Exhibit 99.1
Baytex Energy Corp.
Condensed Consolidated Interim Statements of Financial Position
(thousands of Canadian dollars) (unaudited) | | | | | | | | | | | |
| | As at |
| Notes | September 30, 2021 | December 31, 2020 |
| | | |
| ASSETS | | | |
| Current assets | | | |
| | | |
| Trade and other receivables | | $ | 177,546 | | $ | 107,477 | |
| Financial derivatives | 16 | 7,040 | | 5,057 | |
| | 184,586 | | 112,534 | |
| Non-current assets | | | |
| | | |
| Exploration and evaluation assets | 4 | 176,469 | | 191,865 | |
| Oil and gas properties | 5 | 4,076,375 | | 3,077,548 | |
| Other plant and equipment | | 7,487 | | 7,996 | |
| Lease assets | | 9,054 | | 11,098 | |
| Deferred income tax asset | 13 | — | | 7,055 | |
| | $ | 4,453,971 | | $ | 3,408,096 | |
| | | |
| LIABILITIES | | | |
| Current liabilities | | | |
| Trade and other payables | | $ | 195,230 | | $ | 155,955 | |
| Financial derivatives | 16 | 194,780 | | 26,792 | |
| Lease obligations | | 3,512 | | 4,289 | |
| Asset retirement obligations | 8 | 11,719 | | 11,820 | |
| | 405,241 | | 198,856 | |
| Non-current liabilities | | | |
| Financial derivatives | 16 | 13,403 | | — | |
| Credit facilities | 6 | 545,302 | | 649,221 | |
| Long-term notes | 7 | 987,225 | | 1,132,868 | |
| Lease obligations | | 5,247 | | 6,787 | |
| Asset retirement obligations | 8 | 684,691 | | 748,563 | |
| Deferred income tax liability | 13 | 160,716 | | 93,588 | |
| | 2,801,825 | | 2,829,883 | |
| | | |
| SHAREHOLDERS’ EQUITY | | | |
| Shareholders' capital | 9 | 5,736,593 | | 5,729,418 | |
| Contributed surplus | | 11,773 | | 14,345 | |
| Accumulated other comprehensive income | | 637,945 | | 618,976 | |
| Deficit | | (4,734,165) | | (5,784,526) | |
| | 1,652,146 | | 578,213 | |
| | $ | 4,453,971 | | $ | 3,408,096 | |
Subsequent event (note 7 and 16)
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Interim 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 September 30 | Nine Months Ended September 30 |
| Notes | 2021 | | 2020 | | 2021 | | 2020 | |
| | | | | |
| Revenue, net of royalties | | | | | |
| Petroleum and natural gas sales | 12 | $ | 488,736 | | $ | 252,538 | | $ | 1,315,792 | | $ | 741,841 | |
| Royalties | | (90,523) | | (40,052) | | (239,004) | | (125,928) | |
| | 398,213 | | 212,486 | | 1,076,788 | | 615,913 | |
| | | | | |
| Expenses | | | | | |
| Operating | | 84,196 | | 73,447 | | 247,645 | | 251,597 | |
| Transportation | | 7,818 | | 6,372 | | 24,092 | | 21,745 | |
| Blending and other | | 19,581 | | 10,673 | | 56,668 | | 37,490 | |
| General and administrative | | 9,980 | | 7,741 | | 29,323 | | 24,954 | |
| | | | | |
| Exploration and evaluation | 4 | 6,766 | | 8,909 | | 10,718 | | 11,000 | |
| Depletion and depreciation | | 127,052 | | 106,454 | | 332,119 | | 392,380 | |
| Impairment (reversal) loss | 4, 5 | — | | — | | (1,126,415) | | 2,716,349 | |
| Share-based compensation | 10 | 2,511 | | 2,949 | | 8,262 | | 8,725 | |
| Financing and interest | 14 | 29,028 | | 27,962 | | 83,832 | | 97,412 | |
| Financial derivatives loss (gain) | 16 | 62,846 | | 17,027 | | 293,105 | | (50,156) | |
| Foreign exchange loss (gain) | 15 | 7,466 | | (26,231) | | 2,405 | | 27,688 | |
| Gain on dispositions | | (2,112) | | (98) | | (6,092) | | (246) | |
| Other income | | (366) | | (293) | | (2,092) | | (2,300) | |
| | 354,766 | | 234,912 | | (46,430) | | 3,536,638 | |
| Net income (loss) before income taxes | | 43,447 | | (22,426) | | 1,123,218 | | (2,920,725) | |
| Income tax expense (recovery) | 13 | | | | |
| Current income tax expense | | 486 | | 322 | | 894 | | 880 | |
| Deferred income tax expense (recovery) | | 10,248 | | 696 | | 71,963 | | (261,481) | |
| | 10,734 | | 1,018 | | 72,857 | | (260,601) | |
| Net income (loss) | | $ | 32,713 | | $ | (23,444) | | $ | 1,050,361 | | $ | (2,660,124) | |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustment | | 26,175 | | (30,268) | | 18,969 | | 90,219 | |
| Comprehensive income (loss) | | $ | 58,888 | | $ | (53,712) | | $ | 1,069,330 | | $ | (2,569,905) | |
| | | | | |
| Net income (loss) per common share | 11 | | | | |
| Basic | | $ | 0.06 | | $ | (0.04) | | $ | 1.86 | | $ | (4.75) | |
| Diluted | | $ | 0.06 | | $ | (0.04) | | $ | 1.84 | | $ | (4.75) | |
| | | | | |
| Weighted average common shares (000's) | 11 | | | | |
| Basic | | 564,211 | | 561,128 | | 563,492 | | 560,484 | |
| Diluted | | 571,647 | | 561,128 | | 570,179 | | 560,484 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Interim 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, 2019 | | $ | 5,718,835 | | $ | 17,712 | | $ | 556,224 | | $ | (3,345,562) | | $ | 2,947,209 | |
| Vesting of share awards | | 10,329 | | (10,329) | | — | | — | | — | |
| Share-based compensation | | — | | 6,973 | | — | | — | | 6,973 | |
| Comprehensive income (loss) | | — | | — | | 90,219 | | (2,660,124) | | (2,569,905) | |
| Balance at September 30, 2020 | | $ | 5,729,164 | | $ | 14,356 | | $ | 646,443 | | $ | (6,005,686) | | $ | 384,277 | |
| Balance at December 31, 2020 | | $ | 5,729,418 | | $ | 14,345 | | $ | 618,976 | | $ | (5,784,526) | | $ | 578,213 | |
| Vesting of share awards | 9 | 7,175 | | (7,175) | | — | | — | | — | |
| Share-based compensation | 10 | — | | 4,603 | | — | | — | | 4,603 | |
| Comprehensive income | | — | | — | | 18,969 | | 1,050,361 | | 1,069,330 | |
| Balance at September 30, 2021 | | $ | 5,736,593 | | $ | 11,773 | | $ | 637,945 | | $ | (4,734,165) | | $ | 1,652,146 | |
See accompanying notes to the condensed consolidated interim financial statements.
