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Edited Transcript of PXT.TO earnings conference call or presentation 7-Nov-19 4:30pm GMT

Q3 2019 Parex Resources Inc Earnings Call

Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Parex Resources Inc earnings conference call or presentation Thursday, November 7, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David R. Taylor

Parex Resources Inc. - President, CEO & Director

* Kenneth G. Pinsky

Parex Resources Inc. - CFO & Corporate Secretary

* Michael Kruchten

Parex Resources Inc. - SVP of Capital Markets & Corporate Planning

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Conference Call Participants

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* Al Stanton

RBC Capital Markets, Research Division - Analyst

* Darrell Bishop

Haywood Securities Inc., Research Division - Head of Research & Director

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Presentation

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Operator [1]

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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 September 30, 2019. Like all Parex disclosure documents, the complete financial statements and related MD&A are available on the company's website at www.parexresources.com and on SEDAR.

Before turning the meeting over to Mr. Dave Taylor, President and Chief Executive Officer of Parex Resources Inc., I would like to mention that this call is being recorded, so it will be available for playback on the company's website. Parex 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 to update or revise this information to reflect new events or circumstances, except as required by law. (Operator Instructions)

I would like to turn the call over to Parex' President and Chief Executive Officer. Please go ahead, Mr. Taylor.

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David R. Taylor, Parex Resources Inc. - President, CEO & Director [2]

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Thank you, operator, and thanks, everyone, for joining our Q3 conference call and for your support of Parex Resources. With me today are Ken Pinsky, Chief Financial Officer; Eric Furlan, Chief Operating Officer; Ryan Fowler, Senior VP Exploration; and Mike Kruchten, Senior VP Capital Markets and Corporate Planning. Before we start, our Q&A, I'd like to provide an overview to our shareholders on our Q3 financial results, operations and discuss 2020 guidance.

Third quarter was highlighted by strong netbacks of the USD 29.61 per barrel and funds flow from operations of $143 million or CAD 1.31 a share. With free cash flow of $94 million, we repurchased 3.2 million shares and returned CAD 66 million to our shareholders while increasing our working capital to USD 280 million. Q3 earnings were $57 million or CAD 0.53 a share. I'd like to give a brief operational update that highlights a few of the key projects where we're making significant progress.

In exploration in Q4 2019, we're planning a robust exploration program with wells on block LLA-10, the Tautaco well; and VIM-1, the La Belleza, which are nearing their primary objectives. Also over the next 4 weeks, we plan to spud wells on LLA-32, the Azogue prospect; CPO-11, the Daisy prospect; and 2 Aguas Blancas Southern expansion exploration wells. At Capachos, we anticipate moving a service rig for our workover operation at Capachos 2 to the Andina-3 development well to complete a placement on production in the coming weeks.

Construction of a flow line from the Andina pad to the central gas processing facility located on the central pad has been delayed due to a permitting issue to midyear 2020, thus reducing Q4 2019 and the first half 2020 production by approximately 2,500 barrels a day net. We're confident that we will receive the regulatory approval in Q1 2020 to allow for the full line construction to begin in the spring of 2020.

With respect to ESG, our commitment to social responsibility in the communities where we operate or have employees continues to be important to the company. In October 2019, Parex, jointly with the Chairman of the Board, made a CAD 3.24 million gift to the Faculty of Science at the University of Calgary to mark the company's 10-year anniversary. This gift establishes 6 innovation fellowships intended to support innovators and encourage research with positive social impact.

In Bogotá, Parex donated USD 1.6 million to the Hospital of Simon Bolívar burn unit, the most specialized center for Colombia and also serving patients from the Caribbean, Peru and Ecuador. This is a public hospital treating all patients regardless of income.

With our 2020 initial guidance, we're targeting 14% year-over-year production per share growth with a full year production range of 54,500 to 56,250 barrels of oil equivalent per day.

Including the forecasted increase in working capital on a debt-adjusted basis, we expect to achieve a 23% year-over-year production per share growth. We will have USD 520 million to USD 550 million in funds flow, assuming Brent oil prices of $60 per barrel for the year. We'll have USD 210 million to USD 240 million of spending for the full year capital program, and this includes the drilling of 11 exploration prospects in Colombia.

Following the completion of our full 10% share buyback program in 2019, we're anticipating returning more cash to our shareholders in 2020. Subject to the approval of the Toronto Stock Exchange, we plan to renew our NCIB on December 23, 2019, with the intent to repurchase another 10% of the public float or approximately 14 million shares.

Parex is unique in our industry as the company continues to generate significant free cash flow against the best-in-class balance sheet. We expect to exit 2019 debt-free with over $300 million of working capital. And based on our $60 Brent forecast for our 2020 budget, we will reduce our shares by 14 million and exit 2020 with nearly $400 million of working capital or approximately CAD 4 a share. This balance sheet strength provides significant optionality to invest in conventional resource growth opportunities, which may include jurisdictions outside of Latin America.

