Executive Summary / Key Takeaways

• Baytex Energy Corp. is strategically focused on enhancing free cash flow and aggressively reducing debt, targeting a net debt of approximately $2 billion by year-end 2025, supported by a disciplined capital allocation framework.
• The company's asset portfolio, particularly the Pembina Duvernay and Eagle Ford, demonstrates significant operational efficiencies and growth potential, with the Duvernay achieving record 30-day peak oil rates and both plays showing substantial drilling and completion cost improvements.
• Baytex's oil-weighted production profile provides considerable leverage to oil price upside, with every USD $5 per barrel change in WTI impacting annual adjusted funds flow by approximately $225 million on an unhedged basis.
• Technological advancements in drilling and completions, including cross-border collaboration and the strategic use of refracs in the Eagle Ford, are key differentiators driving capital efficiency and extending asset duration.
• Despite a challenging macroeconomic environment and share price underperformance, Baytex's strong liquidity, long-term debt maturity profile, and prudent hedging strategy position it for resilience and sustainable long-term value creation.

The Resilient Core: Baytex's Strategic Foundation in a Volatile Energy Landscape

Baytex Energy Corp., incorporated in 1993 and headquartered in Calgary, Canada, has forged a distinct identity within the North American oil and gas exploration and production sector. The company's core business revolves around the acquisition, development, and production of crude oil and natural gas across the Western Canadian Sedimentary Basin and the prolific Eagle Ford shale in the United States. Baytex's overarching strategy is anchored in disciplined capital allocation, operational excellence, and a steadfast commitment to free cash flow generation and debt reduction, particularly crucial in the face of fluctuating commodity markets.

The global crude oil market currently presents a complex and volatile landscape, marked by macroeconomic uncertainty, trade tensions, and OPEC's decisions impacting supply. WTI prices have softened, recently trading in the US$55 to $60 per barrel range, down from highs of $80 earlier in the year. This environment underscores the importance of Baytex's oil-weighted production profile, which is approximately 84% crude oil and liquids. This exposure means that every USD $5 per barrel change in WTI impacts the company's annual adjusted funds flow by approximately $225 million on an unhedged basis, positioning Baytex to significantly benefit from any oil price recovery.

Baytex's historical journey reflects a proactive approach to portfolio management and financial discipline. At the end of 2020, the company divested a third of its Viking assets, applying the proceeds directly to debt reduction. This early move set a precedent for optimizing its balance sheet. Further demonstrating this commitment, in 2024, Baytex sold a small thermal operation in Saskatchewan, Crawford Thermal, with proceeds again directed towards debt. The company also refinanced bonds, reducing coupon costs and extending its credit facility terms to 2028, significantly terming out its debt maturities to 2030 and 2032. This strategic deleveraging, coupled with a focus on high-return projects, forms the bedrock of Baytex's investment thesis.

Technological Edge: Driving Efficiency and Unlocking Resource Potential

Baytex's operational prowess is significantly bolstered by its continuous advancements in drilling and completion technologies, which serve as a critical competitive differentiator. The company leverages cross-border collaboration between its Canadian and U.S. teams, sharing learnings and optimizing techniques across its diverse asset base. This synergy has led to tangible, quantifiable benefits across its operations.

In the Pembina Duvernay, for instance, Baytex has achieved remarkable progress. The company's first pad in Q2 2025 delivered average 30-day peak production rates of 1,865 BOE per day per well from 3,800-meter completed lateral lengths, setting the highest 30-day peak oil rates recorded in the West Shale Basin. This performance, which exceeded initial rate expectations, validates the company's technical and operational advances. These gains are not merely anecdotal; Baytex reported a 12% improvement in drilling and completion costs in Q2 2025 compared to 2024, with average well costs running at $12.5 million for 12,000-12,500-foot laterals, equating to approximately $1,000 per completed lateral foot. Further, Duvernay drilling in 2024 was 20% faster and 10% cheaper than the prior year, accompanied by a 40% increase in initial production rates and a 15% bump in Estimated Ultimate Recoveries (EURs) over the 2023 program. These improvements are a direct result of optimized stimulation designs and enhanced execution.

Similarly, in the Eagle Ford, Baytex realized an approximate 11% improvement in drilling and completion costs in Q2 2025. This efficiency gain is attributed equally to service cost reductions, driven by decreased activity levels in the U.S. market, and internal efficiency improvements such as increased lateral footage per day and completion pump hours per day. A notable technological shift has been the adoption of field gas for frac operations, replacing diesel and contributing to meaningful cost savings. The company's refrac program in the Eagle Ford is another key technological initiative. Baytex successfully executed two refracs in Q2 2025 at approximately half the cost of new wells, with initial rates comparable to its broader development program. With 300 refrac opportunities identified across its acreage, this program extends asset duration while delivering strong capital efficiency.