Baytex Energy Corp.
Condensed Consolidated Interim Statements of Cash Flows
(thousands of Canadian dollars) (unaudited)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | Nine Months Ended September 30 |
| Notes | 2021 | | 2020 | | 2021 | | 2020 | |
| | | | | |
| CASH PROVIDED BY (USED IN): | | | | | |
| Operating activities | | | | | |
| Net income (loss) for the period | | $ | 32,713 | | $ | (23,444) | | $ | 1,050,361 | | $ | (2,660,124) | |
| Adjustments for: | | | | | |
| Non-cash share-based compensation | 10 | 1,453 | | 2,336 | | 4,603 | | 6,973 | |
| Unrealized foreign exchange loss (gain) | 15 | 7,545 | | (25,880) | | 3,223 | | 28,125 | |
| Exploration and evaluation | 4 | 6,766 | | 8,909 | | 10,718 | | 11,000 | |
| Depletion and depreciation | | 127,052 | | 106,454 | | 332,119 | | 392,380 | |
| Impairment (reversal) loss | 4, 5 | — | | — | | (1,126,415) | | 2,716,349 | |
| Non-cash financing, accretion, and early redemption expense | 14 | 6,235 | | 2,544 | | 13,082 | | 16,072 | |
| Non-cash other income | 8 | (444) | | (293) | | (2,108) | | (293) | |
| Unrealized financial derivatives loss (gain) | 16 | 8,941 | | 7,284 | | 179,408 | | (19,425) | |
| Gain on dispositions | | (2,112) | | (98) | | (6,092) | | (246) | |
| Deferred income tax expense (recovery) | 13 | 10,248 | | 696 | | 71,963 | | (261,481) | |
| | | | | |
| Asset retirement obligations settled | 8 | (1,805) | | (1,211) | | (4,215) | | (6,080) | |
| Change in non-cash working capital | | (17,631) | | 16,391 | | (54,830) | | 78,829 | |
| | 178,961 | | 93,688 | | 471,817 | | 302,079 | |
| | | | | |
| Financing activities | | | | | |
| Increase (decrease) in credit facilities | | 53,430 | | (75,944) | | (107,230) | | 111,403 | |
| | | | | |
| Payments on lease obligations | | (1,142) | | (1,456) | | (3,143) | | (4,440) | |
| Net proceeds from issuance of long-term notes | | — | | — | | — | | 652,150 | |
| Redemption of long-term notes | 7 | (139,861) | | — | | (146,648) | | (833,672) | |
| | (87,573) | | (77,400) | | (257,021) | | (74,559) | |
| | | | | |
| Investing activities | | | | | |
| Additions to exploration and evaluation assets | 4 | (89) | | (484) | | (733) | | (4,344) | |
| Additions to oil and gas properties | 5 | (94,146) | | (15,418) | | (238,575) | | (198,187) | |
| Additions to other plant and equipment | | (158) | | (40) | | (569) | | (2,027) | |
| Property acquisitions | | (89) | | — | | (114) | | — | |
| | | | | |
| Proceeds from dispositions | | 701 | | 98 | | 947 | | 149 | |
| Change in non-cash working capital | | 1,018 | | (444) | | 24,248 | | (28,683) | |
| | (92,763) | | (16,288) | | (214,796) | | (233,092) | |
| | | | | |
| Change in cash | | (1,375) | | — | | — | | (5,572) | |
| Cash, beginning of period | | 1,375 | | — | | — | | 5,572 | |
| Cash, end of period | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | |
| Supplementary information | | | | | |
| Interest paid | | $ | 32,436 | | $ | 3,365 | | $ | 80,037 | | $ | 55,145 | |
| Income taxes paid | | $ | — | | $ | 1,155 | | $ | — | | $ | 1,155 | |
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 September 30, 2021 and 2020
(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 Texas, United States. The Company’s common shares are traded on the Toronto 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 condensed 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, 2020.
The consolidated financial statements were approved by the Board of Directors of Baytex on November 4, 2021.
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, 2020 are available through its filings on SEDAR at www.sedar.com and through the U.S. Securities and Exchange Commission at www.sec.gov.
Significant Accounting Policies
The accounting policies, critical accounting judgments and significant estimates used in preparation of the 2020 annual financial statements have been applied in the preparation of these consolidated financial statements.
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.
During the nine months ended September 30, 2021, the global economy continued to show signs of recovery from the impacts of the COVID-19 pandemic. Global spot prices for crude oil have recovered and now exceed pre-pandemic levels as optimism for demand recovery improves with limited production growth from independent producers and ongoing OPEC production curtailments. While we have benefited from these improvements in crude oil prices there is a degree of uncertainty related to COVID-19 that has been considered in our estimates for the period ended September 30, 2021.
