Parex Resources Inc.

All participants, please stand by. Your conference is ready to begin. Good morning, everyone, and welcome to Perixx Resources' second quarter earnings call and webcast. Yesterday, Perixx released its unaudited financial and operating results for the quarter ended June 30, 2020. Like all Perixx disclosure documents, the complete financial statements and related MD&A are available on the company's website at www.perixxresources.com and on CDER. Before turning the meeting over to Mr. Dave Taylor, President and CEO of Perixx Resources, Inc., I would like to mention that this event is being recorded, so the recording will be available for playback on the company's website. Perixx 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 Perixx assumes no obligation to update or revise this information to reflect new events or circumstances except as required by law. Please note that at any time, participants on the webcast can submit their questions under the Ask a Question tab at the top of the webcast interface, and participants on the phone can press star 1. I would now like to pass on the meeting to Perik's President and CEO. Please go ahead, Mr. Taylor.

Thank you, Operator. And thanks to everyone on the line for joining myself and the senior leadership team for our Q2 conference call. We appreciate your support of PARCC's resources. Before we start our Q&A session, I'd like to provide some highlights of our Q2 financial results and discuss our plans for the remainder of 2020. I begin by stating our priority during the COVID-19 pandemic remains the health and safety of our employees, our contractors, and the communities where we operate. To minimize social interactions, we changed our operating procedures and reduced field activity, which impacted both CAPEX and production in Q2. our office staff in Bogota and Calgary continued to work primarily from home. In the second quarter, our financial results were strong despite declining global oil prices and ongoing market uncertainty. As a result of voluntary shut-ins, Q2 production averaged around 40,900 barrels per day, a 25% decrease from the previous quarter. PAREX cash net back was $9.96 per BOE, generating funds flow of $39 million or $0.28 a share of With limited operational activity, our capital expenditures were $5 million, and we repurchased 1.1 million shares. The company maintained its financial strength with $334 million in cash and no debt. We exited the second quarter with working capital of $339 million and $200 million of undrawn credit facility. For a 2020 outlet, ARCS is an exceptional financial position in the industry as the company continues to maintain a best-in-class balance sheet, with liquidity exceeding $500 million. In early March, we took decisive action to protect our financial position and to weather the ongoing crisis, as well as take advantage of potential growth opportunities that may arise. As stated at the last quarterly conference call, production levels in the second half of 2020 will be dependent on commodity prices showing stabilization. During Q2, we began to observe greater visibility to stronger netbacks, providing options for the company to, firstly, plan a gradual restart of production volumes from shut-in fields, which were reduced to preserve value. Currently, we're producing approximately 44,000 barrels of oil per day and targeting Q3 average production in the range of 42,000 to 44,000 barrels of oil equivalent per day. Secondly, we're going to resume our capital expenditure programs, and that's contingent on ensuring the welfare of our staff and the communities surrounding our operations. We estimate CapEx to be in the range of $65 to $70 million for the second half of 2020, with the priority being Southern Cassinary Core Area Completions and Development Wells, advancing the VIM-1 La Beliza discovery with Civil Works initial facilities and long lead items, and finally drilling a veranda appraisal well and a Fortuna exploration well in the Middle Magdalena Basin. We will continue to review and evaluate business development opportunities in Columbia as well as other jurisdictions. With this brief overview, I'd like to turn the line back to the operator to start the Q&A session. Operator, over to you.

Thank you. We will now take questions from the telephone lines. If you have a question or are using a speaker phone, please lift your hands up before making your selection. Please press star 1 on your telephone keypad if you have a question. Our first question is from Phil Skolnack from Peak Capital. Please go ahead. Your line is now open.

Yeah, thanks, A Capital. Just a couple questions. First, on the CapEx. It was a little bit lower than what you had pre-guided. I'm assuming that's because of the whole COVID-19 situation. But how is activity looking now for you, and how should we think about it? I mean, it is commodity prices driven. Is that really kind of the key risk? Is there anything COVID-related that kind of could still be a bit of a headwind?

Yeah, as I was mentioning, Phil, you know, there's still concern around the communities where we operate and the safety of our employees and those people in the communities. So it's taking some time to get back to work in some of those areas where communities don't want outside people coming in. So we're very cautious about that and taking our time. So the capital program has some contingencies on us being able to get back into those communities and get fully started up. Having said that, on block 34 we have two non-operated rigs drilling now. We're getting ready to spud one on our Cavastero block here shortly. We have construction operations going on in the field in Andina to complete the flow line. We're getting ready to start our completion work at Aguas Blancas and the drilling of the two wells in the middle Magdalena Basin. We do have plans to do that work that I outlined, the $65 to $70 million, but some of it is contingent on getting into the communities.

I would say that the contingent piece is more around exploration and growth capital than the development capital, Phil.

We're not too concerned about that. Okay, perfect. I was going to ask another question. Just on the M&A opportunities, how are those looking? Is it still a wide bid-ask spread out there?

