Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2024-Q1

[Operator]

Good morning and welcome to the Parex Resources First Quarter 2024 Operating and Financial Results Conference Call. [Operator Instructions] I will now hand today's call over to Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning. Please go ahead, sir.

[Michael Kruchten, executive]

Good morning. It's Mike Kruchten. And on the call with me today are our President and Chief Executive Officer, Imad Mohsen; our Chief Financial Officer, Sanjay Bishnoi, and our Chief Operating Officer, Eric Furlan. [Operator Instructions] As a reminder, this conference call includes forward-looking statements as well as non-GAAP and other financial measures with the associated risks outlined in our news release and MD&A, which can be found on our website or at sedar.ca. Note that all amounts discussed today are in U.S. dollars unless otherwise stated. I'll now turn the call over to Imad. Please go ahead.

[Imad Mohsen, executive]

Thank you, Mike, and good morning, everyone. Before we move to our first quarter operating and financial results, I'd like to share some high-level comments on how we are progressing our strategy and key milestones that we have recently achieved. As a reminder, in '21, we introduced Colombian's growth strategy. This was based on the common vision from the Board and management team to drive long-term sustainable growth in the country where we continue to see immense potential.

Our strategy focuses on 3 key levers, and I'd like to highlight one key accomplishment under each today. The first lever of our strategy focuses on exploitation and technology. When I joined Parex, Colombia was unique in that globally proven technologies that haven't been -- hasn't been fully applied in country. We have run with this opportunity. We are now capitalizing on the competitive advantage that bringing proven technology to Colombia provides.

An example of where this is paying dividends include our base business in SoCa where Cabrestero and Block 34 are outperforming expectations. This is a result of strategically applying technology methods such as horizontals, water flooding and polymer injection, which are allowing us to maximize recovery rates and minimize long-term decline rates.

This is enabling the delivery of stable production with low capital investment going forward. Additionally, we are seeing pace-setting drilling performance in Arauca, which Eric will cover shortly. Our second strategic lever focuses on capturing liquid-rich gas opportunity. With gas plays in Colombia significantly underexplored and the country already in gas shortfall, that is forecast to persist, we see an attractive market that can be captured as well as we have shown in them.

Over the last 2 years, we have been laying groundwork for a partnership with Ecopetrol to enter the high-potential Foothills region of Colombia, which culminated in an agreement announced last month.

We view this deal as an inflection point for Parex, making an expansion into the country's most prolific zone in establishing a unique opportunity to deliver an in-country gas solution for Colombia. Further, we see it as a vote of confidence in our technical capabilities and progressive stakeholder management approach that we will enter the Foothills as an operator, something not often afforded to the smaller entity.

Our final strategic lever is to deliver outside exploration potential. Colombia is where we see some of the most compelling onshore exploration prospects globally. This has been further enhanced by our Foothills deal, which in my mind, is creating a further growth chapter comparable to what Block 34 did for Parex.

We have and continued to strategically high grade and expand our opportunity set, creating a diversified exploration portfolio that can offer some of the best risk/reward oil and gas targets that investors can find in public markets. In my view, this is a key differentiator for Parex with our portfolio offering potential upside that can be found across onshore resources placed in the Americas.

With material progress visible across all 3 elements of our strategy, we are focused on delivering both short-term and long-term value. Operations year-to-date make me confidence in our team's ability to execute on our '24 guidance, while also laying the foundation for sustainable growth for years to come. With that, we can move to the quarterly portion of the call. I'll now ask Eric to provide some comments specific to our year-to-date operational progress. Please go ahead, Eric.

[Eric Furlan, executive]

Thanks, Imad. We have started the second quarter with strong operating momentum, and I'm pleased to say that we are seeing positive production from our base at Cabrestero on Block 34 as well as encouraging performance in the Northern Llanos. Production quarter-to-date is up at approximately 56,000 barrels of oil equivalent per day. In Q1 2024, production averaged 53,338 barrels oil equivalent per day, up 4% compared to Q1 2023.

First quarter production was lower than the prior quarter, primarily due to the suspension of operations in the northern channels. Following the implementation of a framework agreement with the community earlier this quarter, we successfully restarted Capachos and have been operational with 2 rigs in Arauca since late February. With operations in full swing, we are seeing encouraging progress on all fronts at Arauca.

During the quarter, we delivered first production from the field at Arauca-8 exploration well. It is now producing over 4,000 barrels per day of light crude oil with strong natural flow, steady water cut levels and a wellhead pressure that would indicate higher rates are possible, if not for surface level gas facility constraints. We are actively in the process of implementing several short- and long-term options to handle the gas at this location and alleviate constraints.

At Arauca-15, we have reached total depth and are expecting the well to come on production in the coming weeks, which should further support second quarter production. To continue on the drilling side, we're currently progressing the Arauca-81 well at a pace setting rate through lessons learned on our first wells. This well is the first step out well from Arauca-8 and is being drilled to further delineate that discovery. All things considered, we are encouraged from the initial performance at Arauca and are seeing strong and reliable execution from our team.

