I will now turn the call over to Mike Kruchten, Senior Vice President of Capital Planning. You may begin.
Good morning, everyone, and welcome to Parex's second quarter 2024 conference call and webcast. My name is Mike Kruchten, Senior Vice President at Parex, and on the call with me today are our President and Chief Executive Officer, Imad Mohsen, our Chief Financial Officer, Sanjay Bishnoi, and our Chief Operating Officer, Eric Ferland. 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 www.sedarplus.ca. Note that all amounts discussed today are in U.S. dollars, unless otherwise stated. I'll turn the call over to Imad. Please go ahead.
Thank you, Mike, and good morning, everyone. The second quarter highlighted our portfolio's ability to deliver strong financial results and return of capital for shareholders. I'm pleased to say that in 2024, we have delivered an 80% increase year-on-year in free funds flow on strong pricing realizations as well as reduced capital. Part of what's driving our strong financial results is the excellent performance from our base assets at Cabrestero and Block 34. To date, results from water flooding have been encouraging, with generally flat production profiles and reduced capital requirements going forward. We are generating significant free funds flow from these core areas. This can be attributed not only to asset quality, but to the benefits derived from our pre-investment activity on drilling patterns and facility investments.
At Cabrestero, we are seeing encouraging results from our polymer injection pilot and are now in the process of designing a full field expansion and formalizing our plan. Building off Cabrestero enhanced oil recovery success, we are replicating this approach at Block 34. The initial water flood patterns are demonstrating strong performance and post-water flooding implementation, we expect polymer injection to be a viable option. Turning now to Northern Llanos, I'd like to provide some high-level comments on our performance and then hand it over to Eric to provide more specifics on our operational results and plans for the second half of the year. So Arauca. At Arauca to date, results have underperformed compared to our initial expectations. While we are optimistic... We were optimistic at the onset, we have since encountered operational and reservoir challenges as activity has progressed at the block.
As a result, we have paused our in-year drilling campaign to provide the team and our partner with time to reassess our results and develop a plan to optimize the field's potential over the longer term. With activity in Arauca paused, we have shifted capital to our Capachos block, where we are now drilling a follow-up well to Andina Norte- 1, and at Block 32, where we have successfully drilled an extension to the field. These two areas combined are positioning us to partially offset Arauca volumes and drill lower risk appraisal and development wells to add production and potential reserves in second half of 2024.
While the third half of the year has certainly presented its challenges, we are targeting to grow production into year-end, look forward to initial results from our 2024 high-impact Big E wells, and we'll continue to use our free funds flow to deliver share buybacks and regular dividends. I'll now ask Eric to provide additional details on our operational performance.
Thanks, Imad. In Q2 2024, production averaged 53,568 BOE per day, which was relatively flat when compared to Q1 2024. At Arauca, we saw strong, we saw strong initial performance from Arauca-8, with extremely high natural flow rates that made us excited about the field's potential. Since this strong initial performance, the block has performed below our expectations due to a multitude of factors, including wellbore conditions, water intrusion, asphaltenes, and tighter rock than anticipated. It is our view that these complexities can be worked through over time. We're going to complete workovers on the wells we see potential and are assessing the next steps to best restore and optimize production from the field in the short and long term.
As Imad mentioned, in the interim, we have reallocated one of the rigs to Capachos, and once we finish the necessary completions and workovers in Arauca, we plan to release the second rig. It is important to note that while we have resized Arauca, we still see long-term potential from the field. With development opportunities identified, we currently plan to return in 2025 following analysis and recalibration of the initial program's results. With Arauca capital paused, we have reallocated capital to Block 32, where, as Imad mentioned, we successfully drilled an extension to the field. This is supporting a multi-well appraisal and development campaign, and is expected to add barrels to our second half production profile for 2024.
The decision to go back to Block 32 was largely driven by the anticipated mapping size being larger than what was originally thought, which has since proven out by the first successful step-out well, as well as our logging on the follow-up well. Turning to our 2024 Big E exploration plan, we continue to progress, including our near-term prospect, Orontes, at Block 122. To provide an update, the timing for this well has been extended due to previous mechanical issues, as well as a revised target depth based on recalibrated seismic analysis. We are currently at roughly 16,500 feet and plan to reach total depth in late Q3 2024.... Aligning our Big E strategy, we are planning to spud two further exploration wells in the second half of the year at VIM-1, as well as Capachos.
With that, I'd invite Sanjay to please go ahead.
Thanks, Eric. Overall, despite production shortfalls, we had a strong quarter financially. Funds flow provided by operations was $181 million, supported by strong realizations, as well as a positive $21 million one-time foreign exchange gain related to the settlement of the company's 2023 Colombian tax payable. This one-time gain flowed through FFO and positively benefited net backs during the quarter by over $4 per barrel. The company's net income was reduced due to the increase in deferred tax expense, which was also caused by movement in the exchange rate. Currently, we continue to see elevated production expenses related to a strong Colombian peso—excuse me, increased well service costs, and one-time maintenance and facility costs. Despite electricity costs trending downward, our view today is that our production expense will remain elevated and be between $12-$13 per barrel for 2024.
