Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and welcome to Parex Resources Second Quarter Earnings Call and Webcast. Yesterday, Parex released its unaudited financial and operating results for the quarter ended June 30, 2019. Like all Parex disclosure documents, the complete financial statements and related MD&A are available on the company's website at www.parexresources.com and on SEDAR.Before turning the meeting over to Mr. Dave Taylor, President and CEO of Parex Resources Inc., I would like to mention that this call is being recorded, so it will be available for playback on the company's website.Parex would like to remind everyone that remarks made during this session are subject to forward-looking statements, which involve significant risk factors and assumptions and have been fully described in the company's continuous disclosure reports. The information discussed is made as of today's date and time, and Parex assumes no obligation to update or revise this information to reflect new events or circumstances, expect as required by law. [Operator Instructions] I would now like to pass on the meeting to Parex President and CEO. Please go ahead, Mr. Taylor.

[David R. Taylor, President, CEO & Director]

Thank you, operator, and thanks to everyone for joining our Q2 conference call and for your support of Parex. With me today are Ken Pinsky, our Chief Financial Officer; Eric Furlan, Chief Operating Officer; Ryan Fowler, Senior VP, Exploration & Business Development; and Mike Kruchten, Senior VP, Capital Markets & Corporate Planning.Before we start our Q&A session, I'd like to provide an overview to our shareholders on our Q2 financials, operations and discuss the 2019 guidance. Starting with our Q2 financial summary. Q2 is highlighted by strong netbacks and funds flow from operations of $151 million or CAD 1.38 a share. With free cash flow of $102 million, we repurchased 4.7 million shares and increased our working capital to $240 million. Q2 earnings were $101 million or CAD 0.92 per share.On the operational front, I'd like to update you on a few highlights of the projects where we're making significant progress. On our Southern Casanare block assets, the flow line to the key Colombian export pipeline system began flowing in June 2019 as a major step in reducing our transportation emissions, footprint and securing our takeaway capacity.In the June 2019 ANH Colombia bid round, Parex was awarded and has recently signed 2 exploration blocks. The next ANH bid round is currently scheduled for October 31 of this year, and Parex expects to be an active participant in that process.On the exploration front, the Boranda-2 exploration well in the Middle Magdalena Basin was drilled to evaluate the La Paz Formation. The well is tested and produced an average of 960 barrels of oil per day with a final watercut of less than 2%. This is one of the most prolific rates we've observed from the La Paz Formation in this area of the basin. The Boranda-3 appraisal well has been spudded, and we'd be restarting the production on Boranda-2 in the next few weeks.On the Fortuna block, also in the Middle Magdalena Basin, the Habanero-1 well was drilled to test the potential Lisama trap identified on 2D seismic. The well is drilled to a total depth of 6,000 feet and accounted 3 prospective zones in this formation. Currently, we're mobilizing a service rig to test a prospective zone in the deeper Lower Lisama, install a downhole pump, which is better suited to testing lower gravity oil in the Upper Lisama zone, where we swapped 10-degree API oil from a high-quality sand. Additionally, we are currently acquiring 178 square kilometers of 3D seismic on the block to better image the structure and identify additional prospects.At Capachos, the Andina-3 appraisal well is currently drilling at depths of just over 15,000 feet and with target depth of almost 18,000 feet. This week, we're also commissioning another operational milestone with the commissioning of the Capachos central gas plant. Initially, we'll be processing 3 million a day of rich gas, and that'll enable us to strip out 450 barrels of high-value condensate and natural gas liquids with the residual gas being used for power generation and delivery into the local grid.This project also reflects our focus on our ESG performance, and we also want to highlight our commitment to the benefits of communities where we operate. At our Tautaco exploration project in the Llanos Basin as part of our social engagement process, we've installed water filtration plants and refrigerated water dispensers in 2 local schools to supply potable water, benefiting approximately 50 children per school. And we worked with local communities and the municipality to completely renovate the water filtration plant that supplies water to 6,000 residents to that area.I'd like to reiterate our guidance. As previously released, our 2019 guidance is 20% year-over-year production growth, targeting 52,000 to 54,000 barrels of oil per day and an estimated $550 million to $600 million in cash flow, assuming second half 2019 Brent oil prices of $60 to $65 a barrel. Our planned full year CapEx program remains at $200 million to $230 million.We expect to fulfill our share buyback program for 10% or 15 million shares by early in the fourth quarter of this year. And today, we've redeemed 12.7 million shares. Further, subject to the approval of the Toronto Stock Exchange, we expect to renew our NCIB in December 2019 with the intent to repurchase another 10% of the public float.Parex is truly unique in our industry. We will have tremendous optionality to allow us to invest in additional growth opportunities by adding exploration capital, for example, the Tautaco well that I mentioned earlier has been added this year, or acquiring new assets, things in bid rounds or purchased blocks plus returning cash to our shareholders.With that brief introduction, I'd like to turn the line back to the operator to start the Q&A. Over to you, operator.

[Operator]

[Operator Instructions] We have a question from Gavin Wylie from Scotiabank.

