PARXF - Parex Resources Inc. (PARXF) Q3 2022 Earnings Call Transcript

Parex Resources Inc. (PARXF)

Q3 2022 Earnings Conference Call

November 04, 2022 11:30 AM ET

Company Participants

Mike Kruchten – Senior Vice President-Capital Markets and Corporate Planning

Imad Mohsen – President and Chief Executive Officer

Ken Pinsky – Chief Financial Officer

Conference Call Participants

Christopher Jones – Haywood Securities

Oriana Covault – Balanz

Presentation

Operator

All participants thank you for standing by. The conference is ready to begin. Good morning, everyone, and welcome to Parex Resources Third Quarter 2022 Conference Call and Webcast. Please note that at anytime participants on the webcast can submit their questions under the ask a question tab at the top of the webcast interface and participants on the phone can press star one.

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

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, CFO; and Eric Furlan, Chief Operating Officer. 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 or at sedar.com. All amounts discussed today are in U.S. dollars, unless otherwise stated.

Please go ahead, Imad.

Imad Mohsen

Thank you, Mike, and good morning, everyone. Production for the quarter was pre-leased at approximately 51,000 barrels a day, up 8% from the comparative quarter in 2021, with production on a per share basis up 19% over the same period. We are in the process of optimizing and maximizing our key assets by making significant investments at Southern Llanos assets, LLA-34 and Cabrestero, as well as Northern Llanos [indiscernible]. We expect to lower our long-term corporate decline rate and sustaining a lower capital expenditure requirement. This is expected to maximize our reserves as well as generate sustainable and significant free funds flow that can be used for both reinvestment and returns to shareholders.

We are also showing new growth within our portfolio. Recently, we announced that successful drilling efforts year-to-date have translated to proved discoveries on multiple of our blocks. In Northern Llanos, we have had positive drilling results with two wells that have encountered new zones. We had a near-field exploratory discovery in new play in Southern Llanos and in Magdalena Basins at VIM-1. We are seeing encouraging results where we are planning to cycle the gas for condensate recovery at the first quarter.

I will now turn the call over to Ken to discuss some of our financial highlights, return of capital and the proposals for changes in tax regime in Colombia before I can make some final remarks. Please go ahead, Ken.

Ken Pinsky

Thanks, Imad. In the third quarter, we generated funds from operations of US$206 million, which is up 35% over the comparative quarter and our funds flow from operations per share was US$1.85, which was up 49% over the comparative quarter. As planned in the third quarter, we decreased our working capital surplus with the acceleration of our share buyback program and the purchase of long-lead capital expenditure items, such as well casing and gas turbines. That will support our 2023 capital expenditure program. At the end of the quarter, we had a working capital surplus of US$230 million and are still debt-free, and we have an undrawn credit facility of $200 million.

And in quarter three, we completed the 2022 normal course issuer bid, or NCIB, which marks the fourth consecutive year where Parex has purchased a full 10% of common shares allowable for purchase under the program. Since 2017, we have returned over CAD1.1 billion to shareholders through these share repurchases, which I am proud to say is nearly half of our current market capitalization to date. With the normal course issuer bid complete for 2022 and the fourth quarter dividend of CAD0.25 per share approved by the Board of Directors, we expect to return roughly CAD385 million to shareholders in 2022, meeting our goal of returning more than one third of our annual funds flow from operations and 100% of free funds flow to shareholders.

Turning to 2023 and the Colombian government tax reform. Yesterday, a proposal passed into Colombia Senate that will move on to the Colombian Chamber of Representatives. Although it is expected that this proposal will become law and/or will receive final approval, it is still subject to change. Currently, we are assessing and evaluating the current proposal on its impact to Parex. And once finalized, we expect to provide a clear outline of the impacts to Parex, specifically our funds from operations and netback sensitivity. Until it is final, we will not have any specific comments on the proposed changes and their impact. We have operated in Colombia since 2009 and continue to see the country of a strong, stable and profitable environment for long-term investment and where the energy sector is a vital sector.

I would now like to turn the call back to Imad for some final remarks. Please go ahead, Imad.

