Baytex Energy Corp.
Condensed Consolidated Statements of Financial Position
(thousands of Canadian dollars) (unaudited)
As at | March 31, 2018 | December 31, 2017 | ||||
ASSETS | ||||||
Current assets | ||||||
Trade and other receivables | $ | 110,566 | $ | 112,844 | ||
Financial derivatives (note 17) | 16,940 | 18,510 | ||||
127,506 | 131,354 | |||||
Non-current assets | ||||||
Exploration and evaluation assets (note 5) | 271,939 | 272,974 | ||||
Oil and gas properties (note 6) | 4,024,984 | 3,958,309 | ||||
Other plant and equipment | 8,645 | 9,474 | ||||
$ | 4,433,074 | $ | 4,372,111 | |||
LIABILITIES | ||||||
Current liabilities | ||||||
Trade and other payables | $ | 155,779 | $ | 144,542 | ||
Financial derivatives (note 17) | 65,579 | 50,095 | ||||
Onerous contracts | 2,477 | 2,574 | ||||
223,835 | 197,211 | |||||
Non-current liabilities | ||||||
Bank loan (note 7) | 211,831 | 212,138 | ||||
Long-term notes (note 8) | 1,510,909 | 1,474,184 | ||||
Asset retirement obligations (note 9) | 371,395 | 368,995 | ||||
Deferred income tax liability | 186,049 | 204,698 | ||||
Financial derivatives (note 17) | 655 | — | ||||
2,504,674 | 2,457,226 | |||||
SHAREHOLDERS’ EQUITY | ||||||
Shareholders' capital (note 10) | 4,451,901 | 4,443,576 | ||||
Contributed surplus | 11,589 | 15,999 | ||||
Accumulated other comprehensive income | 535,426 | 463,104 | ||||
Deficit | (3,070,516 | ) | (3,007,794 | ) | ||
1,928,400 | 1,914,885 | |||||
$ | 4,433,074 | $ | 4,372,111 |
Subsequent event (note 7)
See accompanying notes to the condensed consolidated interim unaudited financial statements.
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Baytex Energy Corp.
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(thousands of Canadian dollars, except per common share amounts) (unaudited)
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
Revenue, net of royalties | ||||||
Petroleum and natural gas sales (note 11) | $ | 286,067 | $ | 260,549 | ||
Royalties | (64,839 | ) | (57,177 | ) | ||
221,228 | 203,372 | |||||
Expenses | ||||||
Operating | 65,888 | 64,130 | ||||
Transportation | 8,519 | 8,042 | ||||
Blending and other | 17,290 | 10,057 | ||||
General and administrative | 11,008 | 12,583 | ||||
Exploration and evaluation (note 5) | 2,019 | 1,322 | ||||
Depletion and depreciation | 108,289 | 122,331 | ||||
Share-based compensation (note 12) | 3,915 | 4,549 | ||||
Financing and interest (note 15) | 28,010 | 28,506 | ||||
Financial derivatives loss (gain) (note 17) | 27,550 | (35,888 | ) | |||
Foreign exchange loss (gain) (note 16) | 36,217 | (10,588 | ) | |||
Gain on disposition of oil and gas properties | (1,486 | ) | — | |||
Other (income) expense | (279 | ) | 413 | |||
306,940 | 205,457 | |||||
Net income (loss) before income taxes | (85,712 | ) | (2,085 | ) | ||
Income tax recovery | ||||||
Current income tax recovery | (73 | ) | (736 | ) | ||
Deferred income tax recovery | (22,917 | ) | (12,445 | ) | ||
(22,990 | ) | (13,181 | ) | |||
Net income (loss) attributable to shareholders | $ | (62,722 | ) | $ | 11,096 | |
Other comprehensive income (loss) | ||||||
Foreign currency translation adjustment | 72,322 | (18,163 | ) | |||
Comprehensive income (loss) | $ | 9,600 | $ | (7,067 | ) | |
Net income (loss) per common share (note 13) | ||||||
Basic | $ | (0.27 | ) | $ | 0.05 | |
Diluted | $ | (0.27 | ) | $ | 0.05 | |
Weighted average common shares (note 13) | ||||||
Basic | 236,315 | 234,020 | ||||
Diluted | 236,315 | 236,023 |
See accompanying notes to the condensed consolidated interim unaudited financial statements.
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Baytex Energy Corp.
Condensed Consolidated Statements of Changes in Equity
(thousands of Canadian dollars) (unaudited)
Shareholders’ capital | Contributed surplus | Accumulated other comprehensive income | Deficit | Total equity | |||||||||||
Balance at December 31, 2016 | $ | 4,422,661 | $ | 21,405 | $ | 629,863 | $ | (3,094,968 | ) | $ | 1,978,961 | ||||
Vesting of share awards | 9,533 | (9,533 | ) | — | — | — | |||||||||
Share-based compensation | — | 4,549 | — | — | 4,549 | ||||||||||
Comprehensive income (loss) for the period | — | — | (18,163 | ) | 11,096 | (7,067 | ) | ||||||||
Balance at March 31, 2017 | $ | 4,432,194 | $ | 16,421 | $ | 611,700 | $ | (3,083,872 | ) | $ | 1,976,443 | ||||
Balance at December 31, 2017 | $ | 4,443,576 | $ | 15,999 | $ | 463,104 | $ | (3,007,794 | ) | $ | 1,914,885 | ||||
Vesting of share awards | 8,325 | (8,325 | ) | — | — | — | |||||||||
Share-based compensation | — | 3,915 | — | — | 3,915 | ||||||||||
Comprehensive income (loss) for the period | — | — | 72,322 | (62,722 | ) | 9,600 | |||||||||
Balance at March 31, 2018 | $ | 4,451,901 | $ | 11,589 | $ | 535,426 | $ | (3,070,516 | ) | $ | 1,928,400 |
See accompanying notes to the condensed consolidated interim unaudited financial statements.
