EX-99.1 2 a2016q2fs.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1
Baytex Energy Corp.
Condensed Consolidated Statements of Financial Position
(thousands of Canadian dollars)(unaudited)
As at
June 30, 2016

December 31, 2015

 
 
 
ASSETS
 
 
Current assets
 
 
Cash
$
419

$
247

Trade and other receivables
88,001

98,093

Financial derivatives
24,006

106,573

Assets held for sale (note 16)
14,005

—

 
126,431

204,913

Non-current assets
 
 
Financial derivatives
878

4,417

Exploration and evaluation assets (note 4)
545,318

578,969

Oil and gas properties (note 5)
4,391,750

4,674,175

Other plant and equipment
24,903

26,024

 
$
5,089,280

$
5,488,498

 
 
 
LIABILITIES
 
 
Current liabilities
 
 
Trade and other payables
$
139,694

$
267,838

Financial derivatives
11,813

—

 
151,507

267,838

Non-current liabilities
 
 
Bank loan (note 6)
342,754

252,172

Long-term notes (note 7)
1,525,394

1,602,757

Asset retirement obligations (note 8)
336,393

296,002

Deferred income tax liability
536,593

655,255

Financial derivatives
12,769

—

 
2,905,410

3,074,024

 
 
 
SHAREHOLDERS’ EQUITY
 
 
Shareholders' capital (note 9)
4,299,969

4,296,831

Contributed surplus
9,810

4,575

Accumulated other comprehensive income
552,735

705,382

Deficit
(2,678,644
)
(2,592,314
)
 
2,183,870

2,414,474

 
$
5,089,280

$
5,488,498


Subsequent event (note 16)

See accompanying notes to the condensed interim consolidated 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) (unaudited)
 
Three Months Ended June 30
Six Months Ended June 30
 
2016

2015

2016

2015

 
 
 
 
 
Revenue, net of royalties
 
 
 
 
Petroleum and natural gas sales
$
195,733

$
342,803

$
349,331

$
626,186

Royalties
(42,386
)
(77,886
)
(76,968
)
(134,593
)
 
153,347

264,917

272,363

491,593

 
 
 
 
 
Expenses
 
 
 
 
Operating
55,275

82,080

124,955

169,835

Transportation
5,146

14,928

11,921

30,876

Blending
1,207

8,462

3,566

18,136

General and administrative
12,233

15,557

26,402

32,612

Exploration and evaluation (note 4)
1,896

2,195

3,359

4,546

Depletion and depreciation
121,940

161,476

263,611

335,603

Share-based compensation (note 10)
3,933

8,229

8,373

16,233

Financing and interest (note 13)
27,888

26,772

56,941

56,182

Financial derivatives loss (gain) (note 15)
56,748

1,667

42,245

(11,995
)
Foreign exchange loss (gain) (note 14)
3,327

(13,975
)
(84,016
)
83,080

Disposition of oil and gas properties loss (gain)
—

(24
)
22

1,830

Other (income)
(242
)
(2,629
)
(55
)
(4,861
)
 
289,351

304,738

457,324

732,077

Net income (loss) before income taxes
(136,004
)
(39,821
)
(184,961
)
(240,484
)
Income tax (recovery) expense (note 12)
 
 
 
 
Current income tax (recovery) expense
(2,284
)
(553
)
(3,726
)
16,382

Deferred income tax (recovery)
(46,783
)
(12,313
)
(94,905
)
(53,995
)
 
(49,067
)
(12,866
)
(98,631
)
(37,613
)
Net income (loss) attributable to shareholders
$
(86,937
)
$
(26,955
)
$
(86,330
)
$
(202,871
)
Other comprehensive income (loss)
 
 
 
 
Foreign currency translation adjustment
6,062

(41,665
)
(152,647
)
199,253

Comprehensive income (loss)
$
(80,875
)
$
(68,620
)
$
(238,977
)
$
(3,618
)
 
 
 
 
 
Net income (loss) per common share (note 11)
 
 
 
 
Basic
$
(0.41
)
$
(0.13
)
$
(0.41
)
$
(1.08
)
Diluted
$
(0.41
)
$
(0.13
)
$
(0.41
)
$
(1.08
)
 
 
 
 
 
Weighted average common shares (note 11)
 
