Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and welcome to Parex Resources third quarter earnings call and webcast. Yesterday, Parex released its unaudited financial and operating results for the quarter ended September 30, 2018. 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, except as required by law. [Operator Instructions]I would now like to pass 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 Q3 conference call and for your support of Parex. With me today are Ken Pinsky, Chief Financial Officer; Eric Furlan, Chief Operating Officer; Ryan Fowler, Senior VP, Exploration and Business Development; and Mike Kruchten, VP Capital Markets & Corporate Planning. As you know, we are currently in the middle of the strategic repositioning process, and as such, we'll be deviating from our normal quarterly conference call format of a Q&A session. And I'll provide an overview to our shareholders on our financial and operating results and give you a brief update on the strategic repositioning process. I'd like to begin by stating that we are very happy with the underlying fundamental strength of our business in Columbia. Our core Southern Casanare oilfields, the SoCa assets, continue to grow and are delivering exceptionally strong netbacks. We have also made significant progress with our new operated growth projects at Capachos and Aguas Blancas and believe these will provide strong foundation for future growth.In the third quarter, the company delivered record funds flow from operations, the USD 47 million or USD 0.95 per share. On a funds flow per boe basis, we delivered USD 36.68 per boe or approximately CAD 47 per boe, which includes all cash cost. With CapEx of $69 million, our Q3 free cash flow was $78 million, and we still grew our oil production by 5.5% quarter-over-quarter. Our working capital, net of all debt, is now over $143 million, and this includes repurchases, $36 million of shares under our NCIB program. We have delivered 25 consecutive quarters of production growth, and we see this trend continuing into 2019. We continue to build our business for the future, however, it unfolds, by adding 2 new blocks in Columbia, the CPO-11 block in the Llanos Basin and the Fortuna block located in the Middle Magdalena Basin. These are high-quality blocks that add significant exploration potential to our portfolio. And finally, we were able to achieve all this while investigating the possibility of creating additional value through the strategic repositioning process.I would now like to give an operational update that highlights a few key projects where we are making significant progress. We've had excellent exploration success at Capachos, which is in a difficult but opportunity-rich operating area. We've been able to demonstrate our operational strengths here, where we are producing and selling light crude and have drilled a successful multizone exploration well at Andina. And Aguas Blancas, where we know there's significant oil in place, has been challenging to deliver well productivities that are in line with our theoretical calculated productivities. Recently, however, we have successfully applied some new completion techniques that we think could be the key to unlocking the potential of this project. At CPO-11 in the Llanos Basin, we entered into a farm-in and very quickly have commenced operations to start the Anacaona exploration well. This block has multiple high-impact exploration prospects and a play concept that we've successfully drilled before. We're also continuing to grow our business through business development and adding new blocks for the future. Fortuna is our recently acquired block in the Middle Magdalena Basin that has a Lisama Formation and La Luna Formation targets, which are plays that have been successfully developed by peers in the region. We plan to start our first well in Q1 2019 on the Lisama play and shoot some 3D seismic to better define the La Luna prospects.And finally, our 2018 capital that we invested in our Cabrestero block is paying dividends. Our average production in that block has increased to over 8,500 barrels of oil per day in October from 4,100 barrels of oil per day in Q1 2018.In addition, we've now commenced a waterflood project at Bacano and Totoro to enhance oil recovery efficiency and production rates. I'll talk a little bit about our 2019 budget now. In our press release on third quarter MD&A, we've provided a preliminary 2019 guidance for Parex as it is today, that is with the SoCa and non-SoCa assets included. We've provided this preliminary view on 2019 guidance to show investors that in any outcome of the strategic repositioning process, we remain a top-tier producer with organic growth funded from cash flow, significant free cash flow, a large working capital balance, no debt and a strong portfolio of growth opportunities. We truly are a very unique E&P company.Our preliminary 2019 guidance is highlighted by the following: 18% year-over-year production growth targeting 51,000 to 53,000 barrels of oil per day and generating approximately $580 million to $640 million in cash flow at current Brent pricing. Our CapEx program is estimated at $250 million to $300 million. Together, this generates a record amount of free cash flow likely greater than $300 million. This results in our potential debt-adjusted per share growth rate becoming industry-leading. We have tremendous optionality on how to return cash to our shareholders, and besides our catalyst-rich exploration portfolio, our high-growth, high-netback production guidance is anchored on our development inventory. There's additional upside also from the emerging growth projects like Capachos and Aguas Blancas and new projects like CPO-11 and Fortuna. We estimate a $250 million to $300 million capital program to be evenly split by development, appraisal and exploration categories, which includes a funding ledge for new projects that we have in our business development offer.I'd now like to take a few minutes to discuss what I can discuss about the strategic repositioning process. As noted earlier, we're in the middle of the process, and we are encouraged by the progress to date. As we have stated before, we undertook this process from a position of strength. We're in a unique position to seek price discovery on SoCa due to our impeccable balance sheet, our high-quality, low-decline development assets and our growing inventory of early stage, high-impact exploration prospects. In the event of not electing to accept any offer, we are well positioned to carry other business plan. A question we received from shareholders is what will Parex do with its cash on hand and forecast free cash flow in the event that Parex chooses not to accept an offer? That's a reasonable question, and I want to take this opportunity to provide some color. Firstly, there's a number of options available to us and not all options will appeal to every shareholder. We know this from numerous discussions we've had with our shareholders. Everyone has an opinion and they're not all aligned. Secondly, we have always maintained that using our free cash flow solely in the pursuit of growth is not the best alternative. As I'm sure, many of you remember in the good old days, oil companies were notorious for squandering it all the way on projects that didn't make any business sense and Parex has consistently said, we will not do this. The board and executive are united in the view that a mix of growth and return of capital is currently in the best interest of Parex and its shareholders. Majority of our shareholders, I believe, concur with this statement. So how would we return capital? It would be through share buybacks and/or dividends. At this time, we'll not provide any more guidance as to the future plans on the subject, but if you look at the preliminary 2019 guidance, our free cash flow, which, I defined, as funds flow from operations, less capital expenditures from both development and growth categories is in excess of $300 million under current strip price assumptions. The free cash flow forecast coupled with our net working capital, which, at September 30, was $143 million, and that will likely increase to over $200 million at year-end [Audio Gap] in oil prices, provides us with significant flexibility. We can either enhance our per share growth with a significant share buyback or do a combination of share buyback along with the dividend to attract new shareholders who require growth in income.As always, we thank you for your support. We will communicate to you about the future of products when we can. Now we will start the Q&A session. Operator, over to you.

