Parex Resources Inc.

All participants, please stand by. Your conference is ready to begin. Good morning, everyone, and welcome to Parix Resources' third quarter earnings call and webcast. Yesterday, Parix released its unaudited financial and operating results for the quarter ended September 30, 2020. Like all Parix disclosure documents, the complete financial statements and related MD&A are available on the company's website at www.parixresources.com and on CDAR. Before turning the meeting over to Mr. Dave Taylor, President and CEO of PARICS 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. PARICS 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 PAR-X 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 the meeting to PAR-X 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 Q3 conference audio webcast. We appreciate your support of parks resources. Before we start our Q&A session, I'd like to provide some highlights of our Q3 financial results and discuss our plans for the remainder of 2020 and for 2021. I'll begin by stating our priority during the COVID pandemic remains the health and safety of our employees. our contractors, and the communities neighboring our operations. To minimize social interactions, we changed our operating procedures and reduced field activity, which impacted both CAPEX and production in Q3. Q3 production averaged just over 44,300 barrels of oil equivalent per day, an 8% increase from the previous quarter production of about 44,850 barrels of oil equivalent per day, where we voluntarily shut in production. The third quarter was highlighted by strong operating netbacks of US$23 per barrel of oil equivalent and funds flow from operations of 79 million US or Canadian 76 cents per basic share. Q3 capital expenditures were approximately 18 million and our earnings were US$27.6 million or Canadian 27 cents per basic share. With free funds flow of US$62 million approximately, we repurchased 2.3 million shares and returned 31 million Canadian to our shareholders. The company maintained its financial strength with 353 million in cash and no debt. We exited the third quarter with working capital of approximately 371 million U.S. and U.S. 200 million of undrawn credit facility. The company also published its sixth sustainability report, which highlighted our industry-leading environmental health, safety, and social performance. For 2020, Forex has had an exceptional financial position in the industry as our company continues to maintain its best-in-class balance sheet with working capital of $371 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 we move into Q4, we'll be focused on delivering a $35 to $45 million program that includes SOCA development, drilling, and completions, advancing the VIM-1 La Baliza discovery with civil works and long lead items related to facilities, drilling the Cayena-1 horizontal exploration well on the Fortuna block in the Middle Magdalena Basin, and sputting a brand of appraisal well also in the Middle Magdalena Basin. Finally, we plan to repurchase 6.4 million shares in Q4, fulfilling the 10% NCIB annual limit for approximately 14 million total shares that we will have reduced this year. That will reduce our 2020 basic shares to approximately $131 million from $143 million on December 31, 2019. For 2021 guidance, I'd like to briefly outline our plan for 2021. Average production is expected to be in the range of 47,000 to 49,000 BOEs per day. Capital expenditures will be approximately $165 million to $185 million U.S., split between maintenance, development and appraisal, and expiration of new growth programs. And finally, returning capital to shareholders by buying back another 10% of its outstanding share count, or approximately 13 million shares. Finally, I'd like to report that after more than 40 years in the industry energy, including nearly 10 years with CAREX, Mr. Lee DeStefano is retiring as President and Country Manager of CAREX Columbia. Mr. DeStefano will remain in his current position until he formally retires at the end of December 2021. Lee has been instrumental in PAREC's success, especially in building relationships with the communities where we operate. We wish him best in his retirement. In conjunction with Mr. DiStefano's retirement, PAREC has also announced the promotion of Mr. Daniel Ferrero to President and Country Manager of PAREC's Columbia, effective December 1, 2020. Mr. Ferrero has spent 23 years in the upstream oil and gas business in various technical and leadership positions, most recently as Senior Vice President of Columbia Operations. He has been a key leader in PAREX Colombia and prior in our predecessor company, Petrandina Argentina. Throughout 2020, Danielle has been working closely with Lee to transition on the Colombian leadership responsibilities. With this brief overview, I'd like to turn the line back to the operator to start the Q&A session. Alana, over to you.