 
 
 
Basic
210,749

205,896

210,687

187,106

Diluted
210,749

205,896

210,687

187,106


See accompanying notes to the condensed interim consolidated 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 (loss)

Deficit

Total equity

Balance at December 31, 2014
$
3,580,825

$
31,067

$
199,575

$
(1,304,690
)
2,506,777

Dividends to shareholders
—

—

—

(112,423
)
(112,423
)
Vesting of share awards
15,392

(15,392
)
—

—

—

Share-based compensation
—

16,233

—

—

16,233

Issued for cash
632,494

—

—

—

632,494

Issuance costs, net of tax
(19,301
)
—

—

—

(19,301
)
Issued pursuant to dividend reinvestment plan
25,463

—

—

—

25,463

Comprehensive income (loss) for the period
—

—

199,253

(202,871
)
(3,618
)
Balance at June 30, 2015
$
4,234,873

$
31,908

$
398,828

$
(1,619,984
)
3,045,625

Balance at December 31, 2015
4,296,831

4,575

705,382

(2,592,314
)
2,414,474

Vesting of share awards
3,138

(3,138
)
—

—

—

Share-based compensation
—

8,373

—

—

8,373

Comprehensive income (loss) for the period
—

—

(152,647
)
(86,330
)
(238,977
)
Balance at June 30, 2016
$
4,299,969

$
9,810

$
552,735

$
(2,678,644
)
2,183,870


See accompanying notes to the condensed interim consolidated financial statements.

Page 3


Baytex Energy Corp.
Condensed Consolidated Statements of Cash Flows
(thousands of Canadian dollars) (unaudited)
 
Three Months Ended June 30
Six Months Ended June 30
 
2016

2015

2016

2015

 
 
 
 
 
CASH PROVIDED BY (USED IN):
 
 
 
 
Operating activities
 
 
 
 
Net income (loss) for the period
$
(86,937
)
$
(26,955
)
$
(86,330
)
$
(202,871
)
Adjustments for:
 
 
 
 
Share-based compensation (note 10)
3,933

8,229

8,373

16,233

Unrealized foreign exchange loss (gain) (note 14)
3,549

(18,349
)
(83,252
)
82,967

Exploration and evaluation (note 4)
1,896

2,195

3,359

4,546

Depletion and depreciation
121,940

161,476

263,611

335,603

Non-cash financing and interest (note 13)
3,099

2,052

5,341

4,046

Unrealized financial derivatives loss (note 15)
80,564

41,739

110,687

129,911

Disposition of oil and gas properties loss (gain)
—

(24
)
22

1,830

Deferred income tax (recovery)
(46,783
)
(12,313
)
(94,905
)
(53,995
)
Change in non-cash working capital
(25,592
)
(17,042
)
(5,183
)
15,084

Asset retirement obligations settled (note 8)
(708
)
(3,160
)
(2,409
)
(7,606
)
 
54,961

137,848

119,314

325,748

 
 
 
 
 
Financing activities
 
 
 
 
Payment of dividends
—

(43,136
)
—

(83,151
)
Increase (decrease) in bank loan
53,864

(581,653
)
104,607

(482,582
)
Tenders of long-term notes
—

—

—

(10,372
)
Issuance of common shares, net of issuance costs
—

606,095

—

606,095

 
53,864

(18,694
)
104,607

29,990

 
 
 
 
 
Investing activities
 
 
 
 
Additions to exploration and evaluation assets (note 4)
(1,508
)
(1,655
)
(2,573
)
(3,698
)
Additions to oil and gas properties (note 5)
(33,982
)
(104,355
)
(114,602
)
(249,741
)
Property acquisitions, net of divestitures
37

(1,170
)
46

(2,720
)
Current income tax paid on dispositions
—

—

—

(8,181
)
Additions to other plant and equipment, net of disposals
(52
)
336

(374
)
4,706

Change in non-cash working capital
(73,083
)
(16,848
)
(104,318
)
(97,807
)
 
(108,588
)
(123,692
)
(221,821
)
(357,441
)
Impact of foreign currency translation on cash balances
(270
)
(150
)
(1,928
)
835

Change in cash
(33
)
(4,688
)
172

(868
)
Cash, beginning of period
452

4,962

247

1,142

Cash, end of period
$
419

$
274

$
419

$
274

 
 
 
 
 
Supplementary information
 
 
 
 
Interest paid
$
30,222

$
28,760

$
51,876

$
50,350

Income taxes paid
$
—

$
—

$
5,138

$
8,181


See accompanying notes to the condensed interim consolidated financial statements.

