Baytex Energy Corp. 2026 Q2 Earnings Call

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. We've 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 CAD 139 million and exited the quarter with net cash of CAD 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 CAD 625 million. Momentum is building with a 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 toward our 15% total shareholder return target. Thank you, Steve Reynish and Jeffrey Wojahn, for your significant contributions 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 CAD 122 million on exploration and development and brought 24.6 wells on stream, consistent with our full-year plan and weighted to deliver strong production in the back half. Heavy oil was strong across the board. At Peavine, six 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, seven 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, we are on track with second-half development now underway. We have an active second-half plan throughout our heavy oil portfolio, with four rigs running and a fifth starting in Morinville in August. On waterfloods, both initial Peavine pilots are now on injection, one testing repressurization through producer to injector conversion, the other testing pressure maintenance on new development. We are expanding waterflood pilots in the second half with two additional patterns at Peavine and a 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 Keg River Mounds, and we are preparing for up to two exploration test wells in early 2027.

In the Duvernay, the first pad was drilled on our south Gilby acreage and came on stream in June. Three of the four 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 became 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 four-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 funds flow of CAD 254 million in the second quarter or CAD 0.35 per share. Our operating net back was CAD 55.33 per BOE, up from CAD 35.36 per BOE in Q1, reflecting strong realized pricing and continued cost discipline. As a reminder, on an unhedged basis, every CAD 5 move in WTI impacts our annualized adjusted funds flow by approximately CAD 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 CAD 175 million in the quarter, or CAD 0.24 per share, bringing year-to-date net income to CAD 108 million or CAD 0.15 per share.

Free cash flow was CAD 128 million or CAD 0.18 per share compared to CAD 2 million in Q1. The improvement reflects higher adjusted funds flow combined with investing CAD 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 CAD 136 million at an average price of CAD 6.27 per share, and declared a quarterly dividend of two and a quarter cents per share, payable October 1st. Since the sale of our Eagle Ford business in December 2025, we have repurchased 69 million shares, approximately 9% of the shares outstanding for CAD 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 CAD 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 CAD 566 million, which allows us to execute our plans and be resilient through all parts of the cycle. With that, I'll turn the call back over to Chad.

I want to close by putting Q2 in the broader context of where we are headed. The strategy is straightforward. Grow production 6%-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 CAD 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 CAD 93 a barrel, and we maintained 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 string 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 three-year outlook, and we continue to advance our technical and commercial understanding, working towards an FID target half 2 2027. 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. Lastly, before we open for questions, I want to acknowledge Brian Ector. Today is Brian's last day at Baytex, closing out nearly two 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.