3. 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 September 30 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 |
| | | | | | | | |
| Revenue, net of royalties | | | | | | | | |
| Petroleum and natural gas sales | $ | 292,723 | | $ | 158,831 | | $ | 196,013 | | $ | 93,707 | | $ | — | | $ | — | | $ | 488,736 | | $ | 252,538 | |
| Royalties | (32,679) | | (12,297) | | (57,844) | | (27,755) | | — | | — | | (90,523) | | (40,052) | |
| 260,044 | | 146,534 | | 138,169 | | 65,952 | | — | | — | | 398,213 | | 212,486 | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Operating | 63,301 | | 57,557 | | 20,895 | | 15,890 | | — | | — | | 84,196 | | 73,447 | |
| Transportation | 7,818 | | 6,372 | | — | | — | | — | | — | | 7,818 | | 6,372 | |
| Blending and other | 19,581 | | 10,673 | | — | | — | | — | | — | | 19,581 | | 10,673 | |
| General and administrative | — | | — | | — | | — | | 9,980 | | 7,741 | | 9,980 | | 7,741 | |
| | | | | | | | |
| Exploration and evaluation | 6,766 | | 8,909 | | — | | — | | — | | — | | 6,766 | | 8,909 | |
| Depletion and depreciation | 82,241 | | 68,727 | | 43,440 | | 35,820 | | 1,371 | | 1,907 | | 127,052 | | 106,454 | |
| | | | | | | | |
| Share-based compensation | — | | — | | — | | — | | 2,511 | | 2,949 | | 2,511 | | 2,949 | |
| Financing and interest | — | | — | | — | | — | | 29,028 | | 27,962 | | 29,028 | | 27,962 | |
| Financial derivatives loss | — | | — | | — | | — | | 62,846 | | 17,027 | | 62,846 | | 17,027 | |
| Foreign exchange loss (gain) | — | | — | | — | | — | | 7,466 | | (26,231) | | 7,466 | | (26,231) | |
| (Gain) loss on dispositions | (2,302) | | (98) | | 190 | | — | | — | | — | | (2,112) | | (98) | |
| Other (income) expense | (444) | | (694) | | — | | — | | 78 | | 401 | | (366) | | (293) | |
| 176,961 | | 151,446 | | 64,525 | | 51,710 | | 113,280 | | 31,756 | | 354,766 | | 234,912 | |
| Net income (loss) before income taxes | 83,083 | | (4,912) | | 73,644 | | 14,242 | | (113,280) | | (31,756) | | 43,447 | | (22,426) | |
| Income tax expense (recovery) | | | | | | | | |
| Current income tax expense | (57) | | — | | 543 | | 322 | | — | | — | | 486 | | 322 | |
| Deferred income tax expense (recovery) | 20,064 | | 10,589 | | 10,248 | | 696 | | (20,064) | | (10,589) | | 10,248 | | 696 | |
| 20,007 | | 10,589 | | 10,791 | | 1,018 | | (20,064) | | (10,589) | | 10,734 | | 1,018 | |
| Net income (loss) | $ | 63,076 | | $ | (15,501) | | $ | 62,853 | | $ | 13,224 | | $ | (93,216) | | $ | (21,167) | | $ | 32,713 | | $ | (23,444) | |
| | | | | | | | |
Total oil and natural gas capital expenditures (1) | $ | 75,480 | | $ | 3,784 | | $ | 18,143 | | $ | 12,020 | | $ | — | | $ | — | | $ | 93,623 | | $ | 15,804 | |
| (1) Includes additions to exploration and evaluation assets, oil and gas properties, and property acquisitions, net of proceeds from divestitures. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | U.S. | Corporate | Consolidated |
| Nine Months Ended September 30 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 |
| | | | | | | | |
| Revenue, net of royalties | | | | | | | | |
| Petroleum and natural gas sales | $ | 786,171 | | $ | 427,000 | | $ | 529,621 | | $ | 314,841 | | $ | — | | $ | — | | $ | 1,315,792 | | $ | 741,841 | |
| Royalties | (83,536) | | (33,972) | | (155,468) | | (91,956) | | — | | — | | (239,004) | | (125,928) | |
| 702,635 | | 393,028 | | 374,153 | | 222,885 | | — | | — | | 1,076,788 | | 615,913 | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Operating | 186,455 | | 185,641 | | 61,190 | | 65,956 | | — | | — | | 247,645 | | 251,597 | |
| Transportation | 24,092 | | 21,745 | | — | | — | | — | | — | | 24,092 | | 21,745 | |
| Blending and other | 56,668 | | 37,490 | | — | | — | | — | | — | | 56,668 | | 37,490 | |
| General and administrative | — | | — | | — | | — | | 29,323 | | 24,954 | | 29,323 | | 24,954 | |
| | | | | | | | |
| Exploration and evaluation | 10,718 | | 11,000 | | — | | — | | — | | — | | 10,718 | | 11,000 | |
| Depletion and depreciation | 215,803 | | 249,125 | | 112,368 | | 137,462 | | 3,948 | | 5,793 | | 332,119 | | 392,380 | |
| Impairment (reversal) loss | (684,000) | | 1,855,000 | | (442,415) | | 861,349 | | — | | — | | (1,126,415) | | 2,716,349 | |
| Share-based compensation | — | | — | | — | | — | | 8,262 | | 8,725 | | 8,262 | | 8,725 | |
| Financing and interest | — | | — | | — | | — | | 83,832 | | 97,412 | | 83,832 | | 97,412 | |
| Financial derivatives loss (gain) | — | | — | | — | | — | | 293,105 | | (50,156) | | 293,105 | | (50,156) | |
| Foreign exchange loss | — | | — | | — | | — | | 2,405 | | 27,688 | | 2,405 | | 27,688 | |
| (Gain) loss on dispositions | (6,282) | | (246) | | 190 | | — | | — | | — | | (6,092) | | (246) | |
| Other (income) expense | (2,108) | | (694) | | — | | — | | 16 | | (1,606) | | (2,092) | | (2,300) | |
| (198,654) | | 2,359,061 | | (268,667) | | 1,064,767 | | 420,891 | | 112,810 | | (46,430) | | 3,536,638 | |
| 901,289 | | (1,966,033) | | 642,820 | | (841,882) | | (420,891) | | (112,810) | | 1,123,218 | | (2,920,725) | |
| Income tax expense (recovery) | | | | | | | | |
| Current income tax (recovery) expense | (353) | | 469 | | 1,247 | | 411 | | — | | — | | 894 | | 880 | |
| Deferred income tax expense (recovery) | 89,040 | | (74,687) | | 64,908 | | (164,298) | | (81,985) | | (22,496) | | 71,963 | | (261,481) | |
| 88,687 | | (74,218) | | 66,155 | | (163,887) | | (81,985) | | (22,496) | | 72,857 | | (260,601) | |
| Net income (loss) | $ | 812,602 | | $ | (1,891,815) | | $ | 576,665 | | $ | (677,995) | | $ | (338,906) | | $ | (90,314) | | $ | 1,050,361 | | $ | (2,660,124) | |
| | | | | | | | |
Total oil and natural gas capital expenditures (1) | $ | 148,149 | | $ | 129,773 | | $ | 90,326 | | $ | 72,609 | | $ | — | | $ | — | | $ | 238,475 | | $ | 202,382 | |
(1)Includes additions to exploration and evaluation assets, oil and gas properties, and property acquisitions, net of proceeds from divestitures.
