Exhibit 99.1
Baytex Energy Corp. Condensed Consolidated Statements of Financial Position
(thousands of Canadian dollars) (unaudited)
| | | | | | | | | | | |
| | As at | |
| Notes | June 30, 2020 | December 31, 2019 |
| | | |
| ASSETS | | | |
| Current assets | | | |
| Cash | | $ | — | | $ | 5,572 | |
| Trade and other receivables | | 101,770 | | 173,762 | |
| Financial derivatives | 17 | 41,906 | | 5,433 | |
| | 143,676 | | 184,767 | |
| Non-current assets | | | |
| Financial derivatives | 17 | 1,393 | | — | |
| Exploration and evaluation assets | 5 | 198,875 | | 320,210 | |
| Oil and gas properties | 6 | 2,888,287 | | 5,387,889 | |
| Other plant and equipment | | 8,523 | | 7,598 | |
| Lease assets | | 11,853 | | 13,619 | |
| Deferred income tax asset | 14 | 15,213 | | — | |
| | $ | 3,267,820 | | $ | 5,914,083 | |
| | | |
| LIABILITIES | | | |
| Current liabilities | | | |
| Trade and other payables | | $ | 167,193 | | $ | 207,454 | |
| Financial derivatives | 17 | 19,825 | | 8,668 | |
| Lease obligations | | 5,919 | | 5,798 | |
| Asset retirement obligations | 9 | 10,948 | | 11,579 | |
| | 203,885 | | 233,499 | |
| Non-current liabilities | | | |
| | | |
| Credit facilities | 7 | 701,770 | | 505,412 | |
| Long-term notes | 8 | 1,208,066 | | 1,328,175 | |
| Lease obligations | | 6,037 | | 8,085 | |
| Asset retirement obligations | 9 | 712,409 | | 656,395 | |
| Deferred income tax liability | | — | | 235,308 | |
| | 2,832,167 | | 2,966,874 | |
| | | |
| SHAREHOLDERS’ EQUITY | | | |
| Shareholders' capital | 10 | 5,726,708 | | 5,718,835 | |
| Contributed surplus | | 14,476 | | 17,712 | |
| Accumulated other comprehensive income | | 676,711 | | 556,224 | |
| Deficit | | (5,982,242) | | (3,345,562) | |
| | 435,653 | | 2,947,209 | |
| | $ | 3,267,820 | | $ | 5,914,083 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(thousands of Canadian dollars, except per common share amounts and weighted average common shares) (unaudited)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 | | Six Months Ended June 30 | |
| Notes | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | |
| Revenue, net of royalties | | | | | |
| Petroleum and natural gas sales | 13 | $ | 152,689 | | $ | 482,000 | | $ | 489,303 | | $ | 935,424 | |
| Royalties | | (29,156) | | (86,617) | | (85,876) | | (167,942) | |
| | 123,533 | | 395,383 | | 403,427 | | 767,482 | |
| | | | | |
| Expenses | | | | | |
| Operating | | 73,680 | | 100,474 | | 178,150 | | 200,766 | |
| Transportation | | 5,031 | | 11,869 | | 15,373 | | 25,199 | |
| Blending and other | | 5,460 | | 20,890 | | 26,817 | | 37,678 | |
| General and administrative | | 7,438 | | 11,506 | | 17,213 | | 25,642 | |
| | | | | |
| Exploration and evaluation | 5 | 1,831 | | 4,685 | | 2,091 | | 6,529 | |
| Depletion and depreciation | | 104,540 | | 185,772 | | 285,926 | | 371,126 | |
| Impairment | 5, 6 | — | | — | | 2,716,349 | | — | |
| Share-based compensation | 11 | 2,993 | | 5,001 | | 5,776 | | 10,844 | |
| Financing and interest | 15 | 30,230 | | 32,541 | | 69,450 | | 65,283 | |
| Financial derivatives loss (gain) | 17 | 55,662 | | (27,666) | | (67,183) | | 6,781 | |
| Foreign exchange (gain) loss | 16 | (45,973) | | (24,679) | | 53,919 | | (52,215) | |
| Gain on dispositions | | (11) | | (1,057) | | (148) | | (1,057) | |
| Other expense (income) | | 24 | | (1,719) | | (2,007) | | (4,306) | |
| | 240,905 | | 317,617 | | 3,301,726 | | 692,270 | |
| Net income (loss) before income taxes | | (117,372) | | 77,766 | | (2,898,299) | | 75,212 | |
| Income tax expense (recovery) | 14 | | | | |
| Current income tax expense | | 89 | | 495 | | 558 | | 1,090 | |
| Deferred income tax expense (recovery) | | 21,002 | | (1,555) | | (262,177) | | (16,040) | |
| | 21,091 | | (1,060) | | (261,619) | | (14,950) | |
| Net income (loss) | | $ | (138,463) | | $ | 78,826 | | $ | (2,636,680) | | $ | 90,162 | |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustment | | (53,452) | | (45,395) | | 120,487 | | (93,189) | |
| Comprehensive income (loss) | | $ | (191,915) | | $ | 33,431 | | $ | (2,516,193) | | $ | (3,027) | |
| | | | | |
| Net income (loss) per common share | 12 | | | | |
| Basic | | $ | (0.25) | | $ | 0.14 | | $ | (4.71) | | $ | 0.16 | |
| Diluted | | $ | (0.25) | | $ | 0.14 | | $ | (4.71) | | $ | 0.16 | |
| | | | | |
| Weighted average common shares (000's) | 12 | | | | |
| Basic | | 560,512 | | 556,599 | | 560,158 | | 556,022 | |
| Diluted | | 560,512 | | 560,685 | | 560,158 | | 559,972 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Statements of Changes in Equity
(thousands of Canadian dollars) (unaudited)
| | | | | | | | | | | | | | | | | | | | |
| Notes | Shareholders’
capital | Contributed
surplus | Accumulated other comprehensive income | Deficit | Total equity |
| Balance at December 31, 2018 | | $ | 5,701,516 | | $ | 19,137 | | $ | 667,874 | | $ | (3,333,103) | | $ | 3,055,424 | |
| | | | | | |
| | | | | | |
| Vesting of share awards | | 10,373 | | (10,373) | | — | | — | | — | |
| Share-based compensation | | — | | 10,844 | | — | | — | | 10,844 | |
| Comprehensive income (loss) | | — | | — | | (93,189) | | 90,162 | | (3,027) | |
| Balance at June 30, 2019 | | $ | 5,711,889 | | $ | 19,608 | | $ | 574,685 | | $ | (3,242,941) | | $ | 3,063,241 | |
| Balance at December 31, 2019 | | $ | 5,718,835 | | $ | 17,712 | | $ | 556,224 | | $ | (3,345,562) | | $ | 2,947,209 | |
| | | | | | |
| | | | | | |
| Vesting of share awards | 10 | 7,873 | | (7,873) | | — | | — | | — | |
| Share-based compensation | 11 | — | | 4,637 | | — | | — | | 4,637 | |
| Comprehensive income (loss) | | — | | — | | 120,487 | | (2,636,680) | | (2,516,193) | |
| Balance at June 30, 2020 | | $ | 5,726,708 | | $ | 14,476 | | $ | 676,711 | | $ | (5,982,242) | | $ | 435,653 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Statements of Cash Flows
(thousands of Canadian dollars) (unaudited)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 | | Six Months Ended June 30 | |
| Notes | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | |
| CASH PROVIDED BY (USED IN): | | | | | |
| Operating activities | | | | | |
| Net income (loss) for the period | | $ | (138,463) | | $ | 78,826 | | $ | (2,636,680) | | $ | 90,162 | |
| Adjustments for: | | | | | |
| Share-based compensation | 11 | 2,375 | | 5,001 | | 4,637 | | 10,844 | |
| Unrealized foreign exchange (gain) loss | 16 | (45,516) | | (25,318) | | 54,005 | | (52,259) | |
| Exploration and evaluation | 5 | 1,831 | | 4,685 | | 2,091 | | 6,529 | |
| Depletion and depreciation | | 104,540 | | 185,772 | | 285,926 | | 371,126 | |
| Impairment | 5, 6 | — | | — | | 2,716,349 | | — | |
| Non-cash financing, accretion, and early redemption expense | 15 | 2,843 | | 4,449 | | 13,528 | | 9,007 | |
