Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. First Quarter 2022 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.
Thank you, Charisse. Good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter 2022 financial and operating results. Today, I am joined by Ed LaFehr, our President and Chief Executive Officer, Rod Gray, our Executive VP and Chief Financial Officer, and Chad Lundberg, our Chief Operating and Sustainability Officer. While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to the advisories regarding forward-looking statements, oil and gas information, and non-GAAP financial and capital management measures in yesterday's press release. All dollar amounts referenced in our remarks today are in Canadian dollars unless otherwise specified. With that, I would now like to turn the call over to Ed.
Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our first quarter 2022 conference call. During the first quarter, we remained focused on capital discipline, generating free cash flow, and reducing debt. We delivered strong operating and financial results with production of almost 81,000 BOEs per day, free cash flow of $121 million, and a 10% reduction in our net debt to $1.28 billion. I'm very pleased to announce that given the strength of our balance sheet and consistent with our desire to offer direct shareholder returns, the board of directors has approved the filing of a normal course issuer bid application with the Toronto Stock Exchange for a share buyback program of up to 56 million common shares, representing 10% of our public float.
We expect to commence the buyback program in May, which is consistent with the shareholder return framework we discussed last quarter. These are exciting times for Baytex. In addition to the share buyback announcement, we have a number of positive developments to share with you today. First is the success of our Clearwater development at Peavine. Second is our increased 2022 guidance, and third is the update we've made to our five-year plan. Let's start with our Clearwater results. We followed up our 2021 appraisal program on our Peavine acreage with exceptional Q1 2022 drilling program. We have now started up all 10 wells drilled during the first quarter, and production has increased from zero at the beginning of 2021 to approximately 8,000 bbl per day today.
During the first quarter, we successfully executed our first six extended reach horizontal wells, which are utilized to provide appropriate setbacks to residents in environmentally sensitive areas. These ERH wells are among the first of their type to be drilled in Western Canada and consist of 4 2-mile long laterals versus a more traditional well design comprised of 8 1-mile laterals. Our first three ERH wells on the 425 pad have established average 30-day initial production rates of approximately 1,100 bbl per day per well and are the strongest wells ever drilled in the Clearwater Play. In addition, four wells on the 533 pad were brought on stream in March, April, and are expected to generate 30-day initial production rates of 300-400 bbl per day per well.
Initial well performance continues to outperform our type curve assumptions, and we now have seven of the top 10 initial rate wells drilled to date across the Clearwater Play. As we continue to progress our development plan, we have committed to drill six additional Clearwater wells during the fourth quarter. We now intend to run a full one-rig program at Peavine through year-end. As a result, we expect to drill 24 net wells in 2022, up from our original budget of 18 net wells. Maintaining a consistent one-rig program, level loading activity in the second half of 2022 will drive further efficiencies and set the stage for continued strong operating momentum heading into 2023.
At current commodity prices, the Clearwater generates among the strongest economics within our portfolio with payouts of less than three months and has the ability to grow organically while enhancing our free cash flow profile. To date, we have de-risked 50 sections of our 80-section Peavine land base, and our updated plans include the drilling of approximately 120 net wells through 2026. When combined with our legacy acreage position in Northwest Alberta, we estimate that over 125 sections are highly prospective for Clearwater development. With this updated view of our land base, we expect Clearwater production to increase to approximately 10,000 bbl per day during our five-year plan period while generating over CAD 400 million of cumulative free cash flow.
With continued success, we believe the play ultimately holds the potential for over 200 drilling locations that could support production increasing to over 15,000 bbl per day. We are very excited with the Q1 program and what it means for our business going forward. I will now turn to our 2022 outlook and guidance update. With continued strong operating momentum and production growth on our Clearwater lands, we are increasing our production guidance for 2022 to 83,000 BOE to 85,000 BOE per day, up from 80,000 BOE to 83,000 BOE per day previously. We expect to exit 2022 producing approximately 87,000 BOE to 88,000 BOE per day. Based on the forward strip, we now expect to generate approximately CAD 700 million or CAD 1.25 per basic share of free cash flow this year.
