# Message
to Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_BTE_2019/NYSE_BTE_2019.mmd` · pages 1-7_

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Message
to Shareholders

7

Management's Discussion and Analysis

44

Management's
Report

45

Auditors' Reports

49

Consolidated
Financial
Statements

79

Reserves
Information

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## SUMMARY

<table><tr><td colspan="3">Years Ended</td></tr><tr><td></td><td>December 31, 2019</td><td>December 31, 2018</td></tr><tr><td>FINANCIAL</td><td></td><td></td></tr><tr><td>(thousands of Canadian dollars, except per common share amounts)</td><td></td><td></td></tr><tr><td>Petroleum and natural gas sales</td><td>\( 1,805,919</td><td>\) 1,428,870</td></tr><tr><td>Adjusted funds flow(1)</td><td>902,426</td><td>472,983</td></tr><tr><td>Per share - basic</td><td>1.62</td><td>1.35</td></tr><tr><td>Per share - diluted</td><td>1.62</td><td>1.35</td></tr><tr><td>Net income (loss)</td><td>(12,459)</td><td>(325,309)</td></tr><tr><td>Per share - basic</td><td>(0.02)</td><td>(0.93)</td></tr><tr><td>Per share - diluted</td><td>(0.02)</td><td>(0.93)</td></tr><tr><td>Capital Expenditures</td><td></td><td></td></tr><tr><td>Exploration and development expenditures(1)</td><td>\( 552,291</td><td>\) 495,721</td></tr><tr><td>Acquisitions, net of divestitures</td><td>2,180</td><td>1,603,850</td></tr><tr><td>Total oil and natural gas capital expenditures</td><td>\( 554,471</td><td>\) 2,099,571</td></tr><tr><td>Net Debt</td><td></td><td></td></tr><tr><td>Bank loan(2)</td><td>\( 506,471</td><td>\) 522,294</td></tr><tr><td>Long-term notes(2)</td><td>1,337,200</td><td>1,596,323</td></tr><tr><td>Long-term debt</td><td>1,843,671</td><td>2,118,617</td></tr><tr><td>Working capital deficiency</td><td>28,120</td><td>146,550</td></tr><tr><td>Net debt(1)</td><td>\( 1,871,791</td><td>\) 2,265,167</td></tr><tr><td>Shares Outstanding - basic (thousands)</td><td></td><td></td></tr><tr><td>Weighted average</td><td>557,048</td><td>351,542</td></tr><tr><td>End of period</td><td>558,305</td><td>554,060</td></tr></table>