Page 4


Baytex Energy Corp.
Notes to the Condensed Consolidated Interim Financial Statements
For the three and six months ended June 30, 2016 and 2015
(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.

The audited consolidated financial statements of the Company as at and for the year ended December 31, 2015 are available through our filings on SEDAR at www.sedar.com and through the U.S. Securities and Exchange Commission at www.sec.gov.

2.
BASIS OF PRESENTATION
The condensed interim unaudited consolidated financial statements ("consolidated financial statements") have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board. These consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements as of December 31, 2015. The Company's accounting policies are unchanged compared to December 31, 2015. The use of estimates and judgments is also consistent with the December 31, 2015 financial statements.

The consolidated financial statements were approved by the Board of Directors of Baytex on July 27, 2016.

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial information is rounded to the nearest thousand, except per share amounts and when otherwise indicated. Prior period financial statement amounts have been reclassified to conform with current period presentation.


Page 5


3.
SEGMENTED FINANCIAL INFORMATION

Baytex's reportable segments are determined based on the Company's geographic locations.

•
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 USA.
•
Corporate includes corporate activities and items not allocated between operating segments.
 
Canada
U.S.
Corporate
Consolidated
Three Months Ended June 30
2016

2015

2016

2015

2016

2015

2016

2015

 
 
 
 
 
 
 
 
 
Revenue, net of royalties
 
 
 
 
 
 
 
 
Petroleum and natural gas sales
$
75,696

$
174,852

$
120,037

$
167,951

$
—

$
—

$
195,733

$
342,803

Royalties
(7,920
)
(28,258
)
(34,466
)
(49,628
)
—

—

(42,386
)
(77,886
)
 
67,776

146,594

85,571

118,323

—

—

153,347

264,917

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
31,280

55,341

23,995

26,739

—

—

55,275

82,080

Transportation
5,146

14,928

—

—

—

—

5,146

14,928

Blending
1,207

8,462

—

—

—

—

1,207

8,462

General and administrative
—

—

—

—

12,233

15,557

12,233

15,557

Exploration and evaluation
1,896

2,195

—

—

—

—

1,896

2,195

Depletion and depreciation
46,843

67,711

74,470

92,820

627

945

121,940

161,476

Share-based compensation
—

—

—

—

3,933

8,229

3,933

8,229

Financing and interest
—

—

—

—

27,888

26,772

27,888

26,772

Financial derivatives loss
—

—

—

—

56,748

1,667

56,748

1,667

Foreign exchange loss (gain)
—

—

—

—

3,327

(13,975
)
3,327

(13,975
)
Disposition of oil and gas properties loss (gain)
—

—

—

(24
)
—

—

—

(24
)
Other (income)
—

—

—

—

(242
)
(2,629
)
(242
)
(2,629
)
 
86,372

148,637

98,465

119,535

104,514

36,566

289,351

304,738

Net income (loss) before income taxes
(18,596
)
(2,043
)
(12,894
)
(1,212
)
(104,514
)
(36,566
)
(136,004
)
(39,821
)
Income tax (recovery) expense
 
 
 
 
 
 
 
 
Current income tax (recovery) expense
(1,958
)
(2,410
)
—

1,857

(326
)
—

(2,284
)
(553
)
Deferred income tax (recovery) expense
(3,814
)
28,676

(16,928
)
(18,261
)
(26,041
)
(22,728
)
(46,783
)
(12,313
)
 
(5,772
)
26,266

(16,928
)
(16,404
)
(26,367
)
(22,728
)
(49,067
)
(12,866
)
Net income (loss)
$
(12,824
)
$
(28,309
)
$
4,034

$
15,192

$
(78,147
)
$
(13,838
)
$
(86,937
)
$
(26,955
)
 
 
 
 
 
 
 
 
 
Total oil and natural gas capital expenditures (1)
$
2,710

$
9,100

$
32,743

$
98,080

$
—

$
—

$
35,453

$
107,180

(1) Includes acquisitions and divestitures.