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Baytex Energy Corp.
Condensed Consolidated Statements of Cash Flows
(thousands of Canadian dollars) (unaudited)
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
CASH PROVIDED BY (USED IN): | ||||||
Operating activities | ||||||
Net income (loss) for the period | $ | (62,722 | ) | $ | 11,096 | |
Adjustments for: | ||||||
Share-based compensation (note 12) | 3,915 | 4,549 | ||||
Unrealized foreign exchange loss (gain) (note 16) | 36,046 | (11,338 | ) | |||
Exploration and evaluation (note 5) | 2,019 | 1,322 | ||||
Depletion and depreciation | 108,289 | 122,331 | ||||
Non-cash financing and accretion (note 15) | 3,499 | 3,314 | ||||
Unrealized financial derivatives loss (gain) (note 17) | 17,709 | (35,614 | ) | |||
Gain on disposition of oil and gas properties | (1,486 | ) | — | |||
Deferred income tax recovery | (22,917 | ) | (12,445 | ) | ||
Payments on onerous contracts | (97 | ) | (1,846 | ) | ||
Asset retirement obligations settled (note 9) | (3,263 | ) | (5,427 | ) | ||
Change in non-cash working capital | 6,620 | 4,790 | ||||
87,612 | 80,732 | |||||
Financing activities | ||||||
Increase (decrease) in bank loan | (3,916 | ) | 72,742 | |||
(3,916 | ) | 72,742 | ||||
Investing activities | ||||||
Additions to exploration and evaluation assets (note 5) | (1,287 | ) | (3,785 | ) | ||
Additions to oil and gas properties (note 6) | (92,247 | ) | (92,774 | ) | ||
Additions to other plant and equipment | — | (104 | ) | |||
Property acquisitions (note 6) | (187 | ) | (66,084 | ) | ||
Proceeds from disposition of oil and gas properties (note 6) | 2,213 | 80 | ||||
Change in non-cash working capital | 7,812 | 9,539 | ||||
(83,696 | ) | (153,128 | ) | |||
Change in cash | — | 346 | ||||
Cash, beginning of period | — | 2,705 | ||||
Cash, end of period | $ | — | $ | 3,051 | ||
Supplementary information | ||||||
Interest paid | $ | 18,876 | $ | 19,419 | ||
Income taxes paid | $ | 16 | $ | 486 |
See accompanying notes to the condensed consolidated interim unaudited financial statements.
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Baytex Energy Corp.
Notes to the Condensed Consolidated Interim Financial Statements
For the periods ended March 31, 2018 and 2017
(all tabular amounts in thousands of Canadian dollars, except per common share amounts) (unaudited)
1. | REPORTING ENTITY |
Baytex Energy Corp. (the “Company” or “Baytex”) is an oil and gas corporation engaged in the acquisition, development and production of oil and natural gas in the Western Canadian Sedimentary Basin and the United States. The Company’s common shares are traded on the Toronto Stock Exchange and the New York Stock Exchange under the symbol BTE. The Company’s head and principal office is located at 2800, 520 – 3rd Avenue S.W., Calgary, Alberta, T2P 0R3, and its registered office is located at 2400, 525 – 8th Avenue S.W., Calgary, Alberta, T2P 1G1.
The audited consolidated financial statements of the Company as at and for the year ended December 31, 2017 are available
through its filings on SEDAR at www.sedar.com and through the U.S. Securities and Exchange Commission at www.sec.gov.
2. | BASIS OF PRESENTATION |
The condensed consolidated interim unaudited financial statements ("consolidated financial statements") have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting, under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB"). These consolidated financial statements do not include all the necessary annual disclosures as prescribed by IFRS and should be read in conjunction with the annual audited consolidated financial statements as at and for the year ended December 31, 2017.
The consolidated financial statements were approved by the Board of Directors of Baytex on May 3, 2018.
The consolidated financial statements have been prepared on a historical cost basis, with the exception of derivative financial instruments which have been measured at fair value. The consolidated financial statements are presented in Canadian dollars which is the functional currency of the Company. All financial information is rounded to the nearest thousand, except per share amounts or when otherwise indicated.
3. | SIGNIFICANT ACCOUNTING POLICIES |
The accounting policies, critical accounting judgments and significant estimates used in preparation of the 2017 annual financial statements have been applied in the preparation of these consolidated financial statements, except for the adoption of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments as described below.
Changes in significant accounting policies
Revenue Recognition
Baytex adopted IFRS 15 Revenue from Contracts with Customers with a date of initial application of January 1, 2018. For the year ended December 31, 2017, $8.3 million of commodity purchases related to heavy oil sales have been reclassified from petroleum and natural gas sales to blending and other expense to conform with the requirements of IFRS 15. There were no adjustments made to the January 1, 2018 opening statement of financial position on adoption. The additional disclosures required by IFRS 15 are provided in note 11 to these consolidated financial statements.
The nature of the Company's performance obligations, including roles of third parties and partners, are evaluated to determine if the Company acts as a principal. Baytex recognizes revenue on a gross basis when it acts as the principal and has primary responsibility for the transaction. Revenue is recognized on a net basis if Baytex acts in the capacity of an agent rather than as a principal.
