# Message
to Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_BTE_2020/NYSE_BTE_2020.mmd` · pages 1-7_

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Message
to Shareholders

7

Management's
Discussion and
Analysis

45

Management's
Report

46

Auditors'
Reports

49

Consolidated
Financial
Statements

79

Reserves
Information

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## SUMMARY

<table><tr><td colspan="4">Twelve Months Ended</td></tr><tr><td></td><td>December 31, 2020</td><td>December 31, 2019</td><td></td></tr><tr><td>FINANCIAL</td><td></td><td></td><td></td></tr><tr><td>(thousands of Canadian dollars, except per common share amounts)</td><td></td><td></td><td></td></tr><tr><td>Petroleum and natural gas sales</td><td>\(     975,477</td><td>\)     1,805,919</td><td></td></tr><tr><td>Adjusted funds flow (1)</td><td></td><td>311,506</td><td>902,426</td></tr><tr><td>Per share - basic</td><td></td><td>0.56</td><td>1.62</td></tr><tr><td>Per share - diluted</td><td></td><td>0.56</td><td>1.62</td></tr><tr><td>Net income (loss)</td><td></td><td>(2,438,964)</td><td>(12,459)</td></tr><tr><td>Per share - basic</td><td></td><td>(4.35)</td><td>(0.02)</td></tr><tr><td>Per share - diluted</td><td></td><td>(4.35)</td><td>(0.02)</td></tr><tr><td>Capital Expenditures</td><td></td><td></td><td></td></tr><tr><td>Exploration and development expenditures (1)</td><td>\(     280,340</td><td>\)     552,291</td><td></td></tr><tr><td>Acquisitions, net of divestitures</td><td></td><td>(182)</td><td>2,180</td></tr><tr><td>Total oil and natural gas capital expenditures</td><td>\(     280,158</td><td>\)     554,471</td><td></td></tr><tr><td>Net Debt</td><td></td><td></td><td></td></tr><tr><td>Credit facilities</td><td>\(     651,173</td><td>\)     506,471</td><td></td></tr><tr><td>Long-term notes</td><td></td><td>1,147,950</td><td>1,337,200</td></tr><tr><td>Long-term debt</td><td></td><td>1,799,123</td><td>1,843,671</td></tr><tr><td>Working capital deficiency</td><td></td><td>48,478</td><td>28,120</td></tr><tr><td>Net debt (1)</td><td>\(     1,847,601</td><td>\)     1,871,791</td><td></td></tr><tr><td>Shares Outstanding - basic (thousands)</td><td></td><td></td><td></td></tr><tr><td>Weighted average</td><td></td><td>560,657</td><td>557,048</td></tr><tr><td>End of period</td><td></td><td>561,227</td><td>558,305</td></tr></table>

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<table><tr><td></td><td>December 31, 2020</td><td>December 31, 2019</td></tr><tr><td>OPERATING</td><td></td><td></td></tr><tr><td>Daily Production</td><td></td><td></td></tr><tr><td>Light oil and condensate (bbl/d)</td><td>37,056</td><td>43,587</td></tr><tr><td>Heavy oil (bbl/d)</td><td>21,142</td><td>26,741</td></tr><tr><td>NGL (bbl/d)</td><td>7,340</td><td>10,229</td></tr><tr><td>Total liquids (bbl/d)</td><td>65,538</td><td>80,557</td></tr><tr><td>Natural gas (mcf/d)</td><td>85,464</td><td>102,742</td></tr><tr><td>Oil equivalent (boe/d @ 6:1) (2)</td><td>79,781</td><td>97,680</td></tr><tr><td>Netback (thousands of Canadian dollars)</td><td></td><td></td></tr><tr><td>Total sales, net of blending and other expense (3)</td><td>\( 927,096</td><td>\) 1,737,124</td></tr><tr><td>Royalties</td><td>(163,735)</td><td>(320,241)</td></tr><tr><td>Operating expense</td><td>(331,345)</td><td>(397,716)</td></tr><tr><td>Transportation expense</td><td>(28,437)</td><td>(43,942)</td></tr><tr><td>Operating netback (1)</td><td>\( 403,579</td><td>\) 975,225</td></tr><tr><td>General and administrative</td><td>(34,268)</td><td>(45,469)</td></tr><tr><td>Cash financing and interest</td><td>(106,534)</td><td>(107,417)</td></tr><tr><td>Realized financial derivatives gain (loss)</td><td>47,836</td><td>75,620</td></tr><tr><td>Other (4)</td><td>893</td><td>4,467</td></tr><tr><td>Adjusted funds flow (1)</td><td>\( 311,506</td><td>\) 902,426</td></tr><tr><td>Netback (per boe)</td><td></td><td></td></tr><tr><td>Total sales, net of blending and other expense (3)</td><td>\( 31.75</td><td>\) 48.72</td></tr><tr><td>Royalties</td><td>(5.61)</td><td>(8.98)</td></tr><tr><td>Operating expense</td><td>(11.35)</td><td>(11.16)</td></tr><tr><td>Transportation expense</td><td>(0.97)</td><td>(1.23)</td></tr><tr><td>Operating netback (1)</td><td>\( 13.82</td><td>\) 27.35</td></tr><tr><td>General and administrative</td><td>(1.17)</td><td>(1.28)</td></tr><tr><td>Cash financing and interest</td><td>(3.65)</td><td>(3.01)</td></tr><tr><td>Realized financial derivatives gain (loss)</td><td>1.64</td><td>2.12</td></tr><tr><td>Other (4)</td><td>0.03</td><td>0.13</td></tr><tr><td>Adjusted funds flow (1)</td><td>$ 10.67</td><td>$ 25.31</td></tr></table>

