Q2 2023 Parex Resources Inc Earnings Call
Good morning, everyone and welcome to Parks resources second quarter, 2023 conference call and webcast my.
My name is Mike Kruchten, Senior Vice President of capital markets and corporate planning our parks.
On the call with me today are Ahmad molten parks, as 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 anytime participants on the phone compressed star one to submit a question.
As a reminder, this conference call include 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 SEDAR plus dossier.
All amounts discussed today are in U S dollars unless.
Yes, otherwise stated.
Go ahead Mark.
Thank you Mike.
Yes.
Yes.
I would also.
Echo your comments regarding our terrific sustainability efforts.
The goal.
Yes.
As Ken brief.
Okay.
Sorry for that.
So let's start again, thank you Mike Good morning, everyone before I turn it over to Kevin 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.
We'll end the call with comments on the momentum that you are building a velocity on this as well as our updated 2023 guidance and outlook.
First half of 2023.
Proud to say that we continue to progress the three core pillars of our strategy.
First exploitation of technology and Socal, we are seeing success from the Horizontals that you have drilled and we are continuing to progress.
Waterflood plants also and you have 38, we had an oil discovery in the southern reservoir on one of our quick hit 12, 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. There goes the Mou and we also made the decision to expand the facility.
One and 2024.
And third on Big E exploration, we did drill a desk Mr Morial, well at <unk>, which was the first of the three big wells.
23 program.
Slide the one not delivering the outcome that we hoped for we continue to see significant exploration upside potential in Colombia.
We plan to spud two more high impact <unk> second half of 2023.
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.
Thank you Ahmed despite production impacts experienced in the northern Yano at our capacities block the second quarter delivered strong operational and financial results that highlight the robust profitability derived from our Colombia operations.
And flow provided by operations was U S $155 million, which was lower than prior quarters.
Primarily due to decline in global crude pricing notwithstanding our production volume growth.
Average Q2 2020 production of 54120 BOE per day was up 6% compared to Q2, 2022 and up 5% from the prior quarter.
Estimated average production would have been closer to 58000 BOE a day if it not for the temporary shut ins experienced at our patches block.
That were outside of our control.
The net effect was loss production and drilling progress at both <unk> as long as our railroad, which overall had negative impact of approximately 3500 3800 barrels of oil equivalent per day on the quarter.
<unk> will discuss the annual impact 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 in CIB.
Year to date 2023, we have repurchased approximately three 6 million shares or approximately 3% of the fluid.
The mechanism mechanism <unk> funds flow to the shareholders over and above our Canadian $37.05 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.
You expected higher fund slope operations, which will be due to increased production higher benchmark oil prices and our narrower differential for heavy crude stream all the while capital expenditures are forecasting flat based on our first half 2023 run rate.
With that I will pass it onto 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.
<unk>, which for the second year in a row.
Integrates the task force on climate related financial disclosure or TCE ft.
Some noteworthy achievements from our 2020 to report are.
Making.
Progress against our 2030 emission intensity target of 50% by achieving a 37% cumulative reduction in ghd emissions from our 2019 baseline and 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 four core priorities.
Communities.
<unk> 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.
And with that well.
Now to return the call back to Mark 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 alturas terrific sustainability report.
Moving on to Kevin briefly mentioned the company had say social related challenges throughout the first half of the year, the northern Yana, which resulted in temporary shutdowns at <unk> at our outcome.
So continuous engagement with stakeholders community leaders and government officials both assets have been fully operational since late June .
Exiting the quarter was positive momentum.
At <unk>, we are opening up production on wells already drilled notably capacity three so far of Andina to Michel.
The main drivers to increase production on the block.
Throw alco.
We're optimistic about our multiyear drilling campaign and have made the decision to accelerate our program, thereby bringing a second rig onto the block.
Currently drilling our <unk>, which is at 11 5000 feet and expect it to TD late Q3.
We are expecting to spud, our orca eight our second EUR.
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.
3100 barrels a day.
We experienced slower than expected production from.
Soca assets because of higher downtime.
Technical and social.
When we originally set guidance we widened.
So we widened it's taken into account.
Accounts for up uncontrollable above ground factors, which in my mind constitute approximately three to four months deferment of our growth plans.