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Canadian assets | $ | 2,242,931 | | $ | 1,646,412 | |
| U.S. assets | 2,187,459 | | 1,737,533 | |
| Corporate assets | 23,581 | | 24,151 | |
| Total consolidated assets | $ | 4,453,971 | | $ | 3,408,096 | |
4. EXPLORATION AND EVALUATION ASSETS
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Balance, beginning of period | $ | 191,865 | | $ | 320,210 | |
| Capital expenditures | 733 | | 4,490 | |
| | |
| | |
| Divestitures | (97) | | — | |
| Property swaps | 247 | | 468 | |
| Impairment | — | | (113,058) | |
| Exploration and evaluation expense | (10,718) | | (14,011) | |
| Transfer to oil and gas properties (note 5) | (5,458) | | (8,585) | |
| Foreign currency translation | (103) | | 2,351 | |
| Balance, end of period | $ | 176,469 | | $ | 191,865 | |
At September 30, 2021, 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 loss of $127.9 million was recorded 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 loss booked for each CGU at March 31, 2020.
| | | | | |
| Impairment loss at
March 31, 2020 |
| 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, 2020, the Company estimated the recoverable amount of the exploration and evaluation assets within each of its six CGUs due to the ongoing volatility in future oil and natural gas prices. The recoverable amount supported the carrying amount for the Conventional, Peace River, Lloydminster, and Duvernay CGUs and no impairment loss or impairment reversal was recorded. The recoverable amount for the Viking and Eagle Ford CGUs exceeded their carrying amounts which resulted in an impairment reversal of $14.8 million at December 31, 2020. The recoverable amount of each CGU was based on its FVLCD and was estimated with reference to arm's length transaction in comparable locations and the discounted cash flows associated with the Company's future development plans. The following table indicates the impairment reversal booked for the Viking and Eagle Ford CGUs at December 31, 2020.
| | | | | |
| Impairment Reversal at December 31, 2020 |
| Viking CGU | $ | 2,000 | |
| Eagle Ford CGU | 12,803 | |
| $ | 14,803 | |
5. OIL AND GAS PROPERTIES
| | | | | | | | | | | |
| Cost | Accumulated
depletion | Net book value |
| Balance, December 31, 2019 | $ | 11,128,297 | | $ | (5,740,408) | | $ | 5,387,889 | |
| Capital expenditures | 275,850 | | — | | 275,850 | |
| | | |
| | | |
| Transfers from exploration and evaluation assets (note 4) | 8,585 | | — | | 8,585 | |
| | | |
| Change in asset retirement obligations (note 8) | 94,994 | | — | | 94,994 | |
| | | |
| Property swaps | (1,190) | | 178 | | (1,012) | |
| Impairment | — | | (2,247,162) | | (2,247,162) | |
| Foreign currency translation | (82,860) | | 120,123 | | 37,263 | |
| Depletion | — | | (478,859) | | (478,859) | |
| Balance, December 31, 2020 | $ | 11,423,676 | | $ | (8,346,128) | | $ | 3,077,548 | |
| Capital expenditures | 238,575 | | — | | 238,575 | |
| Property acquisitions | 156 | | — | | 156 | |
| Transfers from exploration and evaluation assets (note 4) | 5,458 | | — | | 5,458 | |
| | | |
| Change in asset retirement obligations (note 8) | (59,339) | | — | | (59,339) | |
| Divestitures | (7,039) | | 5,148 | | (1,891) | |
| Property swaps | (25,050) | | 24,704 | | (346) | |
| Impairment reversal | — | | 1,126,415 | | 1,126,415 | |
| Foreign currency translation | (745) | | 18,715 | | 17,970 | |
| Depletion | — | | (328,171) | | (328,171) | |
| Balance, September 30, 2021 | $ | 11,575,692 | | $ | (7,499,317) | | $ | 4,076,375 | |
At September 30, 2021, there were no indicators of impairment or impairment reversal for oil and gas properties in any of the Company's CGUs. Baytex recorded an impairment reversal for its oil and gas properties of $1.1 billion for the nine months ended September 30, 2021 and a net impairment loss of $2.2 billion for the year ended December 31, 2020.
2021 Impairment Reversal
At June 30, 2021, we identified indicators of impairment reversal for oil and gas properties in each of our six CGU's due to the increase in forecasted commodity prices. The recoverable amount for each of our six CGUs exceeded their carrying amounts which resulted in an impairment reversal of $1.1 billion recorded at June 30, 2021. The recoverable amount for each CGU was based on its FVLCD which was estimated using a discounted cash flow model of proved plus probable cash flows from an independent reserve report prepared as at December 31, 2020 and was adjusted by management for operations between December 31, 2020 and June 30, 2021. The after-tax discount rates applied to the cash flows were between 10% and 16%.
At June 30, 2021, the recoverable amount of the Company's CGUs were calculated using the following benchmark reference prices for the years 2021 to 2030 adjusted for commodity differentials specific to the Company. The prices and costs subsequent to 2030 have been adjusted for inflation at an annual rate of 2.0%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
| WTI crude oil (US$/bbl) | 71.33 | | 67.20 | | 63.95 | | 63.23 | | 64.50 | | 65.79 | | 67.10 | | 68.44 | | 69.81 | | 71.21 | |
| WCS heavy oil (CA$/bbl) | 72.22 | | 66.84 | | 61.73 | | 60.70 | | 61.91 | | 63.15 | | 64.42 | | 65.70 | | 67.02 | | 68.36 | |
| LLS crude oil (US$/bbl) | 72.17 | | 68.53 | | 65.80 | | 65.10 | | 66.39 | | 67.71 | | 69.05 | | 70.42 | | 71.82 | | 73.26 | |
| Edmonton par oil (CA$/bbl) | 83.20 | | 78.27 | | 74.06 | | 73.05 | | 74.51 | | 76.00 | | 77.52 | | 79.07 | | 80.66 | | 82.27 | |
| Henry Hub gas (US$/mmbtu) | 3.42 | | 3.19 | | 2.92 | | 2.96 | | 3.02 | | 3.08 | | 3.14 | | 3.21 | | 3.27 | | 3.34 | |
| AECO gas (CA$/mmbtu) | 3.46 | | 3.13 | | 2.72 | | 2.71 | | 2.76 | | 2.82 | | 2.88 | | 2.94 | | 2.99 | | 3.05 | |
| Exchange rate (CAD/USD) | 1.24 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | | 1.25 | |
The following table summarizes the recoverable amount and impairment reversal at June 30, 2021 and demonstrates the sensitivity of the estimated recoverable amount of the Company's CGUs comprising oil and gas properties to reasonably possible changes in key assumptions inherent in the estimate.
| | | | | | | | | | | | | | | | | |
| Recoverable amount | Impairment
reversal | Change in discount rate of 1% | Change in oil price of $2.50/bbl | Change in gas price of $0.25/mcf |
| Conventional CGU | $ | 57,891 | | $ | 15,000 | | $ | 1,000 | | $ | 1,000 | | $ | 8,000 | |
| Peace River CGU | 238,714 | | 154,000 | | 4,000 | | 40,000 | | 2,500 | |
| Lloydminster CGU | 340,730 | | 154,000 | | 12,500 | | 52,000 | | — | |
Duvernay CGU (1) | 115,157 | | 5,000 | | 45,000 | | 44,500 | | 44,500 | |
| Viking CGU | 1,338,985 | | 356,000 | | 47,000 | | 89,500 | | 4,500 | |
| Eagle Ford CGU | 2,015,118 | | 442,415 | | 109,400 | | 103,900 | | 24,400 | |
| $ | 4,106,595 | | $ | 1,126,415 | | $ | 218,900 | | $ | 330,900 | | $ | 83,900 | |
(1) The impairment reversal for the Duvernay CGU was limited to total accumulated impairments less subsequent depletion of $5.0 million.