Page 6


 
Canada
U.S.
Corporate
Consolidated
Six Months Ended June 30
2016

2015

2016

2015

2016

2015

2016

2015

 
 
 
 
 
 
 
 
 
Revenue, net of royalties
 
 
 
 
 
 
 
 
Petroleum and natural gas sales
$
120,844

$
307,264

$
228,487

$
318,922

$
—

$
—

$
349,331

$
626,186

Royalties
(11,755
)
(41,677
)
(65,213
)
(92,916
)
—

—

(76,968
)
(134,593
)
 
109,089

265,587

163,274

226,006

—

—

272,363

491,593

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
65,925

115,915

59,030

53,920

—

—

124,955

169,835

Transportation
11,921

30,876

—

—

—

—

11,921

30,876

Blending
3,566

18,136

—

—

—

—

3,566

18,136

General and administrative
—

—

—

—

26,402

32,612

26,402

32,612

Exploration and evaluation
3,359

4,546

—

—

—

—

3,359

4,546

Depletion and depreciation
101,628

142,828

160,609

191,204

1,374

1,571

263,611

335,603

Share-based compensation
—

—

—

—

8,373

16,233

8,373

16,233

Financing and interest
—

—

—

—

56,941

56,182

56,941

56,182

Financial derivatives loss (gain)
—

—

—

—

42,245

(11,995
)
42,245

(11,995
)
Foreign exchange (gain) loss
—

—

—

—

(84,016
)
83,080

(84,016
)
83,080

Disposition of oil and gas properties loss (gain)
—

2,074

—

(244
)
22

—

22

1,830

Other (income)
—

—

—

—

(55
)
(4,861
)
(55
)
(4,861
)
 
186,399

314,375

219,639

244,880

51,286

172,822

457,324

732,077

Net income (loss) before income taxes
(77,310
)
(48,788
)
(56,365
)
(18,874
)
(51,286
)
(172,822
)
(184,961
)
(240,484
)
Income tax (recovery) expense
 
 
 
 
 
 
 
 
Current income tax (recovery) expense
(3,400
)
14,525

—

1,857

(326
)
—

(3,726
)
16,382

Deferred income tax (recovery) expense
(18,548
)
(96,799
)
(45,328
)
(18,261
)
(31,029
)
61,065

(94,905
)
(53,995
)
 
(21,948
)
(82,274
)
(45,328
)
(16,404
)
(31,355
)
61,065

(98,631
)
(37,613
)
Net income (loss)
$
(55,362
)
$
33,486

$
(11,037
)
$
(2,470
)
$
(19,931
)
$
(233,887
)
$
(86,330
)
$
(202,871
)
 
 
 
 
 
 
 
 
 
Total oil and natural gas capital expenditures (1)
$
7,559

$
31,783

$
109,570

$
224,376

$
—

$
—

$
117,129

$
256,159

(1) Includes acquisitions and divestitures.
As at
June 30, 2016

December 31, 2015

Canadian assets
$
1,987,665

$
2,059,903

U.S. assets
3,064,685

3,304,647

Corporate assets
36,930

123,948

Total consolidated assets
$
5,089,280

$
5,488,498



4.
EXPLORATION AND EVALUATION ASSETS

June 30, 2016

December 31, 2015

Balance, beginning of period
$
578,969

$
542,040

Capital expenditures
2,573

5,642

Property acquisitions, net of divestitures
(65
)
1,813

Exploration and evaluation expense
(3,359
)
(8,775
)
Transfer to oil and gas properties
(2,871
)
(38,062
)
Divestitures
—

