Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy third quarter 2022 financial results 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'll be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should anyone need assistance during the conference call, they may signal an operator by pressing Star, then zero. I'd now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.
Thank you, Gaylene. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2022 financial and operating results. Today's call is somewhat unique in that we are saying goodbye to Ed LaFehr, who has led our organization for the past six years, and we're welcoming Eric Greager as our new President and Chief Executive Officer. We will hear from both Ed and Eric today. We're also joined by Rodney Gray, 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 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 third quarter 2022 conference call. At the same time, I'm truly excited to welcome Eric to Baytex. Throughout his career, Eric has been focused on organic development and engaging and inspiring organizations to create value. Key traits that I know will fit in well here. I will remain with Baytex in an advisory capacity until the end of January, at which point my retirement will officially begin. Today is certainly a bittersweet moment for me. When I joined Baytex six years ago, I remember stating on my first quarterly earnings call how impressed I was with the Baytex team and how committed and focused they were on driving value. This was a strong team with high-quality assets that I knew could build a great future.
Six years and 24 conference calls later, the team and the portfolio are stronger than ever before. I am enormously proud of the entire Baytex team and our accomplishments. Together, we successfully repositioned Baytex through the downturn, strengthened our balance sheet, and we discovered one of the most exciting new Clearwater oil fields that our industry has ever seen. We are progressively increasing direct returns to shareholders, something we are all immensely proud of. Before I turn the call over to Rod and Eric, let me review for one last time our quarterly results. During the third quarter, we delivered strong operating and financial results, which has set the stage for continued momentum as we approach 2023. In addition, we advanced our Clearwater play at Peavine with results from our second half drilling program, continuing to deliver among the best wells drilled in the play.
Production during the third quarter averaged over 83,000 BOEs per day, and we generated quarterly free cash flow of CAD 112 million, which brings our year-to-date free cash flow to CAD 478 million. Capital expenditures totaled CAD 167 million, and we participated in the drilling of 86 gross or 72 net wells. Production in October increased to over 87,000 BOEs per day, which puts us on track to achieve our targeted exit rate of 87,000-88,000 BOEs per day. For 2022, we expect to average approximately 84,000 BOEs per day, which represents 5% annual production growth or 6% on a per-share basis.
We are now forecasting full year 2022 exploration and development expenditures of CAD 515 million, up 3% from our previously targeted CAD 500 million, which represented the high end of our prior guidance range. The incremental capital largely reflects the impact of a strengthening US dollar relative to the Canadian dollar on our U.S. operations and further level loading of activity through year-end to maintain the efficiency of our operations. We remain intensely focused on capital discipline and maximizing free cash flow. Taking into account our year-to-date results and based on the forward strip for the fourth quarter, we expect to generate approximately CAD 650 million or CAD 1.16 per basic share of free cash flow this year. Operationally, the highlight of our business continues to be our Clearwater development at Peavine.
This is an asset that, at current commodity prices, generates among the strongest economics within our portfolio and has the ability to grow organically while enhancing our free cash flow profile. During the third quarter, our Clearwater production averaged 8,200 barrels per day, and in October, we produced approximately 10,000 barrels per day from 24 producing wells. The first four wells from our second half 2022 drilling program generated average 30-day initial production rates of 1,100 barrels per day per well. Initial well performance continues to outperform type curve assumptions, and we now hold 13 of the top 15 initial rate wells drilled across the play. Following further detailed reservoir and economic analysis of the Peavine Clearwater, our second half wells are all drilled at 40-meter interlateral spacing, whereas our initial wells were drilled at 50-meter interlateral spacing.
This tighter spacing enables the drilling of five wells per section versus four wells per section and creates the potential for a 20% increase in our prospective drilling inventory, yielding meaningfully improved resource recovery and value. To date, we have de-risked 50 sections of our 80-section Peavine land base and believe the lands hold the potential for greater than 250 locations, with production increasing to approximately 15,000 barrels per day. When combined with our legacy acreage position in Northwest Alberta, we estimate that over 125 sections of our lands are highly prospective for Clearwater development. I want to now turn it over to Rod, who will provide a brief update on our liquidity and capital structure.
Thanks, Ed, and good morning, everyone. Our liquidity and capital structure have never been stronger. With the established debt targets we now have in place, we are building a business that will be resilient throughout the commodity price cycles. Our net debt, which includes our credit facilities, long-term notes, and working capital, totalled CAD 1.1 billion at September 30th, 2022, down from CAD 1.4 billion at December 31, 2021. We expect to exit 2022 with net debt of under CAD 1 billion. Our net debt was largely unchanged from the second quarter due to our active share buyback program and the impact of a strengthening U.S. dollar relative to the Canadian dollar on our U.S. dollar-denominated debt.
