Good morning, everyone, and welcome to Parex Resources' Q2 , 2023 conference call and webcast. My name is Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning at Parex. On the call with me today are Imad Mohsen, Parex's President and Chief Executive Officer, Ken Pinsky, Chief Financial Officer, and Eric Furlan, Chief Operating Officer. This quarter, we are pleased to offer a new online video webcast, in addition to the regular conference call telephone line for analysts. Please note that at any time, participants on the phone can press * 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&A, which can be found on our website or at sedarplus.ca. All amounts discussed today are in U.S. dollars, unless otherwise stated.
Please go ahead, Imad.
Thank you, Mike. I'd I would also echo your comments regarding our terrific sustainability efforts. Moving on, as Ken brief... Oh. Sorry for that. Let's start again. Thank you, Mike. Good morning, everyone. Before I turn it over to Ken for an overview of our quarterly financial and operational results, and to Mike for his comments on our ninth Annual Sustainability Report, I'd like to share some opening remarks regarding the progress of our overall strategy. I will end the call with comments on the momentum that we are building in the Northern Llanos, as well as our updated 2023 guidance and outlook. In the H1 of 2023, I'm proud to say that we continued to progress the 3 core pillars of our strategy. First, exploitation and technology.
In SoCa, we are seeing success from the horizontals that we have drilled. We are continuing to progress our waterflood plans. Also, in the end of 38, we had an oil discovery in the C7 reservoir on one of our quick hit wells, where we have spud the follow-up horizontal well to maximize recovery. On the gas strategy part, we are making concrete progress in our discussions with Ecopetrol regarding the MOU. We also made the decision to expand the facility of VIM-1 in 2024. Third, on big E exploration, we did drill and test the Chirimoya well at VIM-43, which was the 1st of the 3 big E wells for the 2023 program. Despite the well not delivering the outcome that we hoped for, we continue to see significant exploration upside potential in Colombia.
We plan to spot 2 more high-impact Big E wells in the H2 of 2023, with more to follow in 2024. With that said, I continue to be excited about our trajectory and the organic opportunity set that we have in Colombia for the next-- for both development and exploration. With that, please go ahead, Ken.
Thank you, Imad. Despite production impacts experienced in the Northern Llanos at our Capachos block, the Q2 delivered strong operational and financial results that highlight the robust profitability derived from our Colombia operations. Funds flow provided by operations was US $155 million, which was lower than prior quarters, primarily due to decline in global crude pricing, notwithstanding our production volume growth. Average Q2 2023 production of 54,120 BOE per day was up 6% compared to Q2 2022, and up 5% from the prior quarter. Estimated average production would have been close to 58,000 BOE a day, if it not for the temporary shut-ins experienced at our Capachos block that were outside of our control.
The net effect was lost production and drilling progress at both Capachos as well as Arauca, which overall had an estimated impact of approximately 3,500 or 3,800 barrels of oil equivalent per day on the quarter. Imad will discuss the annual impacts and the update to our guidance later in this call. Production per share increased by 14% year-over-year, which was supported by the higher production levels and the reduction of shares through our normal course issuer bid, or NCIB. Year-to-date 2023, we have repurchased approximately 3.6 million shares, or approximately 3% of the float, as a mechanism to return free funds flow to the shareholders over and above our CAD 0.375 per share quarterly regular dividend.
We ended up the quarter with a slight working capital deficit, which we expect to turn to working capital surplus by year-end, due to expected higher fund flow from operations, which will be due to increased production, higher benchmark oil prices, and our narrower differential for our heavy crude stream. All the while, capital expenditures are forecast remaining flat based on our H1 2023 run rate. With that, I will pass it on to Mike to provide a brief ESG update.
Thanks, Ken. As part of our commitment to delivering superior ESG performance and disclosure, we are now pleased to release our ninth Annual Sustainability Report, for which for the second year in a row integrates the Task Force on Climate-Related Financial Disclosures, or TCFD. Some noteworthy achievements from our 2022 report are: making progress against our 2030 emission intensity target of 50% by achieving a 37% cumulative reduction in GHG emissions from our 2019 baseline. Investing over $5 million in the communities where we operate. As the company works to continuously enhance its ESG performance and disclosure, this year's report sets targets within 4 core priorities: communities, GHG emissions and climate, people and culture, and water.