[Operator]

[Operator Instructions] The first question is from Nathan Piper of RBC.

[Nathan Piper, Analyst]

Just a few questions for me, if I may. First of all, on the acquisitions on Fortuna and CPO-11. Can you give us a bit of a sense or scale of the opportunity here? Is it, roughly speaking, the same sort of thing as Capachos, so the 20 million, 30 million barrels? Or what kind of range can you fit around? Just to give a sense for us of what sort of opportunity you've added into the portfolio, please?

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

Nathan, I think as we've talked about over past couple years is that our goal, whenever we get into new blocks these days, is to try and target things that, we think, can at least replace 1 year's of production. So next year, that guidance range that we've -- you've talked about, we're somewhere in the 15 million to 20 million barrel range. So we believe that these blocks have opportunities that are greater than that. So that would be kind of the minimum.

[Nathan Piper, Analyst]

That's helpful. I wonder also on realizations and how we should think about that going forward? You've obviously got a pipeline that you're going to complete shortly. And does that make a big difference to cost and the ability for you to market the crude in a different way? Or just everything stays roughly the same?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Nathan, this is Ken. We're forecasting that everything stays roughly the same until we see the pipeline in action and start to look at what the pricing will do.

[Nathan Piper, Analyst]

Okay. And then the last nit-pick one is on Capachos. And Andina-2 is going down, which you've mentioned. And what's the kind of production capacity? Or what sort of production capacity would the block have by the end of the year? And given the success you've had on Andina-1 and the [ pre production ] in Capachos, what should we look to for production output from the block? Or how might that evolve? Obviously, it depends on some drilling success, but given the success you've had already, what's the kind of range from Capachos, please?

[Eric Furlan, Chief Operating Officer]

So Nathan, this is Eric here. So right now, we're in the middle of putting together the infrastructure in the Capachos and Andina area to handle the production. And mainly, what we're installing right now is gas plant to allow us to process the gas and generate power. As a company, we don't like to -- we like to conserve all the product we produce. So that's the main thing. As far as facilities, we expect a preliminary power generation to start early in 2019 with the gas plant operational in Q1. And then the tying of the Andina pad to the central facilities will occur about mid-year with an overall goal of having capacity in the 10,000 barrel a day range gross sometime late in 2019 as all these facilities are put in place. So that work is underway. The facilities already have been procured, the gas plant. So we're well on our way to installing all of that equipment.

