Baytex Energy Corp. (BTE) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. Second Quarter 2026 Financial and Operating Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Chris Lessoway, Vice President of Finance and Treasurer. Please go ahead.

Thank you, operator. Good morning, and welcome to Baytex's Second Quarter 2026 Results Conference Call. Joining me today are Chad Lundberg, our President and Chief Executive Officer; Kendall Arthur, our Chief Operating Officer; and Chad Kalmakoff, our Chief Financial Officer. Before we begin, please note that our discussion today contains 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. After our prepared remarks, we'll open the call for questions. Webcast participants can also submit questions online. With that, let me turn the call over to Chad.

Good morning. Q2 was another strong quarter. Production averaged 71,200 BOE per day, above the high end of our guidance for the second straight quarter with continued outperformance across our heavy oil portfolio and first well results from our southern land block in the Duvernay that we call Gilby. We repurchased 22 million shares for $139 million and exited the quarter with net cash of $566 million. With strong well performance to date, full year production guidance has been raised to 71,000 BOE per day, up 1,000 from the midpoint of prior guidance with a targeted exit rate of 72,000 BOE per day. There is no change to our capital program of $625 million. Momentum is building with the renewed interest in Baytex as we continue executing our strategy. We have a clean balance sheet, deep inventory and a team executing with discipline. Our Q2 results reflect that. I am pleased to announce the appointment of 2 new directors: Derek Evans and Deanna Zumwalt. These appointments enhance an already strong board with depth in resource development and energy finance that is directly relevant to our strategy: growing production, capitalizing on opportunities in our portfolio and building towards our 15% total shareholder return target. Thank you, Steve Reynish and Jeffrey Wojahn, for your significant contribution to Baytex. I'll now turn the call over to Kendall to walk us through operations, including our heavy oil and Duvernay results, the waterflood pilots and our second half program.

Thanks, Chad. Production of 71,243 BOE per day exceeded the high end of guidance, representing 11% growth relative to Q2 2025. We invested $122 million on exploration and development and brought 24.6 wells on stream consistent with our full year plan related to deliver strong production in the back half. Heavy oil was strong across the board. At Peavine, 6 of the wells brought on stream during the quarter have established average IP30 rates of 478 barrels per day per well. Well results in Peavine continue to outperform internal expectations as development expands from the core. At Lloydminster, 7 Mannville wells were brought on stream across multiple horizons. The stack keeps delivering at our multilateral and circulation string capabilities are a significant advantage here. At Peace River, activity has picked up after spring breakup, and we are on track with second half development now underway. We have an active second half plan throughout our heavy oil portfolio with 4 rigs running and a fifth starting in Morinville, in August. On waterfloods, both initial Peavine pilots are now on injection, one testing re-pressurization through producer-to-injector conversion, the other testing pressure maintenance on our new development. We are expanding waterflood pilots in the second half with 2 additional patterns at Peavine and Rex formation test in Morinville, both expected to be on injection by Q4. At Utikuma, the 21 square mile seismic program is complete, covering roughly 20% of our 109-section land position. Initial interpretations confirm the presence of the Pekisko mounds and we are preparing for up to 2 exploration test wells in early 2027. In the Duvernay, the first pad was drilled on our South Gilby acreage, which came on stream in June. Three of the 4 wells delivered average IP30 rates of 1,630 BOE per day per well with 88% liquids, amongst our strongest results in the Duvernay on a length normalized basis. The fourth well was completed at half lateral length after the bottom hole assembly become stuck during drilling and was unrecoverable. This well delivered an IP30 of 866 BOE per day. These results strengthen our confidence in the development opportunity across our Southern Duvernay acreage. The second Duvernay pad was drilled on our North Pembina acreage and completion operations are now well underway. This pad is expected to be brought on production in September. The 2026 program is on track, 17 wells drilled, 13 on stream this year and the last 4-well pad to be completed and on stream in early 2027. Q2 was a safe and productive quarter. I want to recognize our operating teams, field and office. Their focus and disciplined execution drove our strong 2Q results. With that, over to Chad Kalmakoff, to discuss our financial performance.

Thanks, Kendall. Our strong operating results translate into strong finance performance. We generated adjusted fund flow of $254 million in the second quarter or $0.35 per share. Our operating netback was $55.33 per BOE, up from $35.36 per BOE in Q1, reflecting strong realized pricing and continued cost discipline. As a reminder, on an unhedged basis, every $5 move in WTI impacts our annualized adjusted funds flow by approximately $125 million. The hedges that were in place prior to the sale of our U.S. assets have rolled off as of Q2, and we no longer have WTI hedges in place. With a strong balance sheet, we don't anticipate entering into WTI hedges. We generated net income of $175 million in the quarter or $0.24 per share, bringing year-to-date net income to $108 million or $0.15 per share. Free cash flow was $128 million or $0.18 per share compared to $2 million in Q1. The improvement reflects higher adjusted funds flow combined with investing $122 million on exploration and development. Holding annual capital flat while raising production guidance reflects strong operational performance and cost discipline. During Q2, we repurchased 22 million shares for $136 million at an average price of $6.27 per share and declared a quarterly dividend of $0.0225 per share payable October 1. Since the sale of our Eagle Ford business in December 2025, we repurchased 69 million shares, approximately 9% of the shares outstanding for $378 million. In July, our normal course issuer bid was renewed, providing capacity to repurchase up to 70.9 million shares through July 1, 2027. We continue to be active on the NCIB and anticipate repurchasing $650 million of shares from the proceeds of the U.S. disposition. Our balance sheet remains very strong, we exited the quarter with net cash of $566 million, which allows us to execute our plans and be resilient for all parts of the cycle. With that, I'll turn the call back over to Chad.