2020 Impairments
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 $2.6 billion recorded at March 31, 2020. The recoverable amount of each CGU was based on its FVLCD which was estimated using a discounted cash flow model of proved plus probable cash flows from an independent reserve report prepared as at December 31, 2019 and was adjusted for operations between December 31, 2019 and March 31, 2020. The after-tax discount rates applied to the cash flows were between 8% and 14%.
At March 31, 2020, the recoverable amount of the Company's CGUs were calculated using the following benchmark reference prices for the years 2020 to 2029 adjusted for commodity differentials specific to the Company. The prices and costs subsequent to 2029 have been adjusted for inflation at an annual rate of 2%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 |
| WTI crude oil (US$/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 | |
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 loss | 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, 2020, the Company estimated the recoverable amount of each of its six CGUs due to the volatility in commodity prices during the year and a reduction in future development costs per well for the Viking and Eagle Ford CGUs. The recoverable amount supported the carrying amount for the Conventional, Peace River, Lloydminster, and Duvernay CGUs and no impairment or impairment reversal was recorded. The recoverable amount for the Viking and Eagle Ford CGUs exceeded their carrying amounts which resulted in an impairment reversal of $341.3 million recorded at December 31, 2020. The recoverable amount for each CGU was based on its FVLCD which was estimated using a discounted cash flow model of proved plus probable cash flows from an independent reserve report prepared as at December 31, 2020. The after-tax discount rates applied to the cash flows were between 10% and 17%.
At December 31, 2020, the recoverable amount of the Company's CGUs were calculated using the following benchmark reference prices for the years 2021 to 2030 adjusted for commodity differentials specific to the Company. The prices and costs subsequent to 2030 have been adjusted for inflation at an annual rate of 2%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
| WTI crude oil (US$/bbl) | 47.17 | | 50.17 | | 53.17 | | 54.97 | | 56.07 | | 57.19 | | 58.34 | | 59.50 | | 60.69 | | 61.91 | |
| WCS heavy oil (CA$/bbl) | 44.63 | | 48.18 | | 52.10 | | 54.10 | | 55.19 | | 56.29 | | 57.42 | | 58.57 | | 59.74 | | 60.93 | |
| LLS crude oil (US$/bbl) | 49.50 | | 52.85 | | 55.87 | | 57.69 | | 58.82 | | 59.97 | | 61.15 | | 62.34 | | 63.56 | | 64.83 | |
| Edmonton par oil (CA$/bbl) | 55.76 | | 59.89 | | 63.48 | | 65.76 | | 67.13 | | 68.53 | | 69.95 | | 71.40 | | 72.88 | | 74.34 | |
| Henry Hub gas (US$/mmbtu) | 2.83 | | 2.87 | | 2.90 | | 2.96 | | 3.02 | | 3.08 | | 3.14 | | 3.20 | | 3.26 | | 3.33 | |
| AECO gas (CA$/mmbtu) | 2.78 | | 2.70 | | 2.61 | | 2.65 | | 2.70 | | 2.76 | | 2.81 | | 2.87 | | 2.92 | | 2.98 | |
| Exchange rate (CAD/USD) | 1.30 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | | 1.31 | |
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
reversal | Change in discount rate of 1% | Change in oil price of $2.50/bbl | Change in gas price of $0.25/mcf |
| Conventional CGU | $ | 54,265 | | $ | — | | $ | 1,000 | | $ | 3,000 | | $ | 9,000 | |
| Peace River CGU | 104,225 | | — | | 1,000 | | 49,500 | | 3,000 | |
| Lloydminster CGU | 212,979 | | — | | 7,000 | | 57,500 | | 500 | |
| Duvernay CGU | 70,491 | | — | | 5,500 | | 12,000 | | 1,500 | |
| Viking CGU | 1,026,026 | | 116,000 | | 34,500 | | 106,500 | | 5,000 | |
| Eagle Ford CGU | 1,609,562 | | 225,326 | | 91,600 | | 157,500 | | 38,400 | |
| $ | 3,077,548 | | $ | 341,326 | | $ | 140,600 | | $ | 386,000 | | $ | 57,400 | |
6. CREDIT FACILITIES
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
Credit facilities - U.S. dollar denominated (1) | $ | 239,433 | | $ | 140,815 | |
| Credit facilities - Canadian dollar denominated | 307,370 | | 510,358 | |
| Credit facilities - principal | 546,803 | | 651,173 | |
| Unamortized debt issuance costs | (1,501) | | (1,952) | |
| Credit facilities | $ | 545,302 | | $ | 649,221 | |
(1)U.S. dollar denominated credit facilities balance was US$188.0 million as at September 30, 2021 (December 31, 2020 - US$110.4 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"). The Credit Facilities mature on April 2, 2024 and 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 ("LIBOR"), plus applicable margins.
The LIBOR benchmark transition begins on December 31, 2021. Certain tenors of the U.S. dollar LIBOR benchmark will no longer be published as of December 31, 2021 while some tenors will continue to be published through mid-2023. We expect the U.S. dollar LIBOR benchmarks to be replaced with an alternative that will apply to our U.S. dollar borrowing at our option. We do not expect this change to have a material impact to Baytex as U.S. dollar borrowings under the credit facilities can also bear interest at the U.S. base loan rate.
The weighted average interest rate on the Credit Facilities was 2.2% for the nine months ended September 30, 2021 (2.5% for nine months ended September 30, 2020).
At September 30, 2021, Baytex had $15.0 million of outstanding letters of credit (December 31, 2020 - $15.0 million) under the Credit Facilities.
At September 30, 2021, Baytex was in compliance with all of the covenants contained in the Credit Facilities and is forecasting compliance with these covenants based on current forward commodity prices. The following table summarizes the financial covenants applicable to the Credit Facilities and Baytex's compliance therewith as at September 30, 2021.
| | | | | | | | |
| Covenant Description | Position as at September 30, 2021 | Covenant |
Senior Secured Debt (1) to Bank EBITDA (2) (Maximum Ratio) | 0.8:1.0 | 3.5:1.0 |
Interest Coverage (3) (Minimum Ratio) | 7.4:1.0 | 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 September 30, 2021, the Company's Senior Secured Debt totaled $561.8 million which included $546.8 million of principal amounts outstanding and $15.0 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 September 30, 2021 was $708.4 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 September 30, 2021 was $95.7 million.
