we've been a lot higher than that. So an absolute or relative level, those are still pretty attractive levels. And when you look at our free cash yield, it can't stay there at 20%. Our share price has to re-rate. It has been, but it's only been doing that on the basis of the commodity price rising up to 70 to 80. So we're flexible right now in our thinking. We need to watch the markets and all those things I just mentioned. And then, at the time we're at $1.2 billion, we'll have to look at where those considerations are and then make the call. But I would say, at this point, share buybacks come before dividends and then our long-term vision is to move to 10% to 15% returns with a combination of growth and/or a dividend.

Okay. Perfect. That's clear. Finally, just with the cost inflation, because I keep hearing more and more about it. But given that you're both in the U.S. and Canada, could you talk a little bit about what you're seeing on both sides of the border? Which one maybe has more pressure?

Yeah. I think it's very germane to where we are in the cycle of starting to bid out our programs and look at our cost structure and where we're going into 2022. So it's very critical. It's a critical topic right now. And we've actually made some decisions, because we are seeing the early phases of inflation hitting us. I'd say the bottom line answer is, we're probably looking at 10% inflation on capital or between 5% and 10%. But having said that, we've already made some decisions to level load our rig activity, which we felt was crucial. We wanted to, for example, the fourth quarter; we've decided to drill for four wells, two additional wells in the Peavine. We're kicking off some other activity as well. We're moving to the high side of capital for 2021, but with high end of production. And we're going to try and not only keep the rigs warm, which is good for efficiencies, but importantly, keep the crews around right to Christmas and then bring them back right after Christmas. So there's not a massive gap there that's threatening not just the iron being warm, but the people and their willingness to come back into this bit of a roller coaster industry we've been on over the last five years. So we've done some things there as well as on the supply chain. Happy for Chad, our Chief Operating and Sustainability Officer, to weigh in. But we've been making decisions as we move towards 2Q -- 4Q and into next year right now. To compare and contrast with the Eagle Ford, I don't know if you saw the Marathon results, but the efficiencies of what they're doing down there are so incredibly strong. They announced their strongest capital efficiencies ever in the third quarter on the Eagle Ford specifically. So their efficiencies are offsetting whatever inflationary components there are, and there certainly are with respect to fuel, with respect to steel and other things, but they're more than offsetting those and still driving their DC&E cost down. So we're seeing, I would say, tremendous cost performance there, and we're trying to offset our cost performance, our cost inflation in the same way here in Canada. It's challenging. Chad, do you want to…?

Yeah. Thanks, Ed. I guess inflation is real. We're starting to see it, and we're starting to see it as we contemplate the buildup of our 2022 plan. What that, Ed didn't necessarily mention was just the relationship with our service providers. And we believe and want to ensure that we always have an honest, fair and transparent relationship with them, through those relationships. And in some cases, there are cases there long-term, up to a decade with some of the rigs that we've had deployed to the company. The biggest thing they talk about and say that it can help is, as Ed mentioned, the level loading of the program. But the other thing is just having a long-term plan in place and sticking to that plan and doing what we say. With that, they're able to go out and procure some of the parts and pieces that they might need, the consumables that they need to be able to service us. But then most importantly is give a longer term forecast to the precious workers that are out there on a daily basis, doing what they need to do to ultimately produce oil for us. So I think I would draw the conversation back to our relationships -- through those strong relationships, really understanding the cost base and the cost drivers and then just really working with our service providers to understand what that means through 2022 and really trying to keep the efficiencies that we’ve gained through 2021 through the capital plan.

Yeah. Bottom line is we're prepared to hit the ground running with rigs and equipment, people, and we're planning for it, and we're ready to go, Phil.

All right. Thanks. That’s all for me.

Our next question is from Patrick O'Rourke with ATB Capital Markets. Please go ahead.