(1,588
)
Assets held for sale (note 16)
(2,338
)
—

Foreign currency translation
(27,591
)
77,899

Balance, end of period
$
545,318

$
578,969


Page 7



5.
OIL AND GAS PROPERTIES

Cost

Accumulated depletion

Net book value

Balance, December 31, 2014
$
6,431,760

$
(1,447,844
)
$
4,983,916

Capital expenditures
515,397

—

515,397

Property acquisitions
551

—

551

Transferred from exploration and evaluation assets
38,062

—

38,062

Change in asset retirement obligations
10,722

—

10,722

Divestitures
(20,096
)
19,449

(647
)
Impairment
—

(755,613
)
(755,613
)
Foreign currency translation
607,885

(68,509
)
539,376

Depletion
—

(657,589
)
(657,589
)
Balance, December 31, 2015
$
7,584,281

$
(2,910,106
)
$
4,674,175

Capital expenditures
114,602

—

114,602

Property acquisitions, net of divestitures
(3
)
—

(3
)
Transferred from exploration and evaluation assets
2,871

—

2,871

Change in asset retirement obligations
41,885

—

41,885

Assets held for sale (note 16)
(15,055
)
3,388

(11,667
)
Foreign currency translation
(210,121
)
42,130

(167,991
)
Depletion
—

(262,122
)
(262,122
)
Balance, June 30, 2016
$
7,518,460

$
(3,126,710
)
$
4,391,750


6.
BANK LOAN
 
June 30, 2016

December 31, 2015

Bank loan - U.S. dollar denominated
$
347,083

$
237,861

Bank loan - Canadian dollar denominated
—

18,888

Bank loan - principal
347,083

256,749

Unamortized debt issuance costs
(4,329
)
(4,577
)
Bank loan
$
342,754

$
252,172


On March 31, 2016, Baytex amended the credit facilities with its banking syndicate to grant the banking syndicate first priority security over its assets. The amended revolving extendible secured credit facilities are comprised of a US$25 million operating loan and a US$350 million syndicated loan for Baytex and a US$200 million syndicated loan for Baytex's wholly-owned subsidiary, Baytex Energy USA, Inc. (collectively, the "Revolving Facilities").

The Revolving Facilities are not borrowing base facilities and do not require annual or semi-annual reviews. The facilities contain standard commercial covenants and do not require any mandatory principal payments prior to maturity on June 4, 2019. Baytex may request an extension under the Revolving Facilities which could extend the revolving period for up to four years (subject to a maximum four-year period at any time). Advances (including letters of credit) under the Revolving 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 exceeds any of the covenants under the Revolving Facilities, Baytex may be required to repay, refinance or renegotiate the loan terms and may be restricted from paying dividends to shareholders or taking on further debt.


Page 8


At June 30, 2016, Baytex was in compliance with all of the covenants contained in the Revolving Facilities. The following table summarizes the financial covenants contained in the Revolving Facilities and our compliance therewith as at June 30, 2016.
 
 
Ratio for the Quarter(s) ending:
Covenant Description
Position as at June 30, 2016
June 30, 2016 to June 30, 2018
June 30, 2018 to September 30, 2018
December 31, 2018
Thereafter
Senior Secured Debt (1) to Bank EBITDA (2)
(Maximum Ratio)
0.86:1.00
5.00:1.00
4.50:1.00
4.00:1.00
3.50:1.00
Interest Coverage (3) 
(Minimum Ratio)
4.05:1.00
1.25:1.00
1.50:1.00
1.75:1.00
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 June 30, 2016, our Senior Secured Debt totaled $359 million.
(2)
Bank EBITDA is calculated based on terms and definitions set out in the credit agreement which adjusts net income (loss) for financing and interest expenses, income tax, certain specific unrealized and non-cash transactions (including depletion, depreciation, exploration expenses, unrealized gains and losses on financial derivatives and foreign exchange and stock based compensation) and is calculated based on a trailing twelve month basis. Bank EBITDA for the twelve months ended June 30, 2016 was $417 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 June 30, 2016 were $103 million.

7.
LONG-TERM NOTES
 
June 30, 2016

December 31, 2015

7.5% notes (US$6,400 – principal) due April 1, 2020
$
8,326

$
8,858

6.75% notes (US$150,000 – principal) due February 17, 2021
195,135

207,600

5.125% notes (US$400,000 – principal) due June 1, 2021
520,360

553,600

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
520,360

553,600

Total long-term notes - principal
1,544,181

1,623,658

Unamortized debt issuance costs
(18,787
)
(20,901
)
Total long-term notes - net of unamortized debt issuance costs
$
1,525,394

$
1,602,757



8.
ASSET RETIREMENT OBLIGATIONS
 
June 30, 2016

December 31, 2015

Balance, beginning of period
$
296,002

$
286,032

Liabilities incurred
2,915

4,964

Liabilities settled
(2,409
)
(10,888
)
Liabilities acquired
—

593

Liabilities divested
(350
)
(10,578
)
Accretion
3,230

6,262

Change in estimate(1)
(1,617
)
33,266

Changes in discount rates and inflation rates
40,936

(17,523
)
Foreign currency translation
(2,314
)
3,874

Balance, end of period
$
336,393

$
296,002

(1)
Changes in the estimated costs, the timing of abandonment and reclamation and the status of wells are factors resulting in a change in estimate.