| Unrealized financial derivatives loss (gain) | 17 | 69,286 | | (14,673) | | (26,709) | | 38,588 | |
| Gain on dispositions | | (11) | | (1,057) | | (148) | | (1,057) | |
| Deferred income tax expense (recovery) | 14 | 21,002 | | (1,555) | | (262,177) | | (16,040) | |
| | | | | |
| Asset retirement obligations settled | 9 | (628) | | (4,798) | | (4,869) | | (9,726) | |
| Change in non-cash working capital | | 8,565 | | 16,253 | | 62,438 | | (42,224) | |
| | 25,824 | | 247,585 | | 208,391 | | 404,950 | |
| | | | | |
| Financing activities | | | | | |
| Increase (decrease) in credit facilities | | 31,426 | | (136,366) | | 187,347 | | (104,754) | |
| | | | | |
| Payments on lease obligations | | (1,468) | | (1,623) | | (2,984) | | (3,012) | |
| Net proceeds from issuance of long-term notes | 8 | — | | — | | 652,150 | | — | |
| Redemption of long-term notes | 8 | — | | — | | (833,672) | | — | |
| | 29,958 | | (137,989) | | 2,841 | | (107,766) | |
| | | | | |
| Investing activities | | | | | |
| Additions to exploration and evaluation assets | 5 | (72) | | (269) | | (3,860) | | (1,394) | |
| Additions to oil and gas properties | 6 | (9,780) | | (105,977) | | (182,769) | | (258,695) | |
| Additions to other plant and equipment | | (1,375) | | (314) | | (1,987) | | (379) | |
| Property acquisitions | | — | | (2,597) | | — | | (2,597) | |
| | | | | |
| Proceeds from dispositions | | 11 | | 950 | | 51 | | 950 | |
| Change in non-cash working capital | | (44,566) | | (1,389) | | (28,239) | | (35,069) | |
| | (55,782) | | (109,596) | | (216,804) | | (297,184) | |
| | | | | |
| Change in cash | | — | | — | | (5,572) | | — | |
| Cash, beginning of period | | — | | — | | 5,572 | | — | |
| Cash, end of period | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | |
| Supplementary information | | | | | |
| Interest paid | | $ | 29,183 | | $ | 34,143 | | $ | 51,780 | | $ | 56,179 | |
| Income taxes paid | | $ | — | | $ | 1,082 | | $ | — | | $ | 1,082 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Notes to the Condensed Consolidated Interim Financial Statements
For the periods ended June 30, 2020 and 2019
(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.
2.BASIS OF PRESENTATION
The condensed consolidated interim 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 consolidated financial statements as at and for the year ended December 31, 2019.
The consolidated financial statements were approved by the Board of Directors of Baytex on July 29, 2020.
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. References to “US$” are to United States ("U.S.") dollars. All financial information is rounded to the nearest thousand, except per share amounts or when otherwise indicated.
The audited consolidated financial statements of the Company as at and for the year ended December 31, 2019 are available through its filings on SEDAR at www.sedar.com and through the U.S. Securities and Exchange Commission at www.sec.gov.
3.SIGNIFICANT ACCOUNTING POLICIES
The accounting policies, critical accounting judgments and significant estimates used in preparation of the 2019 annual financial statements have been applied in the preparation of these consolidated financial statements, except for the adoption of amendments to IFRS 3 Business Combinations as described below.
Current environment and estimation uncertainty
Management makes judgements and assumptions about the future in deriving estimates used in preparation of these consolidated financial statements in accordance with IFRS. Sources of estimation uncertainty include estimates used to determine economically recoverable oil, natural gas, and natural gas liquids reserves, the recoverable amount of long-lived assets or cash generating units, the fair value of financial derivatives, the provision for asset retirement obligations and the provision for income taxes and the related deferred tax assets and liabilities.
In March 2020, the World Health Organization declared a global pandemic related to the novel coronavirus disease 2019 ("COVID-19"). The emergence of COVID-19 and the steps taken by governments to control the spread of the virus has resulted in significant instability in the global economy. The North American oil and gas industry has been particularly impacted as restrictions attempting to limit the spread of COVID-19 have resulted in a sharp decline in demand for crude oil combined with additional supply from the OPEC+ price war have resulted in unprecedented volatility in global crude oil prices. Global crude oil prices began to recover in Q2/2020 as members of OPEC+ agreed to production curtailments and governments began to ease restrictions that allowed economies to begin reopening. While these factors have resulted in recent improvements in crude oil prices the outlook for our industry remains uncertain due to the ongoing spread of COVID-19.
These factors have impacted our results for the six months ended June 30, 2020. At March 31, 2020, we recorded a total impairment of $2.7 billion which included amounts related to our exploration and evaluation assets (note 5) and oil and gas properties (note 6). There is potential for further impairments or reversal of impairments over the balance of 2020 due to the current volatility in forecasted prices for the commodities we produce. In the current environment, assumptions and estimates regarding future commodity prices, the amount of economically recoverable reserves, exchange rates, and interest rates are subject to greater variability than normal. Actual results may differ from these estimates as the effect of future events cannot be determined with certainty.
We have taken action to protect our financial liquidity in response to the recent volatility in commodity prices and instability in the global economy. We have reduced our planned capital expenditures and have reduced production of oil and natural gas when commodity prices do not support economic production. Production could be further reduced or restarted in response to further changes in the commodity price environment. We currently have $363.0 million of availability on our credit facilities and are currently forecasting to remain in compliance with the financial covenants applicable to our credit facilities through at least December 31, 2021 based on current forward commodity prices.
Business Combinations
Baytex adopted amendments to IFRS 3 Business Combinations effective January 1, 2020, which will be applied prospectively to acquisitions that occur on or after January 1, 2020. These amendments did not result in changes to the Company's accounting policies for applying the acquisition method but could result in future acquisitions being accounted for as an asset acquisition as opposed to a business combination.