Offsetting this is strong pricing realizations and lower estimated tax, even at the top surtax band, leading us to a $31-$33 per barrel FFO net back at $85 per barrel Brent, as per our previously guided numbers. Quarterly capital expenditures were $98 million. This was lower than our forecast due to the pause of drilling and facility work in Arauca, as well as smaller adjustments such as seismic and contract amendments. Given the lower production profile that we see for 2024, management is hyper-focused on capital discipline to drive the company's free funds flow profile. With the reallocation of capital that we are doing in year, the timing of production growth has been extended into the back half of 2024.
As such, we are forecasting that our third quarter production volumes will remain generally in line with what we saw this quarter, with growth in the fourth quarter and into year-end. At our current forecasting and today's commodity prices, we anticipate meeting our long-term capital allocation framework to return 33% of total FFO through the regular dividend and share buybacks, while spending at or below the 66% threshold that we have set. During the quarter, we repaid another $10 million of bank debt, so at quarter end, we had a working capital surplus of $34 million and cash of $119 million. With that, I will pass it over to Imad for some final remarks.
Thank you, Sanjay. While we have faced challenges and some disappointing subsurface results during the first half of the year, we have a portfolio that allows for flexibility when it comes to capital allocation. With stable reservoir performance from Cabrestero and Block 34, and the ability to quickly pivot to development opportunities at Block 32 and Capachos, we are optimistic on our production forecast for the back half of 2024, and believe we have made the current correct shift to deliver to the lower end of our annual production guidance. As we have adjusted our production outlook, we are also having capital match that trend, as Sanjay mentioned. Even at a lower production profile at today's commodity prices, we can generate significant free funds flow to support future investment and shareholder returns.
I want to take a second to thank you, thank all of our, our employees for the commitment for the past few months. Their ability to be adaptable and resilient as we adjust plans in support of our strategy is a reflection of the strong and dedicated team we have at Parex. To end, I also want to thank our shareholders and partners for their ongoing 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.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not on mute when called upon. Your first question comes from the line of Alejandro Demichelis of Jefferies. Your line is open.
Yes, good morning. Thank you very much for taking my question. Just one question, please. Given the situation that you're mentioning in Arauca and production for this year, how should we think, or how are you thinking about production growth for 2025 and 2026? Because previously you told us you could be growing at about 5% per annum over there. Good morning. Thanks for your question. As we think about the long-term plan, I'm gonna pass this to Imad, how he sees the company evolving over the next couple of years.
So, so the way I look at this, Alejandro, is we will put the money where it makes sense, where it makes money. I, I'm not pursuing, growth at any cost, and, and that's part of why we reallocated capital to where places where it made sense this year. That would mean that our, our exit rate for this year will be lower, than, what it was planned in initially, I mean, when we, we issued the initial guidance. If I look at 2025, 2026, and beyond, I, I have confidence in the portfolio capability to withstand a long-term growth.... But we didn't do the work yet. We are now, the budget for next year will start in, in early, by the end of this year.
We'll announce it early 2025, and that will be driven by the where we would allocate capital to bring the more benefits for shareholders. And that's where you get your number. I don't—I think the fact that we could reallocate capital and stay within guidance and still reduce the capital overall is a tribute to the diversity of the portfolio and the optionality we have, but to put exact numbers on it is hard at this stage. It's not. The idea is still to try to have a thriving, growing company going forward.
That's very clear. Thank you very much.
Once again, ladies, and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from the line of Daria Lima with Bloomberg. Your line is open.
Hi, thank you for taking my questions. I have a couple on the production. I wanted to know, were there any protests noted in Block 34 in Q2?
Sure. I'll pass that to Eric.
No, as far as I think the question is regarding protests or social disruptions. Most of our disruptions, we did have disruptions in Block 34, but that was mainly associated with power disruptions and a flooding event, which can happen in that area, but the social disruptions have not been material, thus far.
Thank you. Very clear. And also, on the production cost, I've noticed they have grown in Q2 versus Q1. Could you shed some light on that?
Sure. Sanjay?
Yeah, sure. Yeah, we did see some one-time facility and road maintenance costs that were passed through our operating expenses in Q2, and I'd say that was the primary driver of the increase. You know, I would say that in previous discussions, we've talked about power prices being elevated. We've now seen power prices in the country normalize. So that's, you know, that's a positive indication for the business. And as I mentioned in prepared comments, we would expect that for the year, our production cost will be between $12-$13 per barrel.
Thank you. Just one last one for me. On the CapEx side, due to the pause of Arauca and focus on Llanos, do you see any increase in capital expenditures in the second half of the year?
I'm gonna pass that to Imad.
I mean, if you look at our expectation to be on the lower side of the overall year guidance, you can do the math in terms of how much burn rate that will bring you. I don't know exactly the dollar amount. Mike, is that-
Yeah
... higher or lower than first half?
I think we spent roughly $183 million in the first half of the year, and you know, a midpoint of our guidance was around $410 million. So we expect to be, you know, less than $410. So, you know, if you just do the math on that, we'll have slightly more CapEx in the second half of the year, but relatively it'll be pretty close.
Yeah. So, I don't see a huge jump in CapEx in the second half, if that's the question. We are trying to be careful with how we deploy capital. It's not a knee-jerk reaction.
Got it. Thank you. That is all for me.
Once again, ladies, and gentlemen, if you have a question, it is star one on your telephone keypad. There are no further questions at this time. I would like to turn the call to Mike Kruchten for closing remarks.
Thank you very much for joining our second quarter conference call. Please feel free to reach out to Parex, and we can take any additional questions that you may have about Parex. Have a great day.