7. LONG-TERM NOTES
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| 5.625% notes (US$284,478 – principal) due June 1, 2024 | $ | 362,696 | | $ | 510,200 | |
| 8.75% notes (US$500,000 – principal) due April 1, 2027 | 637,475 | | 637,750 | |
Total long-term notes - principal (1) | 1,000,171 | | 1,147,950 | |
| Unamortized debt issuance costs | (12,946) | | (15,082) | |
| Total long-term notes - net of unamortized debt issuance costs | $ | 987,225 | | $ | 1,132,868 | |
(1)The decrease in the principal amount of long-term notes outstanding from December 31, 2020 to September 30, 2021 is the result of principal repayments of $145.0 million and changes in the reported amount of U.S. denominated debt of $2.7 million.
The long-term notes do not contain any significant financial maintenance covenants but do contain a debt incurrence covenant that restricts the Company's ability to raise additional debt beyond the existing Credit Facilities and long-term notes.
During the nine months ended September 30, 2021, Baytex repurchased and cancelled principal notes totaling US$115.5 million of the 5.625% Notes and recorded early redemption expense of $0.9 million and an increase to unamortized debt issuance costs of $0.7 million. Subsequent to September 30, 2021, Baytex repurchased and cancelled US$84.5 million principal amount of the 5.625% Notes due 2024 at the call price of 100.938%, plus accrued interest, effective October 29, 2021. As at November 4, 2021, there was a total of US$200.0 million of the 5.625% Notes that remained outstanding.
8. ASSET RETIREMENT OBLIGATIONS
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Balance, beginning of period | $ | 760,383 | | $ | 667,974 | |
| Liabilities incurred | 10,744 | | 15,189 | |
| Liabilities settled | (4,215) | | (7,168) | |
| | |
| Liabilities acquired from property acquisitions | 131 | | — | |
| Liabilities divested | (2,900) | | (721) | |
| Property swaps | (4,421) | | (525) | |
| Accretion (note 14) | 8,938 | | 8,978 | |
Government grants (1) | (2,108) | | (2,128) | |
| Change in estimate | 991 | | (12,771) | |
Changes in discount rates and inflation rates (2) | (71,074) | | 92,576 | |
| Foreign currency translation | (59) | | (1,021) | |
| Balance, end of period | $ | 696,410 | | $ | 760,383 | |
| Less current portion of asset retirement obligations | 11,719 | | 11,820 | |
| Non-current portion of asset retirement obligations | $ | 684,691 | | $ | 748,563 | |
(1) During the nine months ended September 30, 2021, Baytex recognized $2.1 million of non-cash other income and a reduction in asset retirement obligations related to government grants provided by the Government of Alberta and the Government of Saskatchewan ($2.1 million for the year ended December 31, 2020).
(2) The discount and inflation rates at September 30, 2021 were 2.0% and 1.7%, respectively, compared to 1.2% and 1.5% at December 31, 2020.
9. 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 September 30, 2021, 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, 2019 | 558,305 | | $ | 5,718,835 | |
| Vesting of share awards | 2,922 | | 10,583 | |
| Balance, December 31, 2020 | 561,227 | | $ | 5,729,418 | |
| Vesting of share awards | 2,986 | | 7,175 | |
| Balance, September 30, 2021 | 564,213 | | $ | 5,736,593 | |
10. SHARE AWARD INCENTIVE PLAN
For the three and nine months ended September 30, 2021 the Company recorded total compensation expense related to the share awards of $2.5 million and $8.3 million respectively ($2.9 million and $8.7 million for the three and nine months ended September 30, 2020). Included in compensation expense related to share awards for the three and nine months ended September 30, 2021 is $1.1 million and $3.7 million of cash compensation expense related to the incentive award plan, deferred share unit plan and the associated equity total return swaps ($0.6 million and $1.8 million for the three and nine months ended September 30, 2020).
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 $1.30 per restricted and performance award for the nine months ended September 30, 2021 ($1.48 per restricted and performance award for the nine months ended September 30, 2020).
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, 2019 | 3,801 | | 3,135 | | 6,936 | |
| Granted | 2,239 | | 3,253 | | 5,492 | |
| | | |
| Vested and converted to common shares | (1,730) | | (1,192) | | (2,922) | |
| Forfeited | (188) | | (1,108) | | (1,296) | |
| Balance, December 31, 2020 | 4,122 | | 4,088 | | 8,210 | |
| Granted | — | | 4,723 | | 4,723 | |
| Vested and converted to common shares | (1,861) | | (1,152) | | (3,013) | |
| Forfeited | (128) | | (208) | | (336) | |
| Balance, September 30, 2021 | 2,133 | | 7,451 | | 9,584 | |
(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.
During the nine months ended September 30, 2021, Baytex granted 5.0 million awards under the Incentive Award plan at a weighted average fair value of $1.32 per award (2.9 million awards granted at a fair value of $1.50 per incentive award for the nine months ended September 30, 2020). At September 30, 2021 there were 6.6 million awards outstanding under the Incentive Award plan.
Deferred Share Unit Plan
Baytex has a deferred share unit plan (the "DSU" plan) whereby each Director of Baytex is entitled to receive a cash payment equal to the value of one Baytex common share on the date on which they cease to be a member of the Board. The awards vest immediately upon being granted and are expensed in full on the grant date. The units are recognized at fair value at each period end and are included in trade and other payables.
During the nine months ended September 30, 2021, Baytex granted 0.9 million awards under the DSU plan at a fair value of $1.29 per award. At September 30, 2021, there were 0.8 million awards outstanding under the DSU plan.
The Company uses equity total return swaps on the equivalent number of Baytex common shares in order to fix the aggregate cost of the Incentive Award plan and the DSU plan at the fair value determined on the grant date. The carrying value of the financial derivatives includes the unrealized fair value of the equity total return swaps which was an asset of $7.0 million at September 30, 2021 (December 31, 2020 - liability of $1.1 million).
