Parex Resources Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 9 speakers on the call.

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. After the speakers' remarks, there will be a question and answer session.

Operator

Session. Thank you. I would now like to turn the call over to Mike Crookton, Senior Vice President of Capital Markets and Corporate Planning.

Speaker 1

Good morning, everyone, and welcome to Parox' Q3 2024 Conference Call and Webcast. On the call with me today are our President and Chief Executive Officer, Ahmad Moulton 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 1 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 and A, which can be found on our website or at sedorplus. Ca.

Speaker 1

Note that all amounts discussed today are in U. S. Dollars unless otherwise stated. I'll now turn the call over to Ahmad. Please go ahead.

Speaker 2

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 exploitation opportunities with strong capital efficiency. Regarding all of these priorities, we are making progress.

Speaker 2

Production levels have been stable and within management expectations, leading to an increase our midpoint guidance from 49,000 BOE a day to 49,500,000 BOE a day, representing an additional 2,000 BOE per day for the Q4, including an allowance for social disruptions. In conjunction, our conservative capital focus has resulted and updated our capital guidance, leading to projected higher fee funds flow of $220,000,000 at midpoint of guidance range. Following reset expectations, I'm 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.

Speaker 3

Thanks, Ahmad. In Q3 2024, production averaged 47,569 BOE per day, which is the result of higher downtime, natural decline and Arauca underperformance. At our key SoCa assets, LLA-thirty four in Cabristero, 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, progressing our polymer implementation at Cabristero and the significant efforts from our team to manage production rates where possible. At LLA-thirty two, based off the first successful step up well, we have now drilled 2 more follow-up appraisal wells.

Speaker 3

The latest well on stream is producing roughly 2,000 barrels per day gross, 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. 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.

Speaker 3

The well is producing roughly 5,000 BOE per day gross, 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 spud in the coming weeks. Turning to our Biggie exploration, we're continuing to progress the Atlantis 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 cycle. With that, I'd invite Cam to please go ahead.

Speaker 3

Thanks, Eric. Overall, despite lower production from the prior quarter, we had strong results when it comes to fund flow, as well as our ability to generate a high level of free fund flow with the revised capital program. Fund flow provided by operations was $152,000,000 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 to surtax band. The company had previously accrued for a 15% surtax, but given that depreciation of the oil price in 2024 as well as strip for the remainder of the year, we are now anticipate that the 10% surtax spend will be applicable for the company's 2024 Colombian tax payable.

Speaker 3

Capital expenditures for the quarter were $82,000,000 This was lower than forecast due to slower pace of work in Capachos as well as the deferral of the future prospect at Bin 1. For the Q4, we expect capital to be between $85,000,000 and $100,000,000 with bias to the lower end depending on activity levels. Free fund flow for the quarter was $69,000,000 which was used for return of capital through share repurchases and the regular dividend as well as we repaid $20,000,000 of bank debt. With financial flexibility at period end, we had a working capital surplus of $38,000,000 and a cash level of $147,000,000 With that, I will pass it over to Ahmad for final remarks.

Speaker 2

Thank you, Cam. In the shorter term, I'm excited about the emerging results from our Llanos32 program as well as that we should be reaching the total depth of our first footprint prospect in the coming weeks. Additionally, the production stability and performance we are seeing in our from our key assets, 934 Terastere and CapEx is encouraging. As we think about 2025, our focus is setting an achievable budget that centers on lower risk development and exploitation opportunities with strong capital efficiency. This should drive a higher level of certainty in our forecast and permit delivery of a more predictable outcome for us.

Speaker 2

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. 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 and A session for the investment community.

Speaker 2

Thank

Operator

you. Your first question comes from the line of Jeremy McCrea with BMO Capital Markets.

Speaker 4

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 Ashfall teen issues, have you made any progress in finding some potential solvents here that can resolve that?

Speaker 4

And then just lastly with the Orontes, 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?

Speaker 1

Hey, good morning, Jeremy. Thanks for asking the questions. I'll open up with the guidance on 25. 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.

Speaker 1

We will be releasing that in January and that will also have more contacts about our return of capital. And we've approved the dividends for the Q4 and we'll be also talking about how that will progress through 2025 as we see how the year is unfolding. Eric Furlan is going to talk about Arantas and Eauca.