The change in the Canadian-U.S. exchange rate from June 30th to September 30th impacted our net debt in Canadian dollar terms by approximately CAD 50 million during the quarter. During the third quarter, we also repurchased and cancelled $27 million of the 8.75% long-term notes due 2027, bringing the principal amount outstanding to $473 million. As of September 30th, 2022, we had CAD 714 million dollars of undrawn capacity on our credit facilities, resulting in liquidity net of working capital of CAD 699 million. This improved financial position has enabled us to implement the second phase of our enhanced shareholder return framework in May of this year. We are now allocating 25% of our annual free cash flow to a share buyback program.
Through September, we repurchased 21.6 million common shares for CAD 141 million, representing 3.8% of our shares outstanding at an average price of CAD 6.53 per share. During the month of October, we were subject to a special blackout given the pending announcement of Eric joining Baytex, and as a result, our buybacks were limited during the month. For November and December, we expect to resume buying back our shares as we target 25% of our annual free cash flow for this activity. Now I'd like to turn the call over to Eric and officially introduce him to our analysts and shareholders on the call today.
Thanks, Rod. Thanks, Ed, for your opening remarks as well. Good morning, everyone. I'm excited to be joining Baytex. I've already had the opportunity to engage with the executive team and meet many employees, including the Peace River, Viking, and Duvernay teams. I can't wait to get out to the field in a couple of weeks. I've been impressed with the quality of the assets and the people here at Baytex. I've also spoken with our top shareholders, and I can tell you that we are well aligned on driving returns in the business. Baytex has in place a strong shareholder return framework that is focused on continued deleveraging, and over time, as our debt targets are achieved, increasing the allocation of free cash flow to direct shareholder returns.
I'm very pleased to confirm at this time that upon hitting our ultimate debt target of CAD $400 million, we will increase direct shareholder returns to 75% of our free cash flow. We've laid out a detailed summary of this updated shareholder return framework in our November investor relations presentation, which is available on our website and includes a slide showing CAD $3.2 billion of free cash flow generation, returning CAD $1.8 billion to shareholders over our five-year plan period at $80 US WTI. I'm very excited to get started. Ed, thank you for your leadership and support through this transition. It is greatly appreciated. You've had a tremendous career, and I know everyone at Baytex, including myself, wish you all the best in retirement. Now, operator, we are ready to open the call for questions.
Thank you. We'll now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Patrick O'Rourke with ATB Capital Markets. Please go ahead.
Good morning, guys. First I'd like to say congratulations to Ed on a successful tenure here, and hopefully, in your retirement, you enjoy your time away, but I'm sure you'll keep very busy. To Eric, hopefully, you're enjoying the weather here in Calgary, this week, and nice little start. Just to shift over to the Clearwater here, you guys have obviously, you know, there's been a lot of configurations in terms of the wells. You've done one by eight, two by four. You've gone from 50 meters to 40 meters on the interlateral spacing now. Just a couple of quick questions with respect to that. Number one, you know, is there an ideal design in terms of the one by eight , two by four that you're settling on?
Where do you think you are in terms of understanding the technology and what the optimal sort of configuration is? Second, with respect to the inter-well inter-lateral downspacing from 50 to 40 meters, you talked about the potential to increase inventory 20%. Is that a configuration that would be pervasive across the entire reservoir? Does that only work in certain spots depending on the geology? Is there the potential for further downspacing, you know, what the signals are in terms of inter-lateral communication in the wells?
Yeah, there's a lot in that question, Patrick, so I'll say what I have on my mind there and then pass it over to Chad Lundberg, our Chief Operating Officer. The first thing is, you're aware we've been drilling multilaterals up here in this region for two decades, and we believe we're, if not the best, certainly one of the best in multilateral open hole drilling configurations. We've in Peace River, for example, tested 25-50 meters over the last decade. Actually we've run little pilots from 15-meter spacing to 150-meter spacing back up in the early Harmon Valley days. We've also drilled a variety of geometries and really wild configurations to maximize the resource within whatever part of the Bluesky play we've been in. We're learning and growing in the Peavine very rapidly.