The hard work and dedication exhibited by our teams in both our ESG initiatives and reporting reflects our commitment to responsible resource development. I encourage those interested to explore the complete report, which is now available on our website. With that, I would like now to return the call back to Imad for some final remarks.
Thank you, Mike. This is a paragraph I was looking at in the beginning. I would also echo your comments regarding our terrific sustainability report. Moving on, as Ken briefly mentioned, the company has faced social related challenges throughout the H1 of the year in the Northern Llanos, which resulted in temporary shut-ins at both Capachos and Arauca. Through continuous engagement with stakeholders, community leaders, and government officials, both assets have been fully operational since late June, and we are exiting the quarter with positive momentum. At Capachos, we are ramping up production on wells already drilled, notably Capachos Sur 3, Sur 4 and Andina 2, which are the main drivers to increase production on the block.
At Arauca, we are optimistic about our multi-year drilling campaign, have, and have made the decision to accelerate our program there by bringing a second rig onto the block. We are currently drilling Arauca 15 well, which is at 11,500 feet, and expected to TD in late Q3. We are expecting to spot Arauca 8, our second Big E well in the 2023 program in the late Q3 as well. Turning to our 2023 guidance, the aforementioned shut-ins are estimated to have combined impact on the company yearly production of approximately 3,100 barrels a day. We experienced lower than expected production from Soca asset because of higher downtime, both technical and social. When we originally set guidance, we widened it into...
we widened it to take into account, to account for, uncontrollable aboveground factors, which, in my mind, constitute an approximately 3-4 months deferment of our gross plans. Given the duration and the extent of the shut-ins, we are updating our 2023 average production guidance to 54,000-57,000 BOE a day. Our capital expenditure guidance is also being updated to a range of $450 million-$475 million. The tightening of our prior guidance is driven by the standby costs associated with the shut-ins and the increased spending at VIM-43 exploration well, mainly because of the testing. Looking forward to the remaining of the year, I'm encouraged by our company's momentum and the work our team is doing the, to build the strategy foundations for future upsides.
Having just returned from Bogota last week, where we had extremely productive meetings with Ecopetrol and the relevant ministries, I'm pleased with the progress that we are making to leverage the value of our MOU. In Q4, we have plans to spot the third and final Big E exploration well of the 2023 program at Llanos 122, called Arantes, which is a prospect under our MOU and located in the foothills of Colombia. This opportunity excites me because imagine just the long-term potential if the Western Canadian foothills had only been controlled by 2 partners. To finish, as a part of the ongoing Colombian peace process, a bilateral cessation of hostilities is set to come into effect today, which is encouraging and should help the long-term stability in some of our key operating regions. My outlook is that we are well positioned for a strong back half of 2023.
Our updated guidance implies Q4 2023 production rates that exceed 60,000 barrels a day, and that puts us back on track to deliver on our 3-year plan objectives. I want to thank our employees in Calgary and Colombia for their hard work, and our shareholders for their continued support. This concludes our final remarks. I would like now to turn the call back to the operator to start the Q&A session for the investment community. Thank you.
At this time, if you'd like to ask a question, simply press *, then the number 1 on your telephone keypad. Again, that is * 1 for any questions. We'll pause for just a moment to compile the Q&A roster. Our first question will come from the line of Anthony Linton with Barclays. Please go ahead.
Hey, good morning, guys, and thanks for taking my questions. I guess maybe just to start on the capital budget side, final cost for the Chirimoya well was $49 million, or about 10% of the original allocation. How do you think about that 10% of the budget going towards big E for the balance of the year and then into 2024?
Thanks, Anthony, for that question. When we look at the Big E, you know, we have roughly $50 million allocated to Big E every year. You know, Chirimoya, we had cost overruns on that, and certainly the decision to case and test it added extra capital to that. 1 factor was this was a 100% working interest well, and most of our other wells going forward are going to be 50% working interest. We're comfortable with that $50 million allocation as we go into 2024, as a good proxy for how we'll allocate to Big E as we go forward.
Got it. Okay, thanks. Then staying on capital, you laid out a pretty comprehensive 3-year plan at your investor day in the fall. How do you sort of think about that guidance into 2024 and beyond, based on the updated guidance for the balance of the year?