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 U.S.; and
•Corporate includes corporate activities and items not allocated between operating segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | U.S. | | Corporate | | Consolidated | |
| Three Months Ended June 30 | 2020 | | 2019 | 2020 | | 2019 | 2020 | | 2019 | 2020 | | 2019 |
| | | | | | | | |
| Revenue, net of royalties | | | | | | | | |
| Petroleum and natural gas sales | $ | 73,325 | | $ | 294,698 | | $ | 79,364 | | $ | 187,302 | | $ | — | | $ | — | | $ | 152,689 | | $ | 482,000 | |
| Royalties | (6,157) | | (30,936) | | (22,999) | | (55,681) | | — | | — | | (29,156) | | (86,617) | |
| 67,168 | | 263,762 | | 56,365 | | 131,621 | | — | | — | | 123,533 | | 395,383 | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Operating | 49,162 | | 73,877 | | 24,518 | | 26,597 | | — | | — | | 73,680 | | 100,474 | |
| Transportation | 5,031 | | 11,869 | | — | | — | | — | | — | | 5,031 | | 11,869 | |
| Blending and other | 5,460 | | 20,890 | | — | | — | | — | | — | | 5,460 | | 20,890 | |
| General and administrative | — | | — | | — | | — | | 7,438 | | 11,506 | | 7,438 | | 11,506 | |
| | | | | | | | |
| Exploration and evaluation | 1,831 | | 4,685 | | — | | — | | — | | — | | 1,831 | | 4,685 | |
| Depletion and depreciation | 57,650 | | 116,325 | | 44,972 | | 68,907 | | 1,918 | | 540 | | 104,540 | | 185,772 | |
| | | | | | | | |
| Share-based compensation | — | | — | | — | | — | | 2,993 | | 5,001 | | 2,993 | | 5,001 | |
| Financing and interest | — | | — | | — | | — | | 30,230 | | 32,541 | | 30,230 | | 32,541 | |
| Financial derivatives loss (gain) | — | | — | | — | | — | | 55,662 | | (27,666) | | 55,662 | | (27,666) | |
| Foreign exchange gain | — | | — | | — | | — | | (45,973) | | (24,679) | | (45,973) | | (24,679) | |
| Gain on dispositions | (11) | | (1,057) | | — | | — | | — | | — | | (11) | | (1,057) | |
| Other expense (income) | — | | — | | — | | — | | 24 | | (1,719) | | 24 | | (1,719) | |
| 119,123 | | 226,589 | | 69,490 | | 95,504 | | 52,292 | | (4,476) | | 240,905 | | 317,617 | |
| Net income (loss) before income taxes | (51,955) | | 37,173 | | (13,125) | | 36,117 | | (52,292) | | 4,476 | | (117,372) | | 77,766 | |
| Income tax expense (recovery) | | | | | | | | |
| Current income tax expense | — | | — | | 89 | | 495 | | — | | — | | 89 | | 495 | |
| Deferred income tax expense (recovery) | 6,421 | | (140) | | 21,002 | | 2,014 | | (6,421) | | (3,429) | | 21,002 | | (1,555) | |
| 6,421 | | (140) | | 21,091 | | 2,509 | | (6,421) | | (3,429) | | 21,091 | | (1,060) | |
| Net income (loss) | $ | (58,376) | | $ | 37,313 | | $ | (34,216) | | $ | 33,608 | | $ | (45,871) | | $ | 7,905 | | $ | (138,463) | | $ | 78,826 | |
| | | | | | | | |
Total oil and natural gas capital expenditures(1) | $ | 2,918 | | $ | 69,906 | | $ | 6,923 | | $ | 37,987 | | $ | — | | $ | — | | $ | 9,841 | | $ | 107,893 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | U.S. | | Corporate | | Consolidated | |
| Six Months Ended June 30 | 2020 | | 2019 | 2020 | | 2019 | 2020 | | 2019 | 2020 | | 2019 |
| | | | | | | | |
| Revenue, net of royalties | | | | | | | | |
| Petroleum and natural gas sales | $ | 268,169 | | $ | 558,737 | | $ | 221,134 | | $ | 376,687 | | $ | — | | $ | — | | $ | 489,303 | | $ | 935,424 | |
| Royalties | (21,675) | | (56,120) | | (64,201) | | (111,822) | | — | | — | | (85,876) | | (167,942) | |
| 246,494 | | 502,617 | | 156,933 | | 264,865 | | — | | — | | 403,427 | | 767,482 | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Operating | 128,084 | | 147,979 | | 50,066 | | 52,787 | | — | | — | | 178,150 | | 200,766 | |
| Transportation | 15,373 | | 25,199 | | — | | — | | — | | — | | 15,373 | | 25,199 | |
| Blending and other | 26,817 | | 37,678 | | — | | — | | — | | — | | 26,817 | | 37,678 | |
| General and administrative | — | | — | | — | | — | | 17,213 | | 25,642 | | 17,213 | | 25,642 | |
| | | | | | | | |
| Exploration and evaluation | 2,091 | | 6,529 | | — | | — | | — | | — | | 2,091 | | 6,529 | |
| Depletion and depreciation | 180,398 | | 231,345 | | 101,642 | | 138,731 | | 3,886 | | 1,050 | | 285,926 | | 371,126 | |
| Impairment | 1,855,000 | | — | | 861,349 | | — | | — | | — | | 2,716,349 | | — | |
| Share-based compensation | — | | — | | — | | — | | 5,776 | | 10,844 | | 5,776 | | 10,844 | |
| Financing and interest | — | | — | | — | | — | | 69,450 | | 65,283 | | 69,450 | | 65,283 | |
| Financial derivatives (gain) loss | — | | — | | — | | — | | (67,183) | | 6,781 | | (67,183) | | 6,781 | |
| Foreign exchange loss (gain) | — | | — | | — | | — | | 53,919 | | (52,215) | | 53,919 | | (52,215) | |
| Gain on dispositions | (148) | | (1,057) | | — | | — | | — | | — | | (148) | | (1,057) | |
| Other income | — | | — | | — | | — | | (2,007) | | (4,306) | | (2,007) | | (4,306) | |
| 2,207,615 | | 447,673 | | 1,013,057 | | 191,518 | | 81,054 | | 53,079 | | 3,301,726 | | 692,270 | |
| Net income (loss) before income taxes | (1,961,121) | | 54,944 | | (856,124) | | 73,347 | | (81,054) | | (53,079) | | (2,898,299) | | 75,212 | |
| Income tax expense (recovery) | | | | | | | | |
| Current income tax expense | 469 | | — | | 89 | | 1,090 | | — | | — | | 558 | | 1,090 | |
| Deferred income tax (recovery) expense | (85,276) | | 4,108 | | (164,994) | | 4,708 | | (11,907) | | (24,856) | | (262,177) | | (16,040) | |
| (84,807) | | 4,108 | | (164,905) | | 5,798 | | (11,907) | | (24,856) | | (261,619) | | (14,950) | |
| Net income (loss) | $ | (1,876,314) | | $ | 50,836 | | $ | (691,219) | | $ | 67,549 | | $ | (69,147) | | $ | (28,223) | | $ | (2,636,680) | | $ | 90,162 | |
| | | | | | | | |
Total oil and natural gas capital expenditures(1) | $ | 125,989 | | $ | 174,776 | | $ | 60,589 | | $ | 86,960 | | $ | — | | $ | — | | $ | 186,578 | | $ | 261,736 | |
(1) Includes acquisitions and property swaps, net of proceeds from divestitures.
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| Canadian assets | $ | 1,571,844 | | $ | 3,484,123 | |
| U.S. assets | 1,632,301 | | 2,403,310 | |
| Corporate assets | 63,675 | | 26,650 | |
| Total consolidated assets | $ | 3,267,820 | | $ | 5,914,083 | |
5. EXPLORATION AND EVALUATION ASSETS
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| Balance, beginning of period | $ | 320,210 | | $ | 358,935 | |
| Capital expenditures | 3,860 | | 2,948 | |
| | |
| Property acquisitions | — | | 1,523 | |
| Divestitures | — | | (443) | |
| Property swaps | 479 | | 417 | |
| Impairment | (127,861) | | (7,822) | |
| Exploration and evaluation expense | (2,091) | | (11,764) | |
| Transfer to oil and gas properties (note 6) | (3,689) | | (16,204) | |
| Foreign currency translation | 7,967 | | (7,380) | |
| Balance, end of period | $ | 198,875 | | $ | 320,210 | |
At June 30, 2020, there were no indicators of impairment or impairment reversal for exploration and evaluation assets in any of the Company's CGUs.
At March 31, 2020, the Company identified indicators of impairment for the exploration and evaluation assets within each of its six CGUs. The estimated recoverable amount was below the carrying value of the exploration and evaluation assets in the Conventional, Peace River, Lloydminster, Viking, and Eagle Ford CGUs and an impairment of $127.9 million was recorded as at March 31, 2020. The recoverable amount of each CGU was based on its fair value less costs of disposal ("FVLCD") and was estimated with reference to arm's length transactions in comparable locations and the discounted cash flows associated with the Company's future development plans. The following table indicates the impairment booked for each CGU at March 31, 2020.
| | | | | |
| Impairment |
| Conventional CGU | $ | 4,000 | |
| Peace River CGU | 20,000 | |
| Lloydminster CGU | 42,000 | |
| Viking CGU | 13,000 | |
| Eagle Ford CGU | 48,861 | |
| $ | 127,861 | |
At December 31, 2019, the Company identified indicators of impairment for the exploration and evaluation assets within the Peace River CGU. The estimated recoverable amount was below the carrying value of the exploration and evaluation assets in the Peace River CGU and an impairment of $7.8 million was recorded as at December 31, 2019. There were no indicators of impairment for exploration and evaluation assets in the remaining CGUs at December 31, 2019.