## Notes:

(1) The terms "adjusted funds flow", "exploration and development expenditures", "net debt" and "operating netback" do not have any standardized meaning as prescribed by Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies where similar terminology is used. See the advisory on non-GAAP measures at the end of this press release.

(2) Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. The use of boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

(3) Realized heavy oil prices are calculated based on sales dollars, net of blending and other expense. We include the cost of blending diluent in our realized heavy oil sales price in order to compare the realized pricing on our produced volumes to the WCS benchmark.

(4) Other is comprised of realized foreign exchange gain or loss, other income or expense, current income tax expense or recovery and share-based compensation. Refer to the 2020 MD&A for further information on these amounts.

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## Advisory Regarding Forward-Looking Statements

In the interest of providing Baytex's shareholders and potential investors with information regarding Baytex, including management's assessment of Baytex's future plans and operations, certain statements in this report are "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 and "forward-looking information" within the meaning of applicable Canadian securities legislation (collectively, "forward-looking statements"). In some cases, forward-looking statements can be identified by terminology such as "believe", "continue", "estimate", "expect", "forecast", "intend", "may", "objective", "ongoing", "outlook", "potential", "project", "plan", "should", "target", "would", "will" or similar words suggesting future outcomes, events or performance. The forward-looking statements contained in this report speak only as of the date thereof and are expressly qualified by this cautionary statement.

Specifically, this report contains forward-looking statements relating to but not limited to: our business strategies, plans and objectives; that we are on track to deliver \(250 million (\)0.45 per basic share) of free cash flow in 2021, are building operational momentum and executing our plan to maximize free cash flow and accelerate our debt reduction strategy; in 2021 that: we will benefit from a disciplined approach to capital allocation and a continued drive to improve our cost structure and capital efficiencies, our high graded capital program is focused on high netback light oil assets in the Viking and Eagle Ford and that, at current commodity prices, we intend to implement a heavy oil program in the second half of the year; our guidance for 2021 exploration and development expenditures, production, royalty rate, operating, transportation, general and administration and interest expense and leasing expenditures and asset retirement obligations; that 48% of our net crude oil exposure for 2021 is hedged; In 2021, we expect to benefit from our diversified oil weighted portfolio and our commitment to allocate capital effectively and that our priority is to generate stable production, maximize free cash flow and further strengthen our balance sheet; for 2021 in the Eagle Ford: we expect to bring wells drilled in Q4/2020 on stream in Q1/2021 and bring 18 net wells on production; in the Viking: that we expect to bring 43 net wells on stream in Q1/2020 and 120 net wells on stream in 2021; we have minimal heavy oil development scheduled in H1/2021 and, at current commodity prices, we intend to implement a drilling program in H2/2021 with upwards of 30 net wells drilled at Lloydminster and 6 net wells drilled at Peace River; in Pembina Duvernay we have flexibility to drill up to 4 net wells in H2/2021; based on the forward strip, we expect to increase our financial liquidity to approximately \(500 million in 2021; that we use financial derivative contracts and crude-by-rail to reduce adjusted funds flow volatility and the percentage of our expected production in 2021 of Canadian light oil and heavy oil for which we have hedged the differential to WTI; our 2025 GHG emissions intensity reduction target and our strategy to reach the target; that we plan to publish our fifth corporate sustainability report this year; future development costs, F&D and FD&A; our reserves life index; forecast prices for oil and natural gas; forecast inflation and exchange rates; the net present value before income taxes of the future net revenue attributable to our reserves; the value of our undeveloped land holdings and our estimated net asset value. In addition, information and statements relating to reserves are deemed to be forward-looking statements, as they involve implied assessment, based on certain estimates and assumptions, that the reserves described exist in quantities predicted or estimated, and that they can be profitably produced in the future.