Okay. Good morning. I apologize. I'm calling from the car. So, hopefully, it doesn't sound like I'm on the moon here. But just a couple of quick questions. Number one, in terms of the Clearwater and how that's sort of -- you're sort of viewing that in terms of five-year plan. Are you guys approaching it from a perspective where you're looking at keeping sort of what you put out there on the production front static and the Clearwater would draw capital away from other plays based on being probably the most capital-efficient play in the portfolio and reducing capital spend, or are you looking at it from a perspective where it's just -- it stands up on its own. Obviously, you've got the fast payouts there and it's incremental capital spend and production?

Yes. We don't have a 2022 plan approved yet, Patrick. But I think we're leaning towards Clearwater is an add-on. Some of the things that we've got going in the heavy oil areas in Lloydminster and Peace River proper, for example, believe it or not, are just as competitive and very, very strongly attractive economics. So, we haven't made the call yet. But in the five-year plan, as it's published in our IR deck, we show $370 million of capital. And if you add on -- that's with no Clearwater, if you add on $30 million for a Clearwater program, which is roughly the number of wells we're talking about up to 18 wells then that takes us to $400 million. Then you add on the inflation that we talked about, at least on the components of the program that would inflate, that takes us to $400 million to $420 million. And we think we can generate more free cash flow with that approach than sticking to a more harvest mode on bumping some of that other high-quality activity. So, it's early days, Patrick, but I would say we pointed to $400 million in our five-year plan, and I think that's kind of where we're headed. And it will drive our production very strongly as well and cash flow and free cash flow because it is largely Clearwater.

Okay. In to watch for that at the third of December. And then in terms of the debt repayment and sort of liquidity management, these liquidity management events that you've been having here, obviously, there's been a focus on the 2024. However, through time, you guys have been pretty thoughtful about terming out and laddering. And I just wonder how you think about that going forward with your free cash flow, at least, between now and when you might start returning a little bit to shareholders. Is the focus going to continue to be on those 2024s?

Sure, Patrick, I can answer that. It's Rod. I think historically, we've seen those bonds trade at a slight discount, but I think they, along with share prices and commodity prices have all moved up. Our focus is probably going to stay on the 2024s, which is the near-term maturity. Our breakeven actually buying those and paying the premium right now is just two months. And so -- and they become callable at par in June of next year. So, I think the focus will be there unless we see something different in terms of the trading. But ultimately, so the 2024, so that $400 million, we don't see that being part of our long-term structure, so wouldn't be refinancing around that. But we will monitor markets to see if there is an opportune time to once we do fix the balance sheet, our view is that we can refinance those 2027s at a much lower rate. And so we'll look for an opportune time to do that and turn that out as well.

Okay. Thank you very much.

Our next question is from Jeremy McCrea with Raymond James. Please go ahead.

Hi, guys. This question relates to your Clearwater here a little bit more. I know you guys have been active in Peavine, but I see you guys just spud another Clearwater while quite a bit more north here again. I'm just wondering, when you look at your entire Clearwater potential acreage just from a lot of the old legacy seal assets. Like how prolific do you think the Clearwater exists throughout all of this land? Like is there more than just Peavine here as well, too? And just as a bit of a follow-up, just given where oil prices are. What's the strategy in terms of paying down debt as opposed to kind of saying, make hay while the sun shining here and just -- and going to accelerate a lot more of this drilling.

Yes. Well, let me take the Clearwater question, then we'll go to your further questions. But we -- in the four wells that we announced that we're adding to the 4Q program, one of those was that Spirit River well that's up. It's really quite close to our Seal main battery up in the main field. And then the other three are on Peavine. And that one well has been drilled, completed and is being brought on stream. It's a 6 lager. It's in a little bit thinner rock. It could be probably not the same type of permeabilities that we see in other areas. But I think what we're seeing in that area is it has the potential to be on the 150-barrel a day, 150,000 -- 100,000 to 150,000 BOE EUR. So kind of the core of not necessarily Marten Hills, but the average Clearwater well does about that. And that's what we're hoping for. It's very early up there. We have said we've got 100 to 120 sections of land that are attractive or potentially attractive for Clearwater. And what I'd say about that is just the southern area alone looks like it could grow to potentially 10,000 barrels a day over time. And then if you add some of the stuff in up north that might work, some will work, some won't, I would say that's more infilling and holding flat our Peace River business at around 13,000 to 15,000 barrels a day. So I wouldn't -- it's going to add a ton of value for sure, but it's early, and we'll announce those results probably in early December. We'll have an IP30 around that time.