Revenue from the sale of heavy oil, light oil and condensate, natural gas liquids, and natural gas is recognized based on the consideration specified in contracts with customers. Baytex recognizes revenue when control of the product transfers to the customer and collection is reasonably assured. The amount of revenue recognized is based on the consideration specified in the contract. This is generally at the point in time when the customer obtains legal title to the product which is when it is physically transferred to the pipeline or other transportation method agreed upon and collection is reasonably assured.
The transaction price for variable price contracts in the Canada and U.S. segments is based on a representative commodity price index, and may be adjusted for quality, location, delivery method, or other factors depending on the agreed upon terms of the contract. The amount of revenue recorded can vary depending on the grade, quality and quantities of oil or natural gas transferred to customers. Market conditions, which impact the Company's ability to negotiate certain components of the transaction price, can also cause the amount of revenue recorded to fluctuate from period to period.
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Tariffs, tolls and fees charged to other entities for use of pipelines and facilities owned by Baytex are evaluated by management to determine if these originate from contracts with customers or from incidental or collaborative arrangements. Tariffs, tolls and fees charged to other entities that are from contracts with customers are recognized in revenue when the related services are provided.
Financial Instruments
Baytex adopted IFRS 9 Financial Instruments, on January 1, 2018 using the retrospective method. The adoption of this standard did not result in a change in the recognition or measurement of any of the Company's financial instruments on transition.
IFRS 9 contains three principal classification categories for initial classification of financial assets: measured at amortized cost, fair value through other comprehensive income (“FVOCI”); or fair value through profit or loss (“FVTPL”). The previous IAS 39 categories of held to maturity, loans and receivables and available for sale are eliminated. Financial assets are categorized based on the Company’s objective for the asset and the subsequent cash flows. A financial asset is classified as amortized cost if the asset is held with the objective to collect contractual cash flows that are solely payments of principal and interest on principal amounts outstanding. A financial asset is classified as FVOCI if the asset is held with the objective to both collect contractual cash flows and sell the financial asset. All other financial assets are measured at FVTPL. Financial assets are assessed for impairment using an expected credit loss model. Trade and other receivables are classified and measured at amortized cost.
The initial classification of financial liabilities under IFRS 9 is fundamentally unchanged from the requirements under IAS 39. A financial liability is measured at amortized cost or FVTPL. A financial liability is measured at FVTPL if it is held-for-trading, a derivative, or designated as FVTPL at initial recognition. For liabilities measured at FVTPL, any change in value resulting from a change in Baytex’s credit-risk is recorded through other comprehensive income or loss rather than net income or loss. Trade and other payables, bank loan and long-term notes are classified and measured as amortized cost.
Measurement Uncertainty and Judgments
Revenue - stand-alone selling price
Management is required to make estimates of the price at which the Company would sell the product separately to customers when allocating the transaction price realized in contracts using relative stand-alone selling prices. When making this estimate, management considers market prices and market conditions, as well as cash flows the Company intends to realize based on risk management policies, based on cost and margin objectives.
Future Accounting Pronouncements
Leases
In January 2016, the IASB issued IFRS 16 Leases which replaces IAS 17 Leases. IFRS 16 introduces a single recognition and measurement model for lessees, which will require recognition of lease assets and lease obligations on the balance sheet. Short-term leases and leases for low value assets are exempt from recognition and may be treated as operating leases and recognized through net income or loss. The standard is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 has been adopted. The standard shall be applied retrospectively to each period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company will adopt IFRS 16 on January 1, 2019. The Company has developed a plan to identify and review its various lease agreements in order to determine the impact that adoption of IFRS 16 will have on the consolidated financial statements.
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4. | SEGMENTED FINANCIAL INFORMATION |
Baytex's reportable segments are determined based on the geographic location and nature of the underlying operations:
• | Canada includes the exploration for, and the development and production of, crude oil and natural gas in Western Canada; |
• | U.S. includes the exploration for, and the development and production of, crude oil and natural gas in the United States; and |
