EX-99.1 2 a991-q32019fs.htm EXHIBIT 99.1 Exhibit
Baytex Energy Corp.
Condensed Consolidated Statements of Financial Position
(thousands of Canadian dollars) (unaudited)
 
 
As at

Notes
September 30, 2019

December 31, 2018

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Trade and other receivables
 
$
171,337

$
111,564

Financial derivatives
18
45,318

79,582

 
 
216,655

191,146

Non-current assets
 
 
 
Financial derivatives
18
3,342

—

Exploration and evaluation assets
5
337,586

358,935

Oil and gas properties
6
5,654,365

5,817,889

Other plant and equipment
 
8,042

9,228

Lease assets
3
13,885

—

 
 
$
6,233,875

$
6,377,198

 
 
 
 
LIABILITIES
 
 
 
Current liabilities
 
 
 
Trade and other payables
 
$
212,404

$
258,114

Lease obligations
3, 9
5,659

—

Onerous contracts
3
—

1,986

 
 
218,063

260,100

Non-current liabilities
 
 
 
Bank loan
7
569,447

520,700

Long-term notes
8
1,349,589

1,583,240

Lease obligations
3, 9
8,429

—

Asset retirement obligations
10
689,361

646,898

Deferred income tax liability
 
291,849

310,836

 
 
3,126,738

3,321,774

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Shareholders' capital
11
5,717,237

5,701,516

Contributed surplus
 
17,661

19,137

Accumulated other comprehensive income
 
600,029

667,874

Deficit
 
(3,227,790
)
(3,333,103
)
 
 
3,107,137

3,055,424

 
 
$
6,233,875

$
6,377,198


See accompanying notes to the condensed consolidated interim unaudited financial statements.






Page 1


Baytex Energy Corp.
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(thousands of Canadian dollars, except per common share amounts and weighted average common shares) (unaudited)
 
 
Three Months Ended September 30
Nine Months Ended September 30
 
Notes
2019

2018

2019

2018

 
 
 
 
 
 
Revenue, net of royalties
 
 
 
 
 
Petroleum and natural gas sales
12
$
424,600

$
436,761

$
1,360,024

$
1,070,433

Royalties
 
(75,017
)
(91,945
)
(242,959
)
(233,989
)
 
 
349,583

344,816

1,117,065

836,444

 
 
 
 
 
 
Expenses
 
 
 
 
 
Operating
 
97,377

77,698

298,143

213,735

Transportation
 
9,903

9,520

35,102

25,875

Blending and other
 
12,950

19,548

50,628

55,077

General and administrative
 
9,934

10,158

35,576

31,729

Transaction costs
 
—

13,066

—

13,066

Exploration and evaluation
5
2,138

510

8,667

3,887

Depletion and depreciation
 
180,422

144,501

551,548

364,654

Share-based compensation
13
3,401

7,180

14,245

15,010

Financing and interest
16
31,766

30,029

97,049

86,825

Financial derivatives (gain) loss
18
(28,523
)
30,900

(21,742
)
135,243

Foreign exchange loss (gain)
17
14,237

(20,943
)
(37,978
)
40,023

Gain on dispositions
 
(18
)
(34
)
(1,075
)
(1,764
)
Other income
 
(738
)
(302
)
(5,044
)
(869
)
 
 
332,849

321,831

1,025,119

982,491

Net income (loss) before income taxes
 
16,734

22,985

91,946

(146,047
)
Income tax expense (recovery)
15
 
 
 
 
Current income tax expense (recovery)
 
501

—

1,591

(71
)
Deferred income tax expense (recovery)
 
1,082

(4,427
)
(14,958
)
(51,905
)
 
 
1,583

(4,427
)
(13,367
)
(51,976
)
Net income (loss)
 
$
15,151

$
27,412

$
105,313

$
(94,071
)
Other comprehensive income (loss)
 
 
 
 
 
Foreign currency translation adjustment
 
25,344

(39,360
)
(67,845
)
77,096

Comprehensive income (loss)
 
$
40,495

$
(11,948
)
$
37,468

$
(16,975
)
 
 
 
 
 
 
Net income (loss) per common share
14
 
 
 
 
Basic
 
$
0.03

$
0.07

$
0.19

$
(0.33
)
Diluted
 
$
0.03

$
0.07

$
0.19

$
(0.33
)
 
 
 
 
 
 
Weighted average common shares (000's)
14
 
 
 
 
Basic
 
557,888

375,435

556,651

283,302

Diluted
 
560,888

378,763

560,438

283,302


See accompanying notes to the condensed consolidated interim unaudited financial statements.
 


Page 2


Baytex Energy Corp.
Condensed Consolidated Statements of Changes in Equity
(thousands of Canadian dollars) (unaudited)


 
Shareholders’ capital

Contributed surplus

Accumulated other comprehensive income

Deficit

Total equity

Balance at December 31, 2017
$
4,443,576

$
15,999

$
463,104

$
(3,007,794
)
$
1,914,885

Issued on corporate acquisition
1,238,995

3,100

—

—

1,242,095

Issuance costs, net of tax
(316
)
—

—

—

(316
)
Vesting of share awards
19,272

(19,272
)
—

—

—

Share-based compensation
—

15,010

—

—

15,010

Comprehensive income (loss) for the period
—

—

77,096

(94,071
)
(16,975
)
Balance at September 30, 2018
$
5,701,527

$
14,837

$
540,200

$
(3,101,865
)
$
3,154,699

Balance at December 31, 2018
$
5,701,516

$
19,137

$
667,874

$
(3,333,103
)
$
3,055,424

Vesting of share awards
15,721

(15,721
)
—

—

—

Share-based compensation
—

14,245

—

—

14,245

Comprehensive income (loss) for the period
—

—

(67,845
)
105,313

37,468

Balance at September 30, 2019
$
5,717,237

$
17,661

$
600,029

$
(3,227,790
)
$
3,107,137


See accompanying notes to the condensed consolidated interim unaudited financial statements.
 

