Earnings Call: Q2 2021

Aug 5, 2021

Earnings release

Good morning, everyone, and welcome to Parex Resources Second Quarter Earnings Call and Webcast. Yesterday, Parex released its unaudited financial and operating results for the quarter ended 06/30/2021. Like all Parex disclosure documents, the complete financial statements and related MD and A are available on the company's website at www.parexresources.com and on SEDAR. Before turning the meeting over to Mr. Ken Pinsky, Chief Financial Officer of Parex Resources Inc, I would like to mention that this event is being recorded, so the recording will be available for playback on the company's website. Ericks would like to remind everyone that remarks made during this session are subject to forward looking statements, which involve significant risk factors and assumptions and have been fully described in the company's continuous disclosure reports. The information discussed is made as of today's date and time, and Parex assumes no obligation information to reflect new events or circumstances except as required by law. Please note that at any time, participants on the webcast can submit their questions under the ask a question tab at the top of the webcast interface. I would now like to turn the meeting over to Parex, Chief Financial Officer. Please go ahead, Mr. Pinsky. Thank you, operator, and thanks to everyone on the line for joining myself and our CEO and President, Ahmad Mohsen, for our Q2 conference audio webcast. We appreciate your constant support of Parex Resources. Before we start our Q and A session, I would like to provide some highlights of Q2 financial results and discuss our plans for the remainder of 2021. All values mentioned in this call are stated in U. S. Dollars unless we otherwise specify. I'll begin by saying that our priority during the COVID-nineteen pandemic still remains the health and safety of our employees, our contractors and the communities neighboring our operations. Our T2 production averaged 43,900 BOE per day, a 4% decrease from the previous quarter production due to the transportation blockades in Colombia that temporarily restricted supply drilling and completion activities and our movements of oil within our fields. Normal field operations were restored in June, and at present parts is operating four drilling rigs and a seismic crew. For the second quarter, our funds flow provided by operations totaled GBP 132,000,000 or CAD 1.03 per share basic. Our Q2 capital was GBP 45,000,000, generating prefund flow of GBP 87,000,000. With a portion of that prefund flow, we repurchased 4,200,000.0 shares and thereby returned Canadian's ninety one million to our shareholders. Parex had strong performance for the quarter with earnings of GBP 92,000,000, and we maintained financial strength of $353,000,000 in cash and no debt. We exited the second quarter with working capital of GBP $371,000,000 And along with our credit facility undrawn of GBP 200,000,000,000, we have over GBP 500,000,000,000 or $05,000,000,000 of liquidity. Parex reiterated its dedication to continue lowering our greenhouse gas emissions, intensity per BOE from operated assets. The company's strategy in the short to midterm will focus on optimizing carbon footprint, displacing carbon intensive power sources and increasing power generation from renewable sources. The long term carbon strategy will gradually emerge as Parx evaluates the uncertainties it could face during the net energy transition and outline sustainable pathways to achieving its net zero ambition. Parx is aspired to be among the least less carbon intensive oil and gas B and T companies while continuing to deliver shareholder value and meet ongoing global energy demand. We entered into another strategic partnership with EcPatrol, whereby Parks earned and operated 6% interest in two blocks of Northern Colombia, Aroga and LLA38. Parks' independent qualified reserve engineer, GLJ, recognized company interest 2P reserves or crude plus probable reserves of 7,800,000 barrels of light medium crude oil, along with future development capital of approximately GBP 70,000,000. The initial work plan, which we hope to commence in 2021, will be funded by Parex and consists of drilling two development wells in the Aurelka Field and one exploration well and a further capital program of $75,800,000 which us in Equitable will determine how to allocate. I would now like to pass the meeting over to our President CEO, Avad Gosyn, to go over the second half twenty twenty one outlook. Please go ahead, Iman. Thank you, Ken. Perks is in an exceptional financial position, as Ken explained, and doesn't currently have any hedging in place. So that allows us to reap the full potential upside of strengthened oil prices. As we move into the second half of twenty twenty one, Parex will be focused on appraising our recent discoveries and expansion. Key projects include continuing our appraisal well program on Cabostero, which drilling commenced in June. So far, we are very encouraged by the initial results. Plans to start our significant capital program in the Raza program. Beginning with at least 60,000 exploration wells in Capachos, followed by the Ecopetrol partnership work on Aralka block. On Fortuna, we are drilling a multilateral well, Bela Negro 1 on the Olini formation. We are applying proven but new technologies Colombia to to access areas