For our 2024 Big 'E' exploration plan, we continue to progress our prospects. At our Arantes well, we are progressing slower than expected and are roughly at 10,000 feet. We still expect initial results to come midyear. And at our Hydra well at VIM-1, we are finishing pre-drill work and continue to expect to spud well midyear. Outside of a focus on execution in the quarter, I want to touch quickly on the Foothills agreement and what it means in terms of high-grading our portfolio.

Having been at Parex, since it was established, the set of opportunities to introduce through this deal are reminiscent of the potential we saw in Colombia 15 years ago. In my opinion, it represents a game changer. And I know I speak for the team on the excitement for what's ahead. With that, I'd invite Sanjay to please go ahead.

[Sanjay Bishnoi, executive]

Thanks, Eric. I would echo the sentiment on the team's steady execution. Our technical teams are delivering as promised in Arauca while maintaining production at our legacy assets. We continue to benefit from the strong work of our social team, who worked with local leaders and government to get us back to work in the Northern Llanos. Our downtime to date is within our planning allowance, which has allowed us to maintain our initial production guidance for the year.

Moving to the quarter. Funds flow provided by operations was $148 million. Although we had some production deferred in the quarter, this was offset by strong performance outside of the Northern Llanos basin in combination with healthy crude oil prices. During the quarter, we continued to see elevated production expense primarily related to higher electricity costs and a strong Colombian peso. That being said, in April, we began to see some decline in power costs, leading us to an expectation of lower production expenses in the coming quarters that reinforces our guidance of $10 to $12 per barrel.

Quarterly capital expenditures were $85 million and slightly lower than our budget due to the work stoppage in the Northern Llanos. As a result, we expect some capital to move to later quarters and therefore, remain on track with our previous guided range of capital. During the quarter, we repaid $30 million of bank debt. So at point end, we had a working capital surplus of $56 million and cash of $61 million.

At the moment, we anticipate the small draw on the credit facility to be repaid in the second half of the year, depending on production and commodity prices. Alongside the quarter, the Board of Directors have approved a modest increase to the regular dividend to CAD 0.385 per share. We believe that the dividend increase, which currently yields over 6%, combined with our current valuation and capacity to repurchase stock through our NCIB, provides a strong balance of shareholder returns.

Since it is thematic for us, I also want to comment on the Foothills agreement, which is really an option to enhance our growth potential. Importantly, from my lens, the deal provides us with this opportunity without requiring any changes to our long-term capital allocation framework. What it does allow us to do is add a layer of transformational targets that can be injected into our business to enhance the upside in our already solid Colombian story. With that, I will pass it over to Imad for some final remarks.

[Imad Mohsen, executive]

Thank you, Sanjay. To end, I want to thank all our employees and contractors for their outstanding contribution. Furthermore, I'd like to convey gratitude to our shareholders and partners for their ongoing support. I'm pleased to say that our strategy is progressing across all 3 levers.

The base foundation is strong, and we are strategically positioning Parex for its next growth chapter. This concludes our formal remarks. I would now like to turn the call back to the operator to start the Q&A session for the investment community. Thank you.

[Operator]

[Operator Instructions] Your first question is from the line of Alejandro Demichelis with Jefferies.

[Alejandro Anibal Demichelis, analyst]

Yes. A couple of questions, if I may, please. Talking about your production costs, you mentioned the $10 to $12, is that going to happen in the second quarter as you see it? Or is that kind of towards the end of the year? That's the first question. And then on the second question, is on the social environment in the Northern Llanos, you talked about the framework agreement. Could you please kind of give us some indications of how that is developing as far as you've seen?

[Michael Kruchten, executive]

Thanks for that call. I'm going to actually pass the OpEx question to Sanjay to open up because I think there's some financial levers there that are really driving OpEx.

[Sanjay Bishnoi, executive]

Sure. Yes, thanks for the question. I would say that when you look at what's driven the increase in our operating expenses, it's really a strong Colombian peso and power prices. The power is really driven by a shortage of hydro, just given that there's been dry conditions in country. We have recently seen an improvement in hydro electricity production in the country. And so we've seen prices respond correspondingly. So we -- in terms of our forecast, we're expecting a glide path back into the midrange of our $10 to $12, but we're optimistic that we're over the worst of the power prices in country.

[Operator]

Your next question is from the line of Conrad Bereznicki with Peters & Company.

[Conrad Bereznicki, analyst]

I just had a question around Arauca-8. And just if you could provide any commentary around which formation is producing, and what the results were on the Guadalupe? And then how does that change your thinking or your interpretation of Arauca-81?

[Michael Kruchten, executive]

Great. Thanks, Conrad. I'll pass that to Eric.