I think, yeah, we're going to continue to see a discrepancy between expectations of buyers and sellers. But I think I would say generally we're starting to see a few more opportunities come to the table. I think some more distressed situations are starting to show up. And so we are evaluating things that fit our criteria.

Okay, thanks. And just the final one. Just on transportation costs, we're lower this quarter with the increased wellhead sales. Is that transportation costs or anything, is that a new trend or is that just because of the higher sales that happen?

Yeah, it's just because of the higher wellhead sales. We stopped doing cargoes after April, so May and June had no cargoes. And cargoes, we incur the transportation costs. The port wellhead sales, we don't incur them, so we don't report them. They're netted out as a differential. So you'll start to see transportation costs in Q3 go up as we have two cargoes, August and September. And so therefore, you'll see a shift between differential and transportation costs. But it all kind of makes the same rent minus transportation differential number. So it'll be consistent with a bit of an increase improvement in Q3 because Asconia is tightened right up in about June.

Absolutely. Okay, great. Thanks.

Thank you. Once again, please press star 1 if you would like to ask a question. Our next question is from Gavin Wiley with Scotiabank. Please go ahead. Your line is now open.

Yeah, thanks. So just a quick question for me on taxes. We've seen a couple of the Colombian guys are announced that they've got some VAT recoverable and then also some tax credits that are being layered in for the second half of the year. I'm just wondering if you guys have anything like that coming for second half of this year in terms of credits that will be counting against cash taxes. Thanks.

Gee, Gavin, a question on cash taxes. We didn't have the big VAT receivable like some of our competitors, and we don't know why they did, but we never really had it. We just keep collecting ours kind of on an ongoing basis. We had a tax recovery in the second quarter because effectively, you know, our first quarter taxes and second quarter taxes combined equal the first half of the year tax, and that's how you do your tax accrual effectively. And so in the second quarter, we just effectively had a recovery due to lower realizations, price realizations, and therefore lower taxable income. Q3 and Q4, we're expecting to have taxes in the range of $7 to $8 million per quarter. So that will build up our tax payable balance again. As far as credits go, we did receive a small credit in respect of a program that we're doing in Aguas Blancas to our government program. But, you know, I think it was $2 or $3 million, so nothing significant. And, you know, the government has announced a few programs like that, and we are taking advantage of them. But I don't see it as anything significant or anything you have to model. And you can't really book them until you actually, you know, have gotten confirmation that you will receive them. So I hope that answers your question.

That's perfect. Thank you.

Thank you. Our next question is from Al Stanton with RBC. Please go ahead. Your line is now open.

Yes. Good afternoon, guys. Can I just talk a bit about production or can you talk a bit about production in terms of what is restraining it at the moment? I know COVID is an issue, but just looking at some of the big numbers, Copachos is running at sort of perhaps half capacity at five to six. Roomba is at 1,500,000 barrels a day. It's at zero. And if you look at March to May, there's been 30,000 barrels a day of gross production loss. So I almost feel that you could go back and switch some of it on quite easily. And I suppose the question is, are you going to? And then also, with respect to your current comment about 44,000 barrels a day, that seems to be at the top of your range for Q3. Should we be looking towards the top end of your range in the second half?

I'll answer that. It's Eric here. As far as production goes, as we indicated earlier, when we had the big downturn in price and the elimination of netback, we started shutting everything in. SoCo was a big focus on us. Both in the off and non-off, we started taking production down. That was to preserve the quality barrels we had. We saw no reason to blow them down at essentially no value. And then we had the whipsaw effect with the price of oil and started turning things back on. That is continuing today, but it does take some time. And with the other fields like Roomba, et cetera, that is also the same case. So we turn everything down, we send everyone home, and then bringing them all back takes more time and is more difficult during these COVID times. So what would be a typical one-week startup of a field, like a smaller field like Roomba, can take several weeks. But we are proceeding down that track. As far as bringing fields back on production, we don't have any big surprises. They're coming back on production. a few lost wells, and so we're continuing down that path. Of course, the other part of this is we also stopped a lot of the capital program and development programs. So, you know, in the Soka area, for example, we're probably going to deliver just over half of our capital program for 2020 compared to what we originally had planned. So that is a bit of a slowdown. And your final question on Copachus and Andina, For the most part, capacious Xandina has been held back while we wait on final infrastructure. As a company, we have a policy to not flare gas or minimize any kind of gas flaring. And although there's no permit restrictions to produce capacious Xandina, as you indicated, it has much higher capability. We've kept it essentially choked back or idled back. while we wait for that final infrastructure in place, and we are nearing the start-up of that final infrastructure in the next couple of weeks, mainly that pipeline that allows us to conserve all the gas. So I hope that answered all of your questions. Let me know if there's anything else.

No, that was great, Eric. Thank you.

Thank you. We have no further questions on the phone. We will now turn the meeting back over to Mr. Taylor.

Thank you, operator. I'd like to take this opportunity to thank you for your interest in parks 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 great day.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.