Parex Resources Inc
TSX:PXT
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Parex Resources Inc
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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, 2021. 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. Ken Pinsky, Chief Financial Officer of Parex Resources Inc., I would like to mention that this event is being recorded, so the recording 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, except as required by law. [Operator Instructions]I would now like to turn the meeting over to Parex's Chief Financial Officer. Please go ahead, Mr. Pinsky.
Thank you, operator, and thanks to everyone on the line for joining myself and our CEO and President, Imad Mohsen, for our Q2 conference audio webcast. We appreciate your constant support of Parex Resources. Before we start our Q&A session, I would like to provide some highlights of our Q2 financial results and discuss our plans for the remainder of 2021. All values mentioned in this call are stated in U.S. dollars, unless we otherwise specify. I'll begin by saying that our priority during the COVID-19 pandemic still remains the health and safety of our employees, our contractors and the communities neighboring our operations. Our Q2 production averaged 43,900 BOE per day, a 4% decrease from the previous quarter production due to the transportation blockades in Colombia that temporary restricted supplies for -- to drilling and completion activities and our movement of oil within our fields. Normal field operations were restored in June and at present, Parex is operating 4 drilling rigs and a seismic crew. For the second quarter, our funds flow provided by operations totaled $132 million or CAD 1.3 per share basic. Our Q2 capital expenditures were $45 million, generating free funds flow of $87 million. With a portion of that free funds flow, we repurchased 4.2 million shares and thereby returned CAD 91 million to our shareholders. Parex had strong performance for the quarter with earnings of $92 million, and we maintained financial strength of $353 million in cash and no debt. We exited the second quarter with working capital of $371 million. And with -- along with our credit facility undrawn of $200 million, we have over 500 -- or $0.5 billion of liquidity. Parex reiterated its dedication to continue lowering our greenhouse gas emissions, intensity per BOE from [ operated ] assets. The company's strategy is short to midterm with focus on optimizing carbon footprint, with placing carbon-intensive power sources and increasing power generation from renewable sources. The long-term carbon strategy will gradually emerge as part evaluate the uncertainties that could face during the net energy transition and outline sustainable pathways to achieving its net 0 ambition. Parex is aspired among the least less carbon-intensive oil and gas E&P companies while continuing to deliver shareholder value and meet ongoing global energy demand. We engine to another strategic partnership with Ecopetrol, whereby Parex earns an operative 6% interest in 2 blocks in Northern Colombia, Arauca & LLA-38. Parex's independent qualified reserve engineered GLJ recognized company interest 2P reserves or proved plus probable reserves of 7.8 million barrels of light and medium crude oil, along with future development capital of approximately $70 million. The initial work plan, which we hope to commence in 2021 will be funded by Parex and consists of drilling 2 development wells in the Arauca field and 1 exploration well and a further capital program of $75.8 million, which [indiscernible] Ecopetrol will determine how to allocate. I would now like to pass the meeting over to our President and CEO, Imad Mohsen, to go over the second half 2021 outlook. Please go ahead, Imad.
Thank you, Ken. Parex is in an exceptional financial position as Ken explained and doesn't currently have any hedging in place. So that allows us to reap the full potential upside of strengthened oil prices. As we move into the second half of '21, Parex will be focused on appraising our recent discoveries and expansion. Key projects include: continuing our appraisal well program on Cabrestero, which drilling commenced in June. So far, we are very encouraged by the initial results. [ Last ] to start our significant capital program and around the product, beginning with at least 60,000 in exploration wells in Cabrestero, followed by the Ecopetrol partnership work on Arauca block. On Fortuna, we are drilling a multilateral well, Perla Negra 1 on the Olini Formation. We are applying proven but new technologies to Colombia to assess areas with significant oil in place. Accelerating the installation of facilities to enable the production of compressed natural gas for La Belleza discovery. We are expecting production to begin at restricted rates in Q4, and we expect to have initial results from our Planadas-1 exploration in September. Initiating a quarterly dividend of $0.125 per share, we believe this is a material milestone for Parex, demonstrating our confidence in our portfolio and our commitment to shareholder returns. With this brief overview, I'd like to turn the line back to the operator to start the Q&A session. Operator, over to you.
