Parex Resources Q3 2024 Earnings Report

Parex Resources EPS Results

• Actual EPS: C$0.89
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Parex Resources Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Parex Resources Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 11:30AM ET

Parex Resources (TSE:PXT) Inc engages in exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential. Majority of the company's properties are focused in Colombia, where it pays a royalty or tax to the government for its operations. Parex depends on a team of geologists and geophysicists, in partnership with technologies such as 3D seismic surveying, to help exploration efforts. Oil production is sold to a small basket of participants in South and North America.

Parex Resources Q3 2024 Earnings Call Transcript

Key Takeaways

• Parex raised its Q4 production midpoint guidance to 49,500 BOE/d, up 2,000 BOE/d from prior expectations, even with an allowance for social disruptions.
• The company’s conservative capital program lifts projected free funds flow to $220 million at the midpoint of its guidance range for Q4.
• Q3 production averaged 47,569 BOE/d, weighed down by higher downtime, natural decline and underperformance at its Arauca asset.
• Recent drilling successes include a follow-up appraisal well at LLA-32 producing ~2,000 bbl/d gross and a Capachos well at ~5,000 BOE/d gross, prompting evaluation of full-capacity gas processing expansion.
• In Q3, free funds flow of $69 million funded share buybacks, the regular dividend and $20 million of debt repayment, leaving the company with $147 million in cash on hand.

Presentation

[Operator]

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Parex Resources Q3 2024 Operational and Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. If you would like to, after the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning.

[Mike Kruchten, VP at Parex Resources]

Good morning, everyone, and welcome to Parex's third quarter 2024 conference call and webcast. On the call with me today are our President and Chief Executive Officer, Imad Mohsen, our Interim Chief Financial Officer, Cam Grainger, and our Chief Operating Officer, Eric Furlan. Please note that at any time, telephone participants on the call can press star one to submit a question. As a reminder, this conference call includes forward-looking statements as well as 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 SEDARplus.ca. Note that all amounts discussed today are in U.S. dollars unless otherwise stated. I'll now turn the call over to Imad. Please go ahead.

[Imad Mohsen, CEO at Parex Resources]

Thank you, Mike, and good morning, everyone. While we have faced some challenges throughout the year centered around Arauca, we are putting these in the rearview mirror and focusing on optimizing performance across our portfolio. The path forward is taking into account a lower corporate growth outlook than originally planned. Right now, we are fully engaged on delivering operational reliability, continuing to decrease CapEx where it makes sense, and prioritizing lower-risk development and exploitation opportunities with strong capital efficiency. Regarding all of these priorities, we are making progress. Production levels have been stable and within management expectations, leading to an increase of our midpoint guidance from 29,000 BOE a day to 49,500 BOE a day, representing an additional 2,000 BOE per day for the fourth quarter, including an allowance for social disruptions.

[Imad Mohsen, CEO at Parex Resources]

In conjunction, our conservative capital focus has resulted in updated our capital guidance, leading to projected higher free-fund flow of $220 million at midpoint of guidance range. Following reset expectations and encouraged by our key asset performance, recent drilling results, and the direction we are heading for in 2025, I will now ask Eric to provide additional details on our operational performance. Please go ahead, Eric.

[Eric Furlan, COO at Parex Resources]

Thanks, Imad. In Q3 2024, production averaged 47,569 BOE per day, which was the result of higher downtime, natural decline, and Arauca underperformance. At our key SoCa assets, LLA-34 and Cabrestero, production has stabilized with natural decline rates on an annual basis in line with previous management budgeting. This stability is supported by continued focus on water flooding, progression of polymer implementation at Cabrestero, and the significant efforts from our team to manage production rates where possible. At LLA-32, based off the first successful step-out well, we have now drilled two more follow-up appraisal wells. The latest well on stream is producing roughly 2,000 barrels per day growth, which is a positive result. Based on success to date and our mapping, we spot a horizontal well that is targeting the upper zone. This should allow us to maximize reservoir contact.