[Gavin Wylie, Analyst]

First, I have two questions for you. Just the first one is just on Capachos. I'm just wondering, what do you need to see, whether that success at Andina-3or elsewhere, to move forward with maybe increasing the capacity of the facilities that you've installed. I think you're kind of around that 10,000 barrel a day mark in terms of what you can process. But just wondering, is Andina-3 important enough to expand that into 2020? Or as you noted, is the gas processing capacity one of your limiting factors and that could be, with some additional investment, you could strip more liquids off that?Second question is just on the SIB and the probability of that. Obviously, we've seen you extend the NCIB likely now into Q4. December is fast approaching, I mean, once we get through the sort of September, October time frame. And just wondering, is that even a relatively high priority anymore? Or are you starting to just think of it as we can move ahead with a 10% NCIB in 2020, and that's almost 18% of your stock repurchase over 2 years? Just those two questions for me.

[Eric Furlan, Chief Operating Officer]

Okay. Gavin, I'll start off. It's Eric Furlan here. On Capachos, we do have plans in place to expand the Capachos processing capacity, plans in place to take that over 15,000 barrels a day gross at the moment.As you mentioned, the main issue is how quickly we can expand the infrastructure in the area. It is a bit more remote. You can see, we're doing some interesting things with the gas plant. So we have a unique solution here where we can install a gas plant, recover high-quality and high-value liquids, shrink the gas volume and then we generate power with that gas to return to the local grid and power, as required. So because we're not completely adjacent to, let's say, a gas pipeline that allows us to take away immediately, it takes a more creative solution.Our goal as a company has always been to conserve 100% of produced hydrocarbon. And for that reason, we will stage the expansion accordingly so that we can handle the gas and process all of the fluids. The next milestone for us is we'll be tying in the Andina pad to the central processing facility, which will allow us to gather and process all the liquids and gas in one spot, and then that's the next milestone. But our plans are in place to expand the facility through 2020.

[Kenneth G. Pinsky, CFO & Corporate Secretary]

And Gavin, it's Ken. With respect to your short significant issuer bid question, there's no significant issuer bid. It's a pretty rare thing in this industry, probably in any of the companies listed on TSX, and it involves buying stock at a premium through what we would call a Dutch auction process.The company, as you know, is committed to returning capital to shareholders. We're going to -- as Dave mentioned, we are going to buy back 10% of our stock this year through our NCIB program. And the Board has confirmed we will renew the program, subject to TSX approval, in December 2019. And our intent is to buy back another 10% of the stock and going forward, repeat. So we are very committed to returning capital to the shareholders through the NCIB.The significant issuer bid is another option for us to return capital to shareholders or invest our surplus cash flow. And we look at that as other options such as adding exploration bid around blocks and commitments and looking at the M&A business development arena in Colombia and seeing what's available and what we'd like to see, how we would like to expand the business and make a better business.So there's no probabilities or priorities I can give you except that it's a choice that we have and it's an option that we have, and we look at it amongst our other things that we're looking at to better the business.

[Operator]

[Operator Instructions] The next question is from Al Stanton from RBC.

[Al Stanton, Analyst]

I just want to ask a couple of questions about exploration. The first question is I see the list of H2 drilling targets. I'm just wondering whether you would highlight any targets in particular.And then the other question is with respect to the ANH rounds, whether your area of interest has expanded at all beyond the Middle Magdalena and then the Llanos space and whether perhaps you might look at the Putumayo this time around.

[David R. Taylor, President, CEO & Director]

Yes. I mean we have a list there. There's 7 different opportunities, and it's hard to say which one we like better because they're all different. And I guess that's one of the things that we like to focus on is a portfolio approach.For example, the Block 34 well is targeting a portion of an undrilled fault, a segment to the west of the Tigana field, and those always have potential to have a stratigraphic component to trapping, which is what sets up at the Tigana field. So we like that.Boranda. Obviously, Boranda-3 is a follow-up to the Boranda-2 high prolific well, so we're quite excited about that. And then Tautaco is something that's been on our list for a while. It's a farm-in well so we're carrying a partner. The nice thing about a project like that one is there's several other structures along that trend. That if the first one works, we have follow-up. And then we have some of our other opportunities in Aguas Blancas, et cetera.So it's a portfolio. I'm not going to point to any one particular one, but I think we have a very good cross-section of different opportunities this year.And then with respect to the ANH bid round, Ryan, do you want to talk to that one?

[Ryan W. Fowler]

Yes. Ryan Fowler here. We are, like I think most of the companies in Colombia, aggressively engaged in this next bid round. We expect it to be one of the biggest sales in the history of the country. Numerous blocks available, so it's a full-court press right now in terms of evaluating and deciding how we're going to deploy our future commitment of capital to exploration.

[David R. Taylor, President, CEO & Director]

Yes. And Ryan, I think it's fair to say that this bid round will be the biggest bid round that the ANH has put on.

[Ryan W. Fowler]

Yes. It's looking that way. This is the first bid round ever where the operators have been able to actually submit the blocks that are going to be up for bid, and that is a real game-changer for Colombia.

[Kenneth G. Pinsky, CFO & Corporate Secretary]

But Al, as you can imagine -- it's Ken here. We're not really going to talk about what we're interested in over the phone. We'll let you know after the bid round.

[Operator]

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Taylor.

[David R. Taylor, President, CEO & Director]

Thank you, operator. I'd like to take this opportunity to thank you for your interest in Parex and continued support of the company. For further information, we invite you to visit our website or call us. Thank you again, and have a good day. Operator?

[Operator]

Thank you. That concludes this morning's conference call and webcast. If you would like to replay the call, please visit the Events page on the company's website under Newsroom. Thank you, and goodbye.