• | Corporate includes corporate activities and items not allocated between operating segments. |
Canada | U.S. | Corporate | Consolidated | |||||||||||||||||||||
Three Months Ended March 31 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||
Revenue, net of royalties | ||||||||||||||||||||||||
Petroleum and natural gas sales | $ | 106,814 | $ | 108,151 | $ | 179,253 | $ | 152,398 | $ | — | $ | — | $ | 286,067 | $ | 260,549 | ||||||||
Royalties | (11,334 | ) | (12,633 | ) | (53,505 | ) | (44,544 | ) | — | — | (64,839 | ) | (57,177 | ) | ||||||||||
95,480 | 95,518 | 125,748 | 107,854 | — | — | 221,228 | 203,372 | |||||||||||||||||
Expenses | ||||||||||||||||||||||||
Operating | 45,420 | 43,403 | 20,468 | 20,727 | — | — | 65,888 | 64,130 | ||||||||||||||||
Transportation | 8,519 | 8,042 | — | — | — | — | 8,519 | 8,042 | ||||||||||||||||
Blending and other | 17,290 | 10,057 | — | — | — | — | 17,290 | 10,057 | ||||||||||||||||
General and administrative | — | — | — | — | 11,008 | 12,583 | 11,008 | 12,583 | ||||||||||||||||
Exploration and evaluation | 2,019 | 1,322 | — | — | — | — | 2,019 | 1,322 | ||||||||||||||||
Depletion and depreciation | 46,340 | 49,831 | 61,120 | 71,353 | 829 | 1,147 | 108,289 | 122,331 | ||||||||||||||||
Share-based compensation | — | — | — | — | 3,915 | 4,549 | 3,915 | 4,549 | ||||||||||||||||
Financing and interest | — | — | — | — | 28,010 | 28,506 | 28,010 | 28,506 | ||||||||||||||||
Financial derivatives loss (gain) | — | — | — | — | 27,550 | (35,888 | ) | 27,550 | (35,888 | ) | ||||||||||||||
Foreign exchange loss (gain) | — | — | — | — | 36,217 | (10,588 | ) | 36,217 | (10,588 | ) | ||||||||||||||
Gain on disposition of oil and gas properties | (1,486 | ) | — | — | — | — | — | (1,486 | ) | — | ||||||||||||||
Other (income) expense | — | — | — | — | (279 | ) | 413 | (279 | ) | 413 | ||||||||||||||
118,102 | 112,655 | 81,588 | 92,080 | 107,250 | 722 | 306,940 | 205,457 | |||||||||||||||||
Net income (loss) before income taxes | (22,622 | ) | (17,137 | ) | 44,160 | 15,774 | (107,250 | ) | (722 | ) | (85,712 | ) | (2,085 | ) | ||||||||||
Income tax recovery | ||||||||||||||||||||||||
Current income tax recovery | — | — | (73 | ) | (736 | ) | — | — | (73 | ) | (736 | ) | ||||||||||||
Deferred income tax expense (recovery) | (6,107 | ) | (4,628 | ) | 2,239 | (7,520 | ) | (19,049 | ) | (297 | ) | (22,917 | ) | (12,445 | ) | |||||||||
(6,107 | ) | (4,628 | ) | 2,166 | (8,256 | ) | (19,049 | ) | (297 | ) | (22,990 | ) | (13,181 | ) | ||||||||||
Net income (loss) | $ | (16,515 | ) | $ | (12,509 | ) | $ | 41,994 | $ | 24,030 | $ | (88,201 | ) | $ | (425 | ) | $ | (62,722 | ) | $ | 11,096 | |||
Total oil and natural gas capital expenditures(1) | $ | 49,499 | $ | 104,488 | $ | 42,009 | $ | 58,075 | $ | — | $ | — | $ | 91,508 | $ | 162,563 |
(1) Includes acquisitions, net of proceeds from divestitures.
As at | March 31, 2018 | December 31, 2017 | ||||
Canadian assets | $ | 1,682,178 | $ | 1,677,821 | ||
U.S. assets | 2,742,251 | 2,684,816 | ||||
Corporate assets | 8,645 | 9,474 | ||||
Total consolidated assets | $ | 4,433,074 | $ | 4,372,111 |
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5. | EXPLORATION AND EVALUATION ASSETS |
March 31, 2018 | December 31, 2017 | |||||
Balance, beginning of period | $ | 272,974 | $ | 308,462 | ||
Capital expenditures | 1,287 | 7,118 | ||||
Divestitures | (872 | ) | (1,276 | ) | ||
Exploration and evaluation expense | (2,019 | ) | (8,253 | ) | ||
Transfer to oil and gas properties | (4,337 | ) | (20,198 | ) | ||
Foreign currency translation | 4,906 | (12,879 | ) | |||
Balance, end of period | $ | 271,939 | $ | 272,974 |
6. | OIL AND GAS PROPERTIES |
Cost | Accumulated depletion | Net book value | |||||||
Balance, December 31, 2016 | $ | 7,764,037 | $ | (3,611,868 | ) | $ | 4,152,169 | ||
Capital expenditures | 319,148 | — | 319,148 | ||||||
Property acquisitions | 136,007 | — | 136,007 | ||||||
Transferred from exploration and evaluation assets | 20,198 | — | 20,198 | ||||||
Transferred from other assets | 5,124 | — | 5,124 | ||||||
Change in asset retirement obligations | 42,808 | — | 42,808 | ||||||
Divestitures | (105,272 | ) | 49,291 | (55,981 | ) | ||||
Foreign currency translation | (249,723 | ) | 68,641 | (181,082 | ) | ||||
Depletion | — | (480,082 | ) | (480,082 | ) | ||||
Balance, December 31, 2017 | $ | 7,932,327 | $ | (3,974,018 | ) | $ | 3,958,309 | ||
Capital expenditures | 92,247 | — | 92,247 | ||||||
Property acquisitions | 202 | — | 202 | ||||||
Transferred from exploration and evaluation assets | 4,337 | — | 4,337 | ||||||
Change in asset retirement obligations | 2,598 | — | 2,598 | ||||||
Divestitures | (62 | ) | — | (62 | ) | ||||
Foreign currency translation | 107,978 | (33,163 | ) | 74,815 | |||||
Depletion | — | (107,462 | ) | (107,462 | ) | ||||
Balance, March 31, 2018 | $ | 8,139,627 | $ | (4,114,643 | ) | $ | 4,024,984 |
At the end of each reporting period, the Company performs an assessment to determine whether there is any indication of impairment or reversal of previously recorded impairments for the cash generating units ("CGU") that comprise Oil and Gas Properties. The assessment of indicators is subjective in nature and requires Management to make judgments based on the information available at the reporting date. The Company determined that there were no indicators of impairment or impairment reversals for any of the Company's CGUs as at March 31, 2018.