I want to close by putting in Q2 in the broader context of where we are headed. The strategy is straightforward: grow production 6% to 8% annually, capitalize on our heavy oil expertise, commercialize the Duvernay, drive the cost structure lower and return capital to shareholders. It's that simple. We are targeting a 15% annual total shareholder return at a mid-cycle price of $70 through production growth, dividends and buybacks. That's the target we are building toward. The commodity price environment this quarter continued to prove constructive with WTI averaging $93 a barrel, and we maintain capital discipline throughout. The increased guidance reflects the quality of our inventory and strong execution from our teams. Heavy oil is the foundation over 12 years of risked drilling inventory, decades of multilateral and circulation expertise, active exploration and waterflood pilots at Peavine that could meaningfully improve long-term recovery. The Duvernay continues to advance with the first pad now drilled on our southern acreage in Gilby. It confirms high-quality reservoir, strong well results and verifies inventory as we work towards running a full commercial program in 2027. Gemini Thermal sits beyond the 3-year outlook, and we continue to advance our technical and commercial understanding, working towards an FID target H2 '27. Q2 was a strong quarter for Baytex as we executed our plans and advanced our strategy. I would like to thank our employees and service providers for their tremendous efforts to deliver these results. And lastly, before we open for questions, I want to acknowledge Brian Ector. Today is Brian's last day at Baytex, closing out nearly 2 decades as the trusted voice of this company to the investment community. Brian has worked hard to set myself, Chris and our company up for success. On behalf of everyone at Baytex, thank you, Brian. It's been a privilege. With that, operator, we are ready for questions.

[Operator Instructions] The first question today comes from Phillips Johnston with Capital One Securities.

Congrats, again, to Brian on his well-deserved retirement. My first question is for Chad Kalmakoff. You just affirmed, I guess, the target of $650 million of buybacks for this year in your prepared remarks. You're about halfway through, I think, at the end of June. If we look back at the monthly activity within the second quarter, it looks like there was some price sensitivity. It looks like you guys dialed back some activity in May when the share price was floating around $7 a share. So -- and I know at one point, you guys were considering an SIB to accelerate the buyback. So my question is, are you still -- I guess, my question is how opportunistic are you guys planning on being in terms of the share price in order to avoid procyclical buybacks?

Thanks, Phil. It's -- generally, we really just like the dollar cost averaging. So we do try to be reasonably steady where we can, we do feel like, so on a dollar per share -- sorry, a fixed dollar amount per day, kind of, naturally, dollar cost averages to the lower end, so you're buying more of the lower end and less at the higher end. And the $650 million, we're kind of -- that's about $2.5 million a day. We probably find it to be fairly steady with that for the back half of the year.

Okay. And have you ruled out an SIB at this point?

Yes. In fact, yes, we basically ruled out an SIB today. I think we can meet this commitment through the NCIB. We like the NCIB approach. It's tax-efficient, it's dollar-cost-average efficient and it's not trying to time to market.

Okay. Perfect. And then maybe a second question for Kendall. Nice to see the strong results on the 3 Gilby wells. I wanted to ask if those results, sort of, alter your development strategy for the southern acreage going forward? And do you think the results imply some upside to your inventory assumptions? Or is the success there sort of already baked into what you've laid out?

Yes. I mean I think -- thanks for the question. I think it's early time, but obviously, I think this confirms our expectations for the acreage. In terms of upside at this point in time, too early to say or comment further.

Yes. I think, Phil, like, IP30s are great, and these wells at 1,630 BOE per day, 90% liquids essentially were great results. Some of it was a result of flowing through surface facilities and capacity. And then the second was just a little bit on performance. And really, the question now is where do these now trend to -- with respect to curve. They're slightly beating right now, but we just need more time to analyze. No change to plans.

The next question comes from Amir Arif with ATB Capital.

Congrats on the quarter. Just a follow-up question on the Duvernay. The results were very strong. I was just curious, did you do anything different on the completion approach out here? Or do you think it's more just a reflection of that Southern acreage in terms of the oil cuts and the higher rates?

Thanks, Amir. It's Chad L, I guess. This is a continuation of a long journey in the Duvernay. And so we are continuing to try new things. I think last year, as I spoke before, was all about near wellbore uniformity. This year, we're really looking to far field. So as we move the sand and commodity further from the wellbore, can we still build that efficient frac pack to drain the reservoir? So there's some nuances with respect to the cluster and perf design. We have also been testing different tonnages and water loadings, and you can expect to see more of that through our program this year. In terms of Gilby itself, we did test a higher tonnage loading specifically. But as of right now, it is just pad results, it's rock results, and it's going to take time, as we just spoke, to really understand what's happening in the nuances with the completion program.

That's helpful color. And then just a second question more on the Peavine injection pilots that you have on the first quarter on injection. I was just curious, what different pattern design are you planning to test with the 2 additional pilots that you're planning to do out there?

So the 2 additional pilots are new injectors in combination with new drills. So injection on stream same time as production. So that differs from 1 of the 2 original pilots. The first pilot is injection into our original discovery well two-leg lateral where that will be all about fill up, how fast can we fill up the injector. That was a producer and then start to see a response on the producers. These expanded patterns are just to gain an understanding of: a, slightly different rock, so to continue to develop our statistical average of what this looks like; and then second, to observe what happens when we inject at the same time and start first production.

Okay. So similar to one of your existing injections, but it's a different pattern, a different layout or just different rates that you're planning to set?

So very, very similar to the second pilot, where it's new injectors, new producers, just different pad. This pad further to the West, so slightly different rock.

Got it. Okay. That's helpful. And then on the Pekisko mound opportunity set. I know you've run the seismic. Just curious when you'll be starting to drill any of those prospects that might be on your lands?