[Eric Furlan, COO at Parex Resources]

Following the horizontal, we'll consider drilling future locations while optimizing the wells drilled to date. At Capachos, our latest well came online late in the quarter with strong results. The well is producing roughly 5,000 BOE per day growth, which has resulted in the gas processing facility operating at full capacity, leading us to evaluate the facility when thinking about our 2025 plan. Moving forward on the block, we have an exploration commitment well that we need to complete, which we expect to spot in the coming weeks. Turning to our Big E exploration, we're continuing to progress the Arantes prospect at Block 122. The well is now at roughly 17,750 feet, and we are expecting to have preliminary results by year-end following a successful operational sidetrack. With that, I'd invite Cam to please go ahead.

[Cam Grainger, Interim CFO at Parex Resources]

Thanks, Eric. Overall, despite lower production from the prior quarter, we had strong results when it comes to funds flow, as well as our ability to generate a high level of free funds flow with the revised lower capital program. Funds flow provided by operations was $152 million, supported by a Brent price of $79 per barrel, as well as a significant reduction to current taxes. Specifically, the reduction in current taxes is related to multiple factors, including reduced corporate production, lower global oil prices, as well as movement within the Colombian income tax surtax band. The company had previously accrued for a 15% surtax, but given the depreciation of the oil price in 2024, as well as strip for the remainder of the year, we now anticipate that the 10% surtax band will be applicable for the company's 2024 Colombian tax payable.

[Cam Grainger, Interim CFO at Parex Resources]

Capital expenditures for the quarter were $82 million. This was lower than forecast due to slower pace of work in Capachos, as well as the deferral of the Hydra prospect at VIM-1. For the fourth quarter, we expect capital to be between $85 and $100 million, with bias to the lower end depending on activity levels. Funds flow for the quarter was $69 million, which was used for return of capital through share repurchases and the regular dividend, as well as we repaid $20 million of bank debt. With financial flexibility at period end, we had a working capital surplus of $38 million and a cash level of $147 million. With that, I will pass it over to Imad for final remarks.

[Imad Mohsen, CEO at Parex Resources]

Thank you, Cam. In the shorter term, I'm excited about the emerging results from LLA-32 program. As well as that, we should be reaching the total depths on our first foothill prospect in the coming weeks. Additionally, the production stability and performance we are seeing from our key assets, LLA-34, Cabrestero, and Capachos, is encouraging. As we think about 2025, our focus is setting an achievable budget that's centered on lower-risk development and exploitation opportunities with strong capital efficiency. This should drive a higher level of certainty in our forecast and permit the delivery of a more predictable outcome for us. We look forward to releasing that information to the market in this upcoming January. To close, I want to say that we acknowledge the challenges to date.

[Imad Mohsen, CEO at Parex Resources]

The Parex team is committing to improving results, and I want to thank our employees, shareholders, and partners for their ongoing support. This concludes our formal remarks. I would now like to turn the call back to the operator and start the Q&A session for the investment community. Thank you.

[Operator]

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeremy McCrea with BMO Capital Markets.

[Jeremy McCrea, Managing Director and Oil and Gas Analyst at BMO Capital Markets]

Hi, guys. I've got a couple of questions here for you. I'll start with just some high-level guidance in that. Is there any timeframe when you may be looking to provide more clarity for the dividend, the 2025 production guidance, just as you've seen some stability in some of your kind of core production areas here? The second question is just with the actual team issues. Have you made any progress in finding some potential solutions here that could resolve that? And then just lastly, with Arantes, just with the successful sidetrack and you continuing to move along this path, should we start to think that this well could have some higher chance of success here, I guess, is the best way to phrase it?