Anthony, I'm going to pass that to Imad to talk more about high level strategy, how we see the business.
I mean, for me, what we did, having seen the disruption beginning of the year, is to, we decided to deliver on our capital program. That does is we do spend the CapEx this year as per originally planned, with some small variations, but the key is we deliver all the plan, and we come out strong at Q4. Yeah, we don't get the full production this year, because many of the wells now come end of Q4 or early 2024. That allows us to stick to the spirit of the plan, which is get the production that we said in the 3 years and reduce the capital as we go doing it.
Lots of, lots of the, the, the, the upside will come from just normalizing things that we have now behind pipe and, and, and we're bringing into production.
Got it. Okay, and then maybe just 1 more, if I can. The lower effective tax rate, what's, what's sort of driving the change there, and how long is, is that expected to, you know, stick around for?
Ken?
Thanks, Mike, and thanks, Anthony. What drives it is, I mean, reduction in production that we had in our guidance. Lower commodity prices and higher Vasconia just reduced taxable income expectations for 2023. We're still on track on the capital program, and we did a reorganization the prior year, as you recall, with the Cabrestero reorganization. You know, our effective tax rate just comes down by about 3% for 2023. You know, 2024, it'll be really driven by what your price expectation is, but if you kept it around $80 Brent, I see the same range as being accurate for 2024 as well, Anthony. After that, it's the range of broaden out, because it depends on how successful we are with the exploration program, production levels, and that sort of thing.
for this year, and then going into 2024, I'd use the same range that we, we stated in our MD&A.
Cool. Okay, that's it for me. I'll turn it back. Thanks.
As a reminder, to register for a question, please press * 1 . Your next question will come from the line of Conrad Bereznicki with Peters & Co. Please go ahead. Conrad, your line may be on mute.
Oh, oh, thanks, guys, for taking my question. Can you hear me?
Yes.
Yes.
Awesome. I just wanted to know, how should we think about capital allocation in the back half of the year? Is the preference still NCIB after the base dividends, or could there be some base dividend increases or specials coming?
Thanks, Conrad. When we look at capital allocation, it really is on looking at it holistically on the full year. We have a commitment on the dividend for the year, That annual dividend is really reviewed once a year. When we look at how we're going to return the 1/3 of capital back to shareholders, 1/3 of the fund flow back to shareholders, we take our base dividend, we subtract that, we're buying back shares. You can see in the H1 of the year, we actually returned about 37% of our overall fund flow back to shareholders. Our goal is one-third, so we'll adjust that with pricing, and realizations as we get through the H2 of the year.
As for special dividends, it's always an option, but our preference right now would be to fulfill the 1/3 using the share buyback.
Got it. Thanks for the color. Just 1 more question, just around the gas cycling expansion at VIM-1 next year. Just wondering, what does that mean for liquids recovery, and what are you expecting for liquids growth from VIM-1 going into 2024?
Great. I'll pass that to Eric Furlan.
Thanks, Mike. In VIM, just, just to remind, we're, we're producing about 20 million cubic feet of raw gas right now and making about 3,200 barrels a day of, of gross liquids. We are expanding the facility and the operations to triple that. You could say that operationally, we could get liquids growth up to 10,000 barrels a day and recycling of up to 60 million cubic feet a day. That is our, our plan. We're expecting that to be online later in 2024. We're excited about that opportunity. It's performing very well for us, and we see it as a, a great opportunity in 2024 for us.
Got it. Thanks. That's all I had for questions.
Your next question will come from the line of Luke Davis with RBC Capital Markets. Please go ahead.
T hanks. Good morning, guys. Just curious if you can provide a little bit more context in terms of the drivers for the protests that caused the shut-ins in the quarter. Sounds like, Imad, in your, in your closing remarks, you suggested there might be some mitigation factors going forward, but what's the likelihood of any of that continuing through the back half? Then as, as kind of a follow-up, just curious how much downtime you have built into H2 guidance as well?
Great, I'll pass that to Imad.
We are seeing very positive momentum here. As I mentioned, the cessation of hostilities took place or should take place today. The President Petro was in Bogota this week together, in fact, with our country manager, Daniel Ferreiro. We are seeing completely change of the dynamic in the area, like, we are on the ground. We see how the politics are, how the community mood is, it's pretty encouraging, to be honest. That's why we took the decision to bring a second rig to Arauca. We are being invited by the civil society in that area, as well as the government, to contribute to solutions.