Certainly. Thank you. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Al Stanton with RBC. Please go ahead.

Yes. Good evening, guys. Can I just ask something about the mindset for next year? I mean, just looking through the quarterly numbers for 2019 and also, I suppose, Q1 of this year, production was up at 50-odd thousand barrels a day, 54,000 barrels a day. and yet your forecast for next year is 47 to 49, so that's flat from the fourth quarter. So I was wondering whether, as some people have suggested, you're just being conservative and you're going to beat your numbers, or whether perhaps there is actually a bit of a change in mindset within the sector and you've got less desire to ramp up production, perhaps keep more cash on the balance sheet and slightly be more cautious as you go into next year, having endured quite a tough 2020?

Yeah, Dave, I'll address that. As you know, in the low-price environment, we're not really being rewarded for absolute growth anymore, we believe. Single-digit growth is appropriate in the current climate, and that's, you know, the 47 to 49 that we're forecasting for 2021. So then we have capital allocation decisions, and... know as we give me a range of 165 to 185 million of capital going back into into the ground and we can break that out by the maintenance and development for the absolute growth which we just alluded to we prefer the lower absolute growth second bucket is organic growth capital expiration appraisal and then third would be inorganic acquisition opportunities and finally buying back barrels using our existing buyback program. So I'll talk a little bit about each one of those different items. So if you look at the maintenance and development capital for Absolute Growth, our objective right now is really to preserve the existing barrels in this low price environment. Voluntarily curtailing production in the second quarter allowed us to reset our base a little bit, push field plateaus out by a couple of years, but gives us the optionality to ramp up production activity with the price recovery. Second thing would be the spending capital on our core competency of exploring and appraising. You know, we have a very high quality exploration portfolio and we believe it's actually prudent right now to be looking for new barrels to add NAV and future development inventory when prices recover. So we have a new discovery as well, for example. We have no reserves booked there and lots of potential, so we want to get that appraised also in 2021. to add new barrels. If we look at our current share price, we can also buy our own high quality barrels back for $70 per barrel, fully developed. And we believe this is a pretty unique opportunity to buy back stock and our barrels, which are some of the best in the world, and return capital to shareholders. That's our plan to buy back 10% of the stock in 2021. And we can do all three of these things within the cash flow from operations at $40 to $45 Brent and current Vesconi differentials. And then ultimately that leaves us with our strong balance sheet to $370 million, roughly working capital, undrawn line of $200 million for inorganic acquisition opportunities. But it's important to understand that those types of growth opportunities have to compete for capital with organic opportunities and must have the ability to actually improve our business significantly. So, you know, that's kind of the philosophy or the way we're thinking about the business going forward and why we've targeted the program that we have and the guidance for 2021.

Yeah, I'll add one more thing. You know, if you look at our guidance in our press release, what we're really focused on and have been focused on for quite some time is per share growth. And so if you look at our production per share, it's growth. In 2021, we're forecasting a 14% increase while maintaining the same working capital. So on debt-adjusted production per share growth, we're going up by 14%. We think that's pretty attractive for our peer group, and that's really the number we look at. Top-line growth is, I know, something that people want to see as well sometimes, but right now, us and the investors want to look at production per share growth.

And if I may, just one quick follow-on question. Just looking at the vintages of exploration acreage, are there any ticking clocks, either for you or other people, where there are commitments to drill in 2021 where having cash and maybe access to a rig might open doors for you?

Yeah, we continually look at the competitor landscape out there to see if there's farming opportunities. We know there's some available and we are actively looking at them. Our own acreage, you know, we plan activity over the period of the expiration term and we don't have any issues with respect to our own acreage getting things done. But we know some competitors may have some challenges.

That's great. Thanks, guys.

Thank you. Once again, please press star 1 at this time if you have a question. There are no further questions registered on the phone lines, so I will turn the meeting back over to Mr. Taylor.

Thank you. I'd like to take this opportunity to thank you for your interest in PARCS and 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.

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