Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and welcome to Parex Resources Fourth

Quarter

and

Year

End 2021

Conference

Call

and

Webcast.

[Operator Instructions]

I would

now

like

to

turn

the

call

over

to

Mike

Kruchten,

Senior

Vice

President

of

Capital

Markets

and

Corporate

Planning

at

Parex.

Please

go

ahead,

Mike.

[Michael Kruchten]

Thank

you,

operator,

and

good

morning,

everyone.

On

call

with

me

today

are

Imad

Mohsen,

Parex's

President

and

CEO;

Ken

Pinsky,

Chief

Financial

Officer;

Eric

Furlan,

Chief

Operating

Officer;

and

Ryan

Fowler,

Senior

Vice

President

of

Exploration.

I

would

like

to

remind

you

that

this

conference

call

includes

forward-looking

statements

and

non-GAAP

and

other

financial

measures

with

the

associated

risks

outlined

in

our

news

release

and

MD&A

which

can

be

found

on our

website

or

at

cedar.com.

All

amounts

disclosed

today

are

in

US

dollars,

unless

otherwise

stated.

Please

go

ahead,

Imad.

[Imad Mohsen]

Thanks,

Mike

and

good

morning,

everyone.

As we

reflect

on

2021,

we

are

extremely

proud

of

our

records

results

and

our

team

that's

consistently

executing

in

both

Calgary

and

in

Colombia.

Looking

back,

we

started

the

year

at approximately

45,000 barrels

a

day,

increase

our

capital

budget

significantly

and

exited

that

same

year

at

roughly

51,500

barrels a

day

production

rate.

In tandem with

increasing

our

production,

we

also

saw

an

increasingly

constructive

global

commodity

price

environment

that

ultimately

contributed

to

Parex's

generating

annual

funds

flow

from

operations

of

$578

million,

which

was

a

record and

the

largest

in

the

company's

history. More

to

come

with

that.

During

the

year,

I'm

pleased

to

say

that

we

materially

improved

the

depth

and

the

quality

of

our

land

in

management.

We

acquired

18

new

blocks

in

2021

Columbia

Bid

Round,

as

well

as

expanded

our

strategic

partnership

with

Ecopetrol

in

the

Northern

Llanos,

which

combined

represent

the

nearly

four

times

increase

in

our

total

acreage

in

Colombia.

Parex

is

now

the

largest

independent

acreage

holder

in

Colombia,

which

is

a

development

of

the

cornerstone

to

our

long

term

strategy

and

vital

to

our

commitment

to

grow

our

Colombia

on

the

oil

and

gas

production.

Other

noteworthy

achievements

for

the

year

include

our

corporate

ESG

initiatives

that

Mike

will

briefly

talk

about,

as

well

as

our

return

of

capital

track

records

that can

Ken

will

touch

on.

Therefore,

I

make

some

final

remarks

on

the –

our

outlook

– before

I

make

some

final

remarks

on

our

outlook,

as

well

as

Parex's

positioning

for 2021

and

the

long

term.

Please go ahead, Mike.

[Michael Kruchten]

Thanks,

Imad.

In

2021,

we

advanced

our

climate-related

disclosures,

such

as

our

inaugural

Task

Force

for

Climate

Related

Financial

Disclosure

Report,

achieved

above

industry

average

ESG ratings

for

major

providers

such

as

Sustainalytics,

DVP,

and

Bloomberg.

Critically,

during

the

year,

we

publicly

committed

to

a

50%

reduction

in

our

greenhouse

gas

emissions

by

2030,

and

Parex

is

actively

progressing

on

its

ambition

to

become

one

of the

least

greenhouse

gas

emissions

intensive

oil

and

gas

exploration

companies. In

2021, we

made

progress

towards

this

commitment,

reducing

our

greenhouse

gas

intensity

from

our

operated

assets

by

approximately

14%

and

a

total

reduction

of

approximately

35%

from

our

2019

baseline.