As part of our previously announced return of capital framework, we expect to allocate approximately 25% of our annual free cash flow to direct shareholder returns through the share buyback program I mentioned earlier. The remainder of our free cash flow will continue to be allocated to debt reduction until we achieve a net debt level of CAD 800 million, which represents an expected net debt to EBITDA ratio of one times at a $55 WTI price. This level of net debt will provide us with flexibility to run our business through the commodity price cycles and generate meaningful returns to our shareholders. At current prices, we expect to achieve this net debt level in early 2023, at which point we will consider steps to further enhance shareholder returns.
Our operational success, the continued strong economics of our drilling program, and the inflationary pressures being experienced throughout our industry caused us to review our capital program for the year. We are now forecasting 2022 exploration and development expenditures of $450 million to $500 million, up from $400 million to $450 million, which was set in a $65 U.S. pricing environment. The incremental capital reflects the additional activity on our Clearwater lands and two to three net incremental wells in the Eagle Ford. This increased activity set will result in $30 million of incremental exploration and development expenditures, which is offset by approximately $10 million of reduced light oil activity.
We also updated our 2022 plan to reflect an incremental 8% expected capital cost inflation, which increases our exploration and development expenditures by approximately CAD 30 million. This reflects industry cost pressures related to labor, logistics, fuel, and tangible items such as steel, frac sand, and chemicals. In aggregate, we are now assuming 18% capital cost inflation in 2022 as compared to 2021. Lastly, we have fine-tuned several of our cost assumptions to reflect increased royalties due to higher commodity prices, inflationary pressures on operating and transportation expenses. Offsetting these cost pressures to a certain extent is increased production and a reduction in our interest expense and our net debt is reduced.
With a strong outlook for 2022 unfolding, I want to now turn it over to Rod, who will provide a brief update on our five-year plan and liquidity and capital structure.
Thanks, Ed, and good morning, everyone. We introduced our five-year plan one year ago in April 2021 to highlight our financial and operational sustainability and our ability to generate meaningful free cash flow. We continue to benchmark our results to this five-year plan and intend to update as warranted based on the macro environment, drilling results, and activity across our land base. We are now rolling our five-year plan forward to capture the period 2022 to 2026. Through this plan period, we are committed to a disciplined returns-based capital allocation philosophy, targeting exploration and development expenditures at less than 50% of our adjusted funds flow. We expect to generate annual production growth of 2% to 4%, with production reaching approximately 95,000 BOE a day in 2026.
Year 1 of the five-year plan is based on our 2022 guidance and the forward strip commodity prices. Years 2 through 5, 2023 to 2026, are based on a constant $75 WTI price. Our focus on delivering free cash flow is unchanged. Under these pricing assumptions, we expect to generate approximately CAD 3 billion of cumulative free cash flow during the plan period. In our May investor relations presentation available on our website, you'll find more details regarding our five-year plan, including free cash flow sensitivities at $85 and $95 WTI prices. Turning to our liquidity position at March 31st, we had approximately CAD 600 million of liquidity at March 31st. On April 1st, we announced that we received strong support from our lending syndicate to extend and amend our bank credit facilities.
The revolving credit facilities have been extended by two years from April 2024 to April 2026, and have been increased modestly from approximately $815 million to $850 million. The revolving credit facilities are not borrowing-based facilities and do not require annual or semiannual reviews. Our net debt, which includes our credit facilities, long-term notes and working capital, totaled $1.28 billion at March 31, 2022, down from $1.41 billion at December 31, 2021. At current prices, we expect to exit 2022 with net debt of less than $900 million.
We also intend to repurchase and cancel the remaining $200 million principal amount of 5.625% long-term notes due 2024 at par on June 1st, 2022. With that, I'll turn the call back over to Ed.
Thanks, Rod. We are incredibly excited to be at this position today. To summarize, we remain focused on capital discipline, generating free cash flow and reducing debt. We materially advanced our Clearwater development during the first quarter, and these exceptional wells have enabled us to more than double our Clearwater production to 8,000 bbl per day. As a result, we are pleased to increase our 2022 production guidance and add six new Clearwater wells late this year. Our focus on delivering substantial free cash flow is unchanged. Our updated five-year plan is expected to generate approximately CAD 3 billion of cumulative free cash flow. Once again, I'm very excited that our board of directors has approved a share buyback program that is expected to commence in May. Our business is strong, and we look forward to executing our plans for the ongoing benefit of all stakeholders.
With that, I will ask the operator to please open the call for questions.
Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Patrick O'Rourke with ATB Capital Markets. Please go ahead.
Oh, hey, guys, good morning. Really impressive results on those most recent pads in the Clearwater. Question with respect to the scale and scope of the project here. I know you've taken it up to 10,000 bbl a day, and you're talking about potential for that play to be a 15,000 bbl a day right now. I'm just wondering if you can sort of give us a little bit more color in terms of that 15,000 bbl a day number and what percentage or number of sections within your acreage that encompasses, as of right now.
Right. Well, good morning, Patrick. Yeah, we're very excited that this play is moving as quickly as it is, and it over doubled from 3,000 bbl a day just in January to 8,000 bbl a day now. We now have the performance data we needed in the central portion of our Peavine play that now tells us we have 50 sections de-risked. We've got some private company activity to the south of us, to the west of us, and to the northwest of us that we believe has de-risked that, along with our major activity in the central and western portion of the play, has de-risked those 50 sections in the entire western portion of our 80-section land block. So at four wells a section, that's 200 wells.
We've placed in a conservative manner, 120 wells into our five-year plan, and that's what grows us now to 10,000 bbl a day. Previously, we had 80 wells in the play being developed to get us to 6,000 bbl a day. We've moved that to 10,000 bbl a day. Based on what I just told you know, we could hold that flat for quite some period of time, given that we've got 200 locations de-risked. The question we're gonna be answering over the course of the next six months is, what does it look like to the east, to the southeast, and to the northeast? We'll be appraising those areas over the next several months. In the meantime, that is our five-year plan.
It's very easy to, you know, to project a higher type curve in the center of this play and get us to 15,000 bbl a day, which is what we've done. The question is gonna be pace and timing and the de-risking of the east. You know, it's very easy to get to north of 15,000 bbl a day here. It's very easy for us to see this, which is why we announced it. On the other hand, we're only ready to commit a 10,000 bbl a day program on those, a portion of those 50 sections to the west at this point in time.
Is the gap between the 10,000 bbl and the 15,000 bbl there then, is that primarily derived from sort of a de-risking of the well results and potential sort of areal delineation, or is it more so derived from pace of capitalization and amount of capital directed to the play?
Well, I think it's a little of both. As I said, I think we can get to 15,000 bbl a day. We don't know how large the full extent of the field is. If it's much larger to the east and to the northeast, that will give us some optionality to grow to 15,000 bbl a day or even north of that, and consider different development plans. What we know now today is that we wanna put a portion of those 50 sections to work in the five-year plan context. It's gonna be a matter of de-risking to the east and also a question of how high do we wanna go and how early do we wanna go on blowdown versus, you know, potential much larger development that could extend for over a decade.
We need to get the de-risking done on that bigger question then. We could go to 15,000 bbl a day. There's no question in my mind about that. It's a question of how large is this field in full?
Okay. Just a final question on with respect to that then. You have a five-year plan in place. What's the sort of pace or timeframe for that de-risking that you're referring to there?
I think the major part of the east and northeast de-risking will be first quarter next year. We need some winter access up to the northeast. It's a more remote area up there and so we'll need to get up there on some ice roads over jeep roads, essentially, and you know we're not ready to go beyond that until we get some strat wells down.
Okay, thank you very much.
The next question comes from Eric Nuttall with Ninepoint Partners. Please go ahead.
Hey, good morning, guys. Confusing reaction in the share price today. Not everybody gets to come out and say they just drilled some wells to pay back in weeks. I don't think I've seen that in my career. I just wanted to turn the conversation to return of capital. As your largest shareholder, we fully support the desire to lower leverage. It's an amazing accomplishment to be able to talk about share buybacks now versus two years ago. I wanna focus on 2023. You know, we've got you guys achieving net cash status by the end of next year. We've got you trading at a 38% free cash yield at $100 oil. I know you're using a lower price in your deck.
With 25% of free cash flow now, once you get and achieve your de-leveraging status, you know, you talk about further enhancing returns. What's a reasonable percentage that as shareholders, we should expect next year? Like, is 75% of free cash flow reasonable? 'Cause if that's the case and, you know, we dare to dream and believe in, you know, the current oil price, that's 28%, you know, buyback dividend, some combination thereof. I just wanted to get your sense of what you think a reasonable return to shareholders will be next year once you achieve your leverage target.