Page 3


Baytex Energy Corp.
Condensed Consolidated Statements of Cash Flows
(thousands of Canadian dollars) (unaudited)
 
 
Three Months Ended September 30
Nine Months Ended September 30
 
Notes
2019

2018

2019

2018

 
 
 
 
 
 
CASH PROVIDED BY (USED IN):
 
 
 
 
 
Operating activities
 
 
 
 
 
Net income (loss) for the period
 
$
15,151

$
27,412

$
105,313

$
(94,071
)
Adjustments for:
 
 
 
 
 
Share-based compensation
13
3,401

7,180

14,245

15,010

Unrealized foreign exchange loss (gain)
17
13,855

(20,583
)
(38,404
)
38,136

Exploration and evaluation
5
2,138

510

8,667

3,887

Depletion and depreciation
 
180,422

144,501

551,548

364,654

Non-cash financing and accretion
16
5,014

3,686

14,021

10,441

Unrealized financial derivatives (gain) loss
18
(7,666
)
46

30,922

65,140

Gain on dispositions
 
(18
)
(34
)
(1,075
)
(1,764
)
Deferred income tax expense (recovery)
 
1,082

(4,427
)
(14,958
)
(51,905
)
Payments on onerous contracts
 
—

(147
)
—

(439
)
Asset retirement obligations settled
10
(1,134
)
(3,028
)
(10,860
)
(9,215
)
Change in non-cash working capital
 
(17,275
)
(1,025
)
(59,499
)
(23,633
)
 
 
194,970

154,091

599,920

316,241

 
 
 
 
 
 
Financing activities
 
 
 
 
 
Increase (decrease) in bank loan
 
155,199

(38,305
)
50,445

(43,348
)
Common share issuance costs
 
—

(433
)
—

(433
)
Payments on lease obligations
9
(1,390
)
—

(4,402
)
—

Redemption of long-term notes
8
(198,128
)
—

(198,128
)
—

 
 
(44,319
)
(38,738
)
(152,085
)
(43,781
)
 
 
 
 
 
 
Investing activities
 
 
 
 
 
Additions to exploration and evaluation assets
5
(1,047
)
(2,462
)
(2,441
)
(3,864
)
Additions to oil and gas properties
6
(138,038
)
(136,733
)
(396,733
)
(307,695
)
Additions to other plant and equipment
 
(19
)
(1,395
)
(398
)
(1,902
)
Property acquisitions
 
(120
)
—

(2,193
)
(187
)
Property swaps
 
—

—

(524
)
—

Proceeds from dispositions
 
150

—

1,100

2,234

Change in non-cash working capital
 
(11,577
)
70,396

(46,646
)
84,113

 
 
(150,651
)
(70,194
)
(447,835
)
(227,301
)
 
 
 
 
 
 
Change in cash
 
—

45,159

—

45,159

Cash, beginning of period
 
—

—

—

—

Cash, end of period
 
$
—

$
45,159

$
—

$
45,159

 
 
 
 
 
 
Supplementary information
 
 
 
 
 
Interest paid
 
$
22,315

$
20,708

$
78,493

$
70,406

Income taxes paid
 
$
76

$
10

$
1,158

$
—


See accompanying notes to the condensed consolidated interim unaudited financial statements.
 

Page 4


Baytex Energy Corp.
Notes to the Condensed Consolidated Interim Financial Statements
For the periods ended September 30, 2019 and 2018
(all tabular amounts in thousands of Canadian dollars, except per common share amounts) (unaudited)

1.
REPORTING ENTITY
Baytex Energy Corp. (the “Company” or “Baytex”) is an oil and gas corporation engaged in the acquisition, development and production of oil and natural gas in the Western Canadian Sedimentary Basin and the United States. The Company’s common shares are traded on the Toronto Stock Exchange and the New York Stock Exchange under the symbol BTE. The Company’s head and principal office is located at 2800, 520 – 3rd Avenue S.W., Calgary, Alberta, T2P 0R3, and its registered office is located at 2400, 525 – 8th Avenue S.W., Calgary, Alberta, T2P 1G1.

2.
BASIS OF PRESENTATION
The condensed consolidated interim financial statements ("consolidated financial statements") have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting, under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB"). These consolidated financial statements do not include all the necessary annual disclosures as prescribed by IFRS and should be read in conjunction with the annual consolidated financial statements as at and for the year ended December 31, 2018.

The consolidated financial statements were approved by the Board of Directors of Baytex on October 31, 2019.

The consolidated financial statements have been prepared on a historical cost basis, with the exception of derivative financial instruments which have been measured at fair value. The consolidated financial statements are presented in Canadian dollars which is the functional currency of the Company. All financial information is rounded to the nearest thousand, except per share amounts or when otherwise indicated.

The audited consolidated financial statements of the Company as at and for the year ended December 31, 2018 are available through its filings on SEDAR at www.sedar.com and through the U.S. Securities and Exchange Commission at www.sec.gov.

3.
SIGNIFICANT ACCOUNTING POLICIES

The accounting policies, critical accounting judgments and significant estimates used in preparation of the 2018 annual financial statements have been applied in the preparation of these consolidated financial statements, except for the adoption of IFRS 16 Leases as described below.

Changes in significant accounting policies

Leases

Baytex adopted IFRS 16 Leases on January 1, 2019 using the modified retrospective approach. The modified retrospective approach does not require restatement of comparative financial information as it recognizes the cumulative effect on transition as an adjustment to opening retained earnings and applies the standard prospectively. Comparative information in the Company's consolidated statements of financial position, consolidated statements of income (loss) and comprehensive income (loss), consolidated statements of changes in equity, and consolidated statements of cash flows has not been restated.