Page 9


9.
SHAREHOLDERS' CAPITAL
The authorized capital of Baytex consists of an unlimited number of common shares without nominal or par value and 10,000,000 preferred shares without nominal or par value, issuable in series. Baytex establishes the rights and terms of the preferred shares upon issuance. As at June 30, 2016, no preferred shares have been issued by the Company and all common shares issued were fully paid.
 
Number of Common Shares
(000s)

Amount

Balance, December 31, 2014
168,107

$
3,580,825

Transfer from contributed surplus on vesting and conversion of share awards
1,092

41,836

Issued for cash
36,455

632,494

Issuance costs, net of tax
—

(19,301
)
Issued pursuant to dividend reinvestment plan
4,929

60,977

Balance, December 31, 2015
210,583

$
4,296,831

Transfer from contributed surplus on vesting and conversion of share awards
132

3,138

Balance, June 30, 2016
210,715

$
4,299,969




Page 10


10.
SHARE AWARD INCENTIVE PLAN
The Company has a full-value award plan (the "Share Award Incentive Plan") pursuant to which restricted awards and performance awards (collectively, "share awards") may be granted to the directors, officers and employees of the Company and its subsidiaries. The maximum number of common shares issuable under the Share Award Incentive Plan (and any other long-term incentive plans of the Company) shall not at any time exceed 3.8% of the then-issued and outstanding common shares.

Each restricted award entitles the holder to be issued the number of common shares designated in the restricted award (plus dividend equivalents). Each performance award entitles the holder to be issued the number of common shares designated in the performance award (plus dividend equivalents) multiplied by a payout multiplier. Both awards are expensed over the vesting period.

The Company recorded compensation expense related to the share awards of $3.9 million for the three months ended June 30, 2016 ($8.2 million for the three months ended June 30, 2015) and $8.4 million for the six months ended June 30, 2016 ($16.2 million for the six months ended June 30, 2015).

The weighted average fair value of share awards granted during the six months ended June 30, 2016 was $2.75 per restricted and performance award (for the six months ended June 30, 2015, $17.11 per restricted and performance award).

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, 2014
747

615

1,362

Granted
615

503

1,118

Vested and converted to common shares
(432
)
(382
)
(814
)
Forfeited
(201
)
(123
)
(324
)
Balance, December 31, 2015
729

613

1,342

Granted
1,259

1,371

2,630

Vested and converted to common shares
(62
)
(30
)
(92
)
Forfeited
(20
)
(28
)
(48
)
Balance, June 30, 2016
1,906

1,926

3,832

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

11.
NET INCOME (LOSS) PER SHARE
 
Three Months Ended June 30
 
2016
2015
 
Net loss

Common shares (000s)

Net loss per share

Net loss

Common shares (000s)

Net loss per share

Net income (loss) - basic
$
(86,937
)
210,749

$
(0.41
)
$
(26,955
)
205,896

$
(0.13
)
Dilutive effect of share awards
—

—

—

—

—

—

Net income (loss) - diluted
$
(86,937
)
210,749

$
(0.41
)
$
(26,955
)
205,896

$
(0.13
)

 
Six Months Ended June 30
 
2016
2015
 
Net loss

Common shares (000s)

Net loss per share

Net loss

Common shares (000s)

Net loss per share

Net income (loss) - basic
$
(86,330
)
210,687

$
(0.41
)
$
(202,871
)
187,106

$
(1.08
)
Dilutive effect of share awards
—

—

—

—

—

—

Net income (loss) - diluted
$
(86,330
)
210,687

$
(0.41
)
$
(202,871
)
187,106

$
(1.08
)

For the three months ended June 30, 2016, 3.8 million share awards were anti-dilutive (June 30, 2015 - 3.9 million share awards). For the six months ended June 30, 2016, 3.8 million share awards were anti-dilutive (June 30, 2015 - 1.1 million share awards).


