In the recent Q3 2024 Earnings Call, Parex Resources (PXT) outlined its steady operational performance and financial resilience despite ongoing challenges in the Arauca region. CEO Imad Mohsen reported stable production levels and an increase in fourth-quarter guidance. The company expects a free fund flow of $220 million for the year and remains committed to its Colombian assets, with optimism about future drilling prospects and exploration.
Key Takeaways
- Parex Resources reported stable Q3 production, averaging 47,569 BOE per day.
- Fourth-quarter production guidance increased to 49,500 BOE/day.
- The company is optimizing performance and reducing capital expenditures, projecting a $220 million free fund flow for the year.
- Operational fund flow remained strong at $152 million, with a Brent price of $79 per barrel.
- CapEx for Q3 was $82 million, with Q4 expectations between $85 to $100 million.
- Focus on lower-risk developments in Llanos-34 and Cabrestero areas, with positive outlook on the Arantes prospect.
- Future guidance for 2025, including production and dividends, to be announced in January.
Company Outlook
- The company plans to release its 2025 guidance, including production and dividends, in January.
- Parex Resources is actively seeking M&A opportunities within Colombia to align with their high-return exploration strategy.
Bearish Highlights
- Q3 faced a 10% decrease in production due to operational challenges, impacting unit costs.
- Recent drilling has not fully compensated for production declines, although performance met expectations.
Bullish Highlights
- Horizontal drilling in the Mirador Reservoir has been productive, despite well decline rates.
- The company is optimistic about the economic returns from polymer injection in the Llanos-34 area.
- SoCa assets continue to generate cash flow, with completed infrastructure investments bolstering performance.
Misses
- The company experienced delays with a Big 'E' Exploration well, now expected to be drilled in 2025 due to social issues.
Q&A Highlights
- Management plans to balance share buybacks and debt repayment, with no significant dividend increases expected in the near term.
- The company has $147 million in cash on hand and anticipates fully funding its dividend and capital expenditures for 2024.
Parex Resources demonstrated its ability to maintain stable production and strong financial performance amid regional challenges. With a balanced capital allocation approach, the company is poised to continue delivering value to shareholders while exploring growth opportunities in its Colombian assets. The focus on strategic M&A and efficient operational practices suggests a cautious but optimistic outlook for the future.
Full transcript - None (PARXF) Q3 2024:
Operator: Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Parex Resources Q3 2024 Operational and Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. If you would like to -- after the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning.
Mike Kruchten: Good morning, everyone. And welcome to Parex’ third quarter 2024 conference call and webcast. On the call with me today are our President and Chief Executive Officer, Imad Mohsen; our Intern Chief Financial Officer, Cam Grainger; and our Chief Operating Officer, Eric Furlan. [Operator Instructions] 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. Note that all amounts discussed today are U.S. dollars unless otherwise stated. I’ll now turn the call over to Imad. Please go ahead.
Imad Mohsen: Thank you, Mike, and good morning, everyone. While we have faced some challenges throughout the year centered around Arauca, we are putting these in the rear-view mirror and focusing on optimizing performance across our portfolio. The path forward is taking into account a lower corporate growth outlook than originally planned. Right now, we are fully engaged on delivering operational reliability, continuing to decrease CapEx where it makes sense, and prioritizing lower-risk development and exploitation opportunities with strong capital efficiency. Regarding all of these priorities, we are making progress. Production levels have been stable and within management expectations, leading to an increase our mid -- to increase our midpoint guidance from 49,000 BOE a day to 49,500 BOE a day, representing an additional 2,000 BOE per day for the fourth quarter, including an allowance for social disruption. In conjunction, our conservative capital focus has resulted in updated our capital guidance, leading to projected higher free-fund flow of $220 million at midpoint of guidance range. Following recent expectations, I am encouraged by our key asset performance, recent drilling results and the direction we are heading for in 2025. I will now ask Eric to provide additional details on our operational performance. Please go ahead, Eric.