6. OIL AND GAS PROPERTIES
| | | | | | | | | | | |
| Cost | Accumulated
depletion | Net book value |
| Balance, December 31, 2018 | $ | 10,744,533 | | $ | (4,926,644) | | $ | 5,817,889 | |
| Capital expenditures | 549,343 | | — | | 549,343 | |
| | | |
| Property acquisitions | 2,636 | | — | | 2,636 | |
| Transfers from exploration and evaluation assets (note 5) | 16,204 | | — | | 16,204 | |
| | | |
| Change in asset retirement obligations (note 9) | 23,894 | | — | | 23,894 | |
| Divestitures | (2,069) | | 1,690 | | (379) | |
| Property swaps | 1,773 | | — | | 1,773 | |
| Impairment | — | | (180,000) | | (180,000) | |
| Foreign currency translation | (208,017) | | 89,813 | | (118,204) | |
| Depletion | — | | (725,267) | | (725,267) | |
| Balance, December 31, 2019 | $ | 11,128,297 | | $ | (5,740,408) | | $ | 5,387,889 | |
| Capital expenditures | 182,769 | | — | | 182,769 | |
| | | |
| Transfers from exploration and evaluation assets (note 5) | 3,689 | | — | | 3,689 | |
| | | |
| Change in asset retirement obligations (note 9) | 54,155 | | — | | 54,155 | |
| | | |
| Property swaps | (1,190) | | 178 | | (1,012) | |
| Impairment | — | | (2,588,488) | | (2,588,488) | |
| Foreign currency translation | 194,643 | | (63,318) | | 131,325 | |
| Depletion | — | | (282,040) | | (282,040) | |
| Balance, June 30, 2020 | $ | 11,562,363 | | $ | (8,674,076) | | $ | 2,888,287 | |
At June 30, 2020, there were no indicators of impairment or impairment reversal for oil and gas properties in any of the Company's CGUs.
At March 31, 2020, the Company identified indicators of impairment for each of its six CGUs due to a significant decline in forecasted commodity prices. The recoverable amount was not sufficient to support the carrying amount which resulted in an impairment of $2.6 billion recorded at March 31, 2020. The recoverable amount of each CGU was based on its FVLCD which was estimated using a discounted cash flow model of proved plus probable cash flows from an independent reserve report prepared as at December 31, 2019 and was adjusted for operations between December 31, 2019 and March 31, 2020. The after-tax discount rates applied to the cash flows were between 8% and 14%.
The recoverable amount of the Company's CGUs were calculated at March 31, 2020 using the following benchmark reference prices for the years 2020 to 2029 adjusted for commodity differentials specific to the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 |
| WTI crude oil (US$/bbl) | 29.17 | | 40.45 | | 49.17 | | 53.28 | | 55.66 | | 56.87 | | 58.01 | | 59.17 | | 60.35 | | 61.56 | |
| WCS heavy oil (CA$/bbl) | 19.21 | | 34.65 | | 46.34 | | 51.25 | | 54.28 | | 55.72 | | 56.96 | | 58.22 | | 59.51 | | 60.82 | |
| LLS crude oil (US$/bbl) | 32.17 | | 43.80 | | 52.55 | | 56.68 | | 59.10 | | 60.35 | | 61.52 | | 62.72 | | 63.94 | | 65.19 | |
| Edmonton par oil (CA$/bbl) | 29.22 | | 46.85 | | 59.27 | | 65.02 | | 68.43 | | 69.81 | | 71.24 | | 72.70 | | 74.19 | | 75.71 | |
| Henry Hub gas (US$/mmbtu) | 2.10 | | 2.58 | | 2.79 | | 2.86 | | 2.93 | | 3.00 | | 3.07 | | 3.13 | | 3.19 | | 3.25 | |
| AECO gas (CA$/mmbtu) | 1.74 | | 2.20 | | 2.38 | | 2.45 | | 2.53 | | 2.60 | | 2.66 | | 2.72 | | 2.79 | | 2.85 | |
| Exchange rate (CAD/USD) | 1.41 | | 1.37 | | 1.34 | | 1.34 | | 1.34 | | 1.33 | | 1.33 | | 1.33 | | 1.33 | | 1.33 | |
This data is combined with assumptions relating to long-term prices, inflation rates and exchange rates together with estimates of transportation costs and pricing of competing fuels to forecast long-term energy prices, consistent with external sources of information. The prices and costs subsequent to 2029 have been adjusted for inflation at an annual rate of 2.0%.
The following table demonstrates the sensitivity of the estimated recoverable amount of the Company's CGUs to reasonably possible changes in key assumptions inherent in the estimate.
| | | | | | | | | | | | | | | | | |
| Recoverable amount | Impairment | Change in discount rate of 1% | Change in oil price of $2.50/bbl | Change in gas price of $0.25/mcf |
| Conventional CGU | $ | 37,444 | | $ | 41,000 | | $ | 3,000 | | $ | 3,500 | | $ | 8,500 | |
| Peace River CGU | 109,631 | | 345,000 | | 9,500 | | 53,500 | | 3,000 | |
| Lloydminster CGU | 227,967 | | 470,000 | | 25,000 | | 69,500 | | — | |
| Duvernay CGU | 61,197 | | 5,000 | | 5,500 | | 9,500 | | 1,500 | |
| Viking CGU | 962,134 | | 915,000 | | 57,000 | | 123,000 | | 4,000 | |
| Eagle Ford CGU | 1,576,423 | | 812,488 | | 120,750 | | 141,500 | | 32,000 | |
| $ | 2,974,796 | | $ | 2,588,488 | | $ | 220,750 | | $ | 400,500 | | $ | 49,000 | |
At December 31, 2019, the Company identified indicators of impairment for its Peace River CGU due to a sustained decline in Canadian heavy oil prices and a reduction in planned exploration and development expenditures related to thermal properties in the Peace River CGU. The recoverable amount of the Peace River CGU was based on its value-in-use ("VIU") which was estimated using a discounted cash flow model using proved plus probable cash flows from an independent reserve report prepared as at December 31,2019 and an after-tax discount rate of 11%. The recoverable amount was not sufficient to support the carrying amount of the CGU which resulted in an impairment of $180.0 million recorded as at December 31, 2019. There were no indicators of impairment or impairment reversal for the remaining CGUs as at December 31, 2019.
7. CREDIT FACILITIES
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
Credit facilities - U.S. dollar denominated(1) | $ | 153,730 | | $ | 206,144 | |
| Credit facilities - Canadian dollar denominated | 550,405 | | 300,327 | |
| Credit facilities - principal | 704,135 | | 506,471 | |
| Unamortized debt issuance costs | (2,365) | | (1,059) | |
| Credit facilities | $ | 701,770 | | $ | 505,412 | |
(1)U.S. dollar denominated credit facilities balance was US$112.9 million as at June 30, 2020 (December 31, 2019 - US$159.0 million).
Baytex has US$575 million of revolving credit facilities (the "Revolving Facilities") and a $300 million non-revolving secured term loan (the "Term Loan") (collectively the "Credit Facilities"). On March 3, 2020, Baytex amended its Credit Facilities to extend maturity from April 2, 2021 to April 2, 2024. These facilities will automatically be extended to June 4, 2024 providing Baytex has either refinanced, or has the ability to repay, the outstanding 2024 long-term notes with existing credit capacity as of April 1, 2024.
The extendible secured Revolving Facilities are comprised of a US$50 million operating loan and a US$325 million syndicated revolving loan for Baytex and a US$200 million syndicated revolving loan for Baytex's wholly-owned subsidiary, Baytex Energy USA, Inc. The $300 million Term Loan is secured by the assets of Baytex's wholly-owned subsidiary, Baytex Energy Limited Partnership.
The Credit Facilities are not borrowing base facilities and do not require annual or semi-annual reviews. The Credit Facilities contain standard commercial covenants in addition to the financial covenants detailed below. There are no mandatory principal payments required prior to maturity which could be extended upon Baytex's request. Advances (including letters of credit) under the Credit 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 breaches any of the covenants under the Credit 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 June 30, 2020, Baytex had $15.8 million of outstanding letters of credit (December 31, 2019 - $15.2 million) under the Credit Facilities.
