Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2020-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, 2020. Like all Parex disclosure documents, the complete financial statements, 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 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 pass the meeting to our President and CEO. Please go ahead, Mr. Taylor.

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

Thank you, operator, and thanks to everyone on the line for joining myself, the senior leadership team for our Q3 conference audio webcast. We appreciate your support of Parex Resources. Before we start our Q&A session, I'd like to provide some highlights of our Q3 financial results and discuss our plans for the remainder of 2020 and for 2021. I'll begin by stating our priority during the COVID pandemic remains the health and safety of our employees, our contractors and the communities neighboring our operations. To minimize social interactions, we changed our operating procedures and reduced field activity, which impacted both CapEx and production in Q3. Q3 production averaged just over 44,300 barrels of oil equivalent per day, an 8% increase from the previous quarter production of about 44,850 barrels of oil equivalent per day, where we voluntarily shut in production. The third quarter was highlighted by strong operating netbacks of USD 23 per barrel of oil equivalent and funds flow from operations of USD 79 million or CAD 0.76 per basic share. Q3 capital expenditures were approximately $18 million, and our earnings were USD 27.6 million or CAD 0.27 per basic share. With free funds flow of USD 62 million approximately, we repurchased 2.3 million shares and returned CAD 31 million to our shareholders. The company maintained its financial strength with $353 million in cash and no debt. We exited the third quarter with working capital of approximately USD 371 million and USD 200 million of undrawn credit facility. The company also published its sixth sustainability report, which highlighted our industry-leading environmental, health, safety and social performance. For 2020, Parex is on an exceptional financial position in the industry as the company continues to maintain its best-in-class balance sheet with working capital of USD 371 million. In early March, we took decisive action to protect our financial position and to weather the ongoing crisis as well as take advantage of potential growth opportunities that may arise. As we move into Q4, we'll be focused on delivering a USD 35 million to USD 45 million program that includes SoCa development drilling and completions, advancing the VIM-1 La Belleza discovery with civil works and long lead items related to facilities, drilling the Jacana-1 horizontal exploration well on the Fortuna block in the Middle Magdalena Basin and spudding a Boranda appraisal well also in the Middle Magdalena Basin. Finally, we plan to repurchase 6.4 million shares in Q4, fulfilling a 10% NCIB annual lending for approximately 14 million total shares that we will have reduced this year. That will reduce our 2020 basic shares to approximately $131 million from $143 million on December 31, 2019. For 2021 guidance, I'd like to briefly outline our plan for 2021. Average production is expected to be in the range of 47,000 to 49,000 boes per day. PAUSE Capital expenditures will be approximately USD 165 million to USD 185 million split between maintenance, development and appraisal and exploration of new growth programs, and finally returning capital to shareholders by buying back another 10% of its outstanding share count or approximately 13 million shares. Finally, I'd like to report that after 40 -- more than 40 years in the industry energy, including nearly 10 years with Parex, Mr. Leo Di Stefano is retiring as President & Country Manager of Parex Colombia. Mr. Di Stefano will remain in his current position until he formally retires at the end of December 2020. Leo has been instrumental in Parex' success, especially in building relationships with the communities where we operate. We wish him the best in his retirement.In conjunction with Mr. Di Stefano's retirement, Parex has also announced the promotion of Mr. Daniel Ferreiro to President & Country Manager of Parex Colombia effective December 1, 2020. Mr. Ferreiro has been with us for 20 -- or spent 23 years in the upstream oil and gas business and various technical and leadership positions, most recently as Senior Vice President of Colombia Operation. He has been a key leader in Parex Colombia and prior in our predecessor company, Petro Andina Argentina. Throughout 2020, Daniel has been working closely with Leo to transition on the Colombian leadership responsibilities. With this brief overview, I'd like to turn the line back to the operator to start Q&A session. Alana, over to you.