[Operator Instructions] The first question is from Adam Gill from Paradigm Capital.
Gentlemen, just in terms of the dividend, obviously, it's a pretty small payout of your overall fund flow. I was just wondering if you could frame how you guys are thinking about potential dividend increases? What type of targets, whether it be earnings or funds flow to potentially see that dividend go up over time?
Yes. Thanks, Adam. The dividend was instituted along with our buyback. As Imad said, we wanted to demonstrate our return of capital our mantra, which is what we see operating over the past 3 years. And we've bought back 20% of the stock net of an LTI or long-term incentives exercises and therefore, issued from treasury stock. So that's a big number of the stock of the share buyback. And going forward, the Board wanted to have another lever to return capital to shareholders, and so we instituted the dividend. We have our annual strategy session with them in the fall. And with that, we'll look at our 5-year plan where we think commodity prices are going and then how we want to return excess capital to shareholders. We always will have a return to capital strategy. And how the dividend will fit into that with more clarity, we'll report back to the market in later in the fall after that strategy session. But for now, the yield is about 2.5% to 2.6%. It's kind of in the range, but we would see ourselves in time potentially transferring some money from the buyback to the dividend. But that is something we'll discuss with the Board and along with our 5-year plans.
[Operator Instructions] We do have a question now from Harry Nudelman from HDN Capital.
Perhaps you can just elaborate on the prior question. Are you going to be -- I guess, multiple parts. First off, how much cash would you like to keep on the balance sheet for the proverbial rainy day? The next question is, as you do this 5-year plan, are you going to use different price assumptions? And then from that, with the free cash you generate, determine whether a higher dividend, a variable dividend and/or an accelerated buyback comes into play? Just any other clarity you can add because it's remarkable that you can buy back 3% of your company and still build cash. And yet, for all intent and purposes, the stock wouldn't know what you're doing.
So let me start with the first part of the question. In terms of the cash we have on the balance sheet, whereas -- we don't want to keep increasing into infinity. So we are very comfortable with the levels we are at now. The tool to use the cash other than first, our profitable investments is to return money to shareholders and the tool for that is the buyback. Dividend is fixed commitment on much longer term. What the Board will consider going forward in terms of what dividend level and if we increase it at what pace. Beyond the commodity prices is also our long-term investment program and how we want our grow business and have long-term sustained business that only goes in one direction. So it is multifaceted. We do take always reasonably -- reasonable oil price mine, which is -- what is it, Ken, $55, $60?
We like the budget breakdown around $60 a barrel, and we do run low case scenarios and we run high case scenarios. Yes.
But for me, it's not just an oil price question, it's a combination.
Yes. And I think what I want to reiterate, and this is what we're telling shareholders is that we are an exploration and production company. We will drill exploration wells and not all of them will work, but some will. And in the past, they've worked really well and added a lot of value to the shareholder. And so we're paying a dividend as a function of a return of capital as opposed to thinking of us as a dividend-paying company that is in the oil and gas business. So that dividend is supplementary. And as Imad said, it's a long term -- we do it's a long-term commitment. So moving that around. I know some of our counterparts are talking variable dividends based upon commodity prices. But they'd be more mature dividend payers than we have. And so we're going to feel our way down and see where the -- see what the shareholders want and then see how we can look at this in a longer term in respect of our return of capital strategy.
Great. Just an observation, if I may. It would appear that most investors throughout all of energy today don't believe in any terminal value for a myriad of reasons. And my sense is that's the opportunity or one of the many opportunities here. So to the extent that you contemplate buying back more stock quicker, the advantages are relatively obvious.
The next question is from Al Stanton from RBC.