1 example of that is already we grew our Work for Taxes program, which is for Parex to invest government tax money into infrastructure in the area. Last year, we spent $5 million. In 2023, we got $23 million approved, that's a big overall jump. Last month, we've been invited by the Arauca different stakeholders to deliver an additional $20 million of infrastructure works to remediate the damages in roads and infrastructure they had after floods. We're becoming really part of the solution. Overall, I would say in terms of the government support, the overall social situation, I'm cautiously optimistic. Are there other guarantees? No.
We did take that, the fact that there is always a large and predictable element to Colombia, and, and thus, we think we are reflecting that in the new guidance.
Thanks, Imad, and maybe I'll just.
That helpful, then?
From a downtime, down through the downtime. you know, we are expecting a more normalized downtime going forward of around 5%. that, that does incorporate some social disruptions, but, but not the major ones. reiterating Imad's comments, we do see a different situation right now in the Northern Llanos, and have some confidence moving forward with operations. We currently have 2 service rigs and a drilling rig operating in the area, fairly steady. so we do have some, some momentum going forward here.
Great. That's helpful. Thanks. Just, 1 follow-up. I'm just curious if you can frame out, and I know you're probably going through the, the 2024 budgeting process now, but, but even just directionally, if you could frame out where, where you expect, the most of the growth in the portfolio to come from? If you could sort of frame that out on a field by field basis, that'd be, that'd be helpful.
I'm gonna let Imad talk about, you know, the overall strategy for 2024.
Okay. Let me start by 2023. Like, if you start with CapEx and bring it back to pre-shut-in levels, that's a reasonable amount of growth. We have, in general, the quick hits, like the Lucero one we mentioned, that will also keep delivering reasonable amount of production. And we are seeing also very good outcomes in Llanos on the horizontals we've been drilling there, and there's many more to come, including this year. What that does is it does sets us up for strong exits. We mentioned the outlook of above 60,000 barrels a day for Q4. If you just average that and start from there for the year, you're already having reasonable growth year-over-year.
On top of that, if I think about 2024, we, we have different places where we're investing. We, we are investing in VIM, although that will come to the end of the year. We are bringing 2 rigs to Arauca this year, but most of the production impact will come next year, so there, there'll be growth there. In Llanos, we completed the Cabrestero waterflood, but we are late on the ejection volume. We're ramping up, and we expect to see more of the, the, the, the, the impact, in addition to the horizontals that will continue next year. Of course, there's the big E, we have big hopes for, for example, Arauca 8, well, coming late this quarter, that will happen next year.
It is the same thing as the gas in VIM or the gas strategy or the exploration, but also a lot of exploitation based on technology and based on getting the most of our assets. In fact, we're getting better than what we hoped for when we started trying these horizontals and waterfloods and oil-based mud, you name it. These quick hits or optimization of big fields like Soca will only continue. Eric, you want to add to that?
Thanks, Imad. I mean, we, we have had a, a big shift in focus to exploitation activities. I think about our focus in, in 3 mature fields that were very mature, producing about 1,500 barrels a day, you know, a year and a half ago. They're up over 8,000 barrels a day today. New technology, looking at all the opportunities a second time, is creating a lot of, of low-risk opportunity for us to go forward in optimization.
Just 1 follow-up for me as well. Just wondering if you can speak a little bit to capital and where you would expect that to trend going forward.
S ure, Luke. I think what you can do, as you want to look into the future, is still reference our 3-year plan. We're on track to, you know, deliver that and, and really set ourselves up well going into the Q4 , over 60,000 barrels a day. What we're aiming for is to improve capital efficiency, and that means really higher production with less capital required as we've made these investments, really in infrastructure over the last 2 years.
That's great. Appreciate the detail. Thanks, guys.
Thanks, Luke.
Your next question will come from the line of Roman Rossi with Canaccord. Please go ahead.
Morning, thanks for taking my question, guys. Just regarding VIM-43, now that Chirimoya is on the drive, and the capital commitments to the field, are you expecting to relinquish the block, or are you considering any other activities there?
I'll pass that one over to Eric.