7. | BANK LOAN |
March 31, 2018 | December 31, 2017 | |||||
Bank loan - U.S. dollar denominated(1) | $ | 112,885 | $ | 167,159 | ||
Bank loan - Canadian dollar denominated | 99,686 | 46,217 | ||||
Bank loan - principal | 212,571 | 213,376 | ||||
Unamortized debt issuance costs | (740 | ) | (1,238 | ) | ||
Bank loan | $ | 211,831 | $ | 212,138 |
(1) | U.S. dollar denominated bank loan balance as at March 31, 2018 was US$87.5 million (US$133.5 million as at December 31, 2017). |
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On April 25, 2018, Baytex amended its credit facilities to extend maturity from June 4, 2019 to June 4, 2020. The amended revolving extendible secured credit facilities are comprised of a US$35 million operating loan (previously US$25 million) and a US$340 million syndicated loan for Baytex (previously US$350 million) and a US$200 million syndicated loan for Baytex's wholly-owned subsidiary, Baytex Energy USA, Inc. (collectively, the "Revolving Facilities").
The Revolving Facilities are not borrowing base facilities and do not require annual or semi-annual reviews. The facilities contain standard commercial covenants including the financial covenants detailed below and do not require any mandatory principal payments prior to maturity on June 4, 2020. Baytex may request an extension of the Revolving Facilities which could extend the revolving period for up to four years (subject to a maximum four-year period at any time). Advances (including letters of credit) under the Revolving Facilities can be drawn in either Canadian or U.S. funds and bear interest at the bank’s prime lending rate, bankers’ acceptance discount rates or London Interbank Offered Rates, plus applicable margins. In the event that Baytex exceeds any of the covenants under the Revolving Facilities, Baytex may be required to repay, refinance or renegotiate the loan terms and may be restricted from taking on further debt or paying dividends to shareholders.
At March 31, 2018, Baytex had $15.0 million of outstanding letters of credit (December 31, 2017 - $14.6 million) under the Revolving Facilities.
At March 31, 2018, Baytex was in compliance with all of the covenants contained in the Revolving Facilities. The following table summarizes the financial covenants contained in the Revolving Facilities in place as at March 31, 2018 and as amended on April 25, 2018.
Covenant Description | Position as at March 31, 2018 | March 31, 2018 | April 25, 2018 and thereafter |
Senior Secured Debt(1) to Bank EBITDA(2) (Maximum Ratio) | 0.50:1.00 | 5.00:1.00 | 3.50:1.00 |
Interest Coverage(3) (Minimum Ratio) | 4.56:1.00 | 1.25:1.00 | 2.00:1.00 |
(1) | "Senior Secured Debt" is defined as the principal amount of the bank loan and other secured obligations identified in the credit agreement. As at March 31, 2018, the Company's Senior Secured Debt totaled $227.2 million. |
(2) | Bank EBITDA is calculated based on terms and definitions set out in the credit agreement which adjusts net income or loss for financing and interest expenses, unrealized gains and losses on financial derivatives, income tax, certain specific unrealized and non-cash transactions (including depletion, depreciation, exploration and evaluation expenses, unrealized gains and losses on financial derivatives and foreign exchange and share-based compensation) and is calculated based on a trailing twelve month basis. Bank EBITDA for the twelve months ended March 31, 2018 was $454.8 million. |
(3) | Interest coverage is computed as the ratio of Bank EBITDA to financing and interest expenses excluding non-cash interest and accretion on asset retirement obligations, and is calculated on a trailing twelve month basis. Financing and interest expenses for the twelve months ended March 31, 2018 were $99.8 million. |
8. | LONG-TERM NOTES |
March 31, 2018 | December 31, 2017 | |||||
6.75% notes (US$150,000 – principal) due February 17, 2021 | 193,515 | 187,770 | ||||
5.125% notes (US$400,000 – principal) due June 1, 2021 | 516,040 | 500,720 | ||||
6.625% notes (Cdn$300,000 – principal) due July 19, 2022 | 300,000 | 300,000 | ||||
5.625% notes (US$400,000 – principal) due June 1, 2024 | 516,040 | 500,720 | ||||
Total long-term notes - principal | 1,525,595 | 1,489,210 | ||||
Unamortized debt issuance costs | (14,686 | ) | (15,026 | ) | ||
Total long-term notes - net of unamortized debt issuance costs | $ | 1,510,909 | $ | 1,474,184 |
The long-term notes do not contain any significant financial maintenance covenants. The long-term notes contain a debt incurrence covenant that restricts the Company's ability to raise additional debt beyond the existing Revolving Facilities and long-term notes unless the Company maintains a minimum fixed charge coverage ratio (computed as the ratio of Bank EBITDA (as defined in note 7) to financing and interest expenses on a trailing twelve month basis) of 2.5:1. As at March 31, 2018, the fixed charge coverage ratio was 4.56:1.00.
Page 9
9. | ASSET RETIREMENT OBLIGATIONS |
March 31, 2018 | December 31, 2017 | |||||
Balance, beginning of period | $ | 368,995 | $ | 331,517 | ||
Liabilities incurred | 1,899 | 5,825 | ||||
Liabilities settled | (3,263 | ) | (13,471 | ) | ||
Liabilities acquired | 132 | 22,264 | ||||
Liabilities divested | (324 | ) | (19,940 | ) | ||
Accretion (note 15) | 2,308 | 8,682 | ||||
Change in estimate | 699 | (24,028 | ) | |||
Changes in discount rates and inflation rates | — | 61,011 | ||||
Foreign currency translation | 949 | (2,865 | ) | |||
Balance, end of period | $ | 371,395 | $ | 368,995 |
10. | SHAREHOLDERS' CAPITAL |
The authorized capital of Baytex consists of an unlimited number of common shares without nominal or par value and 10,000,000 preferred shares without nominal or par value, issuable in series. Baytex establishes the rights and terms of the preferred shares upon issuance. As at March 31, 2018, no preferred shares have been issued by the Company and all common shares issued were fully paid.