11. 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 September 30 |
| 2021 | 2020 |
| Net income | Weighted average common shares (000s) | Net income per share | Net loss | Weighted average common shares
(000s) | Net loss per share |
| Net income (loss) - basic | $ | 32,713 | | 564,211 | | $ | 0.06 | | $ | (23,444) | | 561,128 | | $ | (0.04) | |
| Dilutive effect of share awards | — | | 7,436 | | — | | — | | — | | — | |
| | | | | | |
| Net income (loss) - diluted | $ | 32,713 | | 571,647 | | $ | 0.06 | | $ | (23,444) | | 561,128 | | $ | (0.04) | |
| | | | | | |
| Nine Months Ended September 30 |
| 2021 | 2020 |
| Net income | Weighted average common shares (000s) | Net income per share | Net loss | Weighted average common shares (000s) | Net loss per share |
| Net income (loss) - basic | $ | 1,050,361 | | 563,492 | | $ | 1.86 | | $ | (2,660,124) | | 560,484 | | $ | (4.75) | |
| Dilutive effect of share awards | — | | 6,687 | | — | | — | | — | | — | |
| | | | | | |
| Net income (loss) - diluted | $ | 1,050,361 | | 570,179 | | $ | 1.84 | | $ | (2,660,124) | | 560,484 | | $ | (4.75) | |
For the three and nine months ended September 30, 2021, no share awards were excluded from the calculation of diluted income per share as their effect was dilutive. For the three and nine months ended September 30, 2020, all share awards were excluded from the calculation of diluted loss per share as their effect was anti-dilutive given the Company recorded a net loss.
12. 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 September 30 |
| 2021 | 2020 |
| Canada | U.S. | Total | Canada | U.S. | Total |
| Light oil and condensate | $ | 124,930 | | $ | 154,511 | | $ | 279,441 | | $ | 78,432 | | $ | 75,620 | | $ | 154,052 | |
| Heavy oil | 146,468 | | — | | 146,468 | | 69,791 | | — | | 69,791 | |
| NGL | 4,177 | | 22,932 | | 27,109 | | 1,762 | | 8,914 | | 10,676 | |
| Natural gas sales | 17,148 | | 18,570 | | 35,718 | | 8,846 | | 9,173 | | 18,019 | |
| Total petroleum and natural gas sales | $ | 292,723 | | $ | 196,013 | | $ | 488,736 | | $ | 158,831 | | $ | 93,707 | | $ | 252,538 | |
| | | | | | |
| Nine Months Ended September 30 |
| 2021 | 2020 |
| Canada | U.S. | Total | Canada | U.S. | Total |
| Light oil and condensate | $ | 342,744 | | $ | 418,498 | | $ | 761,242 | | $ | 229,745 | | $ | 257,818 | | $ | 487,563 | |
| Heavy oil | 385,288 | | — | | 385,288 | | 169,638 | | — | | 169,638 | |
| NGL | 12,327 | | 52,870 | | 65,197 | | 3,957 | | 25,791 | | 29,748 | |
| Natural gas sales | 45,812 | | 58,253 | | 104,065 | | 23,660 | | 31,232 | | 54,892 | |
| Total petroleum and natural gas sales | $ | 786,171 | | $ | 529,621 | | $ | 1,315,792 | | $ | 427,000 | | $ | 314,841 | | $ | 741,841 | |
Included in accounts receivable at September 30, 2021 is $160.2 million of accrued production revenue related to delivered volumes (December 31, 2020 - $81.3 million).
13. INCOME TAXES
The provision for income taxes has been computed as follows:
| | | | | | | | |
| Nine Months Ended September 30 |
| 2021 | | 2020 | |
| Net income (loss) before income taxes | $ | 1,123,218 | | $ | (2,920,725) | |
| Expected income taxes at the statutory rate of 25.12% (2020 – 25.95%) | 282,152 | | (757,928) | |
| (Increase) decrease in income tax recovery resulting from: | | |
| Share-based compensation | 1,156 | | 1,809 | |
| Effect of foreign exchange | (292) | | 5,022 | |
| Effect of change in income tax rates | (65) | | 22,231 | |
| Effect of rate adjustments for foreign jurisdictions | (19,751) | | 35,982 | |
| Effect of change in deferred tax benefit not recognized | (191,611) | | 409,717 | |
| Effect of U.S. tax change | — | | 19,996 | |
| Adjustments and assessments | 1,268 | | 2,570 | |
| Income tax expense (recovery) | $ | 72,857 | | $ | (260,601) | |
At September 30, 2021, a deferred tax asset of $279.2 million remains unrecognized due to uncertainty surrounding future commodity prices and future capital gains (December 31, 2020 - $469.7 million).
As disclosed in the 2020 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.
14. FINANCING AND INTEREST
| | | | | | | | | | | | | | |
| Three Months Ended September 30 | Nine Months Ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 | |
| Interest on credit facilities | $ | 3,256 | | $ | 3,366 | | $ | 9,842 | | $ | 11,749 | |
| Interest on long-term notes | 19,481 | | 21,943 | | 60,734 | | 69,231 | |
| Interest on lease obligations | 56 | | 109 | | 174 | | 360 | |
| Non-cash financing | 1,733 | | 756 | | 3,272 | | 5,863 | |
| Accretion on asset retirement obligations (note 8) | 3,273 | | 1,788 | | 8,938 | | 6,897 | |
| | | | |
| Early redemption expense (note 7) | 1,229 | | — | | 872 | | 3,312 | |
| Financing and interest | $ | 29,028 | | $ | 27,962 | | $ | 83,832 | | $ | 97,412 | |
15. FOREIGN EXCHANGE
| | | | | | | | | | | | | | |
| Three Months Ended September 30 | Nine Months Ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 | |
Unrealized foreign exchange (gain) loss - intercompany notes (1) | $ | (25,909) | | $ | (11,115) | | $ | 411 | | $ | (11,115) | |
| Unrealized foreign exchange loss (gain) - long-term notes & credit facilities | 33,454 | | (14,765) | | 2,812 | | 39,240 | |
| Realized foreign exchange gain | (79) | | (351) | | (818) | | (437) | |
| Foreign exchange loss (gain) | $ | 7,466 | | $ | (26,231) | | $ | 2,405 | | $ | 27,688 | |
(1)During 2020, a series of intercompany notes totaling US$751.0 million were issued from a Canadian subsidiary to a U.S. subsidiary. These notes are eliminated upon consolidation within the Condensed Consolidated Statement of Financial Position and are revalued at the relevant foreign exchange rate at each period end. Foreign exchange gains or losses incurred within the Canadian subsidiary are recognized in unrealized foreign exchange gain or loss whereas those within the U.S. subsidiary are recognized in other comprehensive income.