Given the duration and the extent of the shutdowns. We are updating our 2023 average production guidance to 54 to 57000 Boe's a day.
Our capital expenditure guidance also being updated to a range of $450 million to $475 million.
As many of our prior guidance is driven by the standby costs associated with the shutdown and the increased spending at <unk> exploration well, mainly because of the testing.
Looking forward the remaining of the year I am encouraged by our company's momentum and the work our team is doing to build the strategy foundations for future upsides.
Having just returned from Bogota last week.
Where we had extremely productive meetings with ecopetrol of their relevant ministries.
Pleased with the progress that you are making to leverage the valuable.
Emily <unk>.
In Q4, we have plans to spud a third a final big E. Firstly, one of the 2023 program John was 1% to two called <unk>, 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 two partners.
To finish.
Part of the ongoing Colombian peace process, a bilateral cessation of.
<unk> is set to come into effect.
To date.
Which is encouraging.
And so without 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 60000 barrels a day and that puts us back on track to deliver on our three year plan objectives.
I want to thank our employees in Calgary in Colombia for their hard work and our shareholders for their continuous 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 Star then the number one on your telephone keypad again that is star one for any questions and we'll pause for just a moment to compile the Q&A roster.
Our first question will come from the line of Anthony <unk> with Barclays. Please go ahead.
Hey, good morning, guys and thanks for taking my questions.
Maybe just to start on the capital budget side final costs for <unk> was $49 million or about 10% of the original allocation.
Do you think about that 10% of the budget going towards big E for the balance of the year and then into 2024.
Yes.
Okay.
Thanks, Anthony for that question.
When we look at the Biggie.
Have roughly $50 million allocated to biggie every year.
And.
Turmoil, we had cost overruns on the island certainly the decision to chase and test it added extra capital to that.
One factor was this was a 100% working interest well in 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 'twenty four is a good proxy for how we will allocate the biggie as we go forward.
Got it okay. Thanks.
And then staying on capital you laid out a pretty comprehensive three 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 <unk> to talk more about high level the strategy, how we see the business.
Yes.
For me, what we did having seen the disruption beginning of the year.
As to.
We decided to deliver on our capital program. So.
What that does is we do spend the capex this year.
The plan was.
With some small variations, but the key is we deliver all of the plant and we come out strong at Q4.
Yes, we don't get the full production this year because many of the wells now come end of.
Q4 or early 'twenty.
<unk> board, but we that allows us to stick to the spirit of the plan, which is get the production that we said in three years and reduce the.
Reduce the.
Yeah.
Capital as we go doing it.
Lots of.
Lots of the the upside will come from just normalizing things that we have now behind pipe and we're bringing it to production.
Got it Okay, and then maybe just one more if I can be.
The lower effective tax rate, what's what's sort of driving the change there and how long does that expected.
Kick around four.
Ken.
Yes, Thanks, Mike and thanks Anthony.
Drives it as reduction in production that we had in our guidance lower commodity prices and harvest Scania just reduced taxable income expectations for 2023.
But we're still on track and the capital program and we did a reorganization to prior year as you recall.
With the cabinet sterile reorganization and so our effective tax rate just comes down by about 3%. After 23 and 24, it will be really driven by which a price expectation is kept at around $80 Brent.
I see the same range as being accurate for 'twenty 'twenty four is well Anthony and then after that it's the range of broad note because it depends on how successful we are with the exploration program and production levels and that sort of thing but.
For this year and then going into 'twenty four it used the same range that we stated in our MD&A.
Well, Okay. That's it for me I'll turn it back thanks.
And as a reminder to register for a question. Please press Star one on your next question will come from the line of Conrad Bird Nicky with Peters <unk> co. Please go ahead.
Okay.
Conrad your line may be on mute.
Thanks, guys for taking my question can you hear me.
Yes, yes.
I just wanted to know how should we think about capital allocation in the back half of the year is the preference still NCI be after the base dividends or could there be some base dividend increases our specials coming.
Thanks Conrad.
When we look at capital allocation. It really is on looking at it holistically in the full year.
We have a commitment on the dividend for the year and that annual dividend is really reviewed once a year.
When we look at how we're going to return the one third of capital.
Back to shareholders, one third of the funds flow back to shareholders, we take our base dividend, we subtract that we're buying back shares.