[Mike Kruchten, VP at Parex Resources]

Hey, good morning, Jeremy. Thanks for asking the questions. I'll open up with the guidance on 2025. Obviously, we're happy to see the production stabilize, and you saw that through the October production again that we released. We're really monitoring how we're producing through Q4, and that really will enable us to set up our guidance for 2025. We will be releasing that in January, and that will also have more context about our return of capital, and we've approved the dividend for the fourth quarter, and we'll be also talking about how that will progress through 2025 as we see how the year is unfolding. Eric Furlan's going to talk about Arantes and Arauca.

[Eric Furlan, COO at Parex Resources]

Sure. Thanks, Mike. So in Arauca, Jeremy, we are completing the Arauca-81 well at this moment, and we also have a planned stimulation, the first one on the Arauca-15 well. As we said before, we can't explain some of the operational, some of the production performance from the zone. So we are trying stimulation technique, and that will be happening here in the next few weeks. In Arantes, the recent drilling is going quite well. We are just above casing point or likely close to it this morning, and at that point, we will case the well off and drill ahead into the prospective zones, and so that, as we've indicated, that will be before year-end.

[Eric Furlan, COO at Parex Resources]

As far as commenting on what we're seeing in the well, I would say the well is coming in like we expected, but we really don't know anything until we drill the prospective zones.

[Jeremy McCrea, Managing Director and Oil and Gas Analyst at BMO Capital Markets]

Yep. Thanks, guys.

[Operator]

The next question comes from the line of Alejandro Demichelis with Jefferies.

[Alejandro Demichelis, Managing Director at Jefferies]

Yes. Good morning, guys. Thank you very much for taking the question. I completely understand you're going to provide more guidance for 2025, but could you give us some kind of indication of how you're seeing your base production at LLA-34 in terms of those horizontal wells, how much kind of decline we should expect from LLA-34 over the next kind of couple of years?

[Eric Furlan, COO at Parex Resources]

Yeah. As far as Block 34, I know there's been some variability this year, but overall, the major assets in SOCA are following our long-term declines and our long-term expectations. So we don't have any major changes there. Obviously, it's harder to predict on a week-to-week, a month-to-month basis, quarter-to-quarter even. But overall, it is following our plan. We are looking at EOR. As we've indicated in Cabrestero, we have the polymer expansion planned for 2025, and our partner in Block 34 is looking at the same. So the strategy in 34 and SOCA is to try to stabilize and lower the decline as much as we can going forward.

[Eric Furlan, COO at Parex Resources]

The other comment I'll have is some of the declines we've seen this year, some of the sharper declines, are associated not with the major assets in SOCA, but in some of the horizontal drilling that we've been doing in the Mirador Reservoir. Those wells are very prolific, and they're very economic, but they do have higher declines. You know, wells that can go from 3,000 barrels a day to under 1,000 barrels a day within a year. Very prolific, but that is part of the decline, and we had a couple of follow-up horizontals this year that didn't replace that decline. Overall, though, the major asset is performing like we expected.

[Alejandro Demichelis, Managing Director at Jefferies]

Okay. And in terms of cash flow generation, because you're talking about bringing EOR and kind of CapEx activities into LLA-34, would that also impact some of the cash flow generation that you get from there?

[Eric Furlan, COO at Parex Resources]

For the most part, so when SOCA, we're finishing up the development, of course, the next big project would be the polymer. The thing with the polymer is it's not a huge amount of capital upfront. So the upfront capital investment is relatively moderate, and it's actually the cost of the polymer over time that really adds that is the big cost component. Now, the nice part about that is we can put the polymer in, see how it works. We've proven that it works in Cabrestero. We've proven that there's no operational issues with injecting polymer into these reservoirs at these depths. And so from that perspective, it's a pay-as-you-go kind of investment. And as long as you keep seeing the returns, you keep injecting. So it's not a big amount of risk capital. And if it performs like it does in Cabrestero, we see a strong economic benefit.

[Eric Furlan, COO at Parex Resources]

So in our mind, the SOCA assets will be a cash cow for years to come because the main investment was to build the infrastructure for water flood and the wells related to it. And these are mostly behind us. And you upgrade facilities here and there, and you do stuff, skids for injection. But overall, they are very cash flow positive. And they are the assets that do underpin together with Capachos our capability to have a sustainable dividend.