16. 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:
| | | | | | | | | | | | | | | | | |
| September 30, 2021 | December 31, 2020 | |
| Carrying value | Fair value | Carrying value | Fair value | Fair Value Measurement Hierarchy |
| Financial Assets | | | | | |
| FVTPL | | | | | |
| Financial derivatives | $ | 7,040 | | $ | 7,040 | | $ | 5,057 | | $ | 5,057 | | Level 2 |
| Total | $ | 7,040 | | $ | 7,040 | | $ | 5,057 | | $ | 5,057 | | |
| | | | | |
| Financial assets at amortized cost | | | | | |
| | | | | |
| Trade and other receivables | $ | 177,546 | | $ | 177,546 | | $ | 107,477 | | $ | 107,477 | | ��� |
| Total | $ | 177,546 | | $ | 177,546 | | $ | 107,477 | | $ | 107,477 | | |
| | | | | |
| Financial Liabilities | | | | | |
| FVTPL | | | | | |
| Financial derivatives | $ | (208,183) | | $ | (208,183) | | $ | (26,792) | | $ | (26,792) | | Level 2 |
| Total | $ | (208,183) | | $ | (208,183) | | $ | (26,792) | | $ | (26,792) | | |
| | | | | |
| Financial liabilities at amortized cost | | | | | |
| Trade and other payables | $ | (195,230) | | $ | (195,230) | | $ | (155,955) | | $ | (155,955) | | — | |
| Credit facilities | (545,302) | | (546,803) | | (649,221) | | (651,173) | | — | |
| Long-term notes | (987,225) | | (1,027,213) | | (1,132,868) | | (761,129) | | Level 1 |
| Total | $ | (1,727,757) | | $ | (1,769,246) | | $ | (1,938,044) | | $ | (1,568,257) | | |
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2021 and 2020.
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 |
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 |
| U.S. dollar denominated | US$750,431 | | US$759,508 | | US$1,132,170 | | US$934,731 | |
Commodity Price Risk
Financial Derivative Contracts
Baytex had the following financial derivative contracts outstanding as of November 4, 2021:
| | | | | | | | | | | | | | |
| Remaining Period | Volume | Price/Unit (1) | Index |
| Oil | | | | |
| Basis Swap | Oct 2021 to Dec 2021 | 8,000 bbl/d | WTI less US$13.41/bbl | WCS |
| Basis Swap | Jan 2022 to Dec 2022 | 12,000 bbl/d | WTI less US$12.40/bbl | WCS |
| | | | |
| Basis Swap | Oct 2021 to Dec 2021 | 7,500 bbl/d | WTI less US$5.03/bbl | MSW |
| Basis Swap | Jan 2022 to Dec 2022 | 4,000 bbl/d | WTI less US$4.43/bbl | MSW |
| | | | |
| Fixed Sell | Oct 2021 to Dec 2021 | 4,000 bbl/d | US$45.00/bbl | WTI |
3-way option (2) | Oct 2021 to Dec 2021 | 500 bbl/d | US$35.00/US$45.00/US$49.03 | WTI |
3-way option (2) | Oct 2021 to Dec 2021 | 1,500 bbl/d | US$35.00/US$45.00/US$49.10 | WTI |
3-way option (2) | Oct 2021 to Dec 2021 | 3,500 bbl/d | US$35.00/US$45.00/US$49.50 | WTI |
3-way option (2) | Oct 2021 to Dec 2021 | 10,000 bbl/d | US$35.00/US$45.00/US$55.00 | WTI |
3-way option (2) | Oct 2021 to Dec 2021 | 2,000 bbl/d | US$37.00/US$42.50/US$48.00 | WTI |
3-way option (2) | Jan 2022 to Dec 2022 | 1,500 bbl/d | US$40.00/US$50.00/US$58.10 | WTI |
3-way option (2) | Jan 2022 to Dec 2022 | 2,000 bbl/d | US$46.00/US$56.00/US$66.72 | WTI |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 bbl/d | US$47.00/US$57.00/US$67.00 | WTI |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 bbl/d | US$50.00/US$60.00/US$70.00 | WTI |
3-way option (2) | Jan 2022 to Dec 2022 | 2,000 bbl/d | US$53.00/US$63.50/US$72.90 | WTI |
3-way option (2)(4) | Jan 2023 to Dec 2023 | 2,000 bbl/d | US$55.00/US$66.00/US$84.00 | WTI |
Swaption (3) | Jan 2022 to Dec 2022 | 5,000 bbl/d | US$53.00/bbl | WTI |
Swaption (3) | Jan 2022 to Dec 2022 | 5,000 bbl/d | US$54.00/bbl | WTI |
| | | | |
| Natural Gas | | | | |
| | | | |
| Fixed Sell | Oct 2021 to Dec 2021 | 16,000 GJ/d | $2.36/GJ | AECO 7A |
| Fixed Sell | Jan 2022 to Dec 2022 | 5,000 GJ/d | $2.53/GJ | AECO 7A |
| Fixed Sell | Oct 2021 to Dec 2021 | 2,500 GJ/d | $2.40/GJ | AECO 5A |
| Fixed Sell | Jan 2022 to Dec 2022 | 14,250 GJ/d | $2.84/GJ | AECO 5A |
| | | | |
| Fixed Sell | Oct 2021 to Dec 2021 | 12,000 mmbtu/d | US$2.70/mmbtu | NYMEX |
| Fixed Sell | Jan 2022 to Dec 2022 | 1,000 mmbtu/d | US$2.94/mmbtu | NYMEX |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 mmbtu/d | US$2.25/US$2.75/US$3.06 | NYMEX |
3-way option (2) | Jan 2022 to Dec 2022 | 1,500 mmbtu/d | US$2.60/US$2.91/US$3.56 | NYMEX |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 mmbtu/d | US$2.60/US$3.00/US$3.83 | NYMEX |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 mmbtu/d | US$2.65/US$2.90/US$3.40 | NYMEX |
3-way option (2) | Jan 2022 to Dec 2022 | 2,500 mmbtu/d | US$3.00/US$3.75/US$4.40 | NYMEX |
(1)Based on the weighted average price per unit for the period.
(2)Producer 3-way option consists of a sold put, a bought put and a sold call. To illustrate, in a US$50.00/US$60.00/US$70.00 contract, Baytex receives WTI plus US$10.00/bbl when WTI is at or below US$50.00/bbl; Baytex receives US$60.00/bbl when WTI is between US$50.00/bbl and US$60.00/bbl; Baytex receives the market price when WTI is between US$60.00/bbl and US$70.00/bbl; and Baytex receives US$70.00/bbl when WTI is above US$70.00/bbl.
(3)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.
(4)Contracts entered subsequent to September 30, 2021.
The following table sets forth the realized and unrealized gains and losses recorded on financial derivatives.
| | | | | | | | | | | | | | |
| Three Months Ended September 30 | Nine Months Ended September 30 |
| 2021 | | 2020 | | 2021 | | 2020 | |
| Realized financial derivatives loss (gain) | $ | 53,905 | | $ | 9,743 | | $ | 113,697 | | $ | (30,731) | |
| Unrealized financial derivatives loss (gain) | 8,941 | | 7,284 | | 179,408 | | (19,425) | |
| Financial derivatives loss (gain) | $ | 62,846 | | $ | 17,027 | | $ | 293,105 | | $ | (50,156) | |