Eric Furlan: Thanks, Imad. In Q3 2024, production averaged 47,569 BOE per day, which is the result of higher downtime, natural decline and Arauca underperformance. At our key SoCa assets, LLA-34 and Cabrestero, production is stabilized with natural decline rates on an annual basis in line with previous management budgeting. This stability is supported by continued focus on water flooding, progression of polymer implementation at Cabrestero, and the significant efforts from our team to manage production rates where possible. At LLA-32, based off the first successful step-out well, we have now drilled two more follow-up appraisal wells. The latest well on stream is producing roughly 2,000 barrels per day growth, which is a positive result. Based on success to-date and our mapping, we spot a horizontal well that is targeting the upper zone. This should allow us to maximize reservoir contact. Following the horizontal, we’ll consider drilling future locations while optimizing the wells drilled to-date. At Capachos, our latest well came online late in the quarter with strong results. The well is producing roughly 5,000 BOE per day growth, which has resulted in the gas processing facility operating at full capacity, leading us to evaluate the facility when thinking about our 2025 plan. Moving forward on the block, we have an exploration commitment well that we need to complete, which we expect to start in the coming weeks. Turning to our Big ‘E’ Exploration, we’re continuing to progress the Arantes prospect at Block 122. The well is now at roughly 17,750 feet. We’re expecting to have preliminary results by year-end, following a successful operational sidetrack. With that, I’d invite Cam to please go ahead.
Cam Grainger: Thanks, Eric. Overall, despite lower production from the prior quarter, we had strong results when it comes to fund flow, as well as our ability to generate a high level of free fund flow with a revised lower capital program. Fund flow provided by operations was $152 million, supported by a Brent price of $79 per barrel, as well as a significant reduction to current taxes. Specifically, the reduction in current taxes is related to multiple factors, including reduced corporate production, lower global oil prices, as well as movement within the Colombian income surtax band. The company had previously accrued for a 15% surtax, but given the depreciation of the oil price in 2024, as well as for the remainder of the year, we now anticipate that the 10% surtax band will be applicable for the company’s 2024 Colombian tax payable. Capital expenditures for the quarter were $82 million. This was lower than forecast due to slower pace of work in Capachos, as well as the deferral of the Hidra Prospect at VIM-1. For the fourth quarter, we expect capital to be between $85 million and $100 million, with bias to the lower end depending on activity levels. Free fund flow for the quarter was $69 million, which was used for return of capital through share repurchases and the regular dividends, as well as we repaid $20 million of bank debt. With financial flexibility at period end, we had a working capital surplus of $38 million and a cash level of $147 million. With that, I will pass it over to Imad for final remarks.
Imad Mohsen: Thank you, Cam. In the shorter term, I’m excited about the emerging results from our Llanos-32 program. As well as that, we should be reaching the total depth on our first footprint prospect in the coming weeks. Additionally, the production stability and performance we are seeing from our key assets, Llanos-34 for Capachos is encouraging. As we think about 2025, our focus is setting an achievable budget that’s centered on lower development and exportation opportunities and strong capital efficiency. This should drive a higher level of certainty in our forecast and permit the delivery of a more predictable outcome for us. We look forward to releasing that information to the market in this upcoming January. To close, I want to say that we acknowledge the challenges today. The Parex team is committed to improving results, and I want to thank our employees, shareholders and partners for their ongoing support. This concludes our formal remarks. I would now like to turn the call back to the Operator and start the Q&A session for the investment community. Thank you.
Operator: [Operator Instructions] Your first question comes from the line of Jeremy McCrea with BMO Capital Markets.
Jeremy McCrea: Thanks. I’ve got a couple of questions here for you. I’ll start with some high-level guidance in that. Is there any time frame when you may be looking to provide more clarity for the dividend, the 2025 production guidance, just as you’ve seen some stability in some of your kind of core production areas here? The second question is just with the asphalt team issues, have you made any progress in finding some potential solvents here that could resolve that? And then just lastly with the Arantes, just with the successful sidetrack and you continuing to move along this path, should we start to think that this well could have some higher chance of success here, I guess, is the best way to phrase it?
Mike Kruchten: Hey. Good morning, Jeremy. Thanks for asking the question. I’ll open up with the guidance on 2025. Obviously, we’re happy to see the production stabilize and you saw that through the October production, again, that we released. We’re really monitoring how we’re producing through Q4, and that really will enable us to set up our guidance for 2025. We will be releasing that in January, and that will also have more context about our return of capital. We’ve approved the dividends for the fourth quarter and we’ll be also talking about how that will progress through 2025 as we see how the year is unfolding. Eric Furlan is going to talk about Arantes and Arauca.