The holders of common shares may receive dividends as declared from time to time and are entitled to one vote per share at any meetings of the holders of common shares. All common shares rank equally with regard to the Company's net assets in the event the Company is wound-up or terminated.
Number of Common Shares (000s) | Amount | ||||
Balance, December 31, 2016 | 233,449 | $ | 4,422,661 | ||
Transfer from contributed surplus on vesting and conversion of share awards | 2,002 | 20,915 | |||
Balance, December 31, 2017 | 235,451 | $ | 4,443,576 | ||
Transfer from contributed surplus on vesting and conversion of share awards | 1,127 | 8,325 | |||
Balance, March 31, 2018 | 236,578 | $ | 4,451,901 |
11. PETROLEUM AND NATURAL GAS SALES
Petroleum and natural gas sales primarily consists of revenues earned from the sale of produced oil and natural gas volumes pursuant to fixed or variable price contracts including the physical delivery contracts for fixed volumes outlined in note 17. The activities that generate petroleum and natural gas sales for our Canadian and U.S. operating segments are described below.
Canada Segment
Petroleum and natural gas sales for Baytex's Canada segment primarily consists of revenues generated from the Company's interest in operated oil and natural gas properties and production taken in-kind related to its interest in non-operated oil and natural gas properties. The Company enters contracts with customers for the sale of production volumes with terms ranging from a period of one month to one year.
Under its contracts with customers, Baytex is required to deliver volumes of heavy oil, light oil and condensate, natural gas liquids and natural gas to agreed upon locations where control over the delivered volumes is transferred to the customer. Revenue is recognized when control of each unit of product is transferred to the customer with revenues due on the 25th day of the month following delivery.
Baytex's customers are primarily oil and natural gas marketers and partners in joint operations in the oil and natural gas industry. Concentration of credit risk is mitigated by marketing production to several oil and natural gas marketers under customary industry and payment terms. Baytex reviews the credit worthiness and obtains certain financial assurances from customers prior to entering sales contracts. The financial strength of the Company's customers is reviewed on a routine basis.
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U.S. Segment
Petroleum and natural gas sales for Baytex's U.S. segment primarily consists of revenues generated from the Company's interest in non-operated oil and natural gas properties where the Company has not elected its right to take its production in-kind. The operator of the oil and natural gas properties that comprise the U.S. segment enters contracts with customers, conducts the activities required to transfer control of light oil and condensate, natural gas liquids and natural gas volumes to the customer, and collects and remits payments from the customer to Baytex.
The Company's petroleum and natural gas sales from contracts with customers for each reportable segment is set forth in the following table.
Three Months Ended March 31 | ||||||||||||||||||
2018 | 2017 | |||||||||||||||||
($ thousands) | Canada | U.S. | Total | Canada | U.S. | Total | ||||||||||||
Heavy oil | $ | 91,883 | $ | — | $ | 91,883 | $ | 89,746 | $ | — | $ | 89,746 | ||||||
Light oil and condensate | 4,851 | 144,607 | 149,458 | 6,542 | 116,535 | 123,077 | ||||||||||||
NGL | 3,356 | 18,178 | 21,534 | 2,972 | 16,724 | 19,696 | ||||||||||||
Natural gas sales | 6,724 | 16,468 | 23,192 | 8,891 | 19,139 | 28,030 | ||||||||||||
Total petroleum and natural gas sales | $ | 106,814 | $ | 179,253 | $ | 286,067 | $ | 108,151 | $ | 152,398 | $ | 260,549 |
Included in accounts receivable at March 31, 2018 is $88.7 million (December 31, 2017 - $91.6 million) of accrued production revenue related to deliveries for periods ended prior to the reporting date.
12. | SHARE AWARD INCENTIVE PLAN |
The Company recorded compensation expense related to the share awards of $3.9 million for the three months ended March 31, 2018 ($4.5 million for the three months ended March 31, 2017).
The weighted average fair value of share awards granted during the three months ended March 31, 2018 was $4.17 per restricted and performance award and $5.77 per restricted and performance award for the three months ended March 31, 2017.
The number of share awards outstanding is detailed below:
(000s) | Number of restricted awards | Number of performance awards(1) | Total number of share awards | |||
Balance, December 31, 2016 | 1,508 | 1,737 | 3,245 | |||
Granted | 1,636 | 1,584 | 3,220 | |||
Vested and converted to common shares | (959 | ) | (1,043 | ) | (2,002 | ) |
Forfeited | (157 | ) | (25 | ) | (182 | ) |
Balance, December 31, 2017 | 2,028 | 2,253 | 4,281 | |||
Granted | 1,941 | 1,849 | 3,790 | |||
Vested and converted to common shares | (527 | ) | (600 | ) | (1,127 | ) |
Forfeited | (113 | ) | (94 | ) | (207 | ) |
Balance, March 31, 2018 | 3,329 | 3,408 | 6,737 |
(1) Based on underlying awards before applying the payout multiplier which can range from 0x to 2x.
13. | NET INCOME (LOSS) PER SHARE |
Baytex calculates basic income per share based on the net income or loss attributable to shareholders using the weighted average number of shares outstanding during the period. Diluted income per share amounts reflect the potential dilution that could occur if share awards were converted. The treasury stock method is used to determine the dilutive effect of share awards whereby the potential conversion of share awards and the amount of compensation expense, if any, attributed to future services are assumed to be used to purchase common shares at the average market price during the year.
