Operations Review

Capital expenditures for exploration and development activities totaled CAD47.7 million for the first quarter of 2009. During this quarter, Baytex Energy took part in drilling 29 (27.8 net) wells, resulting in 19 net oil wells, four (2.8 net) gas wells, two net stratigraphic test wells and four net dry and abandoned wells, for an 86% success rate.

First quarter drilling comprised 11 net oil wells and three net dry holes in the Lloydminster area, four net horizontal production wells and two net stratigraphic test wells at Seal, one net oil well and three (1.8 net) gas wells in the Pembina/Ferrier area, two net oil wells in the Stoddart area, and one net oil well, one net gas well and one net dry hole in east-central Alberta.

Production averaged 39,762 boe/d during the first quarter of 2009, as compared to 42,035 boe/d for the fourth quarter of 2008. Production was reliable with Baytex Energy’s guidance of about 40,000 boe/d for 2009 under the decreased capital program announced in February 2009. Production is anticipated to be about flat at this level for each quarter of 2009. Capital spending guidance also remains unchanged at CAD150 million for exploration and development activities and CAD10 million for deferred acquisition payments for our North Dakota assets.

Although in-line with guidance, heavy oil production was modestly curtailed by Baytex Energy’s decision early in the first quarter to defer well servicing on a small number of higher-cost wells until oil pricing improves. Besides, a portion of Baytex Energy’s originally-planned Seal drilling program was deferred until after breakup based on its anticipation of higher oil prices. Although drilling of Seal wells is economic at first quarter oil prices, the company has deferred some of the drilling based on the expectation of increasing net present value by selling oil from the high production rate early-time period at higher prices shortly in the year.

In the reduced first quarter Seal program, Baytex Energy drilled three horizontal producing wells in its Harmon Valley development area, which started production at an average initial rate of 275 bbl/d per well. Additionally, the company has drilled the first producing well in its West Harmon Valley area, which started production at an initial rate of 180 bbl/d, demonstrating commercial productivity of Baytex Energy’s heavy oil resource using cold methods in a new area about six miles from its existing development area.

Light oil and gas production was also similar to guidance for the first quarter of 2009, but should be modestly positively affected by starting production from various Alberta wells in April 2009. In the first quarter, Baytex Energy concluded building of an eight kilometer gas pipeline in the Ferrier/O’Chiese area which decreased production constraints and improved operating netbacks.

In North Dakota, Baytex Energy concluded a 260 square mile 3D seismic survey over our Bakken-Three Forks project area. The survey is anticipated to support in the high-grading of future Bakken-Three forks sites and also may lead to identification of conventional drilling prospects in other formations. We plan to resume drilling in the third quarter of 2009.

Financial Review

Cash flow from operations for the first quarter of 2009 was CAD59.4 million, a decline of 2% compared to CAD60.5 million for the fourth quarter of 2008. The largest contributor to the decline was decreased commodity prices in the first quarter of 2009. Baytex Energy received an average oil price of CAD36.11 per barrel before hedging in the first quarter of 2009, down 16%, compared to CAD42.83 per barrel before hedging in the fourth quarter of 2008.

Natural gas prices also declined in the first quarter of 2009, with the company receiving an average wellhead price of CAD5.39 per Mcf, 24% lower than the earlier quarter. The decline in commodity prices was partly counterbalanced by a CAD25.1 million realized gain on financial instruments in the first quarter of 2009. This gain is mainly related to a series of costless WTI collars with an average floor price of CAD100 per barrel, covering a total of 4,000 bbl/d for calendar 2009.

A key contributor to the loss was the timing of recognition of income related to Baytex Energy’s financial derivative instruments. The WTI collar contracts were entered into in 2008 to provide cash flow protection for 2009. Under Canadian GAAP, the unrealized mark-to-market net income benefit of those WTI collars was required to be recorded in 2008.

In the first quarter of 2009, the realized benefit of those contracts is reflected in Baytex Energy’s cash flows, but not in its net income, because the net income impact had earlier been recorded. If the benefit of these financial contracts were allowed to be recorded in the period to which the contracts relate, Baytex Energy’s pre-tax net income would have been higher in the first quarter by about CAD26 million.

Heavy oil pricing differential, as measured by market pricing for Lloyd Blend, averaged 22% of WTI for the first quarter of 2009, as compared to 34% in the fourth quarter of 2008. This reduction in differential through the historically higher-differential winter months supports Baytex Energy’s view that there has been a structural change in heavy oil supply and demand, which bodes very well for the longer term outlook for heavy oil pricing.

The discrepancy for the second quarter of 2009 is now being traded at about 15% of WTI, resulting in anticipated wellhead pricing of CAD50 per barrel for Lloydminster-area raw heavy crude, based on existing WTI prices, foreign exchange rates and condensate costs.

After the end of the first quarter of 2009, Baytex Energy entered into a series of contracts concurrently to lock in the raw heavy oil price on a portion of its production for calendar 2010. By concurrently entering into forward contracts for WTI, blend differential, condensate differential and foreign exchange, the company has established a raw Hardisty heavy oil price of CAD55.26 per barrel on 1,925 bbl/d for 2010.

When compared to historic pricing, the only year in which Hardisty pricing exceeded this contracted price was 2008, and this price exceeded the next highest year by over 30%. We believe that the availability of this type of contract pricing provides support for Baytex Energy’s long-term positive outlook for heavy oil pricing.

Total cash distributions in the quarter of CAD34.9 million, or CAD0.42 per unit, represented a payout ratio of 59% net of distribution reinvestment plan (DRIP) participation (69% before DRIP). In order to conserve Baytex Energy financial liquidity, and to better match distribution levels with the prevailing commodity price, the company has reduced its monthly distribution from CAD0.18 to CAD0.12 per unit in respect of February 2009 operations.

At the current commodity price outlook, Baytex Energy anticipates to be able to fully fund this adjusted distribution level along with its capital expenditure program from internally generated cash flow.

Total monetary debt, excluding notional mark-to-market assets at the end of the quarter, was CAD561.9 million which was an raise of CAD28.9 million from the end of 2008. At the end of the first quarter, Baytex Energy had over CAD160 million in available undrawn credit lines.

Consequent to the end of the first quarter of 2009, Baytex Energy concluded a bought deal equity financing, issuing 7.9 million trust units for net proceeds of CAD109.3 million. In addition, through the regularly planned annual review, the company has reached agreement with its lending syndicate to raise its credit facilities from CAD485 million to CAD515 million. The equity issuance and increase in bank facilities have considerably strengthened its balance sheet and expanded financial liquidity.