Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2021-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, 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 pass on the meeting to Parex' Chief Financial Officer. Please go ahead, Mr. Pinsky.

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Thank you, operator, and thanks, everyone on the line for joining myself and the senior leadership team for our Q3 conference audio webcast. We appreciate your ongoing support for Parex Resources. Before we begin our Q&A session, I would like to provide some highlights of our Q3 financial results. Q3 production averaged approximately 47,500 barrels a day, which was an 8% increase from the previous quarter, whereby our production was temporarily affected from transportation blockades that were experienced across Colombia in the spring of 2021. Parex is not currently experiencing any social disruptions, and our production currently is in excess of 49,000 barrels a day. For the third quarter, our funds flow provided by operations totaled $153 million or USD 1.24 per share basic. And our Q3 capital expenditures were $74 million. We generated free funds flow of $78 million, bringing our year-to-date total free funds flow at $250 million. We allocated Q3 free funds flow to share buybacks and a regular and special dividend of $0.125 and $0.25 per share each, respectively, for a total of $0.375 for the quarter. We also continued to buy back shares under our automatic normal first issuer bid and are over 90% through our 10% share buyback target as we talk. We maintained our financial strength with our working capital of $351 million and continue to have no debt year-to-date. We exit the third quarter with $200 million of an undrawn credit facility. I'd also like to point out and note that Parex remains unhedged in 2021, providing full exposure to the current high Brent oil pricing. A further highlight for us in Q3 was Parex expanded its strategic partnership with Ecopetrol, whereby Parex will earn an operated 50% interest in 2 blocks, the Arauca block and the LLA-38 exploration block, both located in the proven and highly prolific Llanos Basin in the Arauca province of Northeastern Colombia, very close to our Capachos block that we've been operating with Ecopetrol over the past 4 or 5 years. Attractive for Parex, the blocks contain proved reserves along with development and drill-ready exploration prospects. This builds on our operational and commercial success at capacities. Our goal is to start operations in the first quarter of 2022 in the Arauca block. Lastly, with ESG as a key value of Parex, we have released our 2020 sustainability report and are committed to reduce our operated Scopes 1 and 2 greenhouse gas emissions intensity by 50% by 2030 from a 2019 baseline. I would now like to pass to this meeting to Parex' President and CEO, Mr. Imad Mohsen, to go over the Q4 outlook and 2022 guidance, which was provided yesterday as well. Go ahead, Imad.

[Imad Mohsen, President, CEO & Director]

Thank you, Ken. As we move through the final quarter, Parex will be focused on the capital program to enhance our long-term sustainability in Colombia and to strengthen our commitment to maximize long-term shareholder value. I'm pleased to report the following upcoming operations in Q4. We have a diverse drilling program in Cabrestero, Capachos and Fortuna blocks. Based on the very positive results to date, we expect an additional 3 to 4 wells to be drilled by year-end in Cabrestero, which is estimated to increase our 2021 exit production to over [ 2,900 ] barrels of oil per day there. Planning also to commence 6-well program in Capachos early 2022. And the Fortuna field has 2 wells already drilled, Cayena a multilateral and Perla Negra, which are waiting completion activities, and we expect to tend towards prior to year-end this year. With regards to 2022 guidance, I will now move to our 2022 guidance to provide an update on our framework for returning capital to shareholders, which we are very excited to describe. One of the elements that attracted me most to join Parex was the depth and quality of the company's exploitation and exploration portfolio in Colombia. At current strip pricing funds flow provided by operations is estimated to be over $725 million. This provides multiple levers to increase shareholder returns that could be dividends, share buybacks and asset growth. We are excited to move forward with a capital growth plan that materially expanded the boundaries of our current development properties, while also unlocking substantial new opportunities within our portfolio. Underpinning the plan is the portfolio with substantial discovered in place volumes that are being unlocked right now using techniques, which are unfamiliar in Colombia, but long proven elsewhere. To name a few multilateral drilling, hydraulic stimulation, synthetics, drilling muds, simulation grounds, radial drilling or airborne and geophysics that could be incorporated in survey operations. There are old tools we have at our fingertips to unlock our Colombian asset base. At forecast oil price of $70 in 2022, Parex' corporate guidance consists of the following: average production range of 52,000 to 54,000 BOE day. Capital expenditures totaling $400 million to $450 million, split between developments, appraisals and exploration programs, 2/3 of which is allocated to exploitation activities. We have substantially increased our CapEx program in '22 for multiple reasons. One is we are beginning operations on our Arauca, LLA-38, Ecopetrol partnership that Ken referred to you all earlier. Second, as we're catching up on the exploration and growth capital that we deferred from 2021, while we were focusing on the health and safety of our communities during the COVID 2019 pandemic. And finally is, we have assessed and unlocked the deep and diverse portfolio of exploration discoveries already made and we -- that we have amassed over the last 3 years. All of this is a critical step to demonstrate Parex' future sustainability. 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]