These forward-looking statements are based on certain key assumptions regarding, among other things: petroleum and natural gas prices and differentials between light, medium and heavy oil prices; well production rates and reserve volumes; our ability to add production and reserves through our exploration and development activities; capital expenditure levels; our ability to borrow under our credit agreements; the receipt, in a timely manner, of regulatory and other required approvals for our operating activities; the availability and cost of labour and other industry services; interest and foreign exchange rates; the continuance of existing and, in certain circumstances, proposed tax and royalty regimes; our ability to develop our crude oil and natural gas properties in the manner currently contemplated; and current industry conditions, laws and regulations continuing in effect (or, where changes are proposed, such changes being adopted as anticipated). Readers are cautioned that such assumptions, although considered reasonable by Baytex at the time of preparation, may prove to be incorrect.

Actual results achieved will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors. Such factors include, but are not limited to: the volatility of oil and natural gas prices and price differentials (including the impacts of Covid-19); the availability and cost of capital or borrowing; risks associated with our ability to exploit our properties and add reserves; availability and cost of gathering, processing and pipeline systems; that our credit facilities may not provide sufficient liquidity or may not be renewed; failure to comply with the covenants in our debt agreements; risks associated with a third-party operating our Eagle Ford properties; public perception and its influence on the regulatory regime; restrictions or costs imposed by climate change initiatives and the physical risks of climate change; new regulations on hydraulic fracturing; restrictions on or access to water or other fluids; changes in government regulations that affect the oil and gas industry; regulations regarding the disposal of fluids; changes in environmental, health and safety regulations; costs to develop and operate our properties; variations in interest rates and foreign exchange rates; risks associated with our hedging activities; retaining or replacing our leadership and key personnel; changes in income tax or other laws or government incentive programs; uncertainties associated with estimation of oil and natural gas reserves; our inability to fully insure against all risks; risks of counterparty default; risks related to our thermal heavy oil projects; alternatives to and changing demand for petroleum products; risks associated with our use of information technology systems; results of litigation; risks associated with large projects; risks associated with the ownership of our securities, including changes in market-based factors; risks for United States and other non-resident shareholders, including the ability to enforce civil remedies, differing practices for reporting reserves and production, additional taxation applicable to non-residents and foreign exchange risk; and other factors, many of which are beyond our control.

These and additional risk factors are discussed in our Annual Information Form, Annual Report on Form 40-F and Management's Discussion and Analysis for the year ended December 31, 2020, to be filed with Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission not later than March 31, 2021 and in our other public filings

The above summary of assumptions and risks related to forward-looking statements has been provided in order to provide shareholders and potential investors with a more complete perspective on Baytex's current and future operations and such information may not be appropriate for other purposes.

There is no representation by Baytex that actual results achieved will be the same in whole or in part as those referenced in the forward-looking statements and Baytex does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities law.

All amounts in this report are stated in Canadian dollars unless otherwise specified.

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## Non-GAAP Financial and Capital Management Measures

In this report, we refer to certain financial measures (such as adjusted funds flow, exploration and development expenditures, free cash flow, net debt and operating netback) which do not have any standardized meaning prescribed by Canadian GAAP ("non-GAAP measures") and are considered non-GAAP measures. While adjusted funds flow, exploration and development expenditures, free cash flow, net debt and operating netback are commonly used in the oil and gas industry, our determination of these measures may not be comparable with calculations of similar measures for other issuers.