Speaker 3

Sure. Thanks, Mike. So in Arouca, Jeremy, so we are completing the Arouca 81 well at this moment and we also have a planned stimulation, the first one on the Arouca 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.

Speaker 3

In Orantas, 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. 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.

Speaker 4

Yes. Thanks, guys.

Operator

Your next question comes from the line of Alejandro Zambales with Jefferies.

Speaker 5

Yes. Good morning, guys. Thank you

Speaker 2

very much for taking the question.

Speaker 5

I completely understand you're going to provide more guidance for 2025. But could you give us some kind of indications of how you're seeing your base production at Vianoz 34 in terms of those horizontal wells? How much kind of decline we should expect from Vianoz 34 over the next kind of couple of years?

Speaker 3

Yes. As far as Block 34, I know there's some variability this year, but overall, the major assets in Soca are following our long term 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 or month to month basis, quarter to quarter even. But overall, it is following our plan.

Speaker 3

We are looking at EOR. As we've indicated in Cabristero, 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 Solca is to try to stabilize and lower the decline as much as we can going forward. The other comment I'll have is some of the declines we've seen this year, some of the sharp 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, wells that can go from 3,000 barrels a day to under 1,000 barrels a day within a year.

Speaker 3

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.

Speaker 5

Okay. And in terms of cash flow generation, because you're talking about where you are and kind of CapEx activities into the Enero thirty four, would that also impact some of the cash flow generation that you get from there?

Speaker 3

For the most part, so when SoCa, we're finishing up 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. 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 you can put the polymer in, see how it works. We've proven that it works in Cabrastero.

Speaker 3

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 Cabrasero, we see a

Speaker 2

strong economic there. So in our mind, the Soca assets are will be a cash cow for years to come because the main investment was to build the infrastructure for waterflood and the wealth related to it. And these are mostly behind us. I mean, we upgrade facilities here and there and we do stuff skills for injection. But overall, they are very cash flow positive.

Speaker 2

And they are the assets that do understand together with Capachos, our capability to have a sustainable business.

Speaker 5

Okay. That's great. Thank you.

Operator

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

Speaker 6

Hey, thanks for taking my question. Just on potential M and A and farm in opportunities, can you provide a detailed thought on M and A? Obviously, you guys executed the deal with Ecopetrol in 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?

Speaker 6

And then just sort of high level, what is the rationale behind the potential M

Speaker 3

and A strategy if there is one?

Speaker 2

So 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 revenue there. On the first question, we've seen in the last 6 months more assets on offer in Colombia, specifically from Ecopetrol than what we've seen last 12 years. And these are assets that Ecopetrol has been proposing for farm ins 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.

Speaker 2

Parex have looked carefully at the assets. We are focusing in particular on 2 types of assets, either ones that would sit our strategy in the foothill, where you have the lower risk, high return exploration opportunities. But the biggest focus will be also the assets that will have low volatility, high predictability inventory of insurance, waterflood, exploitation that could potentially give us long grounding room and have a visibility on how we maintain modest production growth for years to come onto the biggest Foothill upside cap. So the answer is yes, we are looking. It's something we've been working with Ecpatrol on and we hope something good comes out of it.

Speaker 6

Thank you. I'll hand it over.

Operator

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

Speaker 3

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. Sure.

Speaker 3

Thanks, Sam. So obviously, 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 work over.

Speaker 3

We had a lot of wells go down. It happens looking back over the last few years, you do get the odd quarter, the odd month where you have a lot of downtime. So that definitely added. So I think the well service costs and well service and power are 2 biggest OpEx components. I think it was a bit exaggerated here in the last quarter and should normalize into Q4.

Speaker 3

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

Speaker 6

Perfect. Thank you very much.

Operator

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

Speaker 7

Hi. Thank you for taking my questions. I have one on the financial framework. Looking at your free cash flow for the 9 months, it appears to be that you already derisked your 2024 guidance. Does that mean you don't expect any more free cash flow in the upcoming quarter?

Speaker 7

Or is there any more upside in there?

Speaker 3

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 funds flow and CapEx and our dividend payments. But on the full year 2024 dividend and capital would be fully funded.

Speaker 2

How much cash do you have?

Speaker 3

Right now, we have 147,000,000 in cash.