The cumulative effect of initial application of the standard was to recognize an $18.0 million increase to right-of-use assets ("lease assets"), a $2.0 million reduction of onerous contracts and a $18.0 million increase to lease obligations. Initial measurement of the lease obligation was determined based on the remaining lease payments at January 1, 2019 using a weighted averaged incremental borrowing rate of approximately 3.9%. The lease assets were initially recognized at an amount equal to the lease obligations. The lease assets and lease obligations recognized largely relate to the Company's head office lease in Calgary.

The adoption of IFRS 16 using the modified retrospective approach allowed the Company to use the following practical expedients in determining the opening transition adjustment:

•
The weighted average incremental borrowing rate in effect at January 1, 2019 was used as opposed to the rate in effect at inception of the lease;
•
Leases with a remaining term of less than 12 months as at January 1, 2019 were accounted for as short-term leases;
•
Leases with an underlying asset of low value are recorded as an expense and not recognized as a lease asset;
•
Leases with similar characteristics were accounted for as a portfolio using a single discount rate; and
•
Used the Company's previous assessment under IAS 37, "Provisions, Contingent Liabilities and Contingent Assets' for onerous contracts instead of reassessing the lease assets for impairment at January 1, 2019.


Page 5


The Company's accounting policy for leases effective January 1, 2019 is set forth below. The Company applied IFRS 16 using the modified retrospective approach. Comparative information continues to be accounted for in accordance with the Company's previous accounting policy found in the 2018 annual financial statements.

Leases

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A lease obligation and corresponding right-of-use asset ("lease asset") are recognized at the commencement of the lease. The present value of the lease obligation is based on the future lease payments and is discounted using the Company's incremental borrowing rate when the rate implicit in the lease is not readily available. The Company uses a single discount rate for a portfolio of leases with similar characteristics. The lease asset is recognized at the amount of the lease obligation, adjusted for lease incentives received and initial direct costs, on commencement of the lease. Depreciation is recognized on the lease asset over the shorter of the estimated useful life of the asset or the lease term.

Lease payments are allocated between the liability and interest expense. Interest expense is recognized on the lease obligations using the effective interest rate method and payments are applied against the lease obligation.

The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates, and assumptions that affect the reported amount of assets, liabilities, income, and expenses. Actual results could differ significantly from these estimates. Management has made the following judgments, estimates, and assumptions related to the accounting for leases.

The carrying amounts of the right-of-use assets, lease obligations, and the resulting interest and depletion and depreciation expense are based on the implicit interest rate within the lease arrangement or, if this information is unavailable, the incremental borrowing rate. Incremental borrowing rates are based on judgments including economic environment, term, and the underlying risk inherent to the asset.


Page 6


4.
SEGMENTED FINANCIAL INFORMATION

Baytex's reportable segments are determined based on the geographic location and nature of the underlying operations:

•
Canada includes the exploration for, and the development and production of, crude oil and natural gas in Western Canada;
•
U.S. includes the exploration for, and the development and production of, crude oil and natural gas in the United States; and
•
Corporate includes corporate activities and items not allocated between operating segments.
 
Canada
U.S.
Corporate
Consolidated
Three Months Ended September 30
2019

2018

2019

2018

2019

2018

2019

2018

 
 
 
 
 
 
 
 
 
Revenue, net of royalties
 
 
 
 
 
 
 
 
Petroleum and natural gas sales
$
258,769

$
217,805

$
165,831

$
218,956

$
—

$
—

$
424,600

$
436,761

Royalties
(26,193
)
(26,139
)
(48,824
)
(65,806
)
—

—

(75,017
)
(91,945
)
 
232,576

191,666

117,007

153,150

—

—

349,583

344,816

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
73,701

54,710

23,676

22,988

—

—

97,377

77,698

Transportation
9,903

9,520

—

—

—

—

9,903

9,520

Blending and other
12,950

19,548

—

—

—

—

12,950

19,548

General and administrative
—

—

—

—

9,934

10,158

9,934

10,158

Transaction costs
—

—

—

—

—

13,066

—

13,066

Exploration and evaluation
2,138

510

—

—

—

—

2,138

510

Depletion and depreciation
116,316

77,083

63,572

66,830

534

588

180,422

144,501

Share-based compensation
—

—

—

—

3,401

7,180

3,401

7,180

Financing and interest
—

—

—

—

31,766

30,029

31,766

30,029

Financial derivatives (gain) loss
—

—

—

—

(28,523
)
30,900

(28,523
)
30,900

Foreign exchange loss (gain)
—

—

—

—

14,237

(20,943
)
14,237

(20,943
)
Gain on dispositions
(18
)
(34
)
—

—

—

—

(18
)
(34
)
Other income
—

—

—

—

(738
)
(302
)
(738
)
(302
)
 
214,990

161,337

87,248

89,818

30,611

70,676

332,849

321,831

Net income (loss) before income taxes
17,586

30,329

29,759

63,332

(30,611
)
(70,676
)
16,734

22,985

Income tax expense (recovery)
 
 
 
 
 
 
 
 
Current income tax expense
—

—

501

—

—

—

501

—

Deferred income tax expense (recovery)
4,734

4,134

(203
)
9,278

(3,449
)
(17,839
)
1,082

(4,427
)
 
4,734

4,134

298

9,278

(3,449
)
(17,839
)
1,583

(4,427
)
Net income (loss)
$
12,852

$
26,195

$
29,461

$
54,054

$
(27,162
)
$
(52,837
)
$
15,151

$
27,412

 
 
 
 
 
 
 
 
 
Total oil and natural gas capital expenditures(1)
$
96,744

$
94,477

$
42,311

$
44,718

$
—

$
—

$
139,055

$
139,195

(1)
Includes acquisitions and property swaps, net of proceeds from divestitures.


