DBRS Rates Baytex Energy Trust at STA-6 (high)

Dominion Bond Rating Service (“DBRS”) has today assigned a stability rating to Baytex Energy Trust (“Baytex” or the “Trust”) as indicated above.

Baytex was formed in 2003 as a result of the re-organization of Baytex Energy Ltd. Significant limitations for the Trust include its balance sheet leverage, which, at 50%, is aggressive relative to the 20%-25% range for most of its peers. In a strong pricing environment, high leverage and debt-to-cash flow at 2.83 times is a concern. However, this was affected by the large hedging losses (1.79 times excluding hedging), and Cdn$200 million of acquisitions in late 2004 with little impact on cash flow. Pro forma 2005 debt-to-cash flow is expected to improve to 1.8 times (including hedging), in line with management’s target of below two times. Baytex also has significant concentration in heavy oil (60% based on current production), which is subject to pricing differentials. However, Baytex significantly reduces the differential risk [capped at 29% of West Texas Intermediate (“WTI”)] through a five-year supply agreement with Frontier Oil and Refining Company, leaving only 12% of heavy oil exposed to market differential risks.

Notwithstanding the limitations, Baytex has operational strengths supported by its consistent reinvestment program and its ability to keep operating costs fairly well controlled. Prior to 2004, reserves added through discoveries and extensions had covered production volumes since 1998. In 2004, nearly 50% of 2004 production was replaced through the drill bit by reinvesting 71% of operating cash flow relative to the 30%-40% for its peers. Baytex has maintained constant distributions since inception in 2003. In 2004, the Trust paid out approximately 85% of operating cash flow (53% before hedging losses). The 2005 distribution level is expected remain unchanged, resulting in a relatively low 50%-55% payout and a longer term targeted range of 60%-70%. The Trust has a sizeable inventory of undeveloped land (798,000 net acres) including the Seal and recently acquired Stoddart property, representing significant development potential and drilling inventory. The latter was completed with acquisition metrics that compare favourably to recent peer transactions. In addition, approximately 28% of proved reserves are undeveloped, representing opportunities to replace production at lower costs relative to purchasing assets in the very competitive market. The Trust operates 95% of its properties, which allows for better cost control. Notwithstanding the Cdn$78 million loss from commodity hedges in 2004 due to surging commodity prices, the Trust actively manages its commodity and foreign exchange rate risk to provide some stability of cash flow. In addition, the US$180 million unsecured subordinated debt expiring in 2010 provides some financial flexibility in the capital structure, and acts as partial hedge against the strengthening Canadian dollar. At 28,000 boe/d net production (34,000 boe/d gross), and with a market capitalization of about Cdn$1 billion, Baytex ranks among the larger trusts in the sector.

Robust price expectations for 2005 and 2006 offers strong cash flow support. Baytex expects cash flow from operations in 2005 to fully fund the planned Cdn$100 million capital program and distributions.