Adjusted funds flow is not a measurement based on generally accepted accounting principles ("GAAP") in Canada, but is a financial term commonly used in the oil and gas industry. We define adjusted funds flow as cash flow from operating activities adjusted for changes in non-cash operating working capital and asset retirement obligations settled. Our determination of adjusted funds flow may not be comparable to other issuers. We consider adjusted funds flow a key measure that provides a more complete understanding of operating performance and our ability to generate funds for exploration and development expenditures, debt repayment, settlement of our abandonment obligations and potential future dividends.

In addition, we use a ratio of net debt to adjusted funds flow to manage our capital structure. We eliminate settlements of abandonment obligations from cash flow from operations as the amounts can be discretionary and may vary from period to period depending on our capital programs and the maturity of our operating areas. The settlement of abandonment obligations are managed with our capital budgeting process which considers available adjusted funds flow. Changes in non-cash working capital are eliminated in the determination of adjusted funds flow as the timing of collection, payment and incurrence is variable and by excluding them from the calculation we are able to provide a more meaningful measure of our cash flow on a continuing basis. For a reconciliation of adjusted funds flow to cash flow from operating activities, see Management's Discussion and Analysis of the operating and financial results for the year ended December 31, 2020.

Exploration and development expenditures is not a measurement based on GAAP in Canada. We define exploration and development expenditures as additions to exploration and evaluation assets combined with additions to oil and gas properties. Our definition of exploration and development expenditures may not be comparable to other issuers. We use exploration and development expenditures to measure and evaluate the performance of our capital programs. The total amount of exploration and development expenditures is managed as part of our budgeting process and can vary from period to period depending on the availability of adjusted funds flow and other sources of liquidity.

Free cash flow is not a measurement based on GAAP in Canada. We define free cash flow as adjusted funds flow less exploration and development expenditures (both non-GAAP measures discussed above), payments on lease obligations, and asset retirement obligations settled. Our determination of free cash flow may not be comparable to other issuers. We use free cash flow to evaluate funds available for debt repayment, common share repurchases, potential future dividends and acquisition and disposition opportunities.

Net debt is not a measurement based on GAAP in Canada. We define net debt to be the sum of cash, trade and other accounts receivable, trade and other accounts payable, and the principal amount of both the long-term notes and the credit facilities. Our definition of net debt may not be comparable to other issuers. We believe that this measure assists in providing a more complete understanding of our cash liabilities and provides a key measure to assess our liquidity. We use the principal amounts of the credit facilities and long-term notes outstanding in the calculation of net debt as these amounts represent our ultimate repayment obligation at maturity. The carrying amount of debt issue costs associated with the credit facilities and long-term notes is excluded on the basis that these amounts have already been paid by Baytex at inception of the contract and do not represent an additional source of capital or repayment obligation.

Operating netback is not a measurement based on GAAP in Canada, but is a financial term commonly used in the oil and gas industry. Operating netback is equal to petroleum and natural gas sales less blending expense, royalties, production and operating expense and transportation expense divided by barrels of oil equivalent sales volume for the applicable period. Our determination of operating netback may not be comparable with the calculation of similar measures for other entities. We believe that this measure assists in characterizing our ability to generate cash margin on a unit of production basis and is a key measure used to evaluate our operating performance.

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## MESSAGE TO SHAREHOLDERS

In one of the most challenging years experienced by our industry, we delivered on our commitment to preserve financial liquidity, capture cost savings and generate free cash flow. The Covid-19 pandemic required a dynamic response to the oil price collapse and our team delivered. We re-set our business in the face of extremely volatile crude oil markets and intensified efforts to improve all aspects of our cost structure and capital efficiencies, while protecting the health and safety of our personnel. We are now benefiting from these actions as we are poised to generate meaningful free cash flow in 2021 and continue our de-leveraging strategy.

In 2020, we reduced our capital budget by 50% and identified cost savings of approximately \(100 million. We produced 79,781 boe/d (82% liquids) with capital expenditures of \)280 million, in line with our annual guidance. We also hit all of our cost targets with operating expenses averaging \(11.35/boe, transportation expenses of \)0.97/boe and general and administrative expenses under $1.20/boe.