[Alejandro Demichelis, Managing Director at Jefferies]

Okay. That's great. Thank you.

[Operator]

Your next question comes from the line of Chris Jones with Haywood Securities.

[Christopher Jones, Research Analyst at Haywood Securities]

Hey, thanks for taking my question. Just on potential M&A and farming opportunities, can you provide a detailed thought on M&A? Obviously, you guys executed the deal with Ecopetrol on the foothills, but are you looking at other opportunities out there? And I know this question hasn't been asked in a while, but I'm going to ask it here. Is there appetite to potentially look outside of Colombia? And then just sort of high level, what is the rationale behind a potential M&A strategy if there is one?

[Imad Mohsen, CEO at Parex Resources]

I was going to start by your second question. We're not going outside Colombia. We believe in the capital efficiency, the potential of the asset in Colombia, and we have a huge running room there. On the first question, we've seen in the last six months more assets on offer in Colombia, specifically from Ecopetrol than what we've seen in the last 12 years. These are assets that Ecopetrol has been proposing for farming where you pay as you go in carry, you don't pay upfront, and will deliver potentially good returns if you go in at the right levels. Parex has looked carefully at the assets. We are focusing in particular on two types of assets, either ones that would fit our strategy in the foothill where you have a lower risk, high return exploration opportunities.

[Imad Mohsen, CEO at Parex Resources]

But the biggest focus will be also the assets that will have low volatility, high predictability inventory of infills, water flood, exploitation that could potentially give us long running room and have a visibility on how we maintain more of this production growth for years to come onto the biggest foothill upside to come. So the answer is yes, we are looking. It's something we've been working with Ecopetrol on and will hope something good comes out of it.

[Imad Mohsen, CEO at Parex Resources]

Thank you. I'll hand it over.

[Operator]

Your next question comes from the line of Kevin Fisk with Scotiabank.

[Kevin Fisk, Senior Research Associate at Scotiabank]

Thanks for taking my question. Are you able to comment on how much the OpEx guidance increase was from lower production volumes versus higher costs? And also, how do you see OpEx trending beyond 2024? Thanks.

[Eric Furlan, COO at Parex Resources]

Sure. Thanks, Sam. So obviously, we're roughly about 10% down on production quarter to quarter. So that has an impact on the BOE unit cost. So that's it. The other part of it was the other part of it is we did have a very intensive Q3 workover. We had a lot of wells go down. It happens looking back over the last few years. You do get the odd quarter or the odd month where you do have a lot of downtime. So that definitely added. So I think the well service costs and well service and power are two biggest OpEx components. I think was a bit exaggerated here in the last quarter and should normalize into Q4. And then the BOE impact obviously will remain until we can show growth again and dilute that fixed OpEx as most of the OpEx is fixed.

[Eric Furlan, COO at Parex Resources]

So going into Q4, I would expect more normal well workover costs and similar BOE impact.

[Kevin Fisk, Senior Research Associate at Scotiabank]

Perfect. Thank you very much.

[Operator]

Your next question comes from the line of Daria Lima with Bloomberg Intelligence.

[Daria Lima, Analyst at Bloomberge]

Hi. Thank you for taking my questions. I have one on the financial framework. Looking at your free cash flow for the nine months, it appears to be that you already de-risked your 2024 guidance. Does that mean you don't expect any more free cash flow in the upcoming quarter, or is there any more upside in there?

[Cam Grainger, Interim CFO at Parex Resources]

Thanks for the question. I guess as far as the full year 2024, our dividend and CapEx will be fully funded. In Q4, we may have a bit of a timing issue just between fund flow and CapEx and our dividend payments. But on the full year 2024, dividend and capital will be fully funded.

[Daria Lima, Analyst at Bloomberge]

How much cash do you have?

[Cam Grainger, Interim CFO at Parex Resources]

Right now, we have $147 million in cash.