Speaker 7

Thank you. Yes, and maybe on the capital allocation, so you say your dividend payout remains fully funded. If the remainder cash, do you see yourself using it for the repayment of debt? Or are you comfortable with the €30,000,000 on your balance sheet and preferring to use the excess cash for share buybacks?

Speaker 3

Yes. We plan to continue the share buyback and any excess over that will be will go to debt repayments. There will be probably potential nominal debt over the next quarter or 2.

Speaker 7

Thank you. Just last one for me. Operationally, on Yanus Foothills, could you perhaps comment on the time line for rates and the resource potential you're expecting? And in case of a successful exploration, do you expect it to potentially replace the growth that was originally expected from the Aroka?

Operator

So

Speaker 2

in terms of the Aranque Swal right now, the time line for this first one will be probably in the next before year end, we're putting the last casing point before drilling into the prospect zone. It is still a high risk exploration project. We have 1 in 5 chance roughly when we announced it. So we're not counting on it to replace any future growth upside, but it is very significant upside if it does work out and will exceed anything we're hoping for from Arauca. What we are doing in terms of replacing Arauca is the work we're doing in terms of the existing assets in terms of expectation, small e and polymer as well as some of the opportunities Equitrol are offering that we are considering seriously as a bridge.

Speaker 2

The longer term for the Foothills, we're talking here 26 plus would have potential to give us disproportionate growth. And in my mind, Arakawa 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. These 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 our end is a much higher opportunity of success.

Speaker 2

So they are much less risky. This one was the one that opened the door to the foothills for us and our deals with a foothold in order to reach the bigger prices as a lower risk ones. But hey, I'm definitely crossing my finger for everyone we

Speaker 7

Thank you. That's all for me.

Operator

Your next question comes from Connor Schroeder with Shareholder. Conor, your line might be on mute.

Speaker 8

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 a peg debt around $220,000,000 And then with the operational guidance update, it went down to about $170,000,000 But with the new earnings release, it's looking like it's back up to $220,000,000 Now with reduced capital expenditures, is that going to sustain not only the dividend in 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?

Speaker 8

And my other question is, historically, you guys have been on a rate of about buying back around 10% of your company. This year, it's not as high. So I'm just curious what your allocation is looking like for buybacks for the Q4. And if your assets are selling for very cheap, are you guys willing to ramp up the buybacks in order to reward shareholders?

Speaker 2

Okay. Let me start by answering the first question. What you probably are seeing right now is a more conservative view on how we deployed 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.

Speaker 2

With this view right now is to say how can we have stable production at a reasonable amount of capital efficiency and lower CapEx, much lower CapEx than a couple of years that enable us to, 1, have that stable delivery of returns to shareholders, but also invest in the future. Like 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. At these levels where most of the production comes from stable water flooded assets and now with you are helping, would you require less basically per barrel investment to compensate for the decline? On the capital allocation, maybe I'll let Mike answer.

Speaker 2

Hi, Connor.

Speaker 1

Yes, 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 funds sold from operations. And the share buyback program is really a lever as prices and production moves, we can adjust that accordingly. This year, we're still active in the share buyback.

Speaker 1

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.

Speaker 8

Awesome. And my 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 buybacks, do you see like consistent dividend increases of around maybe 10% a year for the foreseeable future?

Speaker 8

Or do you have a dividend hike increase that you guys are maybe targeting for each year?

Speaker 1

Yes. Obviously, the dividends under 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's something that we review all the time. And we think it's a key component of our total return to shareholders.

Speaker 2

We're not going to increase the dividend.

Speaker 8

Okay. Yes, 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 like 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

Speaker 6

to ask.

Speaker 2

Right now, we are maintaining like if you see the announcement for this quarter, we maintain the dividend constant and buybacks become the swing, while we are strengthening the balance sheet on a yearly basis where we added maybe $20,000,000 or so in that 3 segments. So it's these 3 components. And as Mike said, it all depends on what I posted 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.

Speaker 8

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?

Speaker 3

Sure. I think the well you're referring to is one of our big exploration wells that we're excited about the Heedra prospect and there has 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.

Speaker 3

So once we get that approval, we will be moving the rig.

Speaker 8

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

Operator

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

Speaker 1

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.

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Parex Resources Q3 2024
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