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Three Months Ended March 31 | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Net loss | Weighted average common shares (000s) | Net loss per share | Net income | Weighted average common shares (000s) | Net income per share | |||||||||||
Net income (loss) - basic | $ | (62,722 | ) | 236,315 | $ | (0.27 | ) | $ | 11,096 | 234,020 | $ | 0.05 | ||||
Dilutive effect of share awards | — | — | — | — | 2,003 | — | ||||||||||
Net income (loss) - diluted | $ | (62,722 | ) | 236,315 | $ | (0.27 | ) | $ | 11,096 | 236,023 | $ | 0.05 |
For the three months ended March 31, 2018 and 2017, the effect of 6.7 million share awards and 1.2 million share awards, respectively, were excluded from the calculation of diluted earnings per share as they were determined to be anti-dilutive.
14. | INCOME TAXES |
The provision for income taxes has been computed as follows:
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
Net loss before income taxes | $ | (85,712 | ) | $ | (2,085 | ) |
Expected income taxes at the statutory rate of 27.00% (2017 – 26.93%)(1) | (23,142 | ) | (563 | ) | ||
Increase (decrease) in income tax recovery resulting from: | ||||||
Share-based compensation | 967 | 1,228 | ||||
Non-taxable portion of foreign exchange loss (gain) | 4,912 | (1,334 | ) | |||
Effect of rate adjustments for foreign jurisdictions | (9,245 | ) | (11,088 | ) | ||
Effect of change in deferred tax benefit not recognized(2) | 4,912 | (1,334 | ) | |||
Adjustments and assessments | (1,394 | ) | (90 | ) | ||
Income tax recovery | $ | (22,990 | ) | $ | (13,181 | ) |
(1) | Expected income tax rate increased due to an increase in the corporate income tax rate in Saskatchewan (from 11.75% to 12.00%). |
(2) | A deferred income tax asset has not been recognized for allowable capital losses of $104 million related to the unrealized foreign exchange losses arising from the translation of U.S. dollar denominated long-term notes ($86 million as at December 31, 2017). |
As disclosed in the 2017 annual financial statements, Baytex received several reassessments from the Canada Revenue Agency
(the “CRA”) in June 2016. Those reassessments denied $591 million of non-capital loss deductions that Baytex had previously claimed. In September 2016, Baytex filed notices of objection with the CRA appealing each reassessment received and is now waiting for an appeals officer to be assigned to its file. Baytex remains confident that its original tax filings are correct and intends to defend those tax filings through the appeals process.
15. | FINANCING AND INTEREST |
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
Interest on bank loan | $ | 2,929 | $ | 2,552 | ||
Interest on long-term notes | 21,582 | 22,640 | ||||
Non-cash financing | 1,191 | 1,130 | ||||
Accretion on asset retirement obligations (note 9) | 2,308 | 2,184 | ||||
Financing and interest | $ | 28,010 | $ | 28,506 |
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16. | FOREIGN EXCHANGE |
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
Unrealized foreign exchange loss (gain) | $ | 36,046 | $ | (11,338 | ) | |
Realized foreign exchange loss | 171 | 750 | ||||
Foreign exchange loss (gain) | $ | 36,217 | $ | (10,588 | ) |
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's financial assets and liabilities are comprised of cash, trade and other receivables, trade and other payables, financial derivatives, bank loan and long-term notes.
Categories of Financial Instruments
The estimated fair values of the financial instruments have been determined based on the Company's assessment of available market information. To estimate fair values of its financial instruments, Baytex uses quoted market prices when available, or third-party models and valuation methodologies that use observable market data. Baytex aims to maximize the use of observable inputs, where practical. The fair values of financial instruments, other than financial derivatives, bank loan and long-term notes, are equal to their carrying amounts due to the short-term maturity of these instruments. The fair value of financial derivatives are based on mark-to-market values of the underlying financial derivative contracts. The fair value of the bank loan is based on the principal amount of borrowings outstanding. The fair value of the long-term notes are based on the trading value of the notes.
Fair Value of Financial Instruments
Baytex classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instruments:
• | Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. |
• | Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. |
• | Level 3: Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. |
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The carrying value and fair value of the Company's financial instruments carried on the consolidated statements of financial position are classified into the following categories:
March 31, 2018 | December 31, 2017 | |||||||||||||
Carrying value | Fair value | Carrying value | Fair value | Fair Value Measurement Hierarchy | ||||||||||
Financial Assets | ||||||||||||||
FVTPL(1) | ||||||||||||||
Derivatives | $ | 16,940 | $ | 16,940 | $ | 18,510 | $ | 18,510 | Level 2 | |||||
Total | $ | 16,940 | $ | 16,940 | $ | 18,510 | $ | 18,510 | ||||||
Assets at amortized cost | ||||||||||||||
Trade and other receivables | $ | 110,566 | $ | 110,566 | $ | 112,844 | $ | 112,844 | — | |||||
Total | $ | 110,566 | $ | 110,566 | $ | 112,844 | $ | 112,844 | ||||||
Financial Liabilities | ||||||||||||||
FVTPL(1) | ||||||||||||||
Derivatives | $ | (66,234 | ) | $ | (66,234 | ) | $ | (50,095 | ) | $ | (50,095 | ) | Level 2 | |
Total | $ | (66,234 | ) | $ | (66,234 | ) | $ | (50,095 | ) | $ | (50,095 | ) | ||
Financial liabilities at amortized cost | ||||||||||||||
Trade and other payables | $ | (155,779 | ) | $ | (155,779 | ) | $ | (144,542 | ) | $ | (144,542 | ) | — | |
Bank loan | (211,831 | ) | (212,571 | ) | (212,138 | ) | (213,376 | ) | — | |||||
Long-term notes | (1,510,909 | ) | (1,424,996 | ) | (1,474,184 | ) | (1,430,902 | ) | Level 1 | |||||
Total | $ | (1,878,519 | ) | $ | (1,793,346 | ) | $ | (1,830,864 | ) | $ | (1,788,820 | ) |
(1) FVTPL means fair value through profit or loss.