[Daria Lima, Analyst at Bloomberge]

Thank you. Yeah. And maybe on the capital allocation, so you say your dividend payout remains fully funded. With the remainder cash, do you see yourself using it for the repayment of debts, or are you comfortable with the $30 million on your balance sheet and preferring to use the excess cash for share buybacks?

[Cam Grainger, Interim CFO at Parex Resources]

Yeah. We plan to continue the share buyback, and any excess over that will go to debt repayments. There will be probably potential nominal debt over the next quarter or two.

[Daria Lima, Analyst at Bloomberge]

Thank you. Just last one for me. Operationally on Yana's foothills, could you perhaps comment on the timeline for it and the resource potential you're expecting? And in case of successful exploration, do you expect it to potentially replace the growth that was originally expected from the Arauca?

[Imad Mohsen, CEO at Parex Resources]

So in terms of the Arantes well right now, the timeline for this first one will be probably in the next before year-end. We're putting the last casing point before going into the prospect zone. It is still a high-risk exploration project. We have one in five chance roughly when we announce it. So we're not counting on it to replace any future growth. It's upside, but it is very significant upside if it does work out and will exceed anything we were hoping for from Arauca. What we are doing in terms of replacing Arauca is the work we're doing in terms of existing assets, in terms of exploitation, small E and polymer, as well as some of the opportunities Ecopetrol are offering that we are considering seriously as a bridge.

[Imad Mohsen, CEO at Parex Resources]

The longer term for the foothills, and we're talking here 26 plus, would have potential to give us disproportionate growth. And in my mind, Arauca was supposed to be that bridge until that moment, and now we are looking at the options I just mentioned to fill in that bridge. The opportunities in the foothills are extremely sizable. The kind of opportunities companies our size normally don't get the chance to touch, and they happen. The other wells we're targeting in the foothills beyond Arantes are much higher probability of success. So they are much less risky. This one was the well that opened the door to the foothills for us in our deals with Ecopetrol in order to reach the bigger prizes, which are the lower risk ones. But hey, I'm definitely crossing my finger for every well we drill.

[Daria Lima, Analyst at Bloomberge]

Thank you. That will be all from me.

[Operator]

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from Connor Schroeder with shareholder. Connor, your line might be on mute.

[Operator]

Yes, I was on mute. Thank you for taking my question today. My question today is about your guidance for free funds. Originally, in January, you guys had it pegged at around $220 million. And then with the operational guidance update, it went down to about $170 million. But with the new earnings release, it's looking like it's back up to $220 million. Now, with reduced capital expenditures, is that going to sustain not only the dividend and the buybacks, but also give enough money as well to invest back into the business and to essentially, if more injections need to be done or if any more issues come up, will there be enough to service those capital expenditures, and will there be enough to service the buybacks? And my other question is, historically, you guys have been on a rate of about buying back around 10% of your company.

[Operator]

This year, it's not as high. So I'm just curious what your allocation is looking like for buybacks for the fourth quarter, and if your assets are selling for very cheap, are you guys willing to ramp up the buybacks in order to reward shareholders?

[Imad Mohsen, CEO at Parex Resources]

Okay. Let me start by answering the first question. What you probably are seeing right now is a more conservative view on how we deploy CapEx. When we were in the high 50s, we had a number of prolific but high-decline wells that we were trying to compensate for. And on top of that, we were aiming for a growth of 7%, 8% a year. With this view right now, it's to say, how can we have stable production at a reasonable amount of capital efficiency and lower CapEx, much lower CapEx than the couple of years that enable us to, one, have that stable delivery of returns to shareholders, but also invest in the future?

[Imad Mohsen, CEO at Parex Resources]

It's too early for us to announce the budget for next year, but typically, we spend roughly half of, I would say, our expenditure is aiming at enabling future growth reserves, you name it, upside. And the other half goes towards sustaining production, which at these levels, where most of the production comes from stable water-flooded assets and now with EOR helping, would require less, basically, per barrel investment to compensate for the decline. On the capital allocation, maybe I'll let Mike answer.