Yeah. Well, firstly, it's really great and very exciting that those debt targets have come up on us as quickly as they have and will continue to under current pricing. I wanna just first say for all callers on board, I know you're aware of this, Eric, we talk fairly often, but just for everyone else, we are absolutely committed to returning significant returns to shareholders directly and in the form of 25% of our free cash flow this year, to buybacks, in the form of share buybacks. We had unanimous board support over that. We're trading below our intrinsic NAV. We have an all-time low historical multiple, despite the fact our portfolio has improved, pricing has improved, our asset performance has improved.
When we look at the formula in combination with where we are relatively or on absolute level on value, we wanna buy our shares back all day long. This is a very exciting place to be. Now, your question is really more about what happens when we hit the CAD 800 million second target that we've announced, and we expect to be there by early next year, as I just said in the script. At that point in time, we're gonna be even more committed to providing direct returns to shareholders in the form of buybacks, if we're trading as we are today. Potentially in the form of a dividend as well. We have that to debate with the board. Potentially in the form of Clearwater and generating more free cash flow through Clearwater development.
With that, I'm gonna hand it over to Rod just to add any additional flavor on this. We will have options there, as you say, being nearly debt-free in early 2023 to go far beyond where we are today. I just can't give you a specific number. Maybe Rod, you can offer some additional context to help.
Yeah. It's more just context, Eric. I see us driving the debt level lower, running with less leverage in the system, and that gives us optionality. As Ed said, we are committed to providing direct shareholder returns, and I would expect we're gonna have much more flexibility with that, as you've indicated, into 2023.
Like I look at you guys, you know, debt-free, low to no growth, you know, you got a cash problem. I get. You know, we've got Cenovus pledging 100% of free cash flow back to shareholders. I would assume that a 75% bogey. I know it's a board decision, you can't commit to anything right now, but it's just the numbers are truly eye-popping. I just don't think the average guy gets it just yet. Anyways, thanks. Thanks for taking my question.
Yeah. It could be a very, very large number. Thanks for the call and the question. Thanks.
The next question comes from Josh Young with Bison. Please go ahead.
Hey guys. Yeah, those were great questions already, and this is a great report. Thank you for, you know, just fantastic results. Can you talk a little bit about what changed in the Clearwater in terms of yielding? So obviously these are longer laterals, but there are fewer of them in each of these wells. What is it that drove these excellent kind of best-in-play results that you guys just announced? What does it mean for additional inventory in this part of the field?
Well, a large part of that, Josh, is just simply moving towards the central portion of the field and progressively moving there. We had agreed early on with the settlement that we would start in the far west, and we knew it was not in the center of the field. We then moved up structure to the 14 and 36 pad, and that was offsetting a DST that was quite exciting and some conventional logs. We knew we were potentially in a better location. We proved that up with the 903 bbl, 900 bbl a day wells. We knew moving south that we would move into the heart of the thicker, the better permeability trend really in the core of the field.
The exciting thing there is now, as you say, with this new technology, with the four lateral, same meterage as the eight lateral 1-mile wells. These four l ateral 2-mile wells is giving us the ability to do some things from a social standpoint within the settlement to undershoot roads, little hamlets and things, and really get into full development mode. Also when you're drilling in such a consistent reservoir and such a strong, you know, such a clean sand, once you're on bottom, you tend to generate some really strong efficiencies with your ROPs while drilling. We were able to drill these wells not only for better costs, but because we're in the heart of the trend. I think also we're waiting for our super pad facilities to be completed.
We've got these completed and the wells are ready to go. We did this during breakup, which was a bit of a risk, but the configuration of getting the facilities done first, bringing these wells on, these new four lateral wells on these super pads with the full facilities in place, allows us to move to production mode with less hiccups, if you will, in the first 30-60-90 days. That's exactly what the team did. There is quite a large amount of inventory that's just like this. For example, on these three wells at 1,100 bbl a day, we're bringing on the other three on the same pad right now. All these are Q2 wells. None of them came on really in Q1. This is all Q2 and beyond impact.
We've got another three right now, and I would say the core of the play is probably a good 20 sections of land in that area, which is, you know, multiply that by four and that's a lot of wells. That's a good 80 wells. You know, we need to keep building out from the core now and we will do that. We are incredibly excited that we've now got a new pacesetter for the entire basin on these 1,100 bbl a day wells.