There were no transfers between Level 1 and Level 2 in 2017 or during the three months ended March 31, 2018.
Foreign Currency Risk
The carrying amount of the Company’s U.S. dollar denominated monetary assets and liabilities at the reporting date are as follows:
Assets | Liabilities | |||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2018 | December 31, 2017 | |||||||||
U.S. dollar denominated | US$49,169 | US$51,665 | US$1,138,165 | US$1,294,615 |
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Commodity Price Risk
Financial Derivative Contracts
Baytex had the following financial derivative contracts outstanding as of May 3, 2018:
Period | Volume | Price/Unit(1) | Index | Fair Value(2) ($ millions) | |||||
Oil | |||||||||
Basis swap | Apr 2018 to Jun 2018 | 2,000 bbl/d | WTI less US$14.23/bbl | WCS | $ | 1.9 | |||
Basis swap | Apr 2018 to Dec 2018 | 6,000 bbl/d | WTI less US$14.24/bbl | WCS | $ | 14.5 | |||
Basis swap (4) | May 2018 to July 2018 | 2,000 bbl/d | WTI less US$17.65/bbl | WCS | $ | — | |||
Fixed - Sell | Apr 2018 to Dec 2018 | 14,000 bbl/d | US$52.31/bbl | WTI | $ | (54.8 | ) | ||
3-way option (3) | Apr 2018 to Dec 2018 | 2,000 bbl/d | US$60.00/US$54.40/US$40.00 | WTI | $ | (3.2 | ) | ||
Fixed - Sell | Apr 2018 to Dec 2018 | 4,000 bbl/d | US$61.31/bbl | Brent | $ | (9.1 | ) | ||
Fixed - Sell (4) | Jan 2019 to Dec 2019 | 2,000 bbl/d | US$61.70/bbl | WTI | $ | — | |||
Swaption (5) | Jan 2019 to Dec 2019 | 2,000 bbl/d | US$59.60/bbl | WTI | $ | (3.8 | ) | ||
Swaption (4)(5) | Jan 2019 to Dec 2019 | 2,000 bbl/d | US$61.70/bbl | WTI | $ | — | |||
3-way option (3) | Jan 2019 to Dec 2019 | 2,000 bbl/d | US$70.00/US$60.00/US$50.00 | WTI | $ | 1.6 | |||
3-way option (3) | Jan 2019 to Dec 2019 | 1,000 bbl/d | US$75.50/US$65.50/US$55.50 | Brent | $ | 0.7 | |||
Fixed - Sell (4) | Jan 2019 to Jun 2019 | 2,000 bbl/d | US$62.85/bbl | WTI | $ | — | |||
Natural Gas | |||||||||
Fixed - Sell | Jan 2018 to Dec 2018 | 15,000 mmbtu/d | US$3.01 | NYMEX | $ | 0.9 | |||
Fixed - Sell | Apr 2018 to Dec 2018 | 5,000 GJ/d | $2.67 | AECO | $ | 1.9 | |||
Total | $ | (49.4 | ) | ||||||
Current asset | 16.9 | ||||||||
Current liability | 65.6 | ||||||||
Non-current liability | $ | 0.7 |
(1) | Based on the weighted average price per unit for the period. |
(2) | Fair values as at March 31, 2018. For the purposes of the table, contracts entered subsequent to March 31, 2018 will have no fair value assigned. |
(3) | Producer 3-way option consists of a sold call, a bought put and a sold put. To illustrate, in a US$60/US$54.40/US$40 contract, Baytex receives WTI plus US$14.40/bbl when WTI is at or below US$40/bbl; Baytex receives US$54.40/bbl when WTI is between US$40/bbl and US$54.40/bbl; Baytex receives the market price when WTI is between US$54.40/bbl and US$60/bbl; and Baytex receives US$60/bbl when WTI is above US$60/bbl. |
(4) | Contracts entered subsequent to March 31, 2018. |
(5) | For these contracts, the counterparty has the right, if exercised on December 31, 2018, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above. |
Financial derivatives are marked-to-market at the end of each reporting period, with the following reflected in the consolidated statements of income or loss:
Three Months Ended March 31 | ||||||
2018 | 2017 | |||||
Realized financial derivatives loss (gain) | $ | 9,841 | $ | (274 | ) | |
Unrealized financial derivatives loss (gain) | 17,709 | (35,614 | ) | |||
Financial derivatives loss (gain) | $ | 27,550 | $ | (35,888 | ) |
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Physical Delivery Contracts
The following physical delivery contracts were held for the purpose of delivery of non-financial items in accordance with the Company's expected sale requirements. Physical delivery contracts are not considered financial instruments, and as a result no asset or liability has been recognized in the consolidated statements of financial position.
Period | Product | Volume | Price/Unit(1) |
Apr 2018 to Dec 2018 | WCS | 2,000 bbl/d | WTI less US$14.00/bbl |
(1) | Based on the weighted average price per unit for the period. |
As at March 31, 2018, Baytex had committed to deliver the following volumes of raw bitumen to market on rail:
Period | Volume | |
Apr 2018 to Dec 2018 | 5,000 bbl/d | |
Apr 2018 | 2,000 bbl/d | |
May 2018 to Dec 2018 | 2,000 bbl/d |
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