At June 30, 2020, Baytex was in compliance with all of the covenants contained in the Credit Facilities and is forecasting compliance with these covenants through at least December 31, 2021 based on current forward commodity prices. A decrease or a sustained period of low commodity prices may result in non-compliance with our financial covenants and reduced liquidity on our existing credit facilities. Non-compliance with the financial covenants in our credit facilities could result in our debt becoming due and payable on demand. If we anticipate non-compliance we will pro-actively approach our lending syndicate to amend the credit facilities to maintain their availability. There is no certainty that we will be successful in negotiating such amendments. The following table summarizes the financial covenants applicable to the Credit Facilities and Baytex's compliance therewith as at June 30, 2020.
| | | | | | | | |
| Covenant Description | Position as at June 30, 2020 | Covenant |
Senior Secured Debt(1) to Bank EBITDA(2) (Maximum Ratio) | 1.0:1.0 | 3.5:1.0 |
Interest Coverage(3) (Minimum Ratio) | 6.6:1.0 | 2.0:1.0 |
(1)"Senior Secured Debt" is defined as the principal amount of the credit facilities and other secured obligations identified in the credit agreement. As at June 30, 2020, the Company's Senior Secured Debt totaled $719.9 million which includes $704.1 million of principal amounts outstanding and $15.8 million of letters of credit.
(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 expense, income tax, non-recurring losses, certain specific unrealized and non-cash transactions (including depletion, depreciation, exploration and evaluation expense, impairment, deferred income tax expense or recovery, unrealized gains and losses on financial derivatives and foreign exchange, and share-based compensation) and is calculated based on a trailing twelve month basis including the impact of material acquisitions as if they had occurred at the beginning of the twelve month period. Bank EBITDA for the twelve months ended June 30, 2020 was $704.4 million.
(3)"Interest Coverage" is computed as the ratio of Bank EBITDA to financing and interest expense, excluding accretion of debt issue costs and asset retirement obligations, and is calculated on a trailing twelve month basis. Financing and interest expense, excluding accretion of debt issue costs and asset retirement obligations, for the twelve months ended June 30, 2020 was $106.5 million.
8. LONG-TERM NOTES
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| 5.125% notes (US$400,000 – principal) due June 1, 2021 | $ | — | | $ | 518,600 | |
| 6.625% notes ($300,000 – principal) due July 19, 2022 | — | | 300,000 | |
| 5.625% notes (US$400,000 – principal) due June 1, 2024 | 544,620 | | 518,600 | |
| 8.75% notes (US$500,000 – principal) due April 1, 2027 | 680,775 | | — | |
Total long-term notes - principal(1) | 1,225,395 | | 1,337,200 | |
| Unamortized debt issuance costs | (17,329) | | (9,025) | |
| Total long-term notes - net of unamortized debt issuance costs | $ | 1,208,066 | | $ | 1,328,175 | |
(1)The decrease in the principal amount of long-term notes outstanding from December 31, 2019 to June 30, 2020 is the result of principal repayments of $830.4 million, the issuance of $664.7 million aggregate principal amount and changes in the reported amount of U.S. dollar denominated debt of $53.8 million.
On February 5, 2020, Baytex issued US$500 million aggregate principal amount of senior unsecured notes due April 1, 2027 bearing interest at a rate of 8.75% per annum payable semi-annually (the "8.75% Senior Notes"). The 8.75% Senior Notes are redeemable at Baytex's option, in whole or in part, at specified redemption prices after April 1, 2023 and will be redeemable at par from April 1, 2026 to maturity. Transaction costs of $12.5 million were incurred in conjunction with the issuance which resulted in net proceeds of $652.2 million.
On February 20, 2020, Baytex used a portion of the net proceeds from the issuance of the 8.75% Senior Notes to complete the early redemption of the US$400 million principal amount of the 5.125% senior unsecured notes due June 1, 2021 at par plus accrued interest. The principal payment was $530.4 million.
On March 5, 2020, Baytex completed the early redemption of the $300 million principal amount of the 6.625% senior unsecured notes due July 19, 2022 at 101.104% of the principal amount, plus accrued interest. The principal payment was $300.0 million plus early redemption expense of $3.3 million.
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 Credit Facilities and long-term notes unless the Company maintains a minimum coverage ratio (computed as the ratio of Bank EBITDA (as defined in note 7) to financing and interest expense on a trailing twelve month basis) of 2.00:1.00. At June 30, 2020, the fixed charge coverage ratio was 6.2:1.0.
9. ASSET RETIREMENT OBLIGATIONS
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| Balance, beginning of period | $ | 667,974 | | $ | 646,898 | |
| Liabilities incurred | 10,362 | | 21,748 | |
| Liabilities settled | (4,869) | | (15,417) | |
| | |
| Liabilities acquired from property acquisitions | — | | 1,648 | |
| Liabilities divested | (116) | | (1,331) | |
| Property swaps | (514) | | 792 | |
| Accretion (note 15) | 5,109 | | 13,713 | |
| Change in estimate | (3,978) | | 19,632 | |
Changes in discount rates and inflation rates(1) | 47,771 | | (17,486) | |
| Foreign currency translation | 1,618 | | (2,223) | |
| Balance, end of period | $ | 723,357 | | $ | 667,974 | |
| Less current portion of asset retirement obligations | 10,948 | | 11,579 | |
| Non-current portion of asset retirement obligations | $ | 712,409 | | $ | 656,395 | |
(1) The discount and inflation rates at June 30, 2020 were both 1.0%, compared to 1.8% and 1.4%, respectively, at December 31, 2019.
10. SHAREHOLDERS' CAPITAL
The authorized capital of Baytex consists of an unlimited number of common shares without nominal or par value and 10.0 million preferred shares without nominal or par value, issuable in series. Baytex establishes the rights and terms of the preferred shares upon issuance. At June 30, 2020, 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 meeting 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, 2018 | 554,060 | | $ | 5,701,516 | |
| Vesting of share awards | 4,245 | | 17,319 | |
| | |
| | |
| Balance, December 31, 2019 | 558,305 | | $ | 5,718,835 | |
| Vesting of share awards | 2,240 | | 7,873 | |
| Balance, June 30, 2020 | 560,545 | | $ | 5,726,708 | |
11. SHARE AWARD INCENTIVE PLAN
The Company recorded compensation expense related to the share awards of $3.0 million and $5.8 million for the three and six months ended June 30, 2020 ($5.0 million and $10.8 million for the three and six months ended June 30, 2019) which includes $0.6 million and $1.1 million of cash compensation expense related to the incentive award plan and the associated equity total return swaps.
Share Award Plans
Baytex has a share award plan pursuant to which it issues restricted and performance awards. A restricted award entitles the holder of each award to receive one common share of Baytex at the time of vesting. A performance award entitles the holder of each award to receive between zero and two common shares on vesting; the number of common shares issued is determined by a multiplier. The multiplier, which ranges between zero and two, is calculated based on a number of factors determined and approved by the Board of Directors on an annual basis. The restricted awards and performance awards vest in equal tranches on the first, second and third anniversaries of the grant date.
The weighted average fair value of share awards granted was $1.48 per restricted and performance award for the six months ended June 30, 2020 ($2.65 per restricted and performance award for the six months ended June 30, 2019).
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, 2018 | 3,243 | | 3,273 | | 6,516 | |
| Granted | 3,184 | | 3,245 | | 6,429 | |
| | | |
| Vested and converted to common shares | (2,081) | | (2,164) | | (4,245) | |
| Forfeited | (545) | | (1,219) | | (1,764) | |
| Balance, December 31, 2019 | 3,801 | | 3,135 | | 6,936 | |
| Granted | 2,239 | | 3,253 | | 5,492 | |
| Vested and converted to common shares | (1,378) | | (862) | | (2,240) | |
| Forfeited | (137) | | (185) | | (322) | |
| Balance, June 30, 2020 | 4,525 | | 5,341 | | 9,866 | |
(1) Based on underlying awards before applying the payout multiplier which can range from 0x to 2x.
Incentive Award Plan
Baytex has a cash-settled incentive award plan (the "Incentive Award" plan) whereby the holder of each incentive award is entitled to receive a cash payment equal to the value of one Baytex common share at the time of vesting. The incentive awards vest in equal tranches on the first, second and third anniversaries of the grant date. The cumulative expense is recognized at fair value at each period end and is included in trade and other payables.