[Nathan Piper, Analyst]

Okay. And then maybe to return back to the elephant in the living room on the strategic repositioning. You've mentioned that you're encouraged by progress to date. I mean, what's encouraging, the volume of people that have spoken to you? The eye-watering price they're considering? Or what specific things are encouraging you in the process at the moment?

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

Well, we haven't communicated a bid date. So I can't talk about bids. But we've had, what I would say is, quality companies through the data room. And so we've been encouraged by that.

[Nathan Piper, Analyst]

And you have mentioned previously that December would be when you'd hope to -- not conclude the process but bring the process to some sort of the head. Is that a realistic time frame? Or as these people come into a bigger room and require more time, then that time frame is rather elastic?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Well, any sales process, time frames are elastic to a certain degree, Nathan, but we would like to have a communication to the market at some time before year-end, as we suggested in the past, not to say that there is a definitive communication but some sort of communication.

[Nathan Piper, Analyst]

Okay. So the process is progressing in an encouraging way, and at this moment in time, the timings are what you'd set out previously. I mean, I realize you're not going to be too specific, but we -- yes, is that right way to characterize how things are going?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Yes, it's as we said in the script.

[Eric Furlan, Chief Operating Officer]

Yes.

[Operator]

The following question is from Darrell Bishop of Haywood Securities.

[Darrell Bishop, Head of Research]

Nathan covered up my question on the strategic process there. But if I can take you to Aguas Blancas with the kind of early results from the new completions that you mentioned in your press release, just wanted to see if you could give us some more color from what those look like? What was done differently relative to some of the earlier results that were out in January of this year that the markets didn't take necessarily favorably? And how this might change your outlook for the block going into 2019?

[Eric Furlan, Chief Operating Officer]

As far as Aguas Blancas, as we stated earlier, the actual well results when we drilled them have been what we expected -- what we didn't expect with some of the deliverabilities out of the wells, some of the early wells. So we are attempting new completion techniques, for example using different types of fluids when we complete the wells. And we are very early time testing that theory, but it is definitely showing some promise with the results more in line with what we are originally expecting. Over the next 6 weeks or so, we're going to be testing further, with some of the new wells, these new techniques and should have a more comprehensive understanding and outlook on Aguas Blancas at that point.

[Operator]

The following question is from Ian Macqueen.

[Ian Macqueen, Research Analyst]

Just a quick question, following up on Nathan's question. In your 51,000 to 53,000 barrels a day guidance, how much do you actually allocate to Capachos and Andina? So what is the number you are giving us to include for Capachos and Andina as an average for 2019?

[Michael Kruchten]

Ian, it's Mike Kruchten. When we look at the 2019 budget, it's very similar to what Eric stated earlier about we're building the capacity for 10,000 barrels a day gross for Capachos. And then we'll also reassess that once we finish drilling Andina-2. And then we also have a plan to drill Andina Norte, an exploration well, in 2019.

[Ian Macqueen, Research Analyst]

So is there a number -- I guess, there's a lot of variation on what you just said. So is there a number you can kind of give us to steer us in the right direction?

[Michael Kruchten]

Well, the number that Eric mentioned was capacity -- the initial capacity for 10,000 barrels a day gross.

[Ian Macqueen, Research Analyst]

Yes, by midyear.

[Operator]

The following question is from Jenny Xenos of Canaccord Genuity.

[Jenny Xenos, Analyst of Energy]

I have a few questions, please. First of all, with regards to the budget, could you please quantify the differences between the 2018 and 2019 budget? I know there is a lower spend on infrastructure in '19, but could you just give a little bit more color on the differences?

[Michael Kruchten]

Sure, Jenny. It's Mike Kruchten again. With respect to capital, as Dave mentioned earlier, our capital is approximately evenly split between explorations, which is deemed as growth and development and appraisal and maintenance. So that's very similar in a lot of respects compared to 2018. When it comes to the cash netbacks, I think you can take where we are in Q3 as an approximation of the trends that you'll see for 2019. We don't see it vastly different as we move into the next year.