[Operator Instructions] We have a question from Phil Skolnick from Capital.

[Philip Ross Skolnick, Principal & MD Research]

Yes. I had a few questions. The first one is what contributed to the rise in production to an excess of 49,000?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

Phil, it's Ken. Mostly that's coming from Cabrestero. We drilled 8 wells to date on that program. We continue to drill more, as Imad was saying, and we'll keep drilling in 2022. But yes, that's where the production volume increase is primarily coming from.

[Philip Ross Skolnick, Principal & MD Research]

Okay. Perfect. When you were going through your 2022 budget, I guess, how should we think about -- how is your maintenance CapEx requirements? Has it changed much versus 2021 and 2020? Or is it kind of pretty much the same? I mean, outside the fact that you did have higher -- a little bit higher production.

[Michael Kruchten]

Phil, it's Michael Kruchten. No, it's pretty well the same. The maintenance capital is still primarily allocated to key producing blocks in [indiscernible]. And yes, we don't see too much of a change there. Certainly, when we look at the development capital, that's really accelerating the discovery we've had in the past, such as La Belleza, so we can get that production onto stream in 2022.

[Philip Ross Skolnick, Principal & MD Research]

Okay. Perfect. And then finally, what kind of triggers or targets do you look out in deciding the special dividend, just kind of give us a way to gauge them?

[Kenneth G. Pinsky, CFO & Corporate Secretary]

I guess we looked at it, Phil, in respect of, we're mindful of our growth of our balance sheet, and we didn't want to continue to grow working capital. So we looked at how our working capital was forecast to growth at strip prices and our free cash flow and our CapEx program for Q4, looked at where we were at Q3 and wanted to make sure that we came in well below $400 million of working capital for Q4. So that led us to have incremental dollars to either do a share buyback or a special dividend. As I noted, we're almost through our 10% NCIB, didn't feel the need to continue to buy -- doing an incremental SIB or something this year. So the Board approved a special dividend of $0.25. And how you should look at this going forward is we're giving a strong signal to the market that we are going to be managing our working capital at these current levels for the short term, near term. And that as cash flow -- free cash flow that starts to build, we'll be allocating it back to the shareholders in some fashion, in some form.

[Operator]

[Operator Instructions]The next question is from Luke Davis from RBC.

[Luke Davis, Analyst]

You outlined a fairly robust exploration program for 2022. So just wondering if you can provide some details or rankings, I guess, in terms of prospect viability, and just if possible, some parameters around potential resource additions if drilling is successful there? So just really trying to get a sense for potential impacts here.

[Michael Kruchten]

Yes. Luke, it's Michael Kruchten. We have a pretty diverse set of exploration blocks especially the blocks that we've accumulated over the last 3 years, both 5 blocks and plus the Ecopetrol partnership. So those are the blocks we'll be targeting. Obviously, we didn't do a lot of work in 2020 as we worked our way through COVID. The blocks that we really will focus on include Boranda, Capachos, which is Block 38 includes the Califa prospect, CPO-11, Fortuna continuation, 134 in Llanos and some in the lower Magdalena blocks, including VIM-1 and VIM-43. Now we generally don't disclose what the resource assessments are. What I can tell you is, it's a diverse portfolio, and we're always targeting to keep our reserve life index in that 9 to 11 years while at the same time accelerating some of those production volumes upfront. So that's the way we approach our exploration programs for the year.

[Operator]

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

[Imad Mohsen, President, CEO & Director]

Thank you all for attending this session and looking forward to even more results next quarter. Thank you.

[Operator]

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