Page 11



12.
INCOME TAXES
The provision for income taxes has been computed as follows:
 
Six Months Ended June 30
 
2016

2015

Net income (loss) before income taxes
$
(184,961
)
$
(240,484
)
Expected income taxes at the statutory rate of 27.00% (2015 - 25.47%)(1)
(49,939
)
(63,079
)
Increase (decrease) in income tax recovery resulting from:
 
 
Share-based compensation
2,195

4,258

Non-taxable portion of foreign exchange (gain) loss
(10,655
)
10,877

Effect of change in income tax rates
—

10,984

Effect of rate adjustments for foreign jurisdictions
(28,624
)
(23,296
)
Effect of change in deferred tax benefit not recognized(2)
(10,655
)
22,620

Other
(953
)
23

Income tax (recovery)
$
(98,631
)
$
(37,613
)
(1)
Expected income tax rate increased due to an increase in the corporate income tax rate in Alberta (from 10% to 12%), offset by a decrease in the Texas franchise tax rate (from 1.00% to 0.75%).
(2)
A deferred income tax asset has not been recognized for allowable capital losses of $109 million related to the unrealized foreign exchange losses arising from the translation of U.S. dollar denominated long-term notes ($149 million as at December 31, 2015).

In June 2016, certain indirect subsidiary entities received reassessments from the Canada Revenue Agency (the “CRA”) that deny non-capital loss deductions relevant to the calculation of income taxes for the years 2011 through 2015. These reassessments follow the previously disclosed letter from the CRA received by Baytex in November 2014 proposing to issue such reassessments.
Baytex remains confident that the tax filings of the affected entities are correct and will file a notice of objection for each notice of reassessment received. These notices of objection will be reviewed by the Appeals Division of CRA; a process that Baytex estimates could take up to two years. If the Appeals Division upholds the notices of reassessment Baytex has the right to appeal to the Tax Court of Canada; a process that Baytex estimates could take a further two years. Should Baytex be unsuccessful at the Tax Court of Canada, additional appeals are available; a process that Baytex estimates could take another two years and potentially longer. The reassessments do not require Baytex to pay any amounts in order to participate in the appeals process.
By way of background, Baytex acquired all of the interests in several privately held commercial trusts in 2010 with accumulated non-capital losses of $591 million (the “Losses”). The Losses were subsequently used to reduce the taxable income of those trusts. The reassessments disallow the deduction of the Losses under the general anti-avoidance rule of the Income Tax Act (Canada). If, after exhausting available appeals, the deduction of Losses continues to be disallowed, Baytex would owe cash taxes for the years 2012 through 2015 and an additional amount for late payment interest. The amount of cash taxes owing and the late payment interest are dependent upon the amount of unused tax shelter available to offset the reassessed income, including tax shelter from future years available for “carry back” to the years 2012 through 2015.
13.
FINANCING AND INTEREST
 
Three Months Ended June 30
Six Months Ended June 30
 
2016

2015

2016

2015

Interest on bank loan
$
2,690

$
3,345

$
6,301

$
8,763

Interest on long-term notes
22,099

21,375

45,299

43,373

Non-cash financing
1,531

504

2,111

880

Accretion on asset retirement obligations
1,568

1,548

3,230

3,166

Financing and interest
$
27,888

$
26,772

$
56,941

$
56,182



Page 12


14.
FOREIGN EXCHANGE
 
Three Months Ended June 30
Six Months Ended June 30
 
2016

2015

2016

2015

Unrealized foreign exchange loss (gain)
$
3,549

$
(18,349
)
$
(83,252
)
$
82,967

Realized foreign exchange (gain) loss
(222
)
4,374

(764
)
113

Foreign exchange loss (gain)
$
3,327

$
(13,975
)
$
(84,016
)
$
83,080


15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The carrying amounts of the Company’s U.S. dollar denominated monetary assets and liabilities at the reporting date are as follows:

Assets
Liabilities

June 30, 2016

December 31, 2015

June 30, 2016

December 31, 2015

U.S. dollar denominated

US$58,422


US$124,218


US$1,293,729


US$1,240,308


Financial Derivative Contracts

Baytex had the following financial derivative contracts:
Oil
Period
Volume
Price/Unit(1)