Page 7


 
Canada
U.S.
Corporate
Consolidated
Nine Months Ended September 30
2019

2018

2019

2018

2019

2018

2019

2018

 
 
 
 
 
 
 
 
 
Revenue, net of royalties
 
 
 
 
 
 
 
 
Petroleum and natural gas sales
$
817,506

$
471,742

$
542,518

$
598,691

$
—

$
—

$
1,360,024

$
1,070,433

Royalties
(82,313
)
(55,471
)
(160,646
)
(178,518
)
—

—

(242,959
)
(233,989
)
 
735,193

416,271

381,872

420,173

—

—

1,117,065

836,444

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
221,680

147,054

76,463

66,681

—

—

298,143

213,735

Transportation
35,102

25,875

—

—

—

—

35,102

25,875

Blending and other
50,628

55,077

—

—

—

—

50,628

55,077

General and administrative
—

—

—

—

35,576

31,729

35,576

31,729

Transaction costs
—

—

—

—

—

13,066

—

13,066

Exploration and evaluation
8,667

3,887

—

—

—

—

8,667

3,887

Depletion and depreciation
347,661

170,514

202,303

192,212

1,584

1,928

551,548

364,654

Share-based compensation
—

—

—

—

14,245

15,010

14,245

15,010

Financing and interest
—

—

—

—

97,049

86,825

97,049

86,825

Financial derivatives (gain) loss
—

—

—

—

(21,742
)
135,243

(21,742
)
135,243

Foreign exchange (gain) loss
—

—

—

—

(37,978
)
40,023

(37,978
)
40,023

Gain on dispositions
(1,075
)
(1,764
)
—

—

—

—

(1,075
)
(1,764
)
Other income
—

—

—

—

(5,044
)
(869
)
(5,044
)
(869
)
 
662,663

400,643

278,766

258,893

83,690

322,955

1,025,119

982,491

Net income (loss) before income taxes
72,530

15,628

103,106

161,280

(83,690
)
(322,955
)
91,946

(146,047
)
Income tax expense (recovery)
 
 
 
 
 
 
 
 
Current income tax expense (recovery)
—

—

1,591

(71
)
—

—

1,591

(71
)
Deferred income tax expense (recovery)
8,842

(197
)
4,505

15,951

(28,305
)
(67,659
)
(14,958
)
(51,905
)
 
8,842

(197
)
6,096

15,880

(28,305
)
(67,659
)
(13,367
)
(51,976
)
Net income (loss)
$
63,688

$
15,825

$
97,010

$
145,400

$
(55,385
)
$
(255,296
)
$
105,313

$
(94,071
)
 
 
 
 
 
 
 
 
 
Total oil and natural gas capital expenditures(1)
$
271,520

$
174,563

$
129,271

$
134,949

$
—

$
—

$
400,791

$
309,512

(1)
Includes acquisitions and property swaps, net of proceeds from divestitures.

As at
September 30, 2019

December 31, 2018

Canadian assets
$
3,758,068

$
3,739,029

U.S. assets
2,467,765

2,628,941

Corporate assets
8,042

9,228

Total consolidated assets
$
6,233,875

$
6,377,198



Page 8


5.
EXPLORATION AND EVALUATION ASSETS

September 30, 2019

December 31, 2018

Balance, beginning of period
$
358,935

$
272,974

Capital expenditures
2,441

10,567

Corporate acquisition
—

97,858

Property acquisitions
1,473

514

Divestitures
(132
)
(1,021
)
Property swaps
417

—

Exploration and evaluation expense
(8,667
)
(21,729
)
Transfer to oil and gas properties
(12,421
)
(13,866
)
Foreign currency translation
(4,460
)
13,638

Balance, end of period
$
337,586

$
358,935


6.
OIL AND GAS PROPERTIES

Cost

Accumulated depletion

Net book value

Balance, December 31, 2017
$
7,932,327

$
(3,974,018
)
$
3,958,309

Capital expenditures
485,154

—

485,154

Corporate acquisition
1,748,368

—

1,748,368

Property acquisitions
202

—

202

Transfers from exploration and evaluation assets
13,866

—

13,866

Change in asset retirement obligations
238,662

—

238,662

Divestitures
(15
)
—

(15
)
Impairment
—

(285,341
)
(285,341
)
Foreign currency translation
325,969

(110,651
)
215,318

Depletion
—

(556,634
)
(556,634
)
Balance, December 31, 2018
$
10,744,533

$
(4,926,644
)
$
5,817,889

Capital expenditures
396,733

—

396,733

Property acquisitions
1,328

—

1,328

Transfers from exploration and evaluation assets
12,421

—

12,421

Change in asset retirement obligations (note 10)
45,342

—

45,342

Divestitures
(2,069
)
1,690

(379
)
Property swaps
(5,754
)
4,694

(1,060
)
Foreign currency translation
(121,053
)
50,489

(70,564
)
Depletion
—

(547,345
)
(547,345
)
Balance, September 30, 2019
$
11,071,481

$
(5,417,116
)
$
5,654,365


7.
BANK LOAN
 
September 30, 2019

December 31, 2018

Bank loan - U.S. dollar denominated(1)
$
269,205

$
122,388

Bank loan - Canadian dollar denominated
301,587

399,906

Bank loan - principal
570,792

522,294

Unamortized debt issuance costs
(1,345
)
(1,594
)
Bank loan
$
569,447

$
520,700

(1)
U.S. dollar denominated bank loan balance was US$203.3 million as at September 30, 2019 (December 31, 2018 - US$89.7 million).