Moving

forward,

we

expect

to

see

more

reductions

from

advancing

the

implementation

of

geothermal

energy,

all

lines

to reduce

transportation

needs,

gas

plants

to

reduce

flaring,

and

energy

efficiency

initiatives.

Taking

a

step

back

and really

looking

at

sustainability

as

core,

with

the

current

volatility

that

we

are

seeing

in

energy

markets

today

and

considering

the

follow

on

effects

of

that,

Parex

is

in a

position

where

we

can

do

our

part

to

provide

secure,

reliable and

environmentally

friendly

energy.

Plus,

we

can

do

that

while

continuing

to

improve

the

local

communities

where

we

operate.

On

that

note,

we

look

forward

to

2022

and

updating

our stakeholders

throughout

the

year

as

we

look

to

continually

advancing

our

ESG

story

and

meeting

our

overall

sustainability

objectives.

I

will

turn

it over

to

Ken

to

briefly

describe

our

recent

results

and

return

of

capital

track

record.

[Kenneth George Pinsky]

Thank

you,

Mike.

We

closed

2021

with

a

strong

fourth

quarter

where

we

generated

record

funds

flow

from operations

of

$168

million:

that

was

up

200%

quarter-over-quarter.

I'll

add

that

Brent

averaged

in

Q4 2021

approximately

$8

a

barrel.

And

as

Imad

will

tell

you,

we

remain

unhedged

to

global

oil

prices.

Quarterly

net

income

was

$96

million,

while

Q4

2021

production

averaged

nearly

50,000

barrels

a

day,

and

that

was

up

7%

quarter-over-quarter.

Over

the

full

year

2021,

we

generated

over

$300

million

of

free

funds

flow and

continued

to

add

to our

return

of

capital

track

record.

We

paid

a

special

dividend

as

well

as

initiated

a

quarterly

regular

dividend

last

year,

which

was

just

increased

by

our

board

to

12%

in February.

During

the

year,

we

also

repurchased

10%

of

our

company's

public

float,

which

marked

the

third

year

in

a

row

where

we

have

bought

back

the

maximum

allowable

shares

pursuant

to

our

normal

course

issuer

bid

programs.

At

the

end

of

February

2022,

Parex

has

now

returned

over

CAD 1

billion

to

shareholders

through

share

repurchases.

Since

2017,

we

have

reduced

the

fully

diluted

share

count

by

over

25%,

repurchasing

over

47

million

shares

at

an

average

price

of

less

than

CAD 20

per

share,

compared

to

our

close

yesterday

of

CAD 28.89

per

share,

for

reference.

Stating

it

in

another

way,

when

we

started

buying

back

shares

in

2017,

we

had

in

excess

of

164

million

fully

diluted

shares

outstanding,

which,

by

year-end

2022,

we

expect

to

have

approximately

110

million

fully

diluted

shares

outstanding.

To

add,

over

the

same

period,

our

oil

and

natural

gas

production

has

grown

by

approximately

32%.

We

continue

to

have

an

unmatched

balance

sheet,

ending

the

year

with

no

debt,

and

working

capital

of $326

million,

plus

an

undrawn

$200

million

credit

facility.

As

we

look

to

2022, and

even

while

spending

on

a

comprehensive

capital

investment

program,

we

have

expanded

our

return

to

capital

plan,

raising

the

base

dividend

this

year

already,

as

I

have

mentioned,

and

we

are

on

track

to

repurchase

10%

of

our

stock

for

the

fourth

year

in

a

row.

I'm

extremely

proud

of

our

accomplishments

for

2021,

and

I

look

forward

to

2022 and

beyond.

Now,

I'd

like

to

turn

things

back

to

Imad

for

some

final

remarks.

[Imad Mohsen]

Thanks,

Ken.

This

year –

the

year

2021

was

a

record

year

for

us,

and

I'm

excited

for

what

is to

come

for

Parex

in

2022

and

the

long

term.

For

2022,

there

is

no

change

to

our

capital

expenditure

reduction

guidance

that

we

released this

past

November.

We

continue

to

invest

across our development,

exploitation

and

exploration

programs

with

our

current

production

guidelines

expected

to

generate

year-over-year

absolute

production

growth

of

13%

or

22%

on

the a

per

share

basis.

Along

with

our

ambitious

capital

expenditure

program,

we

still

expect

to

repurchase

10%

of

our

stock

this

year

via

NCIB, as Ken

mentioned,

while

also

having base dividend

upside

growth

potential.

Building

our

track

record

of

returning

meaningful

capital

to

shareholders,

moving

forward,

we

want

to

be

clear

that

we

are

targeting

to

return

at

least

a

third

of

free

flow

from

operations

to

shareholders

through

share

repurchases

and

dividends.

With

this

philosophy,

at

current

strip

prices,

Parex

expects

to

return

approximately

40%

of

2022

annual

FFO

to

shareholders.

The

remaining

free

flow

from

operations

will

be

invested

to

grow

the

company

and

replenish

development

inventory

to

support

future

return

of

capital

activities.

There's

an

important

point

I'd

like

to

comment

on

right

now.

Over

the

last

year,

we

have

positioned

Parex

to

capitalize

on

the

current

market

cycle.

Parex

is

100%

unhedged

and

has

a

clear

first mover

advantage

in

today's

oil

and

gas

market

as

we

move

into

2022.

Firstly,

we

are

entering

the

year

having

acquired

the

most

extensive

land

base

in

the

company's

history –

for

steel,

I

would

add.

Second,

we

have

secured

[indiscernible]



(09:40)

under

long-term

contracts

to

have

equipment

in

place

to

cater

for

our

capital

investment

programs

for

years

to

come.

It

does

give

you

some

feeling

of

warm

heart

to

see

with the –

the

last

heavy

rigs

in

Colombia

are

under

contract

with

Parex.

Third,

we

have

increased

critical

organizational

capabilities,

hiring

significant

staff

both

in

Calgary

and

Bogota.

I

would

recall

around

30%

in

Calgary

in

2021

increase

to

help us

ramp

up

our

programs.

And

lastly,

we

have

placed

orders

for

long

lead

items

for

the

foreseeable

future:

that

includes

casings,

well

heads,

steel

compressors,

turbines,

you

name

it,

in

order

to

provide

insulation

from

supply

chain

shortages

and

disruptions

and

the

relative

hedge

against

cost

inflation

going

forward.

Combined, these

actions

put

us

in

an

extremely

competitive

position

organically

to

harvest

upside

opportunities

as

you

are

seeing,

which

is

Brent

pricing

that

could

go

well

above

$100

per

barrel,

which

I

guess

is

$110

today.

So

for

me,

not

waiting

for

steel

when

you're

drilling

a

well

that

pays

back

in

a

month

or

two

gives

you

use

optionality.

With

that,

I

would

like

to

thank

everyone

for

their

continued

support

for

Parex,

and

our

employees

for

their

continuous

hard

work

as

we

execute

our

strategy.

This

concludes

our

formal

remarks

and

I

would now

like

to

turn

the

call

back

to

the

operator

to

start

the

Q&A

session

for

the

investment

community.

Thank

you.

[Operator]

Thank

you.

[Operator Instructions]



We

have

a

question

from

Luke

Davis

from

RBC.

Please

go

ahead.

[Luke Davis, Analyst, RBC Dominion Securities, Inc.]

Hey,

good

morning,

guys.

Imad,

you

mentioned

preorders

for

long

lead

items.

I'm

just

curious

if you

can

provide

a

little

bit

of

commentary

around

what

you're

seeing

or

forecasting

for

kind

of

base

inflation

through

the

balance

of

the

year?

And

then

wondering

how

long

in

advance

you

can

order

for

you?