The Company uses equity total return swaps ("Equity TRS") on the equivalent number of Baytex common shares in order to fix the aggregate cost of the Incentive Award plan at the fair value determined on the grant date. The cumulative expense is recognized at fair value each period with realized gains or losses included in share-based compensation expense and unrealized gains or losses included in unrealized financial derivatives gain or loss. The carrying value of the financial derivatives includes the fair value of the Equity TRS which was a liability of $1.7 million on June 30, 2020.
During the three and six months ended June 30, 2020, Baytex granted 2.9 million awards under the Incentive Award plan at a fair value of $1.50 per award.
Share Options
Baytex assumed share option plans pursuant to a business combination in 2018. No new grants will be made under the option plans.
The Company accounts for share options using the fair value method. Under this method, compensation is expensed over the vesting period for the share options, with a corresponding increase to contributed surplus.
Share options granted under the option plans had a maximum term of 3.5 years to expiry. One third of the options granted vest on each of the first, second, and third anniversaries of the date of grant. The following tables summarize the information about the share options.
| | | | | | | | |
| Number of options (000s) | Weighted average
exercise price |
| Balance, December 31, 2018 | 4,865 | | $ | 6.70 | |
| Forfeited/Expired | (2,390) | | 6.56 | |
| Balance, December 31, 2019 | 2,475 | | $ | 6.83 | |
| Forfeited/Expired | (1,385) | | 7.25 | |
| Balance, June 30, 2020 | 1,090 | | $ | 6.30 | |
| | | | | | | | | | | | | | | | | |
| Options Outstanding | | | Options Exercisable | |
| Exercise price | Number outstanding at June 30, 2020 (000s) | Weighted average remaining life (years) | Weighted average exercise price | Number exercisable at June 30, 2020 (000s) | Weighted average exercise price |
| $5.00 - $7.00 | 1,090 | | 0.40 | | $ | 6.30 | | 998 | | $ | 6.39 | |
| | | | | |
| Total | 1,090 | | 0.40 | | $ | 6.30 | | 998 | | $ | 6.39 | |
12. NET INCOME (LOSS) PER SHARE
Baytex calculates basic income or loss 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 or loss per share amounts reflect the potential dilution that could occur if share awards and share options were converted to common shares. The treasury stock method is used to determine the dilutive effect of share awards and share options whereby the potential conversion of share awards and share options 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 period.
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | | | | |
| 2020 | | | 2019 | | |
| 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 | $ | (138,463) | | 560,512 | | $ | (0.25) | | $ | 78,826 | | 556,599 | | $ | 0.14 | |
| Dilutive effect of share awards | — | | — | | — | | — | | 4,086 | | — | |
| Dilutive effect of share options | — | | — | | — | | — | | — | | — | |
| Net income (loss) - diluted | $ | (138,463) | | 560,512 | | $ | (0.25) | | $ | 78,826 | | 560,685 | | $ | 0.14 | |
| | | | | | |
| Six Months Ended June 30 | | | | | |
| 2020 | | | 2019 | | |
| 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 | $ | (2,636,680) | | 560,158 | | $ | (4.71) | | $ | 90,162 | | 556,022 | | $ | 0.16 | |
| Dilutive effect of share awards | — | | — | | — | | — | | 3,950 | | — | |
| Dilutive effect of share options | — | | — | | — | | — | | — | | — | |
| Net income (loss) - diluted | $ | (2,636,680) | | 560,158 | | $ | (4.71) | | $ | 90,162 | | 559,972 | | $ | 0.16 | |
For the three and six months ended June 30, 2020, all share awards and share options were excluded from the calculation as their effect was anti-dilutive as the Company recorded a net loss. For the three and six months ended June 30, 2019, no share awards were considered to be anti-dilutive and 4.0 million share options were excluded from the calculation of diluted earnings per share as they were determined to be anti-dilutive.
13. PETROLEUM AND NATURAL GAS SALES
Petroleum and natural gas sales from contracts with customers for the Company's Canadian and U.S. operating segments is set forth in the following table.
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | | | | |
| 2020 | | | 2019 | | |
| Canada | U.S. | Total | Canada | U.S. | Total |
| Light oil and condensate | $ | 42,231 | | $ | 61,043 | | $ | 103,274 | | $ | 141,827 | | $ | 153,504 | | $ | 295,331 | |
| Heavy oil | 24,003 | | — | | 24,003 | | 146,038 | | — | | 146,038 | |
| NGL | 847 | | 8,035 | | 8,882 | | 1,757 | | 15,808 | | 17,565 | |
| Natural gas sales | 6,244 | | 10,286 | | 16,530 | | 5,076 | | 17,990 | | 23,066 | |
| Total petroleum and natural gas sales | $ | 73,325 | | $ | 79,364 | | $ | 152,689 | | $ | 294,698 | | $ | 187,302 | | $ | 482,000 | |
| | | | | | |
| Six Months Ended June 30 | | | | | |
| 2020 | | | 2019 | | |
| Canada | U.S. | Total | Canada | U.S. | Total |
| Light oil and condensate | $ | 151,314 | | $ | 182,198 | | $ | 333,512 | | $ | 274,195 | | $ | 302,419 | | $ | 576,614 | |
| Heavy oil | 99,846 | | — | | 99,846 | | 263,724 | | — | | 263,724 | |
| NGL | 2,196 | | 16,877 | | 19,073 | | 5,198 | | 36,610 | | 41,808 | |
| Natural gas sales | 14,813 | | 22,059 | | 36,872 | | 15,620 | | 37,658 | | 53,278 | |
| Total petroleum and natural gas sales | $ | 268,169 | | $ | 221,134 | | $ | 489,303 | | $ | 558,737 | | $ | 376,687 | | $ | 935,424 | |
Included in accounts receivable at June 30, 2020 is $79.8 million of accrued production revenue related to delivered volumes (December 31, 2019 - $138.0 million).
14. INCOME TAXES
The provision for income taxes has been computed as follows:
| | | | | | | | |
| Six Months Ended June 30 | |
| 2020 | | 2019 | |
| Net loss before income taxes | $ | (2,898,299) | | $ | 75,212 | |
| Expected income taxes at the statutory rate of 25.89% (2019 – 26.72%) | (750,370) | | 20,097 | |
| (Increase) decrease in income tax recovery resulting from: | | |
| Share-based compensation | 1,200 | | 2,898 | |
| Non-taxable portion of foreign exchange loss (gain) | 6,968 | | (7,044) | |
| Effect of change in income tax rates | 22,269 | | (10,573) | |
| Effect of rate adjustments for foreign jurisdictions | 36,097 | | (14,427) | |
| Effect of change in deferred tax benefit not recognized | 400,423 | | (6,532) | |
| Effect of U.S. tax change | 20,160 | | — | |
| Adjustments and assessments | 1,634 | | 631 | |
| Income tax recovery | $ | (261,619) | | $ | (14,950) | |
On May 28, 2019 the Alberta government tabled legislation to decrease the corporate income tax rate from 12% to 8% over a multi-year period beginning July 1, 2019 and ending January 1, 2022. On June 29, 2020 the Alberta government announced that the corporate tax rate reduction to 8% previously scheduled for January 1, 2022 would be accelerated to July 1, 2020. Legislation enacting this accelerated timeline is still pending and accordingly the effect is not reflected in the deferred tax recovery recorded for the six months ended June 30, 2020.
At June 30, 2020, a deferred tax asset of $15.2 million has been recognized while $428 million remains unrecognized due to uncertainty surrounding future commodity prices (December 31, 2019 - $28 million).
As disclosed in the 2019 annual financial statements, in June 2016, certain indirect subsidiary entities received reassessments from the Canada Revenue Agency (the “CRA”) that denied $591 million of non-capital loss deductions that relate to the calculation of income taxes for the years 2011 through 2015. In September 2016, Baytex filed notices of objection with the CRA appealing each reassessment received. There has been no change in the status of these reassessments since an Appeals Officer was assigned to the Company's file in July 2018. Baytex remains confident that the original tax filings are correct and intends to defend those tax filings through the appeals process.