Baytex has US$575 million of revolving credit facilities (the "Revolving Facilities") and a $300 million non-revolving term loan (the "Term Loan") (collectively the "Credit Facilities"). On May 2, 2019, Baytex amended its Credit Facilities to extend maturity from June

Page 9


4, 2020 to April 2, 2021. These facilities will automatically be extended to June 4, 2021 providing Baytex has either refinanced, or has the ability to repay, the outstanding 2021 long-term notes with existing credit capacity as of April 1, 2021.

The extendible secured Revolving Facilities are comprised of a US$50 million operating loan (previously US$35 million) and a US$325 million syndicated revolving loan for Baytex (previously US$340 million) and a US$200 million syndicated revolving loan for Baytex's wholly-owned subsidiary, Baytex Energy USA, Inc. and matures on April 2, 2021. The Term Loan is secured by the assets of Baytex's wholly-owned subsidiary, Baytex Energy Limited Partnership and matures on April 2, 2021.

The Credit Facilities are not borrowing base facilities and do not require annual or semi-annual reviews. The Credit Facilities contain standard commercial covenants in addition to the financial covenants detailed below. There are no mandatory principal payments required prior to maturity which could be extended upon Baytex's request. Advances (including letters of credit) under the Credit Facilities can be drawn in either Canadian or U.S. funds and bear interest at the bank’s prime lending rate, bankers’ acceptance discount rates or London Interbank Offered Rates, plus applicable margins. In the event that Baytex breaches any of the covenants under the Credit Facilities, Baytex may be required to repay, refinance or renegotiate the loan terms and may be restricted from taking on further debt or paying dividends to shareholders.

At September 30, 2019, Baytex had $15.4 million of outstanding letters of credit (December 31, 2018 - $14.6 million) under the Credit Facilities.

At September 30, 2019, Baytex was in compliance with all of the covenants contained in the Credit Facilities. The following table summarizes the financial covenants applicable to the Revolving Facilities and Baytex's compliance therewith as at September 30, 2019.
Covenant Description
Position as at September 30, 2019
Covenant
Senior Secured Debt(1) to Bank EBITDA(2) (Maximum Ratio)
0.66:1.00
3.50:1.00
Interest Coverage(3) (Minimum Ratio)
8.02:1.00
2.00:1.00
(1)
"Senior Secured Debt" is defined as the principal amount of the bank loan and other secured obligations identified in the credit agreement. As at September 30, 2019, the Company's Senior Secured Debt totaled $586.2 million which includes $570.8 million of principal amounts outstanding and $15.4 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 expenses, unrealized gains and losses on financial derivatives, income tax, non-recurring losses, payments on lease obligations, certain specific unrealized and non-cash transactions (including depletion, depreciation, exploration and evaluation expenses, unrealized gains and losses on financial derivatives and foreign exchange and share-based compensation) and is calculated based on a trailing twelve month basis 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, 2019 was $889.4 million.
(3)
Interest coverage is computed as the ratio of Bank EBITDA to financing and interest expenses, excluding non-cash interest and accretion on asset retirement obligations, and is calculated on a trailing twelve month basis. Financing and interest expenses for the twelve months ended September 30, 2019 were $111.0 million.

8.
LONG-TERM NOTES
 
September 30, 2019

December 31, 2018

6.75% notes (US$150,000 – principal) due February 17, 2021
$
—

$
204,683

5.125% notes (US$400,000 – principal) due June 1, 2021
529,740

545,820

6.625% notes (Cdn$300,000 – principal) due July 19, 2022
300,000

300,000

5.625% notes (US$400,000 – principal) due June 1, 2024
529,740

545,820

Total long-term notes - principal
1,359,480

1,596,323

Unamortized debt issuance costs
(9,891
)
(13,083
)
Total long-term notes - net of unamortized debt issuance costs
$
1,349,589

$
1,583,240


On September 13, 2019, Baytex completed the early redemption of the US$150,000 principal amount of 6.75% senior unsecured notes, due February 17, 2021. The total principal payment was $198.1 million.

The long-term notes do not contain any significant financial maintenance covenants. The long-term notes contain a debt incurrence covenant that restricts the Company's ability to raise additional debt beyond the existing credit facilities and long-term notes unless the Company maintains a minimum fixed charge coverage ratio (computed as the ratio of Bank EBITDA (as defined in note 7) to financing and interest expenses on a trailing twelve month basis) of 2.50:1.00. At September 30, 2019, the fixed charge coverage ratio was 8.02:1.00.


Page 10


9.
LEASE OBLIGATIONS

Baytex had the following future commitments associated with its lease obligations at September 30, 2019.
 
September 30, 2019

Less than 1 year
$
6,102

1 - 3 years
8,517

3 - 5 years
196

After 5 years
—

Total lease payments
14,815

Amounts representing interest over the term of the lease
(727
)
Present value of net lease payments
14,088

Less current portion of lease obligations
5,659

Non-current portion of lease obligations
$
8,429


The Company recorded interest related to its lease obligations of $0.1 million and $0.5 million for the three and nine months ended September 30, 2019. The Company recorded lease payments of $1.4 million and $4.4 million for the three and nine months ended September 30, 2019.

10.
ASSET RETIREMENT OBLIGATIONS
 
September 30, 2019

December 31, 2018

Balance, beginning of period
$
646,898

$
368,995

Liabilities incurred
16,873

12,537

Liabilities settled
(10,860
)
(14,035
)
Liabilities assumed from corporate acquisition
—

39,960

Liabilities acquired from property acquisitions
608

132

Liabilities divested
(424
)
(580
)
Property swaps
(1,229
)
—

Accretion (note 16)
10,268

10,914

Change in estimate
(2,435
)
33,453

Changes in discount rates and inflation rates(1)
30,904

192,672

Foreign currency translation
(1,242
)
2,850

Balance, end of period
$
689,361

$
646,898

(1)
The discount and inflation rates at September 30, 2019 were 1.75%, compared to 2.15% and 2.00%, respectively, at December 31, 2018.