With this brief introduction, I'd like to turn the line back over to the operator to start the Q&A. Operator, over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Darrell Bishop from Haywood Securities.

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Darrell Bishop, Haywood Securities Inc., Research Division - Head of Research & Director [2]

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I just have 2 quick questions, both related to the 2020 guidance. First of all, with respect to your production guidance. I know you mentioned the flow line potentially reducing 2,500 barrels a day in the first half of 2020. But I think when a lot of clients are looking at the 5% growth year-over-year, guys are looking at it as being conservative.

So just want to get a break down from you guys on where that capital is going from a development and exploration perspective. And then second question here is just related to some of the optionality, Dave, that you mentioned that your free cash flow and the cash on hand for next year, and where those opportunities might lie. Particularly, you guys mentioning opportunities outside of Colombia in Latin America. I just wonder if you can give some more color around what jurisdictions might be piquing your interest right now.

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David R. Taylor, Parex Resources Inc. - President, CEO & Director [3]

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Sure. I'll start with a second question, Darrell, and then I'll ask Ken, maybe, to address the first question. Right now the premise is -- that we had is we want to be opportunistic given the balance sheet strength and strong working capital position that we have. We believe there should be some high-quality assets on the market as larger companies potentially shed some assets. So we're well positioned to look after some of this and take care of maybe picking up some of those opportunities.

What we want to look for is material conventional assets in proven basins, we prefer oil, politically stable places that would have strong netbacks, recycle ratios and future growth. So it's kind of a more of a global look at possible places we could invest rather than having a specific place right now. But we would look outside of Colombia and potentially outside of Latin America if we could find opportunities to fit those criteria.

I'll turn it over to Ken for the first part.

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Kenneth G. Pinsky, Parex Resources Inc. - CFO & Corporate Secretary [4]

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Thanks, Dave. In respect to your comments on capital, in our presentation, we have outlined our sources of cash going through to incremental cash at different prices. And you can see, that's on Page 8. And what you can see is for maintenance capital, which is really production or capital to keep our production flat from Q4 into 2020. We have about $115 million to $125 million, with about $100 million of that -- $90 million to $100 million being spent on Block 34 and the rest on various operated properties.

On the development side, we have $30 million to $40 million, that's mostly Aguas Blancas and Boranda. We have exploration of $65 million to $75 million, and we have up to 11 exploration prospects in Colombia, and we detail those in the presentation by block. And then we have a share buyback that we expect will cost approximately $200 million. And then that gives us -- that can all be funded at lower than $60 Brent. So we will -- at $60 Brent, we'd still be increasing our working capital from $300 million at the end of 2020 -- or 2019 forecast to at the end of 2020 approximately $400 million. And this gives us this optionality, as Dave discussed, that allow us to look for other prospects and opportunities that in this world where we're not seeing any new cash for the oil and gas business, we think we'll see companies have divest to some good assets and we want to be able to look at these and see if they fit within what we want to do going forward with the company.

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Operator [5]

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(Operator Instructions) The next question is from Al Stanton from RBC Capital Markets.

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Al Stanton, RBC Capital Markets, Research Division - Analyst [6]

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Yes. A couple of largely unrelated questions. Just on the question about acquisitions in terms of whether you feel there's a need for you to expand outside the Calgary in terms of the logistics and whether you're actively looking for it. Well, are there any opportunities you're currently reviewing at the moment? And then the next question would be, would you consider opening offices, let's say, in London or elsewhere to give you a larger geographical footprint? And then as I said, completely unrelated, I was just wondering if there's any guidance on the spend through next year, whether it was first half or second half-weighted.

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David R. Taylor, Parex Resources Inc. - President, CEO & Director [7]

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Yes. Just in terms of acquisitions -- it's Dave, we're always looking at things that are on the market and especially things that are in our own backyard, which is Latin America or Colombia, specifically. And we're just, as we mentioned, starting to dip our foot in the water outside Colombia a little bit. So we don't have any specific things that we're looking at that I can talk about.

In terms of relocating offices outside of Calgary, we haven't talked about that. I'm looking around the table here, and none of the guys seem to want to move to Houston, I don't think. But -- so we haven't really done that. In terms of the weighting of the capital program, Mike?

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Michael Kruchten, Parex Resources Inc. - SVP of Capital Markets & Corporate Planning [8]

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Yes. That's probably 60-40 in the first of the year compared to the second half of the year.

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Operator [9]

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(Operator Instructions) Mr. Taylor, there are no further questions on the telephone lines.

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David R. Taylor, Parex Resources Inc. - President, CEO & Director [10]

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Thank you, operator. I'd like to take this opportunity to thank you for interest in Parex and your continued support of the company. For further information, we invite you to visit our website or call us. Thank you, again, and have a good day. Operator?

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Operator [11]

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Thank you. That concludes this morning's conference call and webcast. If you would like to replay the call, please visit the Events page of the company's website under Newsroom. Thank you and goodbye.