On April 7, 2020, the U.S. Department of the Treasury and the IRS published final regulations addressing “anti-hybrid” rules under section 267A of the U.S. tax code and thus became substantially enacted. Pursuant to these regulations, the Company is no longer entitled to certain tax benefits previously recognized during 2019. Accordingly, a charge against deferred income taxes in the amount of $20.2 million was recorded in the three months ended June 30, 2020.
15. FINANCING AND INTEREST
| | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 | |
| 2020 | | 2019 | | 2020 | | 2019 | |
| Interest on credit facilities | $ | 4,248 | | $ | 5,109 | | $ | 8,383 | | $ | 10,521 | |
| Interest on long-term notes | 23,015 | | 22,825 | | 47,288 | | 45,427 | |
| Interest on lease obligations | 124 | | 158 | | 251 | | 328 | |
| Non-cash financing | 665 | | 1,051 | | 5,107 | | 2,146 | |
| Accretion on asset retirement obligations (note 9) | 2,178 | | 3,398 | | 5,109 | | 6,861 | |
| Early redemption expense (note 8) | — | | — | | 3,312 | | — | |
| Financing and interest | $ | 30,230 | | $ | 32,541 | | $ | 69,450 | | $ | 65,283 | |
16. FOREIGN EXCHANGE
| | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 | |
| 2020 | | 2019 | | 2020 | | 2019 | |
| Unrealized foreign exchange (gain) loss | $ | (45,516) | | $ | (25,318) | | $ | 54,005 | | $ | (52,259) | |
| Realized foreign exchange (gain) loss | (457) | | 639 | | (86) | | 44 | |
| Foreign exchange (gain) loss | $ | (45,973) | | $ | (24,679) | | $ | 53,919 | | $ | (52,215) | |
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, credit facilities, and long-term notes. The fair value of the credit facilities is equal to the principal amount outstanding as the credit facilities bear interest at floating rates and credit spreads that are indicative of market rates. The fair value of the long-term notes is determined based on market prices.
The carrying value and fair value of the Company's financial instruments carried on the condensed consolidated statements of financial position are classified into the following categories:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | |
| Carrying value | Fair value | Carrying value | Fair value | Fair Value Measurement Hierarchy |
| Financial Assets | | | | | |
| FVTPL | | | | | |
| Financial derivatives | $ | 43,299 | | $ | 43,299 | | $ | 5,433 | | $ | 5,433 | | Level 2 |
| Total | $ | 43,299 | | $ | 43,299 | | $ | 5,433 | | $ | 5,433 | | |
| | | | | |
| Financial assets at amortized cost | | | | | |
| Cash | $ | — | | $ | — | | $ | 5,572 | | $ | 5,572 | | — |
| Trade and other receivables | 101,770 | | 101,770 | | 173,762 | | 173,762 | | — |
| Total | $ | 101,770 | | $ | 101,770 | | $ | 179,334 | | $ | 179,334 | | |
| | | | | |
| Financial Liabilities | | | | | |
| FVTPL | | | | | |
| Financial derivatives | $ | (19,825) | | $ | (19,825) | | $ | (8,668) | | $ | (8,668) | | Level 2 |
| Total | $ | (19,825) | | $ | (19,825) | | $ | (8,668) | | $ | (8,668) | | |
| | | | | |
| Financial liabilities at amortized cost | | | | | |
| Trade and other payables | $ | (167,193) | | $ | (167,193) | | $ | (207,454) | | $ | (207,454) | | — | |
| Credit facilities | (701,770) | | (704,135) | | (505,412) | | (506,471) | | — | |
| Long-term notes | (1,208,066) | | (670,458) | | (1,328,175) | | (1,290,817) | | Level 1 |
| Total | $ | (2,077,029) | | $ | (1,541,786) | | $ | (2,041,041) | | $ | (2,004,742) | | |
There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2020 and 2019.
Foreign Currency Risk
The carrying amounts of the Company’s U.S. dollar denominated monetary assets and liabilities recorded in entities with a Canadian dollar functional currency at the reporting date are as follows:
| | | | | | | | | | | | | | |
| Assets | | Liabilities | |
| June 30, 2020 | December 31, 2019 | June 30, 2020 | December 31, 2019 |
| U.S. dollar denominated | US$31,708 | | US$8,733 | | US$927,633 | | US$841,961 | |
Interest Rate Risk
Interest Rate Swaps
As of June 30, 2020, Baytex had an interest rate swap acquired in a business combination in 2018 outstanding with a notional value of $100 million maturing in October 2020, with a fixed contract price of 2.02% referencing the Canadian Dollar Offered Rate. At June 30, 2020, the fair value of the interest rate swap was a liability of $0.5 million (December 31, 2019 - nil).
Commodity Price Risk
Financial Derivative Contracts
Baytex had the following financial derivative contracts outstanding as of July 29, 2020:
| | | | | | | | | | | | | | |
| Remaining Period | Volume | Price/Unit(1) | Index |
| Oil | | | | |
WCS Stream(8) | July 2020 | 8,000 bbl/d | $27.15/bbl | Blended |
WCS Stream(8) | August 2020 | 5,000 bbl/d | $32.05/bbl | Blended |
| Basis Swap | July 2020 to Dec 2020 | 6,500 bbl/d | WTI less US$16.27/bbl | WCS |
| Basis Swap | Jan 2021 to Dec 2021 | 4,000 bbl/d | WTI less US$14.26/bbl | WCS |
MSW Stream(7) | July 2020 | 11,695 bbl/d | $27.17/bbl | Blended |
MSW Stream(7) | August 2020 | 5,000 bbl/d | $42.28/bbl | Blended |
| Basis Swap | July 2020 to Dec 2020 | 5,000 bbl/d | WTI less US$6.15/bbl | MSW |
Basis Swap(9) | Jan 2021 to Dec 2021 | 2,000 bbl/d | WTI less US$5.95/bbl | MSW |
| Fixed - Sell | July 2020 | 4,000 bbl/d | US$24.73/bbl | WTI |
| Fixed - Sell | July 2020 | 9,500 bbl/d | $36.32/bbl | WTI-CAD |
| Fixed - Sell | August 2020 | 5,000 bbl/d | US$36.30/bbl | WTI |
| Fixed - Sell | August 2020 | 5,000 bbl/d | $48.55/bbl | WTI-CAD |
| Fixed - Sell | July 2020 to Dec 2020 | 6,000 bbl/d | US$43.50/bbl | WTI |
| Fixed - Sell | October 2020 to Dec 2020 | 2,000 bbl/d | US$40.61/bbl | WTI |
| | | | |
3-way option(2) | July 2020 to Dec 2020 | 3,000 bbl/d | US$50.00/US$56.00/US$61.35 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 3,000 bbl/d | US$50.00/US$57.00/US$60.00 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 4,500 bbl/d | US$50.00/US$57.00/US$62.00 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 3,000 bbl/d | US$50.00/US$58.00/US$62.00 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$58.00/US$60.50 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$58.00/US$60.83 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,500 bbl/d | US$51.00/US$59.00/US$65.60 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,500 bbl/d | US$51.00/US$59.00/US$66.00 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$59.50/US$66.15 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$60.00/US$65.60 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$60.00/US$66.00 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 1,000 bbl/d | US$51.00/US$60.00/US$66.05 | WTI |
3-way option(2) | July 2020 to Dec 2020 | 2,000 bbl/d | US$51.00/US$60.00/US$66.70 | WTI |
3-way option(2)(9) | Jan 2021 to Dec 2021 | 5,000 bbl/d | US$35.00/US$45.00/US$55.00 | WTI |
Swaption(3) | Jan 2021 to Dec 2021 | 3,000 bbl/d | US$64.50/bbl | Brent |
Swaption(4) | Jan 2021 to Dec 2021 | 3,000 bbl/d | US$70.00/bbl | Brent |
Swaption(4) | Jan 2021 to Dec 2021 | 3,000 bbl/d | US$60.75/bbl | WTI |
Swaption(6)(9) | Jan 2022 to Dec 2022 | 5,000 bbl/d | US$53.00/bbl | WTI |
| | | | |
| Natural Gas | | | | |
| Fixed - Sell | July 2020 to Dec 2020 | 10,500 GJ/d | $2.01/GJ | AECO 7A |
| | | | |
| Fixed - Sell | Jan 2021 to Dec 2021 | 13,000 GJ/d | $2.29/GJ | AECO 7A |
| Fixed - Sell | July 2020 to Dec 2020 | 2,500 GJ/d | $2.29/GJ | AECO 5A |
Fixed - Sell (9) | Jan 2021 to Dec 2021 | 2,500 GJ/d | $2.40/GJ | AECO 5A |
| Fixed - Sell | Oct 2020 to Dec 2020 | 5,500 mmbtu/d | US$2.64/mmbtu | NYMEX |
| Fixed - Sell | Jan 2021 to Dec 2021 | 12,000 mmbtu/d | US$2.70/mmbtu | NYMEX |
3-way option(2) | July 2020 to Dec 2020 | 5,000 mmbtu/d | US$2.25/US$2.60/US$2.85 | NYMEX |
Swaption(5) | Jan 2021 to Dec 2021 | 5,000 mmbtu/d | US$2.90/mmbtu | NYMEX |
| | | | |
| | | | |
| | | | |
(1)Based on the weighted average price per unit for the period.