Sure. Thanks, Mike. We, we haven't come to a final conclusion there, of course. We, we've just tested the well, we're understanding what, what we saw and, and looking at that play that we were chasing there, an additional play. We, we don't have a conclusion there. We don't have any immediate activity planned in VIM, in VIM 43, but, but we are looking at, at all the prospects yet, so that is still to be decided.
Okay, thanks. Regarding reaching full capacity, production capacity at Capachos, when are you expecting to reach that? Does it depend on new wells or just existing ones?
Go ahead, Eric.
Thanks. For the most part, or for fully, that is existing wells. You know, we have 3 wells that have been basically shut, shut in for the majority of the year so far. Unit 2, that's a very prolific well and the entire Capachos Sur compartment. Really, this is, this is bringing volumes online with pump changes and final completions. We expect to complete a large majority of that work in August. We are expecting to go back up to capacity in the very short term.
Okay, thanks. Just a follow-up on that. If I look at your 3-year base development program, you are projecting like 63,000 barrels for 2024. What's the exit rate for 2023?
Roman, we put into our news release with our revised guidance that, you know, we want to exit above 60,000 barrels a day in Q4, and that really positions us well for that 3-year plan, where we said we'd be at 63,000 as an average in, for next year.
Mm-hmm. Okay. Thank you very much. That's all for me.
Once again, to ask a question, please press * 1 on your telephone keypad. Your next question will come from the line of Kevin Fisk with Scotiabank. Please go ahead.
Thanks for taking my question. The Brent Vasconia differential narrowed in Q2, and I'm curious how you're thinking about the differential going forward.
Thanks, Kevin. You know, I think traditionally, the Vasconia differential, kind of you look at a 5-year average, it's probably been between, you know, $4-$5 a barrel. We had it much higher at the start of this year. It was about $8-$10 a barrel, and, you know, it's, it's gone down, and we've seen even some bids below $4 in the last couple of months here. You know, differentials, as you know, looking at Canadian differentials is very tricky to forecast, but we are seeing very positive things, with, you know, the TMX or Dos Bocas in Mexico, really moving crude out of the Gulf Coast, which is really the price marker for us.
You know, we're forecasting it to be in this $4-$5 as we go forward here for the rest of the year.
Okay, thanks. That's it for me.
Thanks, Kevin.
Your next question comes from the line of Samuel Chen with AllianceBernstein. Please go ahead.
Hi, thank you. Just a quick question. If you can help me to understand, how are we getting from the 54,000 this quarter to 60,000? I read your press release. We got Capachos for about 2,000, Arauca for about 1,000 a bit, and you have the production declines at SOCA. Even if I add them all up, we're not getting back to 60,000. If you can help me understand, that'd be great. Thank you.
Great. I'll pass that to Eric.
Sure, thanks, Mike. The main areas for our production growth are, as I mentioned already, the Capachos area. That is essentially bringing the field back online. Second, of course, we've mentioned Arauca. Those wells, as I talked about in our investor day, historically, have capabilities of 5,000-plus growths per day, so there's a lot of potential there. In addition, we have a very robust program underway in SoCa regarding the horizontal wells. We talked a little bit about the horizontal wells we built. We're exploiting the Mirador reservoir there. That has about 120 million barrels in place, but we have not yet found a good way to produce it. We think we found that now. The horizontal wells are producing well above expectations.
That horizontal program in 34, replacing some of the, some of the program we had, means that we, we grow in 34, more than replaces declines and grows in 34 going forward. We've highlighted the, the main areas we're focusing on. In addition to that, we still have the conventional development going on in Cabrestero and Block 34. That continues to this day. We have the, the, some of the quick hits, Lucero. We are drilling that horizontal as we speak, almost in the horizontal zone, so we expect to have that on production shortly. We know there's oil there. We know it's a very prolific reservoir that'll be multi-thousand barrels a day. When, when we add it all up in addition to the, the, the key areas we've highlighted, and all the other program, that's how we get there.
The very short-term catalysts, I would say, are gonna be the Lucero online and just restoring Capachos. That in itself is gonna be a very big jump for us. Thank you. Just a quick follow-up. Can I assume that the roughly 3,000 barrels per day of sequential increase we're seeing from Q2 to Q1, this is just from the partial recovery? It's not related to any of those enhancements that you just mentioned the last minute. Correct. We have not so far in the H1 of 2023, our downtime in the Northern LLA has been significant, in the range of about 70%. We've been on partial production, and we're trying to get to that full production, and we should be there in the next couple few weeks.