Okay.

And then on the question about debt versus growth, it goes back to the shareholder return framework that I just mentioned. We think we can actually grow a little bit and generate free cash flow at the same time. That's the optimum point for us right now in the cycle where we are, where the world is not quite yet clamoring for growth. It may well be by mid-2022, but it's not today and nor is the market. But we have talked about a five-year plan and put out a five-year plan that does optimize us in that 80,000 to 85,000 barrel a day range, moves us up to the top end of that range fairly quickly on pretty disciplined capital. So I would say we're going to stick to that plan until we update it in early December, and you'll get a better feel potentially for where we are in debt versus growth. But I think the two go hand-in-hand. And we want to deliver our five -year plan, and that's the core of what we're trying to do.

Okay. Perfect. Thank you.

There are no further questions registered at this time. I would like to turn the conference back over to Brian Ector for any closing remarks.

All right. Thanks…

Pardon me sir. I'm sorry, I'm sorry. We actually have one more question. Sorry about that.

Okay. Let's take one more question, please.

Thank you sir. It's from Josh Young from Bison. Please go ahead sir.

Hey guy, great results. I wanted to ask two quick things. One, on the Eagle Ford, it sounded like there were fewer wells that came online, and that drove slightly lower volumes. Do you guys expect that to -- there to be increased activity there, or is that a lower production rate expected going forward?

Well, it was 30,000 barrels a day, roughly. We expect to deliver about 30,000. So it was on expectations. But we have our annual meeting, Josh, down in Houston next week. And that's where we set the budget over the next year and look at activity going forward, et cetera. But this quarter looks very much in line with 3Q. 4Q looks in line with 3Q, and then we'll get together with the partner -- and partners, and look at 2022. But I would say, we don't expect anything any different in the Eagle Ford. We expect really disciplined capital, generating free cash flow off of these prices in excess of $300 million in free cash flow at an asset level on the Eagle Ford. And we expect it to stay about those levels going forward. I think that's what we showed in our five-year plan.

Great. That's helpful and that makes sense. And I do notice that you added some inventory in the presentation, which has been consistent with what you guys have done. Then the one other question is on the Duvernay, which is maybe your least topic, but you guys – it looks like you have some good additional early well-performance on these next two wells. What are your thoughts medium to longer term on the Duvernay given your success at Clearwater and elsewhere? Where does that fit into the portfolio? And how do you guys think about it from a strategic perspective longer term?

Well, it's the biggest potential growth engine in the company, the biggest physical growth engine. We've already said that it can go to 20,000 barrels a day. We have a contiguous land position of 200 sections. And we've derisked now with these two wells all the way to the south. So these are our furthest southerly wells, one’s in its 15th day of the flowback, the other is in its first -- into the first week of the flowback or 10 days, possibly. And it's early, but this second well is producing at the highest oil rates and probably BOEs that we've ever seen in the play. So we're honing the formula. We're derisking the land. We're holding the land, and we're honing our execution formula to get a breakthrough in rate and productivity, but also in capital and cost delivery. And we haven't yet fully delivered on those two things. But we'll certainly continue to hold it and derisk it. As I've said before, there's probably a commercial opportunity for some consolidation in the basin. But we would expect that, as I said earlier on one of the other questions, if the world or if the market or if the investors are looking for growth, we have not just in the Duvernay but across our heavy oil portfolio and the Peavine and the way we do land, bolt-ons and tuck-ins, we have ample inventory to grow this company. But we're not ready for it now. So we're derisking. We're holding the land and we're honing our execution formula. But we're very excited about these wells. And we'll announce IP30s in early December on those, Josh.

Great. Thank you very much.

And this concludes the question-and-answer session. Back over to you, Brian.

All right. Thanks, Claudia, and thanks, everyone, for participating in our third quarter conference call today. Have a great day.

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