Imad Mohsen

Thank you, Ken. Looking ahead to the fourth quarter, over the past weeks of October, we have been working through localized blockade in Southern Llanos, where the impact was roughly 4,000 barrels a day. As we actively work with communities, these localized blockades have been lifted, and full production is being brought back online. Given wells that have been drilled successes to date, we still expect to achieve our Q4 guidance of 54,000 to 58,000 BOE a day and are focused on executing our 60,000 barrels a day exit milestone. This is credit to our staff who have managed and navigated many twists in terms this year and the overall depths and resilience of our portfolio.

As Ken mentioned, Colombian tax reform is being finalized and we are currently working through the – our budget process with the plan to release our 2023 guidance in early December. With this release, we also plan to provide a full some corporate update that outlines our long-term vision, strategy, operations and future opportunities.

I would like to confirm our commitment to Colombia, the country with an amazing resource base, strong dependable institutions and following the tax reform would continue to provide a very competitive fiscal term and netbacks.

With that, I’d like to thank everyone for their continuous support of Parex and the hard work that our employees and contractors execute for us every day.

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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have a question from Christopher Jones from Haywood Securities. Please go ahead.

Christopher Jones

Hey guys. Thanks for taking my call. I know you’re in the midst of the budgeting process for 2023. Just wondering what level of inflationary impacts you are expecting next year and maybe provide us with some preliminary high level thought on 2023 activity and spending levels? Thank you.

Imad Mohsen

We expect year-on-year inflation like-for-like of roughly 10% and that’s credit to our program where we pre-ordered a good number of amounts of long leads that at previous prices. But also because of the effects of the peso’s exchange rate on our costs in Colombia for labor.

Ken Pinsky

Yes, Chris. We’ll release the budget like Imad said in December and we’ll give you some – we’ll give the guidance then.

Christopher Jones

Okay, that’s helpful. And then just on 2022 CapEx, we’re sitting here in early November. Are you able to give us a sense of where CapEx should sort of settle out within the range provided at your end? Are you guys sort of pointing to the low end, mid-range, or high end?

Ken Pinsky

Yes, we’ll be right within our guidance range. So once you exclude the long lead items that have been purchased, we should be in that $525 million to $550 million.

Christopher Jones

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from Oriana Covault from Balanz. Please go ahead.

Oriana Covault

Hi, good afternoon. This is Oriana Covault with Balanz. I had two brief questions. The first is that we heard over the week some things with the minister of Colombia [ph] regarding the exploration agenda. So just if you could perhaps provide more details or thoughts in terms of the chain of reactivation of unused license and how would this impact Parex programs in the upcoming years?

Imad Mohsen

So I’d like to highlight the fact that before this election last year, we managed to acquire 18 blocks, which has basically quadrupled our land area in Colombia. With that, with a number of active licenses that we have in our portfolio, we don’t see any constraints whatsoever for decades plus on our running room in terms of exploration. So with that in mind, we are observing the new government’s views on opening blocks or reactivating them or not. But we don’t see any impact given that we are already more – we have more than enough effect to drill.

Oriana Covault

Got it. Thank you. And just one final one, understanding that you are not perhaps discussing the impact from the reform. Just if you have any detail for information that you could share with regard to this sliding scale on income surcharge any, beyond the potential impact, what are you seeing from these drafts in terms of when would this 5% to 10% – 15% scale start impacting in reference prices?

Ken Pinsky

Yes, like I said, once the proposal’s finalized, we’ll come out with a full description of how it affects us and how it works. We’ve seen six, maybe seven proposals since they started talking about it. So we just don’t feel that it’s worthwhile to go through the seventh or eighth. We’ll wait here because we’re very close, we think to the end of getting a final document in place.

Oriana Covault

That’s perfectly clear. Thanks again for taking the questions and congratulations on the quarter.

Imad Mohsen

Thank you.

Operator

Thank you. [Operator Instructions] We have no further questions at this time on the phone. I would like to turn the meeting back over to Mr. Kruchten.

Mike Kruchten

Thank you very much for everyone joining our call today and if you have any questions, feel free to contact me at Parex. 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.

For further details see: