Parex Resources Inc

TSX:PXT

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and welcome to Parex Resources Fourth Quarter 2023 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.

[Mike Kruchten, SVP Capital Markets and Corporate Planning]

Thank you, operator, and good morning, everyone. On the call with me today are Imad Mohsen, Parex's President and Chief Executive Officer; Ken Pinsky, Chief Financial Officer; Eric Furlan, Chief Operating Officer; and Ryan Fowler, Senior Vice President of Exploration.

As a reminder, 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 at sedar.com. All amounts discussed today are U.S. dollars unless otherwise stated.

Please go ahead, Imad.

[Imad Mohsen, President & CEO]

Thank you, Mike. Good morning, everyone, and thank you for joining us on today's call. I'm extremely pleased and proud of what our team has accomplished over the last year. Before I turn it over to Ken to provide an update on our financial results for last year, I wanted to highlight some of the key milestones delivered during the year, which are progressing all three pillars of our strategy.

First, we are delivering sustainable growth through exploitation and implementation of industry proven, but new to Colombia technology, such as horizontal drilling, synthetic drilling fluids and water flood. This approach has translated to average full year production of over 52,000 barrels a day, which represented an increase of 23% per share year-over-year. We are also diversifying our portfolio into liquid rich field.

In 2022, we progressed our strategic partnership with Ecopetrol, signing a memorandum of understanding to partner on 13 blocks along the prolific hotel trends in the Llanos Basin. We are excited about this MOU, which will allow us both to capture synergies and maximize existing infrastructure in developing gas volumes in the area. In addition to this partnership, we are leading development in liquid-rich plays in the Magdalena basin, such as the one in VIM-43 (ph) where we also see world-class resource potential.

Lastly, 2022 was an instrumental year in progressing high impact prospects within our exploration portfolio, including the 18 blocks we captured in late 2021. In December, we outlined the significant running room that now exists within Parex's portfolio, which will allow us to drill a high-impact target every three to four months.

We have successfully built a pipeline of opportunities that provides exposure to outsized returns and step change growth. So the steps we took throughout 2022, have built a strategic foundation for sustainable growth to enable higher capital efficiency in 2023 and beyond.

I will now hand it over to Ken, who will discuss our full year results, before I make some remarks on the current situation in Northern Llanos as well as the outlook for 2023. Please go ahead, Ken.

[Ken Pinsky, CFO]

Thank you, Imad. For the full year 2022, we generated record funds flow provided by operations or FFO of $725 million, which was up 26% from 2021. Now on an adjusted basis, funds flow from operations was $825 million and in Canadian dollars, that's over CAD1 billion. The $100 million adjustment during Q4 reflects a restructuring of our corporate organization for better operational and income tax efficiencies as we previously announced.

FFO was higher in 2022 due to higher production volumes and commodity pricing seen throughout the year. With strong financial results and a very positive outlook, we continue to add to our industry-leading return of capital record. In 2022, we returned roughly 36% of our adjusted FFO to shareholders through dividends and share repurchases. Throughout the year, we repurchased $220 million worth of shares to complete our fourth consecutive full normal course issuer bid or NCIB. And we brought our fully diluted share count to roughly 110 million shares at year end, which is a 33% decrease since 2017.

Through the lower share count and our cash flow growth, we have grown the regular dividend from CAD0.125 per share per quarter to CAD0.375 per share per quarter as the Board approved for our Q1 2023 dividend. For the remainder of the year, we plan to continue to utilize our NCIB to return free funds load back to shareholders. And we have already repurchased 1.6 million shares so far.

Over the past five years, cumulatively, we have returned CAD1.3 billion to our shareholders through dividends and share repurchases, which represents over 50% of the company's current market capitalization. In 2023, we plan to continue reinforcing our long-term capital allocation framework, which is to return greater than or equal to one-third of our total funds flow from operations to shareholders and thereby target a return of 100% of our free funds flow or free cash flow to the shareholder.

I would now like to turn the call back to Imad for some final remarks.

[Imad Mohsen, President & CEO]

Thank you so much, Ken. It's really hard to be upset about the highest income, cash distribution and profits in our history. I now want to make some brief comments on our operations in Northern Llanos before talking about our outlook for 2023.

In late January of this year, we proactively shut in operations at our Capachos block and halted drilling activities at our Arauca Block. These decisions were not made likely, and we were -- and these decisions were based on heightened securities concerns in the area related to ongoing destocks. Since that time, our team in Colombia has been actively engaged -- engaging stakeholders at all levels, including community leaders, regional governors, material executives and security agencies to support a timely resolution.

One of Parex's key differentiators and biggest strength is our ability to build strong relationships based on mutual trust and respect with community stakeholders. It's this differentiator that has enabled Parex to consistently succeed in regions where others have faced challenges. And it is what makes me cautiously optimistic that the resolution will be achieved in the coming months.

All of our facilities have been secured and are ready to be restarted, and our communities are eager to return to work. Once it is safe for our employees and contractors to do so, we look forward to restarting our operations. Resetting our production guidance this year, we proactively widened our rates to account for aboveground factors such as what we're seeing in Capachos as well as increase our downtime contingency for the same reason.

Today, we remain comfortable with our annual guidance range. That being said, Capachos being shut in puts pressure on the top end of our annual guidance rates. We do think that these short-term challenges are balanced out by the peace (ph) process taking place, which we will expect will drive stability in Colombia over the long term. Excluding the shut-in situations, I am excited about the opportunities coming from our portfolio.

Our base operations in Southern Llanos are delivering very strong results. We spud the Chirimoya well, high impact prospect in January. The well is making significant progress and is at roughly 12,000 feet right now, and we currently expect preliminary results in the second quarter. We are seeing great success at VIM-1 with our gas cycling strategy, which is the first project of its kind for Parex.

The use of gas cycling has already enabled us to double liquid productions to 4,000 barrels a day gross. We see the potential to more than double that amount again, and we are currently considering options to expand the facility. This is a proof of concept on how we will develop liquid rich gas fields, such as VIM-43 and the Llanos Foothills. So it's very important for Parex.

With all of this upside, we continue to view Colombia as the number one place to invest capital. Based on the opportunities that are in front of us and the robust risk/reward profile, we see that drive growth any other jurisdiction I know in the world.

Following a successful year, in which we delivered the highest earnings in our 12 year history, I want to thank our employees in Calgary and Colombia, and I am excited about what is to come for 2023. I would also like to take the time to thank our shareholders for their continued support.

This concludes our formal remarks. I would now like to turn the call back to the operator to start the Q&A session for the investment community. Thank you all.

[Operator]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Adam Gill from Paradigm Capital. Please go ahead.

[Adam Gill, Paradigm Capital]

Good morning. I have three questions about Capachos given the success late last year completing the Mirador formation. So first off, what's your best estimate when production can be restored in the field as well as completing drilling of the Arauca-8 well to the north? And do you expect protest interruptions in this area will be more problematic than in your other blocks?

[Eric Furlan, Chief Operating Officer]

The main point in the Northern Llanos is all the equipment is there, all the facilities are ready to start off. The second, we find the security situation acceptable to Parex. We will resume operations. And as we've said, we expect that to happen during the quarter, and things are advancing in the area.

From our perspective, in 2023, it hasn't changed our plans. We are still really excited about the area. We see these as some growing pains in the area, given some of the changes in Colombia, but it hasn't changed our overall outlook on the potential and the excitement we have for the area.

[Operator]

Thank you. [Operator Instructions] And we do have Adam Gill from Paradigm Capital. Please go ahead.

[Adam Gill, Paradigm Capital]

Okay. Thank you. Just to follow up. The second question was, does this interruption delay the fluid expansion at Capachos into 2024?

[Eric Furlan, Chief Operating Officer]

No, it does not. The first -- that expansion, which was really gas handling and the ability to increase our gas capability was nearing completion. It will delay it for the amount of time that we are shut in, but we don't expect anything further beyond that.

[Adam Gill, Paradigm Capital]

Okay. Sounds good. And then lastly, what's the pace of timing for additional Mirador recompletions over 2023 and 2024?

[Eric Furlan, Chief Operating Officer]

We'll look at them as a need to add scenario. So we have a certain -- after this next facility expansion, we're going to be in the 7,000-plus net range for capability. And then we will recomplete -- we have multiple wells that we can recomplete in different zones. We're going to be doing some of that testing immediately on some of the wells that are currently not active. But we will add those in as we need be to keep the facility full.

[Adam Gill, Paradigm Capital]

Okay. Sounds good. I’ll pass back to the operator.

[Operator]

Thank you. [Operator Instructions] Our following question is from Anthony Linton from Barclays. Please go ahead.

[Anthony Linton, Barclays]

Hey, guys. Thanks a lot for taking my questions this morning. I just wanted to get an understanding. So production right now is just under 51,000 BOEs. Can you -- how do you sort of think of production coming back online, whether it's later this quarter or early Q2, and then how you kind of see production trending through the year? And what are the sort of different levers that could see a trend towards the low or higher end of the range?

[Imad Mohsen, President & CEO]

Good morning, Anthony. Thanks for the question. Yes, as for production as we go forward, we're roughly in the 51% range for Q1. But as we noted, we also have 3,000 to 5,000 barrels a day net coming on, either this week or in a very near term. And that really is driven by Rumba, VIM-1 expansion and Block 34. So we see ourselves being into the guidance range of 57% and 63% in Q2 with quarterly growth throughout the rest of the year.

[Anthony Linton, Barclays]

Got you. Okay. That's helpful. And then maybe just on Chirimoya, can you just remind us of the potential upside associated with your high impact targets?

[Ryan Fowler, SVP, Exploration]

Good morning, Tony. It's Ryan Fowler. We don't typically talk specifically about the size of targets on our prospects. But Chirimoya is a very large four-way closure that has significant resource potential. And we're -- it would be the largest prospect currently in our portfolio. So we're very lucky to be able to get on that early in the process here. We're 12,000 feet down. So we've done a lot of the heavy lifting already in this well. And now the next 6,000 feet is going to see us drill through three different reservoir targets. So -- and that's all going to happen in Q2.

[Anthony Linton, Barclays]

Okay. Got it. No, that’s helpful. That’s it from me. I’ll turn it back. Thanks.

[Operator]

Thank you. [Operator Instructions] Following question is from Conrad Bereznicki from Peters & Co. Limited. Please go ahead.

[Conrad Bereznicki, Peters & Co. Limited]

Good morning, everyone. I was just wondering with respect to shareholder returns, how you balance or think about increasing the base dividend versus share buybacks? And then maybe further to that point, what metrics do you use to determine your shares are undervalued and buybacks make sense?

[Ken Pinsky, CFO]

Hi, Conrad. It's Ken. Good question, and thank you. With any company that pays a regular dividend, you'd like to -- the Board would like to see that regular dividend to grow. So over the last 18 months to two years, we have grown that regular dividend, as I suggested or noted in my little campaign, by over 2 times or 3 times now. And we'll continue to look to grow that regular dividend on a prudent basis because it has to be, as you know, sustainable and different commodity price scenarios and different production scenarios.

So that's -- therefore, the focus is on the regular dividend with the buyback then making up the rest of our free cash flow target of returning back to the shareholder, 100% of our free cash flow. And so at -- commodity prices at $80 and above, we look to be able to do a full 10% buyback as well as pay that $0.375 dividend, which is up from $0.25 in the previous quarter. Is that an answer to your question?

[Conrad Bereznicki, Peters & Co. Limited]

Yeah. No, it does. And then just the last question. You talked about the potential expansion of VIM-1 with La Belleza and the gas injection. Is that something that we could expect later in the year or is that more of a 2024 time frame?

[Ken Pinsky, CFO]

Eric?

[Eric Furlan, Chief Operating Officer]

Sure. We're working on that right now during the final facility's design. We've got compressors already on order. So time line would be kind of end of this year to do the expansion. It's really facility-related at this point. We have more than enough injection and production capability to double our current operation. So we are doing things two-fold: one, optimizing what we currently have, how much more can we get through the system; and then moving forward with an expansion to at least double, and we're evaluating tripling the facility.

[Conrad Bereznicki, Peters & Co. Limited]

Great. Thanks. That’s all the questions I have. I’ll pass it back to the moderator.

[Operator]

Thank you. Our following question is from [indiscernible] a shareholder. Please go ahead.

[Unidentified Participant]

Good morning and thanks for taking my question. It's actually [indiscernible] and I know it's hard to pronounce. I was just curious to obtain more information about the consequences and the effect on the company of the tax reforms, which will become effective from 1 January 2023.

[Ken Pinsky, CFO]

Sure. I can take that call. It's Ken, the CFO. In our MD&A, Page 21, 22, we talk about the tax reform and the impact. And to summarize, our effective tax rate this year, if I look at after tax, our funds flow from operations, which is on an after-tax basis and our tax bill was around 23%. And going forward to 2023, with some of the planning we've done, we're looking at an effective tax rate at current prices of around 23% to 27%. So a little bit of change potentially, but not as significant as what was first talked about.

And part of that was because of the uncertainty of what the tax reform is actually saying, and you have to wait for some times of these bills to come out and then you can read them and see what the dialogue and the bill actually says. But -- and then going after that, we'll see what happens. Taxes are inherently difficult to forecast a couple of years out because they depend upon your reserves, your capital spend and commodity prices. So I hope that gives you some color there.

[Imad Mohsen, President & CEO]

And Jan (ph), let me add to this that your name sounds very nice to me, so not difficult to pronounce at all.

[Unidentified Participant]

Thank you very much.

[Ken Pinsky, CFO]

Thank you.

[Operator]

Thank you. Our following question is from Mike Murphy from BMO Capital Markets. Please go ahead.

[Michael Murphy]

Yeah. Good morning, guys. I think Eric answered my first question, but relating to the disruptions in the Northern Llanos, with the ELN having a bigger presence near your Arauca Block relative to Capachos, do you think there's a chance to be able to get to get Capachos back online before you resume drilling out Arauca or do you think this will happen simultaneously?

[Imad Mohsen, President & CEO]

I think there is a likelihood it happens indeed. That's a very good point. The driver for assuming operation and our experience has always been the more economic activities you have in an area, the more the population is pressing for it -- to go back to work and to have good business. So Capachos has much more of a base of operation and people at impact than Arauca where we just started. We just started well. So both that and the different concentration of ELN would let me to know maybe you’ll get Capachos first and a couple of weeks later Arauca.

[Michael Murphy]

Okay. That’s great color. Thanks.

[Operator]

Thank you. [Operator Instructions] And we have no further questions registered at this time. I would now like to turn the meeting back over to Mike.

[Mike Kruchten, SVP Capital Markets and Corporate Planning]

Thank you very much, operator. This concludes our Q4 conference call. Please feel free to reach out to Parex if you have any additional questions, and have a great day.

[Operator]

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