Just a couple of questions, if I may. First of all, the one variable that we weren't really talking about in the lower oil price environment is taxation. So I'm curious to know what your views are with respect to the tax rate going forward? And how that dovetails with turnover in spending, whether spending is now going to creep up with turnover. So how did that dovetail? And then finally, just a question on the rest of the growth in the past quarter with respect to marketing and delivering your crude, whether there is any sort of silver lining in working out which routes and which markets to sell it into to maximize realizations?
Thanks, Al. I'll answer your second question first with respect to what to be learned about the transportation disruptions. What we learned is that none of the oil and gas business industry was really target. We weren't targeted directly. It was the transportation hubs that are upstream of our operations. And what really impacted was our ability to move supplies through a drilling rigs because at the time we're actually moving into a bigger exploration program. So we were moving rigs around. And that slowed us completely. If we're up and running on the pad, then we usually get worked as a disruption of potentially coming some action, and therefore, we can stock up for crude and fuel for the rig and not be bothered. We're just caught in the middle of moving rigs. In respect to production, what we know is from tying in by pipeline, most of what we call our Southern Casanare asset. We were about 35,000 barrels a day, what I'd say, disruption proof, which allows us to do whatever we want to do at any given time. And that was positive, and we kind of thought that what it was before and could be planned for events that are unforeseen. And we've also got ourselves up to our run rate. We're at 48,000 barrels a day again today, which is the highest we've been since COVID, which we're quite happy with. We have 4 rigs in the field working. There's been no disruption. So Colombia, sometimes it gets noisy. And especially if you look on Bloomberg, you can get -- you can see things. But in the field, it was relatively calm except back a couple of weeks, 2 to 3 weeks where we had some trucker union activities, which have now ceased and everybody back to work. And the government did a very good job we thought in addressing that and working directly with the unions and what agreements that they have. So we are thankful of the Colombian government. They did a very good job. In respect to your first question, you were breaking up, but I think you're asking about tax rates. And the Colombia Congress is now debating a new tax bill. One of the things we're talking about is increasing the corporate rate of 35% and 31%. That incremental 4% will have some effect on us. But because we continue to invest in the country, it will be relatively minor. I would recall that during the Santos, the previous President's regimen, President Santos, we had tax rates as high as 40%. And as long as you're investing in the country, if you take anything else, you're creating tax, completable app -- you're creating tax depletion to offset your tax. So that's all I have to say about that, unless you have further questions.
Yes. I suppose the one bit that you might have missed was the relationship between CapEx and the oil prices, is that going to be reestablished?
Relationship we heard between our capital spend and the price of oil?
Yes.
Definitely, one of the things we wanted to do was actually -- COVID slowed our exploration program down, and we are an exploration company, as I said. And Imad, when he joined the company looked at the opportunities and said, we need to catch up for 2020. We agree. The Board agreed, and that's what really drove our CapEx spend and increasing this year. Yes, oil prices are helpful because you have the incremental cash flow. And as you heard, we do get questions on how much working capital do you guys want to build. So, Imad, you have something to add?
Yes. I mean here, of course, at $100, there are more opportunities at [ 20 ], but the reality is most of our opportunities that we have in the pipeline are extremely robust at all kind of visible pricing in the medium term. So what happened is we have discoveries before COVID, then we're not appraised yet. There were some delays last year. And we see a lot of potential for development growth and appraisal, and we want to bring these opportunities forward. Most of the opportunities I mentioned in the chart today where discoveries made a year or 2 earlier and that need to be appraised. So you have 10, 20, 30 well development program coming out of that. And this opportunity, in our view, should -- if the geology proves what we think there should be robust regardless of [indiscernible] Yes, predictable oil slide price fluctuation.
There are no further questions registered at this time on the phone lines. I would like to turn the meeting back over to Mr. Mohsen.
Thanks. Thank you for your interest in Parex, and your continued support of the company. For further information, we invite you to visit our website or call us. Thanks again, and have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.