Just

talking

2022,

does

that

go

multi-years? Just

a

little

bit

more

detail

there

would be

helpful.

Thanks.

[Imad Mohsen]

I

would

say,

something

like

eight

months

ago,

I

agreed

with

the

management

team

that

there

is

a

– first

for

COVID,

but

also

the

way

the

cycle

was

working,

there's

a

chance

for

supply

disruption.

So

what

we

started

to

do

since

that

moment

is

define

our

needs

with

three

years

in

mind,

and

wherever

we

could,

to

place

orders

to

fix

the

terms.

That

doesn't mean

you

don't

get

any

inflation.

So

let's

say,

you

buy

steel

pipes,

you

wouldn't

be

having

some

indexing

on

steel

prices.

But

that's

very

different

than

having

to

go

in

a

bidding

war

against

that

same

price.

Sitting

in

somebody's

yard,

we

can

get

3

or

4 times

that

inflation.

We're

not

seeing

much

inflation

right

now

in

Colombia

just

because

of

the

local

conditions

on

rigs

and

other

items.

But

I

can

see

some

very

–

I

can

see

some

signs

for

inflation

going

up,

but

within

numbers

that

doesn't

affect

our

margins

any

significantly.

Do

you want

to add

to

that,

anything,

Eric?

[Eric Furlan, Chief Operating Officer, Parex Resources, Inc.]

That

summarizes

it

quite

well.

I

think

the

big

things

we've

done

to

secure

the

rigs,

especially

the

big

rigs

and

go

forward.

Those

are

our

long-term

contracts.

And

as

Imad

has

alluded

to,

we're

not

seeing

a

big

inflation

component.

We

secured

the

critical

equipment

we

need

and

the

pipe

for

the

next

couple

of

years.

So

I

think

we're

sitting

in

pretty

good

shape.

[Imad Mohsen]

And

that

also

expands

on

surface

facility

equipments

where

people

were

brave

enough

to

say,

let's

order

power

generation

kits

or

turbines

or

compressors

or

even

gas

treatment

facilities

before

the

wells

were

put

on

the

ground.

I

can

tell

you

these

things

coming

– to

deliver

in

the

coming

few

months

and

years

will

be

very

handy

and

trying

to

expand

compared

to

our

competitors.

[Luke Davis, Analyst, RBC Dominion Securities, Inc.]

Got

it.

That's

really

helpful.

And

if

I

could

just

ask

a

follow

up

to

that.

Curious

to

just

get

your

general

thoughts

on

the

upcoming

elections

here,

something

that

comes

up

a

fair

bit.

So

just

if

you

go

through

kind of

a

couple

potential

scenarios

and

kind

of

where

you

guys

are

sitting

right

now,

that'll

be

helpful.

[Michael Kruchten]

Sure.

This

is

Mike

Kruchten.

Regarding

the

election, that's

going

to

play

out

over

the

next

couple

months

up

into

June.

Really,

we're

not

seeing

anything

too

different

than

what

we

saw

the

past

in

2018.

There'll

be

some

consolidation

of

all

the

candidates

that

are

running.

And

we

really

don't

think

we're

well

positioned

to

work

with

Colombia

and

continue

investing

heavily

in

Colombia

no

matter

what

the

outcome

is.

We

have

a

very

strong

land

position:

gives

us

lots

of

exploration

running

room

and

production

running

room

over

the

next

five

years.

And

yeah,

we're

–

we

think

it

won't

really

change

our

overall

strategy.

[Luke Davis, Analyst, RBC Dominion Securities, Inc.]

That's

helpful.

Thanks

very

much.

[Operator]

Thank

you.

[Operator Instructions]



There

are

no

further

questions

on

the

phone

for

now.

I

would

like

to

turn

the

meeting

back

over

to

Mike.

[Michael Kruchten]

Thanks

very

much

for

all

the

participants

joining

our

call

today.

If

you have

further

questions,

feel

free

to

contact

me

at

Parex.

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.