[Operator]

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

[Al Stanton, MD & Oil & Gas Equity Analyst]

Yes. Can I just ask something about the mindset for next year? I mean, we're just looking through the quarterly numbers for 2019. And also, I suppose Q1 of this year, production was up 50-odd-thousand barrels a day, 54,000 barrels a day, and yet your forecast for next year is 47,000 to 49,000 because that's flat from the fourth quarter. So I was wondering whether some people have suggested you're just being conservative and you're going to beat your numbers or whether perhaps there is actually a bit of a change in mindset within the sector. And you've got less desire to ramp up production, perhaps keep more cash on the balance sheet and slightly be more cautious as you go into next year, having enjoyed quite a tough 2020.

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

Yes. It's Dave. I'll address that. As you know, in the low price environment, we're not really being rewarded for absolute growth anymore. We believe the single-digit growth's appropriate in the current climate, and that's the 47,000 to 49,000 that we're forecasting for 2021. So then we have capital allocation decisions, and as we've given you a range of $165 million to $185 million of capital going back into the ground. And we can break that out by the maintenance and development for the absolute growth, which we just alluded to. We'd prefer the lower absolute growth. Second bucket is organic growth capital, exploration and appraisal, and then third would be inorganic acquisition opportunities, and, finally, buying back barrels using our existing buyback program. So I'll talk a little bit about each one of those different items. So if you look at the maintenance and development capital for absolute growth, our objective right now is really to preserve the existing barrels in this low price environment. Voluntarily curtailing production in the second quarter allowed us to reset our base a little bit, push field plateaus out by a couple of years, but gives us the optionality to ramp up activity with the price recovery. Second thing would be the spending capital on our core competency of exploring and appraising. We have a very high-quality exploration portfolio, and we believe it's actually prudent right now to be looking for new barrels to add NAV and future development inventory when prices recover. So we have a new discovery at La Belleza as well, for example. We have no reserves booked there and lots of potential. So we want to get that appraised also in 2021 to add new barrels. If we look at our current share price, we can also buy our own high-quality barrels back for $70 per barrel, fully developed. And we believe this is a pretty unique opportunity to buy back stock and our barrels, which are some of the best in the world, and returning capital to shareholders. That's our plan to buy back 10% of the stock in 2021. And we can do all 3 of these things within the cash flow from operations at $40 to $45 Brent and current Vasconia differentials. And then ultimately, that leaves us with our strong balance sheet to $370 million, roughly, working capital, undrawn line of $200 million for inorganic acquisition opportunities. But it's important to understand that those types of growth opportunities have to compete for capital with organic opportunities and must have the ability to actually improve our business significantly. So that's kind of the philosophy or the way we're thinking about the business going forward and why we've targeted the program that we have in the guidance for 2021.

[Eric Furlan, Chief Operating Officer]

Yes. I'll add one more thing. And if you look at our guidance in our press release, what we're really focused on and have been focused on for quite some time is per share growth. And so if you look at our production per share, it's growth. In 2021, we're forecasting a 14% increase while maintaining the same working capital. So our debt adjusted production per share growth were going up by 14%. We think that's pretty attractive for our peer group, and that's really the number we look at. Top line growth is, I know, something that people want to see as well sometimes. But right now, us and the investors want to look at production for share growth.

[Al Stanton, MD & Oil & Gas Equity Analyst]

And if I may, just one quick follow-on question. Just looking at the vintages of exploration acreage, is there -- are there any ticking clocks, either for you or other people, where there are commitments to drill in 2021, where having cash and maybe access to a rig might open doors for you?

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

Yes, we continually look at the competitor landscape out there to see if there's farm-in opportunities. We know there's some available, and we are actively looking at them. Our own acreage, we plan activity over the period of the exploration term. And we don't have any issues with respect to our own acreage getting things done. But we know some competitors may have some challenges.

[Operator]

[Operator Instructions] There are no further questions registered on the phone lines, so I will turn the meeting back over to Mr. Taylor.

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

Thank you. 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]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.