We've only got 24 wells on, and we're at 10,000 barrels a day. You saw us move to the 4-lateral extended reach drills fairly recently. We probably got 10 of those on now, certainly 9 since the second half. That is our preferred configuration for the majority of the remaining development, at least for now. The reason for that is partly technical and partly social issues. We can drill these wells with the big ROPs. We get drilling in the sand, we pull out of the hole four fewer times. It's a cost optimization, and it's also one where we're seeing the ability to stay in reservoir longer. Geosteering here, by the way, I think is one of the critical success factors, and we've got 99%+ in zone drill success here.
These two mile laterals are making a big difference for us technically and from a cost standpoint. They're also important from a social standpoint. Social license there in the Métis settlement is very, very important as we move towards the hamlets and the residential areas, and we're able to undershoot environmentally and socially sensitive areas. That's critical to us. You know, the team is very creative. They're very tenacious. We're always leading kind of the innovative trends on multilateral drilling. You know, we certainly will probably go further. Chad, do you wanna add anything to what I said there?
I'll just add, whether you're drilling one by eights or two by fours, you're essentially drilling the same amount of rock. There could be some operational efficiencies with, as Ed described, the four laterals where you're less trips in and out of the well. 50 meters to 40 meters spacing, I think is pretty key for us. Let's face it all comes down to rock quality. When we think about Clearwater, it comes down to mobility and the thickness of the rock, and that will ultimately dictate if we are able to push this even further. You know, in the Peace region itself, for 25-50 meters, we use that as a bit of an analogous to get going, being cautious to not overcapitalize early in the play.
We're actively modeling to help drive these decisions and then carefully calibrating the models with our production results as we continue to develop and drill. That will really dictate how we develop moving into the future from here.
I'm just curious how you measure that. Do you have technology downhole that can determine sort of competitive drainage between the legs?
Well, certainly while we're drilling, we have technology in the lateral that helps us to decode and understand the rock. You know, we can deploy different levels of sophistication on the drill bit to help us to understand. Then on the back end, you know, it comes down to production modeling as well as pressure surveys to help understand the drainage patterns.
Okay, thank you.
The next question is from Menno Hulshof with TD Securities. Please go ahead.
Good morning, everyone, and thanks for taking my questions. I would certainly echo Patrick's comments earlier. Maybe I'll just start with M&A. You sold 600 BOED of non-core natural gas in the quarter. My question is, are there other opportunities to core up the portfolio? Or should we assume that's pretty much it for the time being? More generally, how are you thinking about portfolio composition at the moment? Any thoughts on the market for acquisitions would be helpful as well.
Yeah, I'll start with that. Menno and other people may wanna comment. We've obviously got a new CEO who has a lot of experience in some of these basins as well. We're pretty well cored up.
We've been trying to monetize some of the non-core liquids rich gas, the 600 BOE a day we just sold for CAD 26 million. We're trying to monetize that now for two or three years, and we got to a place where AECO had picked up to the point where we got a fair valuation on that property. There is a little bit more in there. We still have some liquid rich gas properties that don't fit as neatly as other places, as I've said before, but we're pretty well cored up. We like our multi-basin diversification, as I said. We like being in South Texas, attracting the phenomenal gas prices as well as oil prices down there. We're not seeing the fluctuations in pricing like the Permian does on Waha, for example, on the gas side.
The other thing is that the Duvernay I've talked about as being a question mark. We need to see, you know, a little bit more de-risking and value enhancement, and we have. In fact, we did a ton of science this year. We only drilled three wells, but those three wells were roughly on type curve. The science is showing and sort of confirming that this is a 20,000 barrel a day opportunity. It's one that has large reserve add potential, and it's got 80%-110% IRRs, I believe, on an $80 WTI price deck, and it can grow within cash flow down to $70 WTI. I would say now the Duvernay has moved more towards a strategic asset for Baytex, but it's still a go slow to go fast.
We need to learn as much as we can and then determine the right time to bring it into the plan. It's not really in our five-year plan. We've got a few wells we drill every year. I would say that one's a bit more strategic now, having done the work and calibrated it with new production data. We've only got 15 wells in the play. I think we're pretty well cored up, Menno, but you know, let the team continue to work it.
Appreciate the color. Just moving on to the cost structure, given your cross-border exposure. Are you seeing any discernible differences between Canada and the U.S. when it comes to capital and OpEx and inflation? How could that impact your capital allocation decisions into 2023?