That's great. Thank you. That's helpful color. Could you talk about, as a follow-up, what this means for your other heavy oil inventory at Peace River and at Lloydminster, and how applicable the technology and the techniques that you're using for these great results in the Clearwater might be for this other inventory?
Yeah. Well, I think, you know, we're probably the lead explorer, developer, and operator of multilateral heavy oil wells. We see ourselves that way. We certainly do it in Lloydminster, have been doing this for decades in Peace River, and now we're applying this to the Clearwater. We have a second well up in the core of our legacy Peace River lands that we'll drill at the end of this year. It will more likely be in an appraisal mode. It will more likely be a six-shooter, 1-mile leg type configuration as opposed to the 2-mile configuration, because you'd really need to get confidence in the continuity of the reservoir and structure to be going out 2 miles, and we wouldn't get there on an appraisal well.
In Lloydminster, we do a combination of single laterals, multiple laterals of all different kinds of configurations depending on what's needed. This has certainly opened our eyes to a new way of doing things where we have the continuous reservoir, so we'll always look at it. We have probably our deepest and strongest inventory in the entire company in Lloydminster. Along that fairway, we're gonna be running a full rig year program. We'll start up just after breakup and go with that one rig in Lloydminster. We're gonna be running a full rig program after breakup in Peace River proper. We'll be running now with these added six wells, a full rig in Peavine for the rest of the year.
We'll have three rigs going full-time coming out of breakup in the heavy oil properties, doing a variety of different kinds of lateral and multilateral configurations. We're incredibly excited about this though, Josh. It is a real step change in the way people are gonna start looking at Clearwater development.
Great. Thank you.
The next question comes from Jeremy McCrea with Raymond James. Please go ahead.
Hey, just to follow up on Eric and Josh's questions here. You know, I've been following the development of your Clearwater here, and it always seems every quarter you guys are revising your numbers up and more up. Again, you know, today here, you're revising your numbers up more. What are you? How conservative are you guys in your numbers here and what you think you really could do heading into 2023? How much, you know, are you seeing other technologies that you wanna employ on your wells? I'm just trying to get a sense of, you know, just 'cause we see this and we see how big this could be, just how much conservatism you guys have built into your numbers here.
Just on a follow-up with that, just in terms of some of the M&A that's going on in the sector with some of the land sales, you know, just kind of a quick comment on that as well.
Well, we don't comment on land sales, but we have said we've got 145 sections of highly prospective lands in the Clearwater. That's 80 in Peavine and then another 45 up in the northwest region of the Clearwater play. We just offer those kind of generic numbers, but we don't comment on land sales. Are we conservative? Yes. What we promise to market, we know we can deliver. We don't miss our quarterly earnings or quarterly production and development targets. I don't think we ever have in five or six years. We like to put things out that we can beat. You've already seen that we're at 8,000 bbl a day today, and this is partly the basis of your question.
Our exit rate in Peavine should be 8,000 bbl to 10,000 bbl a day. Then, you know, we'll be very close to getting to the top end of our five-year plan in the Clearwater at 10,000 bbl a day fairly early in the five-year plan. You know, it's a bigger conveyor belt to hold it flat. The question's gonna be how much activity do we wanna push into the plan, to the previous question, to go towards that 15,000 bbl a day or higher. Yes, we do like to beat our numbers, particularly to the external market. We have stretch targets inside the company, and we're very good about how we progress things and innovate along the way as well, so we know what the best answers are sooner.
We're learning very, very quickly in this. The whole Clearwater is a brand-new play. It's only at 80,000 bbl a day at a play level, let alone our. You know, so now we've got 10% of the play level production at 80,000 bbl a day, and many analysts are projecting that to go to 200,000 bbl a day. We think Clearwater is gonna go to substantially higher than 200,000 bbl a day across the regional area. We're gonna be a big part of that. We wanna be a builder, a developer, and an aggregator in the area and look for more beats, if you wanna call it that, on the plan as we go forward. That's what we like to do.
Okay. Perfect. Thanks, guys.
Thanks, Jeremy.
This concludes the question and answer session. I would like to turn the conference back over to Brian Ector for any closing remarks.
Thank you, Charisse. Thanks everyone for participating in our first quarter 2022 conference call. Have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.