And you can see in the first half of the year, we actually returned about 37% of our overall funds flow back to shareholders. Our goals one third so we'll adjust that with pricing.
And realizations as we get through the second half of the year.
As far as special dividends, it's always an option for our preference right now would see to fulfill.
The one third using the share buyback.
Got it thanks for the color just one more question just around the gas cycling expansion had been one next year just wondering what does that mean for liquids recovery and are you expecting for liquids growth from des Moines going into 2024.
Great.
Pass off to Eric Furlan.
Thanks, Mike.
And Vim, just just to remind we're producing about 20 million cubic feet of raw gas right now and making about 3200 barrels a day of gross liquids, we are expanding the facility and the operations triple that.
So you could say that operationally, we could get liquids growth up to 10000 barrels a day and recycling of up to 60 million cubic feet. A day. So that is our plan, we're expecting that to be online later in 'twenty four.
But we're excited about that opportunity is performing very well for us and we see it as a great opportunity in 'twenty 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.
Yes, thanks, 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.
It sounds like commodity 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 and then as kind of a follow up just curious how much downtime you have built into second half guidance as well.
Great I'll pass that to Ahmad.
Yes.
We are seeing very positive momentum here as I mentioned, the cessation of hostilities took place.
Or should take place today.
President petrol was in.
Borgata.
This week together effect with our country manager Danielle for air.
And we.
We are seeing completely changed the dynamic in the area.
We are on the ground, we see how.
We see how the politics are.
The community is.
And thats pretty encouraging.
That's why we took the decision to bring a second rig to our outcome.
We are being invited by the civil Society in that area as well as the government to contribute to solutions.
One example of that.
Already we grew our work for Texas program lets us put backs on the government tax money into infrastructure in the area. So last year. We spent 5 million Bucks in 2023, and we got $23 million approved so that's the big overall.
The last months, we have been invited by the different.
Different stakeholders to deliver an additional 20 million bucks.
Infrastructure works to remediate the damages in roads and infrastructure they have.
After floods.
So we're becoming really part of the solution. So overall I would say in terms of the government support.
The overall social situation.
I'm cautiously optimistic is there other guarantees so.
So we did take that the fact that there is always the largely unpredictable element to Colombia, and thus we think we are reflecting that in the new guidance.
Thanks, Matt and maybe I'll just kind of is helpful and then Mcdonald's.
Okay.
From a downtime bands for the downtime, we are expecting a more normalized downtime going forward of around 5%.
That does incorporate some social disruptions, but not the major ones and reiterating in Matt's comments.
We do see a different situation right now in the northern channels.
Some confidence moving forward with operations. We currently have two service rigs and the drilling rig operating in the area.
Pretty steady.
And so we do have some some momentum going forward here.
Great that's helpful. Thanks.
One follow up I'm, just curious if you can frame.
Frame out I know you are probably going through the 2020 for budgeting process now, but even just directionally if.
If you could frame out where you expect.
Most of the growth in the portfolio to come from and if you could sort of frame that on a field by field basis that there would be helpful.
I'm going to let Mike talk about the overall strategy.
Our strategy for 2024.
Okay, Let me start by 'twenty like if you start with capacitors and bring it back to pre shutdown levels.
That's a reasonable amount of growth.
We have in general the quick hits like the Sarawak, We mentioned that we'll also keep delivering reasonable amount of production.
And.
We are seeing also very good outcomes in the analyst on the on the Horizontals, we've been drilling there and Theres many module.
To come including this year, what that does is it does sets us up to four a strong exit. So we mentioned the outlook of about 60000 barrels a day for Q4.
If you just average that.
Start from there for the year, you're already having reasonable growth year on year.
On top of that.
If I think about <unk>.
124, we have different places, where we're investing we are investing in vim, although that will come to the end of the year.
We are bringing two rigs to our outcome this year, but most of the production impact will come next year. So that there will be growth there in <unk>.
We completed a thorough waterflood, but we are.
On the injection volumes, so we're ramping up and we expect to see more of the.
The impact in addition to the Horizontals that will continue next year.
And of course, there's the biggie.
We have big hopes for for example.