with significant oil in place. Accelerating the installation of facilities to enable the production of compressed natural gas from La Belleza discovery. We are expecting production to begin at restricted rates in Q4, and we expect to have initial results from our Plananos One in French one in September. Initiating quarterly dividend of $0.01 $25 per share, We believe this is a material milestone for Barrick, demonstrating our confidence in our portfolio and our commitment to shareholder return. With this brief overview, I'd like to turn the line back to the operator to start the Q and A session. Operator, over to you. Thank you. The first question is from Adam Gill from Paradigm Capital. Gentlemen, just in terms of the dividend, obviously, it's a pretty small payout of your overall funds flow. I was just wondering if you could frame how you guys are thinking about potential dividend increases, what type of targets, whether it be earnings or funds flow, potentially see that dividend go up over time? Yes. Thanks, Adam. The dividend was instituted along with our buyback. As I said, we want to demonstrate our return account mantra, which is what we've been operating over the past three years. And we've bought back about 20% of the stock net of any LTI or going through incentive exercises and therefore issued some treasury stock. So that's a big number of stock of the share buyback. And going forward, the Board wanted to have another lever to return capital to shareholders, and so we instituted the dividend. We have our annual strategy session with them in the fall. And with that, we'll look at our five year plans, where we think commodity prices are going and then how we want to return excess capital to shareholders. We always will have a return to capital strategy. And how the dividend will fit into that, if with more clarity, we'll report back to the market later in the fall after that strategy session. But for now, the yield is about 2.5% to 2.6%. It's kind of in the range. But we would see ourselves in time potentially transferring some money from the buyback to the dividend. But that is something we'll discuss with the Board and along with our Biker plans. There are no further questions. We do have a question now from Harry Nobleman from HDN Capital. Please go ahead. Yes. Good morning. Perhaps you can just elaborate on the prior question. Are you going to be I guess, multiple parts. First off, how much cash would you like to keep on the balance sheet for the proverbial rainy day? The next question is as you do this five year plan, are you you gonna use different price assumptions? And then from that, with the free cash you generate, determine whether a higher dividend, a variable dividend, and or an accelerated buyback comes into play? Just any other clarity you can add because it's remarkable that you can buy back 3% of your company and still build cash. And yet, for all intents and purposes, the stock wouldn't know what you're doing. So so let let me start with the first part of the question. In terms of the cash we have on the balance sheet, we're we don't wanna keep increasing it to the facility. So so we are very comfortable with the levels we are at now. The the tool to use the gas other than first our profitable investment is is to return money to shareholders, and and the tool for that is the buyback. Dividends is a fixed commitment on a much longer term. What support will consider going forward in terms of what dividend levels and if we increase it at what pace, Beyond the commodity prices, it's also our long term investment program and how we wanna grow the business and have a long term sustained business that only goes in one direction. So it is multifaceted. We do take all the reasonably reasonable oil price of mine, which is what what is it? $10.55, 60? We we like the budget breakdown around $60 per barrel, and we do run low case scenarios, and we run high case scenarios. Yeah. But but for for me, it's not just lower price protection, it's combination. Yeah. And I think what I wanna reiterate, and this is what we've telling shareholders, is that we we are an exploration and production company. We will drill exploration wells, and not all of them will work, but some will. And in the past, they've worked really well and added a lot of value to the shareholders. And so we're paying a dividend as a function of a return of capital as opposed to thinking of sort of a dividend paying company that isn't in the oil and gas business. So that dividend is supplementary. And Ahmed said, it's a long term we do it as a long term commitment. So moving that around, I know some of our counterparts are talking variable dividends based upon commodity price. But they see more mature dividend payers than we have. And so we're going to feel our way down and see where to see what the shareholders want and then see how we can look at this in the longer term in respect of a return on capital strategy. Great. Just an observation, if I may. It would appear that most investors throughout all of energy today don't believe in any terminal value for a myriad of reasons. And my sense is that's the opportunity or one of the many opportunities here. So to the extent that you contemplate buying back more stock quicker, the advantages are relatively obvious. Thank you. Thank you. The next question is from Al Stanton from RBC. Please go