Page 11


11.
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, 2019, no preferred shares have been issued by the Company and all common shares issued were fully paid.

The holders of common shares may receive dividends as declared from time to time and are entitled to one vote per share at any meetings of the holders of common shares. All common shares rank equally with regard to the Company's net assets in the event the Company is wound-up or terminated.
 
Number of Common Shares
(000s)

Amount

Balance, December 31, 2017
235,451

$
4,443,576

Vesting of share awards
3,343

19,496

Issued on corporate acquisition
315,266

1,238,995

Issuance costs, net of tax
—

(551
)
Balance, December 31, 2018
554,060

$
5,701,516

Vesting of share awards
3,912

15,721

Balance, September 30, 2019
557,972

$
5,717,237


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
 
2019
2018
 
Canada

U.S.

Total

Canada

U.S.

Total

Light oil and condensate
$
134,921

$
140,344

$
275,265

$
69,557

$
170,402

$
239,959

Heavy oil
117,961

—

117,961

139,305

—

139,305

NGL
1,486

11,045

12,531

4,147

30,508

34,655

Natural gas sales
4,401

14,442

18,843

4,796

18,046

22,842

Total petroleum and natural gas sales
$
258,769

$
165,831

$
424,600

$
217,805

$
218,956

$
436,761

 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
2019
2018
 
Canada

U.S.

Total

Canada

U.S.

Total

Light oil and condensate
$
409,117

$
442,763

$
851,880

$
79,894

$
476,086

$
555,980

Heavy oil
381,684

—

381,684

364,957

—

364,957

NGL
6,684

47,656

54,340

11,595

71,480

83,075

Natural gas sales
20,021

52,099

72,120

15,296

51,125

66,421

Total petroleum and natural gas sales
$
817,506

$
542,518

$
1,360,024

$
471,742

$
598,691

$
1,070,433


Included in accounts receivable at September 30, 2019 is $138.6 million (December 31, 2018 - $77.4 million) of accrued production revenue related to deliveries for periods ended prior to the reporting date.

13.
SHARE AWARD INCENTIVE PLAN
The Company recorded compensation expense related to the share awards of $3.4 million and $14.2 million for the three and nine months ended September 30, 2019 ($7.2 million and $15.0 million for the three and nine months ended September 30, 2018).
 
The weighted average fair value of share awards granted was $2.63 per restricted and performance award for the nine months ended September 30, 2019 ($4.04 per restricted and performance award for the nine months ended September 30, 2018).


Page 12


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, 2017
2,028

2,253

4,281

Granted
2,793

2,591

5,384

Assumed on corporate acquisition
302

257

559

Vested and converted to common shares
(1,682
)
(1,661
)
(3,343
)
Forfeited
(198
)
(167
)
(365
)
Balance, December 31, 2018
3,243

3,273

6,516

Granted
3,158

3,245

6,403

Vested and converted to common shares
(1,902
)
(2,010
)
(3,912
)
Forfeited
(281
)
(315
)
(596
)
Balance, September 30, 2019
4,218

4,193

8,411

(1)
Based on underlying awards before applying the payout multiplier which can range from 0x to 2x.

Share Options

Baytex inherited share option plans pursuant to a business combination in 2018. No new grants will be made under the option plans.

The Company accounts for share options using the fair value method. Under this method, compensation is expensed over the vesting period for the share options, with a corresponding increase to contributed surplus.

Share options granted under the option plans had a maximum term of 3.5 years to expiry. One third of the options granted vest on each of the first, second, and third anniversaries of the date of grant. The following tables summarize the information about the share options.
(000s, except per common share amounts)
Number of options

Weighted average exercise price

Balance, December 31, 2017
—

$
—

Assumed on corporate acquisition
9,187

6.63

Forfeited/Expired
(4,322
)
6.57

Balance, December 31, 2018
4,865

$
6.70

Forfeited/Expired
(1,468
)
6.24

Balance, September 30, 2019
3,397

$
6.90


 
Options Outstanding
Options Exercisable
Exercise price
Number outstanding at September 30, 2019 (000s)

Weighted average remaining life (years)

Weighted average exercise price

Number exercisable at September 30, 2019 (000s)

Weighted average exercise price

$5.00 - $7.00
1,957

1.09

$
6.32

1,175

$
6.40

$7.01 - $9.00
1,440

0.29

7.68

1,326

7.66

Total
3,397

0.75

$
6.90

2,501

$
7.07


14.
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. 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.

Page 13


 
Three Months Ended September 30
 
2019
2018
 
Net income

Weighted average common shares (000s)

Net income per share

Net income

Weighted average common shares (000s)

Net income per share

Net income - basic
$
15,151

557,888

$
0.03

$
27,412

375,435

$
0.07

Dilutive effect of share awards
—

3,000

—

—

3,328

—

Dilutive effect of share options
—

—

—

—

—

—

Net income - diluted
$
15,151

560,888

$
0.03

$
27,412

378,763

$
0.07

 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
2019
2018
 
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
$
105,313

556,651

$
0.19

$
(94,071
)
283,302

$
(0.33
)
Dilutive effect of share awards
—

3,787

—

—

—

—

Dilutive effect of share options
—

—

—

—

—

—

Net income (loss) - diluted
$
105,313

560,438

$
0.19

$
(94,071
)
283,302

$
(0.33
)

For the three and nine months ended September 30, 2019, no share awards were considered to be anti-dilutive. For the three months ended September 30, 2018, no share awards were considered to be anti-dilutive and for the nine months ended September 30, 2018, 6.7 million share awards were excluded from the calculation of diluted earnings per share as they were determined to be anti-dilutive. For the three and nine months ended September 30, 2019, 3.4 million share options were excluded from the calculation of diluted earnings per share as they were determined to be anti-dilutive (8.7 million for the three and nine months ended September 30, 2018).