It was coming late this quarter that will happen next year. So it does the same thing the guests in them or the guest strategy exploration, but also a lot of expectation based on technology on base and based on getting the most of our assets in fact, we're getting better than what we hoped for when.
You start to try and do these horizontals.
Floods in oil based mud you name it.
And these quick hits or optimization of big feels like silica will only continue Eric do you want to add to that.
Yes, Thanks, Matt I mean, we have had a big shift in focus exploitation activities I think about our focus in three mature fields that were very mature producing about 500 barrels a day a year and a half ago. They are up over 8000 barrels a day to day, so new technology looking at all the opportunities set.
Time is creating a lot of.
Low risk opportunity for us to go forward and optimization.
Just one 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.
Yeah sure look I think what you can do as you wanted to look into the future as bill referenced a three year plan, we are on track to.
Deliver that and really set ourselves up well going into the fourth quarter.
Over 60000 barrels a day and what we're aiming for is improved capital efficiency and that means really higher production with less capital required as we've made these investments really in infrastructure over the last two years.
That's great I appreciate the detail thanks, guys.
Thanks Luke.
Your next question will come from the line of Rodman Rossi with Canaccord. Please go ahead.
Okay.
Morning, Thanks for taking my question guys.
Chuck regarding <unk>.
<unk> now that it's really more share with it right.
And the capital commitments are you.
William distributor or are you considering any other activities there.
I'll pass that one over to Eric.
Sure. Thanks, Mike.
We haven't come to a final conclusion there of course, we just tested the well we are understanding what we saw in looking at that play that were chasing there an additional play. So we don't have a conclusion there we don't have any immediate activity planned.
And then 43, but we are looking at all the prospects yet so that is still to be decided.
Okay. Thanks.
Regarding reaching full capacity.
But production capacity at the by choice when are you expecting to reach that John that would depend on new well towards our existing line.
Go ahead Eric.
Thanks for the most part.
Fully that is existing wells.
We have three wells that have been basically shut shut in for the majority of the year. So far andina to this very prolific well and the entire departure sure compartment. So really this is this is bringing volumes online with pump changes and final completions.
And we expect to complete a large majority of that work in August . So we are expecting to go back up the capacity in the very short term.
Okay, Thanks, and just a follow up on that.
At your rebate the RB development program.
Europe was shaking like 63000 barrels or any four so what's the exit rate for 2003.
Roman we put into our news release with our revised guidance.
We want to exit above 60000 barrels a day.
In Q4, and that really positions us well for that three year plan, where we said we'd be at 63000 is an average.
For next year.
Okay.
Okay. Thank you very much that's all for me.
And one for Dan to ask a question. Please press star one on your telephone Keypad. Your next question will come from the line of Kevin <unk> with Scotiabank. Please go ahead.
Thanks for taking my question, the Brent plus 20 differential narrowed in Q2 and Im curious how youre thinking about the differential going forward.
Yes, thanks, Kevin.
I think traditionally the best only a differential can be looking at a five year average has probably been between.
Four to $5 a barrel we had much higher started this year is about eight to $10 a barrel.
And.
It's gone down and we've seen even some bids below $4 in the last couple of months here.
Differentials as you know.
Looking at Canadian differentials is very tricky to forecast, but we are seeing very positive things.
With the Tms, our dos focus in Mexico, really moving crude out of.
The Gulf Coast, which is really the price marker for us. So we're forecasting it to be in this $4 to $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 Daniel Chan with Alliance Bernstein. Please go ahead.
Great. Thank you just a quick question.
Help me to understand.
How are we getting from the 54000 this quarter to 60000 I read your press release.
We've got capacity of about 2000 a.
I woke up about any of the production declines at Soca lately.
I didn't know about.
We're not getting back to 60000 can you 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 goals are.
As I mentioned already the <unk> area that is essentially bringing the field back online.
Second of course, we've mentioned a railcar.
Those wells as I talked about in our Investor day.
Historically, our capabilities of 5000, plus gross per day, so there's a lot of potential there.
In addition, we have a very robust program underway and sokha regarding the horizontal wells. So we talked a little bit about the horizontal wells, we drilled were exploiting the mirador reservoir. There that has about 120 million barrels in place, but we have not yet.
<unk>.
A good way to produce it we think we found that now the horizontal wells are producing well above expectation so that horizontal program in 34 reps.