[Mike Kruchten, VP at Parex Resources]

Hi, Connor. Yeah, that's a good point. In previous years, we would buy back the full 10% of our float with the share buyback program. As you have seen, we've moved to more of a balanced approach with return of capital, having a very strong dividend payment and complementing that with a share buyback program that really gets us to returning 33% of our fund flow from operations. And the share buyback program is really a lever. As prices and production move, we can adjust that accordingly. This year, we're still active in the share buyback. We think it provides value given our valuation. And we plan to continue to do that and use that as a lever as we go forward with the dividend as being the main anchor in the return of capital.

[Mike Kruchten, VP at Parex Resources]

Awesome. And I got one more question. My last question is for you guys. Last year, with the dividend, you guys, after the buyback, ended up paying out less this year after increasing it. Going forward with that 33% payout ratio and the buyback, do you see consistent dividend increases of around maybe 10% a year for the foreseeable future, or do you have a dividend hike increase that you guys are maybe targeting for each year?

[Mike Kruchten, VP at Parex Resources]

Yeah. Obviously, the dividends under it, it's a constant discussion at the board level, reviewed and approved. We're basically at a 12% yield right now. So probably not prudent to be thinking about significant dividend increases at this level, but it is something that we review all the time, and we think it's a key component of our total return to shareholders.

[Imad Mohsen, CEO at Parex Resources]

We're not going to increase the dividend for the first year.

[Imad Mohsen, CEO at Parex Resources]

Okay. Yeah. I was just curious. I know that it's one of your guys' core values is the buybacks. And I know you guys have increased the dividends more in the future. So I was just kind of curious if you guys were planning on staying at the same dividend rate or if you guys are planning on cutting back on the buybacks and ramping up the dividends or staying back on the dividends and ramping up the buybacks as the buybacks do provide really good value right now. That's what I guess I was trying to ask.

[Imad Mohsen, CEO at Parex Resources]

Right now, we are maintaining. If you see the announcement for this quarter, we maintain the dividend constant, and the buybacks become the swing while we are strengthening the balance sheet in the early days where we added maybe $20 million or so in debt repayment. So it's these three components. And as Mike said, it all depends on quarter-to-quarter, per quarter. I would say the oil price has a lot to do with it. Oil price goes to $100, your buybacks go up.

[Imad Mohsen, CEO at Parex Resources]

Okay. And I think the last question that I can maybe think of as well is, I know that you guys had a delay on one of your wells for a social issue, but it was pretty much ready to go. Do you guys have any updates on that well and that social issue and if that's been kind of worked around or?

[Mike Kruchten, VP at Parex Resources]

Sure. I think the well you're referring to is one of our big E exploration wells that we're excited about, the Hydra Prospect. And there have been some social challenges entering the area. And so that well has been pushed to 2025. We still expect to drill it and are working in a very collaborative fashion with communities to try to reach an agreement and move that project forward. It is ready to drill. So once we get that approval, we will be moving the rig.

[Mike Kruchten, VP at Parex Resources]

Awesome. Sounds great, guys. You've answered all my questions.

[Operator]

I will now turn the call back over to Mike Kruchten for closing remarks.

[Mike Kruchten, VP at Parex Resources]

Thank you very much for joining us today. If you have any questions, feel free to contact us personally at Parex, and have a great day. Thank you.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Participants

Executives

• Mike Kruchten, VP
• Eric Furlan, COO
• Cam Grainger, Interim CFO
• Imad Mohsen, CEO

Analysts

• Analyst 1
• Kevin Fisk, Senior Research Associate at Scotiabank
• Alejandro Demichelis, Managing Director at Jefferies
• Daria Lima, Analyst at Bloomberge
• Jeremy McCrea, Managing Director and Oil and Gas Analyst at BMO Capital Markets
• Christopher Jones, Research Analyst at Haywood Securities