As Matt alluded to earlier, we see a different scenario up in the area right now, in a different environment that we believe will be able to continue operating with normal downtime and deliver those volumes. Thank you. Thank you, guys. Best of luck.
Your next question will come from the line of Oriana Covault with Balanz. Please go ahead.
Hi, thanks for taking my questions. I had 2. If we may go one by one, that, that would be great. The first is a follow-up with regard to the horizontal drilling in LLA-34. Just to understand it and seeing that it's, it has been successful and, and volumes have continued to be steadily going in LLA, like, when do you expect to reap the benefits of this horizontal drilling program, and, and when should we see what would be a reasonable, quote, unquote, expected production growth in the area seeing this horizontal drilling program?
Mike?
Eric. Thanks, Mike. The horizontal program in 34, let me talk a little bit about what our expectations were and what we're seeing. 120 million barrels of oil in place, of good quality oil. Trying a new technique to extract it. First horizontal well that's been on production for just over 4 months, came on production over 3,000 barrels a day. We expected it to decline a lot more than it has. It's still producing about 2,500 barrels a day. We've had payout in about 3 months. The second horizontal well has come online with similar type of performance, and today we're in the 4,500-5,000 barrel a day gross production from a couple of horizontals in Block 34.
Both ourselves and our partner are very excited about this development. We have shifted capital based on the results to this horizontal program, and are replacing some of the conventional development and take advantage of this horizontal development, and adding another 3 wells that'll be online this year in 2023. The impact of that is growth towards the end of the year in Block 34, so more than maintaining decline with a smaller number of wells and actual growth in production. You're already seeing some of that benefit, a little bit of it. Like I say, the second well just came on production about a week ago, so you're not seeing the full potential.
Going forward, the, the exciting part is, for us, not only, this program that's gonna be 3-4 wells firm going into 2024, but where else can we, apply this technology? We're getting better at it. We're drilling the wells more efficiently for lower cost, and, and there are a lot of areas that we can use this technology to exploit, even in SoCa, and I wouldn't be surprised if you see this going into, thinner areas in, in the Mirador, possibly areas in the Paleocene. We're learning as we're going and getting better, and it's exciting program for both ourselves and our partner.
Perfect, thanks. That, that's very clear and, and very encouraging for, for the area. Just 1 final one regarding seeing your cash position dropping below average levels, of course, owing to the cash tax payment and the tax payments and so on. I just wanted to touch base to see if, if you provide, like, a target cash balance, or where do you see as, as a, an optimal cash balance being, of course, the distributions to shareholders via dividends and buybacks for the remainder of the year?
Great. I'll pass that to our CFO, Ken.
Thanks for the question. We, you know, the dividend and the buybacks are funded from the free cash flow that the generation... that's generated from the operation, so I don't need cash on hand for that because, you know, we're pretty confident on what we're gonna generate for the next year. Sure, it's subject to commodity prices, but at the same time, we've been through lots of different commodity price scenarios in Colombia, and it's a very profitable business, and we do have control over our capital's discretionary, our capital expenditures. You know, I don't look at our beginning cash balance as paying a dividend or anything like that. You know, where's an optimal? Well, you know, we like to traditionally, we run, you know, higher than a slight deficit.
We do have a $200 million line that we haven't drawn for 6 years with the banks. Don't expect to have to draw it this time either. You know, I think at the end of the year, if at $80 oil in Vasconia and hitting our production, midpoint of our production targets, we should build our working capital back up to that $50 million-$100 million range, and that means probably $150-$200 in cash. Because included in that $50 million-$100 million is all our tax payable for that year, for the current year that's paid in the following year. Cash is always ahead of working capital, if that helps.
P erfect. That, that helps. Thanks very much.
With that.
Great
I'll turn the call back to Mike Kruchten for any closing remarks.
Well, thank you very much for joining us today, and especially in this new format. We appreciate you being on the call, and if you have any questions, please feel free to engage us directly at Parex. With that, we'll close the call, and have a great summer.