Replacing some of the some of the program we had.
Means that we grow in 34 more than replaces declines and grows 34 going forward. So we highlighted the main areas. We're focusing on in addition to that we still have the conventional development going on in cabinets sterile in block 34 that continues to the stake we have that some of the quick hits new Sheryl.
Our drilling the horizontal as we speak almost in the horizontal zones. So we expect to have that on production. Shortly we know theres oil there. We know its very prolific reservoir that'll be multi thousand barrels a day. So when we add it all up in addition to the key areas we've highlighted.
And all the other program, that's how we get there, but they're very short term catalysts I would say are going to be the Lucerne online and just restoring capacities so that in itself.
He is going to be a very big jump for us.
Thank you. So just a quick follow up can I assume that the roughly 3000 barrels per day of sequential increase we're seeing from Q2 to Q1. This is just from the partial recovery.
Not related to any of those enhancement that you just mentioned the last minute.
Correct, we have not.
So far in the first half of 2023, our downtime in the northern channels has been significant in the range of 70% and so 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 of few weeks and as Matt alluded to earlier, we see a different scenario up in the area right now in a different.
Environment that we believe will continue to be able to continue operating as normal downtime and deliver those volumes.
Okay. Thank you. Thank you guys best of luck.
Your next question will come from the line of Oriana Cobalt with Merrill Lynch. Please go ahead.
Hi, Thanks for taking my question.
I had two if we may go one by one that would be great. In the first is a follow up with regard to the horizontal drilling.
Dennis <unk> for Gist.
Just to understand it and seen that it has been successful in volume continued to be that it would be going in guidance like when do you expect to reap the benefits of the toy hands on training program and when should we see why it would be reasonable.
Quote unquote.
Our expected production growth in the area.
Horizontal drilling program.
Eric.
Thanks, Mike, Yes, the horizontal program 34.
Let me talk a little bit about what our expectations were and what were seeing again 120 million barrels of oil in place of Richard good quality oil.
Trying new techniques to extract that first horizontal well thats been on production for just over four months came on production over 3000 barrels a day, we expected it to decline a lot more than it has it's still producing about 2500 barrels a day.
So we've had payout in about three months or the second horizontal wells come online with similar type of performance and today. We're in the 4500 to 5000 barrel a day gross pre.
Adoption from 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 what another three wells that will be online. This year in 2023 now the impact of that is growth towards the end.
The year in block 34, so some more than maintaining decline with a smaller number of wells and actual growth in production. So you're already seeing some of that benefit a little bit of.
Like I say the second well just came on production about a week ago. So.
So youre not seeing the full potential.
<unk>, but going forward the exciting part is for US not only this program that's going to be three to four wells firm going into 'twenty, four 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 there are a lot of areas that we can use this technology to exploit even in socal and I wouldn't be surprised if you see this going into thinner.
Thinner areas in the Mirador, possibly you are using to Paleocene and so we're learning as we're going and getting better and it's exciting program from both ourselves and our partner.
Okay.
Perfect. Thanks.
Very clear and very encouraging for the area and just one final one regarding.
Senior cash decision dropping below average levels of course, owing to the cash tax theme and the tax payments and so on I just wanted to add.
If you provide like a target cash balance or where do you see us as an opt.
Optimal cash.
Cash balance Glu 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.
The dividend and the buybacks were funded from a free cash flow.
The generation that's generated from the operation So I don't need cash on hand for that because.
We're pretty confident on where we're going to generate for next year and ensured 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 is discretionary capital expenditure. So.
I don't look at our beginning cash balances paying a dividend or anything like that.
Whereas an optimal well we liked the traditionally we run higher than a slight deficit. We do have a $200 million line that we haven't drawn for six years with the banks.
Don't expect to have to draw it this time either but.
I think at the end of the year at $80 oil invest going in hitting our production mid point of our production targets.
Shipbuilder working capital back up to that $50 million to $100 million range and that means probably a 150 to 200 of cash because included in that $50 million to $100 million is all our tax payable for that year for the current year that's paid in the following year.
So cash is always ahead of working capital.
If that helps.
Okay, Yes.
Perfect that helps thanks very much.
And with that 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 our parks.
And with that we'll close the call and have a great summer.
[music].