15.
INCOME TAXES
The provision for income taxes has been computed as follows:
 
Nine Months Ended September 30
 
2019

2018

Net income (loss) before income taxes
$
91,946

$
(146,047
)
Expected income taxes at the statutory rate of 26.72% (2018 – 27.00%)
24,568

(39,433
)
(Increase) decrease in income tax recovery resulting from:
 
 
Share-based compensation
3,806

3,963

Non-taxable portion of foreign exchange (gain) loss
(5,179
)
5,201

Effect of change in income tax rates
(10,573
)
—

Effect of rate adjustments for foreign jurisdictions
(20,965
)
(27,400
)
Effect of change in deferred tax benefit not recognized(1)
(4,803
)
5,201

Adjustments and assessments
(221
)
492

Income tax recovery
$
(13,367
)
$
(51,976
)
(1)
A deferred income tax asset has not been recognized for accumulated allowable capital losses of $120 million (December 31, 2018 - $139 million) related to foreign exchange losses on long-term notes.

For the nine months ended September 30, 2019, the deferred tax recovery includes $10.6 million attributable to decreases in the Alberta provincial income tax rate for the periods from July 1, 2019 to January 1, 2022, which reduces the provincial rate to 11% effective July 1, 2019, and further reduces it by 1% on January 1st for each of the years 2020, 2021 and 2022, bringing the provincial rate to 8%.
As disclosed in the 2018 annual financial statements, Baytex received several reassessments from the Canada Revenue Agency (the “CRA”) in June 2016 which denied $591 million of non-capital loss deductions that Baytex had previously claimed. In September

Page 14


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 our file in July 2018. Baytex remains confident that its original tax filings are correct and intends to defend those tax filings through the appeals process.

16.
FINANCING AND INTEREST
 
Three Months Ended September 30
Nine Months Ended September 30
 
2019

2018

2019

2018

Interest on bank loan
$
4,650

$
4,108

$
15,171

$
10,297

Interest on long-term notes
21,955

22,235

67,382

66,087

Interest on lease obligations
147

—

475

—

Non-cash financing
1,607

866

3,753

2,991

Accretion on asset retirement obligations (note 10)
3,407

2,820

10,268

7,450

Financing and interest
$
31,766

$
30,029

$
97,049

$
86,825


17.
FOREIGN EXCHANGE
 
Three Months Ended September 30
Nine Months Ended September 30
 
2019

2018

2019

2018

Unrealized foreign exchange loss (gain)
$
13,855

$
(20,583
)
$
(38,404
)
$
38,136

Realized foreign exchange loss (gain)
382

(360
)
426

1,887

Foreign exchange loss (gain)
$
14,237

$
(20,943
)
$
(37,978
)
$
40,023


18.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's financial assets and liabilities are comprised of cash, trade and other receivables, trade and other payables, financial derivatives, bank loan, long-term notes, and lease obligations. The fair value of the bank loan 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 consolidated statements of financial position are classified into the following categories:
 
September 30, 2019
December 31, 2018
 
 
Carrying value

Fair value

Carrying
value

Fair value

Fair Value Measurement Hierarchy

Financial Assets
 
 
 
 
 
FVTPL(1)
 
 
 
 
 
Financial derivatives
$
48,660

$
48,660

$
79,582

$
79,582

Level 2

Total
$
48,660

$
48,660

$
79,582

$
79,582

 
 
 
 
 
 
 
Financial assets at amortized cost
 
 
 
 
 
Trade and other receivables
$
171,337

$
171,337

$
111,564

$
111,564

—

Total
$
171,337

$
171,337

$
111,564

$
111,564

 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
Financial liabilities at amortized cost
 
 
 
 
 
Trade and other payables
$
(212,404
)
$
(212,404
)
$
(258,114
)
$
(258,114
)
—

Bank loan
(569,447
)
(570,792
)
(520,700
)
(522,294
)
—

Long-term notes
(1,349,589
)
(1,315,950
)
(1,583,240
)
(1,492,363
)
Level 1

Lease obligations
(14,088
)
(14,088
)
—

—

—

Total
$
(2,145,528
)
$
(2,113,234
)
$
(2,362,054
)
$
(2,272,771
)
 
(1)
FVTPL means fair value through profit or loss.

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2019 and 2018.

Page 15



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, 2019

December 31, 2018

September 30, 2019

December 31, 2018

U.S. dollar denominated

US$41,939


US$80,857


US$853,897


US$963,351


Interest Rate Risk

Interest Rate Swaps

Baytex had the following interest rate swaps outstanding as of October 31, 2019:
Contract Type
Notional Amount
Maturity Date
Fixed Contract Price
Reference(1)
Fair Value
($ millions)

Interest rate swap
$100 million
October 2020
2.02%
CDOR
$
—

Total
 
 
 
 
$
—

(1)
Canadian Dollar Offered Rate.