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<table><tr><td rowspan="2"></td><td colspan="2">Years Ended</td></tr><tr><td>December 31, 2019</td><td>December 31, 2018</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></td><td></td></tr><tr><td>Heavy oil (bbl/d)</td><td>43,587</td><td>29,264</td></tr><tr><td>NGL (bbl/d)</td><td>26,741</td><td>25,954</td></tr><tr><td></td><td>10,229</td><td>9,745</td></tr><tr><td>Total liquids (bbl/d)</td><td>80,557</td><td>64,963</td></tr><tr><td>Natural gas (mcf/d)</td><td>102,742</td><td>92,971</td></tr><tr><td>Oil equivalent (boe/d @ 6:1) (3)</td><td>97,680</td><td>80,458</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 (4)</td><td>\( 1,737,124</td><td>\) 1,360,038</td></tr><tr><td>Royalties</td><td>(320,241)</td><td>(313,754)</td></tr><tr><td>Operating expense</td><td>(397,716)</td><td>(311,592)</td></tr><tr><td>Transportation expense</td><td>(43,942)</td><td>(36,869)</td></tr><tr><td>Operating netback</td><td>\( 975,225</td><td>\) 697,823</td></tr><tr><td>General and administrative</td><td>(45,469)</td><td>(45,825)</td></tr><tr><td>Cash financing and interest</td><td>(107,417)</td><td>(104,318)</td></tr><tr><td>Realized financial derivatives gain (loss)</td><td>75,620</td><td>(73,165)</td></tr><tr><td>Other (5)</td><td>4,467</td><td>(1,532)</td></tr><tr><td>Adjusted funds flow (1)</td><td>\( 902,426</td><td>\) 472,983</td></tr><tr><td>Netback (per boe)</td><td></td><td></td></tr><tr><td>Total sales, net of blending and other expense (4)</td><td>\( 48.72</td><td>\) 46.31</td></tr><tr><td>Royalties</td><td>(8.98)</td><td>(10.68)</td></tr><tr><td>Operating expense</td><td>(11.16)</td><td>(10.61)</td></tr><tr><td>Transportation expense</td><td>(1.23)</td><td>(1.26)</td></tr><tr><td>Operating netback (1)</td><td>\( 27.35</td><td>\) 23.76</td></tr><tr><td>General and administrative</td><td>(1.28)</td><td>(1.56)</td></tr><tr><td>Cash financing and interest</td><td>(3.01)</td><td>(3.55)</td></tr><tr><td>Realized financial derivatives (loss) gain</td><td>2.12</td><td>(2.49)</td></tr><tr><td>Other (5)</td><td>0.13</td><td>(0.05)</td></tr><tr><td>Adjusted funds flow (1)</td><td>$ 25.31</td><td>$ 16.11</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) Principal amount of instruments. The carrying amount of debt issue costs associated with the bank loan and long-term notes are excluded on the basis that these amounts have been paid by Baytex and do not represent an additional source of capital or repayment obligations.

(3) 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.

(4) 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.

(5) Other is comprised of realized foreign exchange gain or loss, other income or expense, current income tax expense or recovery and payments on onerous contracts. Refer to the 2019 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 "anticipate", "believe", "continue", "could", "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 have flexibility to execute our business plan driving free cash flow and strengthening our balance sheet; our 2020 production and capital expenditure guidance; that our exploration and development program is expended to be fully funded by adjusted funds flow at the forward strip and we have flexibility to adjust our spending plans; the percentage of our net crude oil exposure that is hedged for 2020; that after completing the announced redemption of long-term notes our credit facilities will be one-third undrawn, we will have over $300 million of liquidity and the weighted average cost of our debt will be approximately 6%; that we have a strong drilling inventory of approximately 10 or more years in each core asset; we are committed to stable production, generating free cash flow and strengthening our balance sheet.

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; availability and cost of gathering, processing and pipeline systems; failure to comply with the covenants in our debt agreements; the availability and cost of capital or borrowing; that our credit facilities may not provide sufficient liquidity or may not be renewed; risks associated with a third-party operating our Eagle Ford properties; the cost of developing and operating our assets; depletion of our reserves; risks associated with the exploitation of our properties and our ability to acquire reserves; 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; public perception and its influence on the regulatory regime; restrictions or costs imposed by climate change initiatives; variations in interest rates and foreign exchange rates; risks associated with our hedging activities; changes in income tax or other laws or government incentive programs; uncertainties associated with estimating oil and natural gas reserves; our inability to fully insure against all risks; risks of counterparty default; risks associated with acquiring, developing and exploring for oil and natural gas and other aspects of our operations; risks associated with large projects; 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; 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, 2019, to be filed with Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission not later than March 31, 2020 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, EBITDA, 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, EBITDA, 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, 2019.

EBITDA is not a measurement based on GAAP in Canada. EBITDA is defined as net income or loss adjusted 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, exploration and evaluation expenses, unrealized gains and losses on financial derivatives and foreign exchange and share-based compensation).

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 bank loan. 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 bank loan 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 bank loan 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

While we have been a publicly listed corporation for more than 25 years, we are taking steps to systematically transform Baytex. We are now a company with a diversified North American oil portfolio designed to generate free cash flow. We have shifted our portfolio to predominantly high operating netback, light oil assets while also reducing our cash cost structure and improving capital efficiencies. More recently, we have refinanced our long-term notes and extended the term of our revolving credit facilities to 2024. These steps give us the confidence and flexibility to execute our business plan to continue driving free cash flow and strengthening our balance sheet.