Index
Fixed - Sell
July 2016 to December 2016
5,000 bbl/d

US$63.79

WTI
Producer 3-way option(2)
July 2016 to December 2016
10,000 bbl/d
US$59.85/US$49.75/US$39.75

WTI
Producer 3-way option(2)
January 2017 to December 2017
10,000 bbl/d
US$58.53/US$45.90/US$36.00

WTI
Basis swap
July 2016 to September 2016
500 bbl/d
WTI less US$12.30

WCS
Basis swap
July 2016 to December 2016
4,500 bbl/d
WTI less US$13.27

WCS
Basis swap
October 2016 to December 2016
500 bbl/d
WTI less US$13.45

WCS
Basis swap
January 2017 to December 2017
1,500 bbl/d
WTI less US$13.42

WCS
Sold call option(3)
October 2016 to December 2016
1,000 bbl/d

US$52.05

WTI
Sold call option(3)(4)
January 2017 to December 2017
5,000 bbl/d

US$53.67

WTI
(1)
Based on the weighted average price/unit for the remainder of the contract.
(2)
Producer 3-way option consists of a sold call, a bought put and a sold put. To illustrate, in a $60/$50/$40 contract, Baytex receives WTI + US$10/bbl when WTI is at or below US$40/bbl; Baytex receives US$50/bbl when WTI is between US$40/bbl and US$50/bbl; Baytex receives WTI when WTI is between US$50/bbl and US$60/bbl; and Baytex receives US$60/bbl when WTI is above US$60/bbl.
(3)
Counterparty has the option to enter into a fixed sell for the periods, volumes and prices noted.
(4)
The Company restructured the sold call options subsequent to June 30, 2016. At June 30, 2016 the price was US$49.57/bbl.

Natural Gas
Period
Volume
Price/Unit(1)

Index
Fixed - Sell
July 2016 to December 2016
 15,000 mmBtu/d

US$2.98

NYMEX
Fixed - Sell
January 2017 to December 2017
 17,500 mmBtu/d

US$2.83

NYMEX
Fixed - Sell
January 2018 to December 2018
7,500 mmBtu/d

US$3.00

NYMEX
Fixed - Sell
July 2016 to December 2016
32,500 GJ/d

$2.39

AECO
Fixed - Sell
January 2017 to December 2017
12,500 GJ/d

$2.65

AECO
Fixed - Sell
January 2018 to December 2018
5,000 GJ/d

$2.67

AECO
(1)
Based on the weighted average price/unit for the remainder of the contract.



Page 13


Financial derivatives are marked-to-market at the end of each reporting period, with the following reflected in the consolidated statements of income (loss) and comprehensive income (loss):
 
Three Months Ended June 30
Six Months Ended June 30
 
2016

2015

2016

2015

Realized financial derivatives (gain)
$
(23,816
)
$
(40,072
)
$
(68,442
)
$
(141,906
)
Unrealized financial derivatives loss - commodity
80,564

45,158

110,687

135,191

Unrealized financial derivatives (gain) - redemption feature on long-term notes
—

(3,419
)
—

(5,280
)
Financial derivatives loss (gain)
$
56,748

$
1,667

$
42,245

$
(11,995
)

Physical Delivery Contracts

As at June 30, 2016, 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; therefore, no asset or liability has been recognized in the consolidated financial statements.
Heavy Oil
Period
Volume
Price/Unit(1)
WCS Blend
July 2016 to December 2016
2,000 bbl/d
WTI less US$13.68
(1)
Based on the weighted average price/unit for the remainder of the contract.

As at June 30, 2016, Baytex had committed at fixed price to deliver the volumes of raw bitumen as noted below to market on rail:
 
Period
Term volume
Raw bitumen
July 2016 to December 2016
7,400 bbl/d
Raw bitumen
January 2017 to December 2017
5,000 bbl/d

16. SUBSEQUENT EVENT
On July 27, 2016, Baytex disposed of its operated interest in certain Eagle Ford properties, which consisted of oil and gas properties and exploration and evaluations assets, for approximately $55 million. At June 30, 2016, $2.3 million of exploration and evaluation assets and $11.7 million of oil and gas properties relating to the disposition were reclassified to assets held for sale.


Page 14