[Jenny Xenos, Analyst of Energy]

Okay. But I guess, what I was referring to is that the budget is smaller in 2019 than it is in 2018. So I understand that a large portion of that difference is from a lower spend in infrastructure. Is that correct?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

There's a couple of factors there, Jenny. One is, the -- there is no infrastructure spend in 2019 like there was in '18 in respect of that pipeline build-out that we did. So it accounts for about $20 million net. Plus we're through the earning phase on Aguas Blancas and Capachos. So now we have a partner in those drills. So we have to forecast our networking interest, which, on Aguas Blancas, went from a 100% in our earnout phase now to 60%. And then in Capachos, it's 50-50 with that petrol on subscript capital going forward in 2018, and for the most of the year, it was 100%. I think roughly, that's where you're seeing the changes of the decrease from this year. Plus, again, we did our Fortuna buyout. That caused -- that well or that block was $17 million.So those 3 factors get you roughly in line with the difference in capital in '18 and '19.

[Jenny Xenos, Analyst of Energy]

That's very helpful. And I wanted to drill in a bit more on the exploration program next year. You mentioned that about 1/3 of your budget will be spent on exploration. So that's $75 million to $100 million roughly. And we know from GeoPark's press release that you will drill 2 to 3 exploration wells at Llanos 34 and then another 2 exploration wells at Llanos 32, plus I understand you have 1 well commitment at CPO-11 and 2 wells at Fortuna. And you mentioned another exploration well, Andina Norte, I believe, at Capachos. What will the rest of the exploratory program look like in 2019?

[Ryan W. Fowler]

Jenny, this is Ryan. I think you got most of the list covered in terms of the bigger exploration projects. We have a number of sort of ongoing projects and some of the other blocks that will come to fruition here, but you've covered the list.

[Jenny Xenos, Analyst of Energy]

So what's the total kind of approximate exploration well count then in your program?

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

He's counting them.

[Ryan W. Fowler]

I'm counting them. I think you mentioned 8.

[Michael Kruchten]

We'd also be adding exploration wells in Aguas Blancas as we appraise the southern extent of that block.

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

New patent, De Mares.

[Michael Kruchten]

And [ Biranda ]. I think those were the ones that you did mention.

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

Yes.

[Jenny Xenos, Analyst of Energy]

So about 8 exploration wells plus Aguas Blancas?

[Michael Kruchten]

So call it, 12.

[Jenny Xenos, Analyst of Energy]

12 all together, okay.

[Michael Kruchten]

Yes.

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Which won't be the -- which I guarantee will not be the number we actually drill, because every year we move that budget around as we see other opportunities or we get access to lands in 1 block quicker than access to lands in another block. So we just -- we look at as an allocation of capital. About 1/3 of our capital is going to be spent on exploration this year, Jenny.

[Jenny Xenos, Analyst of Energy]

Great. That's very helpful. And what exactly is the work program at Capachos? What is the capital budget allocated to it? And where will that spend go?

[Michael Kruchten]

Yes. So Jenny, for Capachos, as we said, we want to -- we're drilling Andina-2 right now, it's an appraisal well. We will drill Andina Norte next year, and we've really purposely left out all the details of our budget, it's very preliminary. We wanted to provide you with the high level of capital and production numbers. And as we mentioned, we will provide additional details more on a area basis as we progress through the current process we're in.

[Jenny Xenos, Analyst of Energy]

Okay. That's fine. One last question for me, please. Operating cost at Llanos 34 saw a quite a substantial decrease from Q2 to Q3 from about $5 a boe to $4.30 a boe. Could you speak a little bit to what drove that increase in operating cost? Was it lower amount of workovers during the quarter? And when do you expect this sustainable level to be kind of in Q4 and going into 2019?

[Eric Furlan, Chief Operating Officer]

Jenny, this is Eric here. For the most part -- most of that difference is due to workovers. So we had a little bit more downtime for -- from -- in the last quarter from wells going down. So well workovers are a big part of that swing. And going forward, we don't expect any large changes in operating cost, kind of $4.50 kind of range, plus minus $0.30 depending on how clean the quarter is, how workovers [ mals well ]. So it's pretty consistent.

[Operator]

[Operator Instructions] The following question is from David Popowich of CIBC.

[David Popowich, Director of Institutional Equity Research]

I was just wondering if you can address how you're planning to proceed with reserve reporting this year. Is there any chance you would have an interim reserve report out before the end of the calendar year? Or would you still expect to have something in mind with how you've reported in the past, like the first week of February?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Yes, we'd be looking, David, at having the report out in the first week of February consistent with prior practice.

[Operator]

[Operator Instructions] There are no further questions registered at this time. I'll turn the meeting back over to Mr. Taylor.

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

Thanks, 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 of the company's website under Newsroom. Thank you, and goodbye.