For investors, these technological differentiators translate directly into a stronger competitive moat. The ability to drill faster, cheaper, and more effectively, while also enhancing well performance and extending asset life through refracs, directly contributes to higher capital efficiencies, improved margins, and more robust free cash flow generation. This technological edge allows Baytex to extract more value from its existing asset base, underpinning its long-term growth strategy and enhancing its market positioning against competitors.

Competitive Landscape and Strategic Positioning

Baytex operates in a highly competitive oil and gas market, contending with larger, more diversified players like Canadian Natural Resources (CNQ), Suncor Energy (SU), Cenovus Energy (CVE), and Ovintiv (OVV). While these competitors often boast greater scale and broader asset bases, Baytex carves out its niche through focused regional expertise and operational agility.

Compared to Canadian Natural Resources, a major Canadian energy company known for its diversified portfolio and operational efficiency, Baytex's strength lies in its targeted focus on high-potential plays like the Eagle Ford and Pembina Duvernay. While CNQ benefits from scale for more stable revenue streams and stronger profitability, Baytex's agility allows for quicker entry into emerging opportunities and more rapid exploitation of specific resource plays. Baytex's TTM Gross Profit Margin of 37.90% and Net Profit Margin of 9.80% are generally lower than those of larger, integrated players, reflecting its upstream focus and smaller scale. However, its operational improvements, such as the 11% reduction in Eagle Ford drilling and completion costs, demonstrate its ability to enhance efficiency within its targeted segments.

Against integrated giants like Suncor Energy, which benefits from downstream operations for price stability, Baytex maintains a leaner, upstream-focused model. This specialization allows Baytex to concentrate capital and expertise on exploration and production, potentially leading to higher capital efficiencies in its specific development areas. However, it lacks the integrated capabilities that provide SU with a buffer against commodity price volatility.

Cenovus Energy, another significant Canadian producer with a strong presence in oil sands, shares some operational similarities with Baytex. However, Baytex differentiates itself through its emphasis on lighter oil assets, which can offer advantages in market adaptability. While CVE has shown strong cost management, Baytex's regional expertise and technological advancements in drilling and completions aim to close any efficiency gaps and drive superior well economics.

In the U.S. Eagle Ford, Baytex directly competes with companies like Ovintiv, which also focuses on shale plays. Baytex's refrac program, offering initial rates comparable to new wells at half the cost, provides a significant capital efficiency advantage, extending asset duration and enhancing returns. This technological edge helps Baytex compete effectively in shared U.S. markets, even if OVV might have a broader technological adoption for extraction efficiency.

Baytex's competitive advantages stem from its established asset base in key regions, providing cost leadership through operational familiarity, and its focused acquisition and development strategy. This allows for faster innovation cycles and differentiation by targeting high-potential plays. However, the company remains vulnerable to commodity price volatility due to its oil-weighted portfolio and less diversified asset base compared to some larger peers. The high capital requirements and regulatory hurdles inherent in the oil and gas industry act as significant barriers to entry, helping Baytex defend its market position against new challengers.

Financial Performance and Liquidity: A Foundation for Growth

Baytex delivered solid financial results in Q2 2025, consistent with its full-year plan, despite a soft commodity backdrop where WTI averaged USD 64 per barrel. Adjusted funds flow reached $367 million, or $0.48 per basic share, generating $3 million in free cash flow. The company returned $21 million to shareholders, including $4 million in share repurchases and $17 million in quarterly dividends. For the first quarter of 2025, Baytex generated $53 million in free cash flow, a notable improvement over the prior year.

The company's commitment to debt reduction is evident. Net debt decreased by $96 million, or 4%, to $2.3 billion in Q2 2025, supported by a strengthening Canadian dollar. Baytex systematically repurchased USD 41 million of its 8.5% long-term notes during the quarter. As of March 31, 2025, net debt stood at $2.4 billion, representing a 10% reduction over the last 12 months (15% on a U.S. dollar basis). The company maintains substantial financial flexibility, with USD 1.1 billion in credit facility capacity, less than 25% drawn, and maturing in June 2029. Its long-term debt maturity profile provides significant runway, with the earliest note maturity in April 2030. Baytex views its primarily U.S. dollar-denominated debt as naturally hedged against its U.S. business, which generates U.S. cash flows for repayment.