Eric Furlan: Sure. Thanks, Mike. So, in Arauca, Jeremy, so we are completing the Arauca 81 well at this moment and we also have a planned stimulation, the first one on the Arauca 15 well. As we said before, we can’t explain some of the operational, some of the production performance from the zone, so we are trying a stimulation technique and that will be happening during the next few weeks. In Arantes, the recent drilling is going quite well. We are just above casing point or likely close to it this morning, and at that point, we will face the well off and drill ahead into the prospective zones, and so that, as we’ve indicated, that will be before year end. As far as commenting on what we’re seeing in the well, I would say the well is coming in like we expected, but we really don’t know anything until we’ve drilled out the prospective zone.
Jeremy McCrea: Yeah. Thanks, guys.
Operator: Your next question comes from the line of Alejandro Demichelis with Jefferies.
Alejandro Demichelis: Yes. Good morning, guys. Thank you very much for taking the question. I completely understand you’re going to provide more guidance for 2025, but could you give us some kind of indication of how you’re seeing your base production at Llanos-34 in terms of those horizontal wells, how much decline we should expect from Llanos-34 over the next couple of years?
Eric Furlan: Yeah. As far as Block 34, I know there’s some variability this year, but overall, the major assets in SoCa are following our long-term declines and our long-term expectations, so we don’t have any major changes there. Obviously, it’s harder to predict on a week-to-week or month-to-month basis, quarter-to-quarter even, but overall, it is following our plan. We are looking at EOR. As we’ve indicated in Cabrestero, we have the polymer expansion planned for 2025, and our partner in Block 34 is looking at the same. The strategy in 34 and SoCa is to try to stabilize and lower the decline as much as we can going forward. The other comment I’ll have is some of the declines we’ve seen this year at some shaft because [ph] are associated not with the major assets in SoCa, but in some of the horizontal drilling that we’ve been doing in the Mirador Reservoir. Those wells are very prolific and they’re very economic, but they do have higher declines in the wells that can go from 3,000 barrels a day to under 1,000 barrels a day within a year. Very prolific, but that is part of the decline and we had a couple of follow-up horizontals this year that didn’t replace that decline. Overall, though, the major asset is performing like we expected.
Alejandro Demichelis: Okay. In terms of cash flow generation, because you’re talking about EOR and kind of CapEx activities in Llanos-34, will that also impact some of the cash flow generation that you get from there?
Eric Furlan: For the most part, so when -- SoCa, we’re finishing up the development. Of course, the next big project would be the polymer. The thing with the polymer is it’s not a huge amount of capital upfront. The upfront capital investment is relatively moderate and it’s actually the cost of the polymer over time that really adds, that is the big cost component. The nice part about that is we can put the polymer in, see how it works. We’ve proven that it works in Cabrestero. We’ve proven that there’s no operational issues with injecting polymer into these reservoirs at these depths. So and from that perspective, it’s a pay-as-you-go kind of investment and as long as you keep seeing the returns, you can keep injecting. So, it’s not a big amount of risk capital, and if it performs like it does in Cabrestero, we see a strong economic benefit.
Imad Mohsen: So, in our mind, the SoCa assets are -- will be a cash flow for years to come, because the main investment was to build the infrastructure for water plots and the reservoirs related to it. And these are mostly behind us and the upgrade actually here and there and we do stuff for injection. But, overall, they are very cash flow positive. And they are the assets that do understand together with our capability to have a sustainable business.
Alejandro Demichelis: Okay. That’s great. Thank you.
Operator: Your next question comes from the line of Chris Jones with Haywood Securities.
Chris Jones: Hey. Thanks for taking my question. Just on potential M&A and farming opportunities, can you provide a detailed thought on M&A? Obviously, you guys executed the deal with Ecopetrol in the Foothills, but are you looking at other opportunities out there? And I know this question hasn’t been asked in a while, but I’m going to ask it here. Is there an appetite to potentially look outside of Colombia? And then just sort of high-level, what is the rationale behind a potential M&A strategy if there is one?
Imad Mohsen: I was going to start by your second question. We’re not going outside Colombia. We believe in the capital efficiency and the potential of the asset in Colombia and have huge run in Colombia. On the first question, we’ve seen in the last six months more assets on offer in Colombia, specifically from Ecopetrol, than what we’ve seen in the last 12 years. These are assets that Ecopetrol has been proposing for farmers, where you pay as you go, you carry, you don’t pay up front and will deliver potentially good returns if you go in at the right levels. Parex has looked carefully at the assets. We are focusing in particular on two types of assets, either ones that would fit our strategy in the Foothills, where you have the lower-risk, high-return exploration opportunities, but the biggest focus will be also the assets that will have low volatility, high predictability inventory of inflows, waterfloods, exploitation, that could potentially give us long running room and have a visibility on how we maintain more production growth for years to come onto the biggest Foothill upside cap. So the answer is yes, we are looking. It’s something we’ve been working with Ecopetrol on and we hope something good comes out of it.
Chris Jones: Thank you. I’ll hand it over.
Operator: Your next question comes from the line of Kevin Fisk with Scotiabank (TSX:BNS).
Kevin Fisk: Thanks for taking my question. Are you able to comment on how much the OpEx guidance increase was from lower production volumes versus higher costs, and also how do you see OpEx trending beyond 2024? Thanks.
Mike Kruchten: Sure. Thanks, Kevin. So, obviously, we’re roughly about 10% down on production quarter-to-quarter, so that has an impact on the BOE unit cost. So that’s it. The other part of it was -- the other part of it is we did have a very intensive Q3 workover. We had a lot of wells go down. It happens, looking back over the last few years, you do get the odd quarter, the odd month, we have a lot of downtime, so that definitely added. So I think the well service costs and well service and power are two biggest OpEx components. I think it was a bit exaggerated here in the last quarter and should normalize into Q4. The BOE impact, obviously, will remain until we can show growth again and delete that fixed OpEx, if most of the OpEx is fixed. So going into Q4, I would expect more normal well workover costs and similar BOE impact.
Kevin Fisk: Perfect. Thank you very much.
Operator: Your next question comes from the line of Daria Lima [ph] with Bloomberg Intelligence.
Unidentified Analyst: Hi. Thank you for taking my questions. I have one on the financial framework. Looking at your free cash flow for the nine months, it appears to be that you already derisked your 2024 guidance. Does that mean you don’t expect any more free cash flow in the upcoming quarter or is there any more upside in there?
Mike Kruchten: Thanks for the question. I guess as far as the full year 2024, our dividend and CapEx will be fully funded. In Q4, we may have a bit of a timing issue just between fund flow and CapEx and our dividend payment. But on the full year 2024, dividend and capital will be fully funded.
Imad Mohsen: How much cash do you have?
Mike Kruchten: Right now, we have $147 million in cash.
Unidentified Analyst: Thank you. Yeah. And maybe on the capital allocation, so you say your dividend payment remains fully funded. With the remainder cash, do you see yourself using it for the repayment of debt or are you comfortable with the $30 million on your balance sheet and preferring to use the excess cash for share buybacks?
Mike Kruchten: Yeah. We plan to continue the share buybacks and any excess over that will go to debt repayment. There will be probably potential nominal debt over the next quarter or two.
Unidentified Analyst: Thank you. Just last one from me. On -- operationally, on Llanos Foothills, could you perhaps comment on the timeline for it and the resource potential you are expecting? And in case of a successful operation, do you expect it to potentially replace the growth that was originally expected from the Arauca?
Imad Mohsen: So, in terms of the Arantes well right now, the timeline for this first one will be probably in the next two years and we’re putting the last case in point before the prospect zone. It is still a high-risk exploration project. We have a one-in-five chance, roughly, when we announce it. We’re not counting on it to replace any future growth upside, but it is a very significant upside if it does work out and will exceed anything we were hoping for from Arauca. What we are doing in terms of replacing Arauca is the work we’re doing in terms of existing assets, in terms of exploitation, small energy and polymer, as well as some of the opportunities Ecopetrol are offering that we are considering seriously as a bridge. The longer term for the Foothills, and we’re talking here 2026-plus, would have potential to give us disproportionate growth. And in my mind, Arauca was supposed to be that bridge until that moment and now we are looking at the options I just mentioned to fill in that bridge. The opportunities in the Foothills are extremely sizable. The kind of opportunities companies our size normally don’t get the chance to touch and they happened -- the other wells we’re targeting in the Foothills beyond Arantes are much higher probability of success, so they are much less risky. This one was the well that opened the door to the Foothills for us, and now it gives us Ecopetrol, in order to reach the bigger prices as a lower risk one. But hey, I’m definitely crossing my finger for every well we drill.
Unidentified Analyst: Thank you. That’s all from me.
Operator: [Operator Instructions] Your next question comes from Connor Schroeder [ph] with shareholder. Connor, your line might be on mute.
Unidentified Analyst: Yes. I was on mute.
Imad Mohsen: That’s okay.