[Eric Furlan, executive]

Thanks, Mike. The main producing zone right now in the Arauca-8 well is the Gacheta reservoir. We have multiple reservoirs perforated there. The upper Guadalupe reservoir did test. We tested multiple zones there and had a mixed result with some oil and gas and some water results. So we went back to the original high-quality test we got from the Gacheta because we want to put that on a long-term test.

As far as our strategy, we are delineating both the Guadalupe, Gacheta and any other reservoirs with a Arauca-81. But right now, obviously, we're most interested in the Gacheta, given the performance to date and what we're seeing and the quality of the production.

[Conrad Bereznicki, analyst]

And then maybe just a second question. As you start to get some ability to gas egress in that area. Does that change how you're going to continue to develop that well? Like would you look at maybe adding [indiscernible] once you have a little bit more gas handling capacity?

[Eric Furlan, executive]

Yes, definitely. So obviously, we don't talk a lot right now about some prolific tasks that our gas and associated liquids because there is a limitation right now on gas handling. So we have a short-term strategy right now to ramp up our gas capability with the main tie-in to the facility and certain short-term solutions that include trucking up some gas, power generation, internal use. So that's the short term.

Over the long term, as part of our agreement with Ecopetrol and this pipeline -- multiphase pipeline, ultimately, when that is commissioned, we have egress for any amount of gas. And at that point, we would look to exploit much larger volumes of gas and associated liquids from those reservoirs. But over the short term, over the next year, the focus will certainly be to target the reservoirs that are the highest oil cut, lowest gas in the interim.

[Operator]

[Operator Instructions]

[Michael Kruchten, executive]

I think we missed a question earlier from Alejandro from Jefferies on the framework agreement in the Northern Llanos on the update on the social environment. Imad, I'll pass it over to you.

[Imad Mohsen, executive]

Sorry for not answering at the point. I think the social environment in Northern Llanos is like any new place we went to, starts difficult. People need to get used to us. We need to get used to them. And as time goes, the synergy between our presence and the community starts to show its place, as we employ people for the operations, for drilling. We train people for construction, welding, you name it. And we help create local businesses relate to small businesses that deliver services to us from the communities.

I think the deal we struck early this year after the shut-in, which included a number of agreements like bringing local -- gas to local network and other views on how people are paid, and how we cooperate together, does open doors. And we're seeing the effect of that right now. I'm feeling very comfortable right now having 2 rigs working full time in Arauca.

So is that the end of surprises? No that we're adding new areas especially in these border areas, would have possible downtime, and we count for that in our forecasting. So -- but overall, the trend is very positive, and I'm very encouraged by it.

[Operator]

Your next question is from the line of [ Dhairya Lima ] with Bloomberg.

[Unknown Analyst]

This is Dhairya from Bloomberg Intelligence. I have 1 on capital allocation. Could you give us a little bit more color on your appetite for buybacks this year? And whether you're going to prioritize the repayment of the credit facility?

[Michael Kruchten, executive]

Thank you for your question. I'll pass that to Sanjay.

[Sanjay Bishnoi, executive]

Sure. Yes, Dhairya, thanks for the question. I think we expect to be able to do both. So we will pay back the credit facility. And we still -- we already have a pretty healthy level of share buybacks. I believe we've repurchased 1.5 million shares at the end of the quarter.

And that could accelerate. If commodity prices continue to stay where they are, that could certainly accelerate. So we expect we'll be able to accomplish both, and maybe I'll turn it back over to Mike in case you have any other flavors that you want to have.

[Michael Kruchten, executive]

Thanks, Sanjay. Yes, we're sticking with our 1/3 return of funds flow from operations as a capital return, and that's a mix between dividend what was increased to this quarter for the year. And then the remainder will be share buybacks. And we'll be looking at how prices are realized, and we'll adjust the share buyback amount to fulfill that promise to our shareholders.

[Operator]

Your next question is from the line of Kevin Fisk with Scotiabank.

[Kevin Fisk, analyst]

I just have a question about the polymer flood pilot at Cabrestero. How should we think about the time line for that being rolled out more extensively at that asset?

[Michael Kruchten, executive]

Great. That is certainly Eric's favorite topics. I'll pass it to him.

[Eric Furlan, executive]

Thanks, Mike. We -- as we said, the polymer pilot is going quite well. We had a lot of -- obviously, you have a lot of uncertainties going into a pilot situation, can you inject the fluid, how does it perform? On all fronts, it's been above our expectations.

We were actually expecting to see breakthrough at a known well already. We have not seen that. That's quite positive. So what we're looking for now is more material oil increases. The longer the polymer doesn't break through, the better it is for us.

We're expecting about Q3 to get a good idea of what it looks like and to be able to model it a little better. So I think end of year to roll out a potential larger scale expansion or announce that.

[Operator]

At this time, there are no further questions. I will now hand the call back over to Mike Kruchten for any closing remarks.

[Michael Kruchten, executive]

Thank you very much, operator. That concludes our second quarter conference call. Thank you for joining us, and have a great day.