ahead. Yes. Good evening, Just a couple of questions, if I may. First of all, the one variable that we weren't really talking about in a lower oil price environment is taxation. So I'm curious to know what your views are with respect to the tax rate going forward and how that dovetails with turnover and spending, whether spending is now going to creep up with turnover. So how does that all dovetail? And then finally, just a question on the lesson you've learned in the past quarter with respect to marketing and delivering your crude, whether there is any sort of silver lining in working out which routes and which markets to sell it into to maximize realization? Thank you. Thanks, Al. I'll answer your second question first with respect to what did we learn about the transportation disruptions. What we learned is that none of the oil and gas business industry was really targeted. We weren't targeted directly. It was the transportation hubs that are upstream of our operations. And what it really impacted was our ability to move supplies for our drilling rigs. Because at the time, we were actually moving into a bigger exploration program, so we were moving rigs around. That slowed us completely. If we're up and running on the pad, then we usually get word there's a disruption potentially coming or some action. And therefore, we can stock up for food and fuel for the rig and not be bothered. We were just caught in the middle of moving rigs. In respect to production, what we know is from tying in by pipeline, most of what we call our Southern Casan area assets, we were about 35,000 barrels a day of, what I'd say, disruption proof, which allows us to do whatever we want to do at any given time. And that was positive, and we kind of thought that's what it was beforehand because we planned for events that aren't pristine. And we've also got ourselves up to our run rate. We're at 48,000 barrels a day, again, today, which is the highest we've been since COVID, which we're quite happy with. We have four rigs in the field working. There's been no disruption. So Columbia, sometimes it gets noisy. And especially if you look on Bloomberg, you can get you can see things. But in the field, it was relatively calm except for that couple of weeks, two to three weeks where we had some trucker union activities, which have now ceased. And everybody's back to work. And the government did a very good job, we thought, in addressing that and working directly with the unions and what they have. So we are thankful the Colombian government did a very good job. In respect to your first question, you were breaking up, but I think you're asking about tax rates. And the Colombian Congress is now debating a new tax bill. One of the things they're talking about is increasing the corporate rate to 35% from 31%. That incremental 4% will have some effect on us. But because we continue to invest in the country, it will be relatively minor. I recall that during the Santos, the previous President's regime, President Santos, we had tax rates as high as 40%. And it it you know, as long as you're investing in the in the country, it's like anything else. You're creating tax depletions. You're creating tax completion to offset your tax. So that's all I have to say about that. Unless you have further questions. Yes. I suppose the one bit that you might have missed was the relationship between CapEx and the oil price. Is that going to be reestablished? The relationship we heard between our capital spend and the price of oil? Yes. Definitely, one of the things we wanted to do was actually COVID slowed our exploration program down, and we are an exploration company, as I said. And I'm glad when he joined the company and looked at the opportunities and said we need to catch up for 2020. We agreed. The board agreed, and that's what really drove our CapEx spend and increasing this year. Yes. Oil prices are helpful because you have the incremental cash flow. And as you heard, we do get questions on how much working capital you guys want to build. So, Anat, do you have something to add? Yeah. I I mean, here, of course, at how many dollars there are more opportunities at at 20, but the reality is most of our opportunities that we have in the pipeline are extremely robust at all kind of visionable prices in the in the medium term. So what happened is we have discoveries before COVID. They were not appraised yet. There were some delays last year, and we see a lot of potential for development growth and appraisal, and we wanna bring these opportunities forward. Most of the opportunities I mentioned in in in the chat today were discoveries made a year or two late earlier, and that needs to be appraised. So we have ten, twenty, 30 well development programs coming out of that. And these opportunities, in our view, should if if the geology proves what we think is there should be robust regardless the price yeah. Predictable oil price price fluctuations. Thank you. Thank you. There are no further questions registered at this time on the phone lines. I would like to turn the meeting back over to mister Mohsen. Thanks. Thank you for your interest, in Berg, and, your continued support for the company. For for further information, we invite you to visit our website or call us. Thanks again, and have a good day. Thank you. The conference has now ended. Please disconnect your lines at this time,