Unidentified Analyst: Thank you for taking my question today. My question today is about your guidance for free funds. Originally in January, you guys had it pegged at around $220 million, and then with the operational guidance update, it went down to about $170 million. But with the new earnings release, it’s look like -- it’s looking like it’s back up to $220 million. Now, with reduced capital expenditures, is that going to sustain not only the dividend and the buybacks, but also give enough money as well to invest back into the business and to -- essentially, if more injections need to be done, or if any more issues come up, will there be enough to service those capital expenditures and will there be enough to service the buybacks? And my other question is, historically, you guys have been on a rate of buying back around 10% of your company. This year, it’s not as high, so I’m just curious what your allocation is looking like for buybacks from the fourth quarter. And if your assets are selling for very cheap, are you guys willing to ramp up the buybacks in order to reward shareholders?
Imad Mohsen: Okay. Let me start by answering the first question. What you probably are seeing right now is a more conservative view on how we deploy the CapEx. When we were in the high 50s, we had a number of prolific but high decline levels that we were trying to compensate for and on top of that, we were aiming for a growth of 7% per year to 8% per year. With this view right now, it’s to say, how can we have stable production at a reasonable amount of capital efficiency and lower CapEx, much lower CapEx than the last couple of years, that enable us to, one, have that stable delivery of returns to shareholders, but also invest in the future. Like, it’s too early for us to announce the budget for next year, but typically we spend roughly half of, I would say, our expenditure is aiming at enabling future growth, reserves and the other half goes towards sustaining production, which at these levels where most of the production comes from stable, water flooded assets, and now with you are helping, would you require less per barrel investment to compensate for the decline? On the capital allocation, maybe I’ll let Mike answer.
Mike Kruchten: Hi, Connor. Yeah. That’s a good point. In previous years, we would buy back the full 10% of our float with the share buyback program. As you have seen, we’ve moved to more of a balanced approach with return of capital, having a very strong dividend payment and complementing that with the share buyback program that really gets us to returning 33% of our fund flow from operations. The share buyback program is really a lever as prices and production moves. We can adjust that accordingly. This year, we’re still active in the share buyback. We think it provides value given our valuation, and we plan to continue to do that and use that as a lever as we go forward with the dividend as being the main anchor in the return of capital.
Unidentified Analyst: Awesome. And my -- I got one more question. My last question is for you guys. Last year with the dividend, you guys after the buyback ended up paying out less this year after increasing it. Going forward with that 33% payout ratio and the buyback, do you see consistent dividend increases of around maybe 10% a year for the foreseeable future? Do you have a dividend hike increase that you guys are maybe targeting for each year?
Mike Kruchten: Yeah. Obviously, the dividend is under -- it’s a constant discussion at the Board level to review and approve. We’re basically at a 12% yield right now, so it’s probably not prudent to be thinking about significant dividend increases at this level, but it’s something that we review all the time and we think it’s a key component of our total return to shareholders.
Imad Mohsen: We’re not going to increase the dividend.
Unidentified Analyst: Okay. Yeah. I was just curious. I know that one of your core values is the buybacks and I know you guys have increased the dividends more in the future, so I was just curious if you guys were planning on -- staying at the same dividend rate or if you guys are planning on cutting back on the buybacks and ramping up the dividends or staying back on the dividends and ramping up the buybacks as the buybacks do provide really good value right now. That’s what I guess I was trying to ask.
Imad Mohsen: Right now, we are maintaining, like, if you see the announcement for this quarter, we maintained the dividend constant and the buybacks become the swing while we are strengthening the balance sheet where we added maybe $20 million or so in that three-phase. It’s these three components. As Mike said, it all depends on what approves the quarter-per-quarter. I would say the oil price has a lot to do with it. Oil price goes to $100 for buybacks for us.
Unidentified Analyst: Okay. And I think the last question that I can maybe think of as well is I know that you guys had a delay on one of your wells for a social issue, but it was pretty much ready to go. Do you guys have any updates on that well and that social issue and if that’s been worked around or not?
Mike Kruchten: I think the well you’re referring to is one of our Big ‘E’ Exploration wells that we’re excited about the huge prospect and there has been some social challenges entering the area. And so that well has been pushed to 2025. We still expect to drill it and are working in a very collaborative fashion with the communities to try to reach an agreement and move that project forward. It is ready to drill. So once we get that approval, we will be moving with it.
Unidentified Analyst: Awesome. It sounds great, guys. You’ve answered all my questions.
Operator: I will now turn the call back over to Mike for closing remarks.
Mike Kruchten: Thank you very much for joining us today. If you have any questions, feel free to contact us personally at Parex and have a great day. Thank you.
Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.