(2)Producer 3-way option consists of a sold put, bought put, and a sold call. To illustrate, in a US$50.00/US$58.00/US$62.00 contract, Baytex receives WTI plus US$8.00/bbl when WTI is at or below US$50.00/bbl; Baytex receives US$58.00/bbl when WTI is between US$50.00/bbl and US$58.00/bbl; Baytex receives the market price when WTI is between US$58.00/bbl and US$62.00/bbl; and Baytex receives US$62.00/bbl when WTI is above US$62.00/bbl.
(3)For these contracts, the counterparty has the right, if exercised on September 30, 2020, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(4)For these contracts, the counterparty has the right, if exercised on December 31, 2020, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(5)For these contracts, the counterparty has the right, if exercised on December 23, 2020, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(6)For these contracts, the counterparty has the right, if exercised on December 31, 2021, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(7)For these contracts, the contract price per unit is the sum of the average WTI price for the period and the average of the Edmonton SW blend differential (the average of TMX SW 1a index as determined by NGX and the NE Monthly Index for physical SW as determined by Net Energy), converted to CAD at the noon day average rate.
(8)For these contracts, the contract price per unit is the sum of the average WTI price for the period and the average of the Western Canadian Select blend differential (the average of the Natural Gas Exchange Inc's WCS Index Differential and the Net Energy Inc.'s WCS Index Differential), converted to CAD at the noon day average rate.
(9)Contracts entered subsequent to June 30, 2020.
The following table sets forth the realized and unrealized gains and losses recorded on financial derivatives.
| | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 | |
| 2020 | | 2019 | | 2020 | | 2019 | |
| Realized financial derivatives gain | $ | (13,624) | | $ | (12,993) | | $ | (40,474) | | $ | (31,807) | |
| Unrealized financial derivatives loss (gain) | 69,286 | | (14,673) | | (26,709) | | 38,588 | |
| Financial derivatives loss (gain) | $ | 55,662 | | $ | (27,666) | | $ | (67,183) | | $ | 6,781 | |
Liquidity Risk
Liquidity risk is the risk that Baytex will encounter difficulty in meeting obligations associated with financial liabilities. Baytex manages its liquidity risk through cash and debt management. Such strategies include monitoring forecasted and actual cash flows from operating, financing and investing activities, available credit under existing banking arrangements, opportunities to issue additional common shares as well as reducing capital expenditures.
As at June 30, 2020, Baytex had availability of $363.0 million on its Credit Facilities (December 31, 2019 - $523.8 million).
The timing of cash outflows relating to financial liabilities as at June 30, 2020 is outlined in the table below:
| | | | | | | | | | | | | | | | | |
| Total | Less than 1 year | 1-3 years | 3-5 years | Beyond 5 years |
| Trade and other payables | $ | 167,193 | | $ | 167,193 | | $ | — | | $ | — | | $ | — | |
Credit facilities(1)(2) | 704,135 | | — | | — | | 704,135 | | — | |
Long-term notes(2) | 1,225,395 | | — | | — | | 544,620 | | 680,775 | |
Interest on long-term notes(3) | 522,472 | | 90,203 | | 180,405 | | 147,253 | | 104,611 | |
| Lease obligations | 12,591 | | 6,268 | | 5,834 | | 489 | | — | |
| $ | 2,631,786 | | $ | 263,664 | | $ | 186,239 | | $ | 1,396,497 | | $ | 785,386 | |
(1)At December 31, 2019, the credit facilities were set to mature on April 2, 2021. On March 3, 2020, Baytex amended the credit facilities to extend maturity to April 2, 2024 which will automatically be extended to June 4, 2024 providing the Company has either refinanced or has the ability to repay the outstanding 2024 long-term notes with existing credit capacity as of April 1, 2024.
(2)Principal amount of instruments. On February 5, 2020, Baytex issued US$500 million principal amount of 8.75% senior unsecured notes due 2027 and issued a redemption notice for the $300 million principal amount of 6.625% senior unsecured notes due 2022 (note 8). The Company completed the redemption of these notes on March 5, 2020. On February 20, 2020 Baytex completed the redemption of the US$400 million principal amount of senior unsecured notes due 2021 (note 8).
(3)Excludes interest on credit facilities as interest payments on credit facilities fluctuate based on amounts outstanding and interest rates.
Credit Risk
Credit risk is the risk that a counterparty to a financial asset will default resulting in Baytex incurring a loss. As at June 30, 2020, the Company is exposed to credit risk with respect to its trade and other receivables and financial derivatives. Baytex manages these risks through the selection and monitoring of credit-worthy counterparties.
Most of the Company's trade and other receivables relate to petroleum and natural gas sales. Baytex reviews its exposure to individual entities on a regular basis and manages its credit risk by entering into sales contracts after reviewing the creditworthiness of the entity. Letters of credit or parental guarantees may be obtained prior to the commencement of business with certain counterparties. Credit risk may also arise from financial derivative instruments. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The Company considers all financial assets that are not impaired or past due to be of good credit quality.
The majority of the Company's credit exposure on trade and other receivables at June 30, 2020 relates to accrued revenues and our financial hedging contracts. Accounts receivable from purchasers of the Company's petroleum and natural gas sales are typically collected on the 25th day of the month following production. Joint interest receivables are typically collected within one to three months following production. Included in trade and other receivables at June 30, 2020 is $79.8 million (December 31, 2019 - $138.0 million) of accrued petroleum and natural gas sales related to delivered volumes.
Should the Company determine that the ultimate collection of a receivable is in doubt, the carrying amount of trade and other receivables is reduced by adjusting the allowance for doubtful accounts and a charge to net income or loss. If the Company subsequently determines the accounts receivable is uncollectible, the receivable and allowance for doubtful accounts are adjusted accordingly. As at June 30, 2020, allowance for doubtful accounts was $1.6 million (December 31, 2019 - $1.6 million).
In determining whether amounts past due are collectible, the Company will assess the nature of the past due amounts as well as the credit worthiness and past payment history of the counterparty. As at June 30, 2020, trade and other receivables that Baytex has deemed past due (more than 90 days) but not impaired was $1.8 million (December 31, 2019 - $2.7 million). Baytex has estimated the lifetime expected credit loss as at and for the quarter ended June 30, 2020 to be nominal.
The Company's trade and other receivables, net of the allowance for doubtful accounts, were aged as follows as at June 30, 2020.
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| Current (less than 30 days) | $ | 99,274 | | $ | 169,500 | |
| 31-60 days | 567 | | 1,199 | |
| 61-90 days | 103 | | 342 | |
| Past due (more than 90 days) | 1,826 | | 2,721 | |
| $ | 101,770 | | $ | 173,762 | |