Page 16


Commodity Price Risk

Financial Derivative Contracts

Baytex had the following financial derivative contracts outstanding as of October 31, 2019:
 
Remaining Period
Volume
Price/Unit(1)

Index
Fair Value(2) 
($ millions)

Oil





 
Basis Swap
Oct 2019 to Dec 2019
7,000 bbl/d
WTI less US$17.59/bbl

WCS
$
(2.5
)
Basis Swap
Oct 2019 to Dec 2019
4,000 bbl/d
WTI less US$8.00/bbl

MSW
$
(0.8
)
Basis Swap
Jan 2020 to Dec 2020
2,500 bbl/d
WTI less US$16.10/bbl

WCS
$
0.2

Fixed - Sell
Oct 2019 to Dec 2019
12,000 bbl/d
US$62.35/bbl

WTI
$
12.4

Fixed - Sell
Oct 2019 to Dec 2019
2,000 bbl/d
US$65.50/bbl

Brent
$
1.7

Fixed - Sell (6)
Jan 2020 to Mar 2020
4,000 bbl/d
US$55.90/bbl

WTI
$
—

3-way option(3)
Oct 2019 to Dec 2019
2,000 bbl/d
US$49.00/US$61.70/US$75.00

WTI
$
1.8

3-way option(3)
Oct 2019 to Dec 2019
2,000 bbl/d
US$50.00/US$60.00/US$70.00

WTI
$
1.4

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$55.00/US$65.00/US$72.60

WTI
$
1.0

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$56.00/US$66.00/US$72.50

WTI
$
1.0

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$56.00/US$66.00/US$73.00

WTI
$
1.0

3-way option(3)
Oct 2019 to Dec 2019
2,000 bbl/d
US$57.00/US$67.00/US$73.00

WTI
$
2.2

3-way option(3)
Oct 2019 to Dec 2019
2,000 bbl/d
US$58.00/US$68.00/US$74.00

WTI
$
2.2

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$60.00/US$69.90/US$75.00

WTI
$
1.1

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$61.00/US$71.00/US$76.00

WTI
$
1.2

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$63.00/US$73.00/US$78.00

WTI
$
1.2

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$55.50/US$65.50/US$75.50

Brent
$
0.7

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$60.00/US$70.00/US$77.55

Brent
$
1.0

3-way option(3)
Oct 2019 to Dec 2019
1,000 bbl/d
US$63.00/US$73.00/US$83.00

Brent
$
1.1

3-way option(3)
Jan 2020 to Dec 2020
3,000 bbl/d
US$50.00/US$56.00/US$61.35

WTI
$
2.0

3-way option(3)
Jan 2020 to Dec 2020
3,000 bbl/d
US$50.00/US$57.00/US$60.00

WTI
$
2.4

3-way option(3)(6)
Jan 2020 to Dec 2020
3,000 bbl/d
US$50.00/US$57.00/US$62.00

WTI
$
—

3-way option(3)
Jan 2020 to Dec 2020
1,500 bbl/d
US$51.00/US$59.00/US$65.60

WTI
$
2.6

3-way option(3)
Jan 2020 to Dec 2020
1,500 bbl/d
US$51.00/US$59.00/US$66.00

WTI
$
2.7

3-way option(3)
Jan 2020 to Dec 2020
1,000 bbl/d
US$51.00/US$59.50/US$66.15

WTI
$
1.9

3-way option(3)
Jan 2020 to Dec 2020
1,000 bbl/d
US$51.00/US$60.00/US$65.60

WTI
$
2.1

3-way option(3)
Jan 2020 to Dec 2020
1,000 bbl/d
US$51.00/US$60.00/US$66.00

WTI
$
2.1

3-way option(3)
Jan 2020 to Dec 2020
1,000 bbl/d
US$51.00/US$60.00/US$66.05

WTI
$
2.1

3-way option(3)
Jan 2020 to Dec 2020
2,000 bbl/d
US$51.00/US$60.00/US$66.70

WTI
$
4.3

Swaption(4)
Jan 2020 to Dec 2020
1,000 bbl/d
US$62.50/bbl

WTI
$
(0.1
)
Swaption(4)
Jan 2020 to Dec 2020
1,000 bbl/d
US$63.20/bbl

WTI
$
(0.1
)
Swaption(5)
Jan 2021 to Dec 2021
3,000 bbl/d
US$60.75/bbl

WTI
$
(2.2
)
Swaption(5)(6)
Jan 2021 to Dec 2021
3,000 bbl/d
US$70.00/bbl

Brent
$
—







 
Natural Gas





 
Fixed - Sell
Oct 2019 to Dec 2019
15,000 mmbtu/d

US$2.97

NYMEX
$
0.9

Total
 
 
 
 
$
48.6

Financial derivatives - Current asset
 
 
 
45.3

Financial derivatives - Non-current asset
 
 
 
3.3

(1)
Based on the weighted average price per unit for the period.
(2)
Fair values as at September 30, 2019.
(3)
Producer 3-way option consists of a sold put, a bought put and a sold call. To illustrate, in a US$50/US$60/US$70 contract, Baytex receives WTI plus US$10.00/bbl when WTI is at or below US$50/bbl; Baytex receives US$60.00/bbl when WTI is between US$50/bbl and US$60/bbl; Baytex receives the market price when WTI is between US$60/bbl and US$70/bbl; and Baytex receives US$70/bbl when WTI is above US$70/bbl.
(4)
For these contracts, the counterparty has the right, if exercised on December 31, 2019, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(5)
For these contracts, the counterparty has the right, if exercised on December 30, 2020, to enter a swap transaction for the remaining term, notional volume and fixed price per unit indicated above.
(6)
Contracts entered subsequent to September 30, 2019.

Page 17



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
 
2019

2018

2019

2018

Realized financial derivatives (gain) loss
$
(20,857
)
$
30,854

$
(52,664
)
$
70,103

Unrealized financial derivatives (gain) loss
(7,666
)
46

30,922

65,140

Financial derivatives (gain) loss
$
(28,523
)
$
30,900

$
(21,742
)
$
135,243


Physical Delivery Contracts

The following physical delivery contracts were held for the purpose of delivery of non-financial items in accordance with the Company's expected sale requirements. Physical delivery contracts are not considered financial instruments and, as a result, no asset or liability has been recognized in the consolidated statements of financial position.

As at October 31, 2019, Baytex had committed to deliver the following volumes of raw bitumen to market on rail:
Remaining Period
Volume
Oct 2019
1,000 bbl/d
Oct 2019 to Dec 2019
11,000 bbl/d
Jan 2020 to Dec 2020 
7,500 bbl/d


Page 18