Despite the many challenges facing our industry today, we recognize that developing environmentally and socially responsible energy plays an important role in raising the standard of living for people around the world. In 2019 we continued our excellent health, safety and environmental performance and published our fourth biennial corporate sustainability report. This report demonstrates our commitment to transparency and to managing the environmental and social impacts of our business. We have elevated our standards, establishing a target to reduce our greenhouse gas emissions intensity by 30% over the next three years. We believe our safety and environmental leadership will serve us well as we continue to adapt to changing market conditions.

We have a high quality and diversified oil portfolio and our operating teams are well established with a track record of delivering results. 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 East Shale 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.

Our 2019 operating and financial results demonstrate the benefits of this diversified oil weighted portfolio and our commitment to allocate capital effectively, generate free cash flow and further strengthen our balance sheet. We produced 97,680 boe/d (82% liquids) and exceeded the high end of our annual guidance with capital expenditures at the low end of guidance totaling $552 million. This resulted in the following financial results:

• EBITDA of $1 billion and free cash flow of $329 million.

- Net debt reduction of 17%, or $393 million, due to the strong free cash flow and a strengthening of the Canadian dollar relative to the U.S. dollar.

• Redeemed our US$150 million principal amount of 6.75% senior unsecured notes nearly two years early.

We also demonstrated reserves growth with proved developed producing reserves increasing 5%, finding & development costs of \(13/boe and a recycle ratio of 2.3x. In aggregate, we replaced 112% of 2019 production, adding 40 million boe of proved plus probable reserves through development activities. In the Eagle Ford, strong well performance continues to be driven by enhanced completions across our acreage position. In the Viking, over 90% of our drilling is now comprised of extended reach horizontal wells. In our heavy oil assets we delivered stable production with limited capital investment. We also continued to advance our Duvernay shale light oil asset with two strong wells in the East Shale Basin.

Subsequent to year-end, we issued US$500 million principal amount of 8.75% senior unsecured notes, maturing on April 1, 2027 which enabled us to redeem two series of notes; US$400 million principal amount of 5.125% senior unsecured notes due June 1, 2021 and $300 million principal amount of 6.625% senior unsecured notes due July 19, 2022. Following the redemption of these notes, our next long-term note maturity is June 2024.

We also extended the maturities of our revolving credit facilities and term loan to April 2, 2024. These credit facilities, which total \(1.046 billion, are not borrowing base facilities and do not require annual or semi-annual reviews. Following all of these steps, our credit facilities are approximately one-third undrawn and we retain over \)300 million of liquidity with a weighted average interest rate on our long-term debt of approximately 6%.

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## Looking Forward

We maintain an attractive and deep inventory of development locations with approximately ten years or more of remaining drilling opportunities in each of our core assets. We remain committed to delivering stable production, maximizing free cash flow and further strengthening our balance sheet.

Our 2020 annual guidance is unchanged as we target production of 93,000 to 97,000 boe/d with exploration and development expenditures of \(500 to \)575 million. At the time of writing, our exploration and development program is expected to be fully funded from adjusted funds flow at the forward strip and we have the operational flexibility to adjust our spending plans based on changes in commodity prices.

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 2020, 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\(58/bbl with upside participation to US\)63/bbl. We are also contracted to deliver 11,500 bbl/d of our heavy oil volumes to market by rail.

Baytex's success is due to very engaged Board, management and employee group who are all strongly aligned and committed to driving value for shareholders. With the combined team, we are confident we have the skills, experience and focus that will create a more prosperous future.

We look forward to executing our plans in 2020 for the ongoing benefit of all stakeholders and we thank you for your continued support.

Sincerely,

![](images/7_0.jpg)

Edward D. LaFehr

President and Chief Executive Officer

March 4, 2020