We generated free cash flow of \(18 million and a \)24 million net debt reduction (including the Canadian dollar strengthening relative to the U.S. dollar). We also negotiated a bank credit facility extension and refinanced our long-term notes, both important measures to ensure our financial liquidity. We issued US\(500 million senior unsecured notes maturing April 2027 which enabled us to redeem two near term notes maturing in 2021 and 2022. As of December 31, 2020, we held \)367 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital, of \(319 million. We are well within our financial covenants and our first long-term note maturity of US\)400 million is not until June 2024.

In addition, we continue to build on our long term, high quality and diversified oil portfolio. Our operating teams are well established with a track record of enhancing our inventory and delivering results. Our proved plus probable reserves at year-end total 462 mmboe and we maintain a strong reserves life index of 17.9 years. In Canada, we have one of the largest conventional oil portfolios, including high operating netback, light oil production in the Viking and low decline, heavy oil production at Peace River and Lloydminster. We also hold a dominant land position in the emerging light oil resource play in the Pembina Duvernay, which has similar geologic and reservoir characteristics to our Eagle Ford shale asset in the United States. Our position in the Eagle Ford is defined by one of the highest quality, lowest-cost U.S. resource plays with outstanding drilling economics.

As part of our core values, we are driven to safely and responsibly develop energy resources while reducing environmental impact. In 2019, we established a GHG emissions reduction target. Our objective was to reduce our corporate GHG emission intensity (tonnes of CO \( _{2} \) e per boe) by 30% by 2021, relative to our 2018 baseline. We are pleased to announce that we have exceeded this target, achieving a 46% reduction in our GHG emissions intensity through year-end 2020. This represents an annual reduction of 1.6 million tonnes of CO \( _{2} \) e and is equivalent to taking 340,000 cars off the road annually.

As an element of our corporate culture we continue to set the bar higher. We have established a new target to reduce our corporate GHG emission intensity by a further 33% from current levels by 2025. This equates to an approximate 65% reduction by 2025, relative to our 2018 baseline. The entire organization is proud of our emissions reduction strategy which includes gas conservation and combustion, reusing associated gas as fuel for field activities, reduced emissions from storage tanks, along with monitoring and preventing fugitive emissions.

We look forward to publishing our fifth corporate sustainability report later this year. We are committed to transparency and accountability, as well as progressing the environmental and social aspects of our business.

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## Looking Forward

We maintain an attractive and deep inventory of development drilling locations with approximately ten years or more in each of our core assets. In 2021, we will benefit from a disciplined approach to capital allocation as well as our continued drive to improve our cost structure and capital efficiencies. Our high graded capital program is focused largely on our high netback light oil assets in the Viking and Eagle Ford. At current commodity prices, we intend to implement a heavy oil program in the second half of the year.

We are executing our plan to maximize free cash flow and accelerate our debt reduction strategy. Our 2021 guidance remains unchanged as we target production of 73,000 to 77,000 boe/d with exploration and development expenditures of \(225 to \)275 million. During Q4/2020, we resumed drilling activity, which is leading to operational momentum early in 2021 with current production over 78,000 boe/d. At the time of writing, we expect to generate over \(250 million (\)0.45 per basic share) of free cash flow in 2021 and increase our financial liquidity to over $550 million.

We maintain a consistent approach to risk management and marketing, utilizing various financial derivative contracts and crude-by-rail to reduce the volatility in our adjusted funds flow. For 2021, we have entered into hedges on approximately 48% of our net crude oil exposure, largely utilizing a 3-way option structure that provides WTI price protection at US$45/bbl with upside participation to US$52/bbl. We are also contracted to deliver 5,500 bbl/d of our heavy oil volumes to market by rail.

We continue to enhance our organizational capability at all levels - from the Board, to management and to all employees. I am particularly proud of our response to the Covid-19 pandemic as we strive to create a more sustainable business and prosperous future. Our team is resilient and focused and we are totally committed to generating value for shareholders.

We look forward to executing our plans for the benefit of all stakeholders and we thank you for your support.

Sincerely,

![](images/7_0.jpg)

Edward D. LaFehr

President and Chief Executive Officer

February 24, 2021