Yeah. Well, we took a view in Q1 and increased our capital, and we saw inflation both in Canada and Eagle Ford running, you know, reasonably hot and reasonably consistent. Since that time, what we've seen is a very big pickup in inflation in Eagle Ford and in Texas in general, and less so in Canada. We're now showing 20% inflation in Canada from, call it, our budget numbers for 2022 into as we look at 2023. We're seeing a 30% increase in inflation in the Eagle Ford, and part of that is just because of the degree of pressure pumping we do on the frack side of the business. Chad, do you wanna add any further color on the inflation deltas?
Well, no. I mean, you draw a radius around the Permian, and that is definitely being impacted in a big way in the United States. We're seeing more inflation in the Eagle Ford versus Canada. In terms of capital allocation decisions, the Eagle Ford is still incredibly strong economics, so we're still generating good returns with the inflationary pressure. You know, net-net, across the board in 2022, we've seen a 20% inflationary add overall, and we're probably running a little hotter than that H2, where we've seen a little bit more through the back half of the year. Right now we're just trying to anticipate what we look forward to through 2023 and our planning for budgetary purposes.
Thank you. I'll turn it back.
Thanks, Menno Hulshof.
The next question is from Dennis Fong with CIBC World Markets. Please go ahead.
Hi, good morning, and thanks for taking my question. I'm gonna third the congratulations to Ed LaFehr here in terms of the CEO transition. My first question here is just really around Seal. I know there's kind of a second net or another net well that's being drilled here in the fourth quarter to further evaluate that asset. Just curious as to how you're thinking about balancing further delineation and of the Seal asset while also balancing off development obviously within Peavine.
Yeah. Well, Seal's an exciting area. It's we're gonna see a big uptick in activity, partly due to the competitor activity and partly due to our own. We're gonna drill the second well on that Seal trend that you mentioned diagonally across roughly two townships of land that we own. We'll get that done, and we'll have results on that by full year end of this year. We're also gonna see some of the competitors come very close to our lease lines. We're already seeing permitted wells that juxtapose our leases very closely around Seal and what we call the greater Harmon Valley area as well. There's more to go there. There's some data collection. It's a multi-zone area, more so than Peavine.
Peavine is the Falher E, and we've got the Falher D through the Falher A up in.
Seal and Harmon Valley that we're looking at very carefully. We'll drill the second one by the end of the year, then I think we've got two planned in 2023. Meantime, we're flat out in Peavine, and we wanna keep growing that asset. We've got one rig operating in Peavine, and that's gonna move to two rigs in Q1, and then we'll have a rig operating right throughout the area of Peace River, broader Peace River in 2023 as well. You can look for potentially more activity up there from us. Certainly, the competitors will help us learn and de-risk our properties in a trickier area than Peavine.
Great. Thanks. Shifting my focus, and maybe this is a question for Rod with respect to the term debt, like, obviously the market seems to be in a relatively favorable situation to be repurchasing that continuously. Just curious as to how you're thinking about the current capital structure of the company. Is the credit facility gonna be the focus going forward? Obviously, as this set of term notes are relatively more expensive. Just curious as to how you're thinking about the entire capital structure of the company.
I think longer term, Dennis, I think we point to our overall debt targets. Right now having the term debt in there probably doesn't fit within it. It tends to be more expensive than what we'd be paying on our bank line. Despite the increases that we've seen from the Fed, I think our variable rate debt is still just over 4%. Comparative to the 8.75% we'd be paying on the notes, we are better off to take out the notes when possible. I think the volatility in the market's given us some opportunity to advance on some of those purchases where we've stepped in and taken those out just over par. I think we'll continue to watch the market closely and look to optimize the position as we de-lever.
Great. Thanks. My final question here is just on the capital return component. I understand just given current valuation, the focus is on the buyback, but I know that in the past there has been a, we'll call it an expression of interest around a dividend. How should we be thinking about that, especially after you potentially cross that threshold of achieving that net debt floor?
Well, I think we're gonna continue to monitor it, Dennis. I think our focus has been on de-levering and also recognizing that we believe our shares have been undervalued, and so the buyback has been the preferred choice. I think if you look at our communication, we remain open to considering all forms of returns to shareholders. But when we think of it, we are committing to call it 75% of free cash flow going back in some form to shareholders. I think we continue to watch for some form of market differentiation around that, and we'll look to optimize that when the time comes. Given that we're probably lagging peers in reaching those hurdles, I think we're gonna have the benefit of some hindsight on that to be able to implement.
Ultimately, we are committed to the direct shareholder returns.
Great. I appreciate the color. Thank you.
This concludes the question and answer session. I'd like to turn the conference back over to Brian Ector for any closing remarks.
All right. Thanks, operator. Thanks everyone for participating in our third 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.