In 2024, Baytex generated $656 million in free cash flow, with over 70% realized in the second half of the year. The company achieved 10% production per share growth and a 13% increase in 2P net asset value per share, while improving its cash cost structure by 5% on a BOE basis. Strong PDP recycle ratios of 1.9 times (1P) and 2.7 times (2P) underscore the efficiency of its capital program and high netback oil-weighted portfolio. The company's TTM revenue stands at $4.21 billion, with a net income of $236.60 million and annual operating cash flow of $1.91 billion. These figures demonstrate a robust financial foundation, enabling the company to pursue its strategic objectives of deleveraging and targeted growth.

Outlook and Strategic Initiatives: Charting a Course for Value Creation

Baytex's forward-looking strategy is firmly rooted in its commitment to free cash flow generation and debt reduction. Based on forward strip pricing, the company expects to generate approximately $400 million of free cash flow in 2025, with the majority weighted to the second half of the year. This free cash flow will be entirely allocated to debt repayment after funding quarterly dividend payments, with a clear target of reducing net debt to approximately $2 billion by year-end 2025. This refined shareholder return framework, which temporarily suspends share buybacks in favor of accelerated debt repayment, highlights management's prudent approach in the current volatile pricing environment. The quarterly dividend of CDN$0.0225 per share remains a priority, reflecting its importance to shareholders.

The 2025 E&D capital budget is set at $1.2 billion to $1.3 billion, supporting annual production of 148,000 to 152,000 BOE per day. Given the prevailing commodity price environment, both capital expenditures and production are anticipated to trend toward the low end of these ranges. Baytex's hedging program, with approximately 45% of its net crude oil exposure hedged at a $60 per barrel floor for the balance of 2025, acts as a crucial "insurance product" to mitigate revenue volatility and provide stability for capital allocation decisions. The company aims to layer in $60 floor hedges for 2026, targeting 40% hedged by year-end 2025.

Operationally, the Pembina Duvernay is poised for significant growth. Baytex plans to transition this asset to full commercialization through 2026 and into 2027, targeting 18 to 20 wells per year. This ramp-up is expected to increase Duvernay production to 20,000 to 25,000 BOE per day by 2029-2030. For 2026, the company is targeting 12 to 15 Duvernay wells, a strategic step towards full development. Infrastructure spending for the Duvernay is estimated at $25 million to $30 million annually in the early years, benefiting from existing gas pipeline networks and a large, underutilized gas processing facility with Keyera (KEY), which significantly reduces overall capital contributions. In the Eagle Ford, Baytex plans to increase the pace of its highly capital-efficient refrac program, targeting 6 to 10 refracs in 2026.

Risks and Challenges

Despite a clear strategic direction, Baytex faces several pertinent risks. The primary challenge remains commodity price volatility. While the company's oil-weighted profile offers upside, it also exposes Baytex to significant downside risk, as evidenced by the recent softening of WTI prices. The effectiveness of its hedging strategy, while providing a floor, also caps upside potential. Geopolitical factors, including global trade tensions and OPEC's decisions, introduce further uncertainty into crude oil markets.

Operational risks, though mitigated by a focus on efficiency, persist. The successful execution of the Duvernay commercialization plan and the Eagle Ford refrac program is critical to achieving production and cost targets. Infrastructure build-out in the Duvernay, while planned, requires careful management. Furthermore, the company's debt levels, while being actively reduced, still represent a significant financial commitment. Although the debt maturity profile is favorable, sustained low commodity prices could impact the pace of deleveraging. The share price performance has not reflected the company's operational strength, a concern acknowledged by management, highlighting the challenge of market perception in a volatile sector.

Conclusion

Baytex Energy Corp. is executing a compelling investment thesis centered on disciplined capital allocation, operational excellence, and an aggressive debt reduction strategy. By leveraging its technologically advanced drilling and completion techniques, particularly in the high-potential Pembina Duvernay and capital-efficient Eagle Ford assets, Baytex is driving significant improvements in production and cost structures. The company's commitment to deleveraging, targeting $2 billion in net debt by year-end 2025, coupled with a prudent hedging program and strong liquidity, positions it for resilience amidst a volatile energy market. While external factors like commodity price fluctuations and broader macroeconomic uncertainties present challenges, Baytex's strategic focus on enhancing free cash flow, optimizing its asset base, and capitalizing on its technological leadership provides a clear pathway to sustainable long-term value creation for shareholders. The company's ability to organically fund its growth initiatives, particularly the Duvernay ramp-up, through its cash-generating Eagle Ford operations, underscores the strength and balance of its portfolio.