Parex Resources Inc.

All participants, thank you for standing by. The conference is ready to begin. Good morning, everyone, and welcome to Pyrex Resources' second quarter earnings call and webcast. Yesterday, Pyrex released its unaudited financial and operating results for the quarter ended June 30, 2021. Like all Pyrex disclosure documents, the complete financial statements and related MDMA are available on the company's website at www.parexresources.com, and on CDAR. Before turning the meeting over to Mr. Ken Pinsky, Chief Financial Officer of Parex 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. 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 PARACS 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 turn the meeting over to PAREC's Chief Financial Officer. Please go ahead, Mr. Pinsky.

Thank you, Operator, and thanks to everyone on the line for joining myself and our CEO and President, Ahmad Mohsen, for our Q2 conference audio webcast. We appreciate your constant support of Clark's resources. Before we start our Q&A session, I would like to provide some highlights of our Q2 financial results and discuss our plans for the remainder of 2021. All values mentioned in this call are stated in UF's dollars, unless we otherwise specify. I'll begin by saying that our priority during the COVID-19 pandemic still remains the health and safety of our employees, our contractors, and the communities neighboring our operations. Our G2 production averaged 43,900 DOE per day, a 4% decrease from the previous quarter production due to the transportation blockades in Columbia that technically restricted supplies to drilling and completion activities and our movements of oil within our fields. Normal field operations were restored in June, and as present, Pyrex is operating four drilling rigs and assigned a crew. For the second quarter, our funds still provided by operations totaled $132 million, or $1.03 Canadian per share basic. Our Q2 capital expenditures were $45 million, generating free fund flow of $87 million. With a portion of that free fund flow, we repurchased 4.2 million shares, and thereby returned Canadian $91 million to our shareholders. Eric had strong performance for the quarter, with earnings of $92 million, and we maintained financial strength of $353 million in cash and no debt. The exit of the second quarter was working capital of $371 billion. And along with our credit facility undrawn of $200 billion, we have over $500 or half a billion of liquidity. Pyrex reiterated its dedication to continue lowering our greenhouse gas emissions and testing for BOE from operating assets. The company's strategy in the short to mid-term will focus on optimizing carbon footprint, displacing carbon-intensive power sources, and increasing power generation from renewable sources. The long-term carbon strategy will gradually emerge as FARCS evaluates the uncertainties it could face during the net energy transition and outlines sustainable pathways to achieving its net zero ambition. FARCS is aspired to be among the least, less carbon-intensive oil and gas E&T companies, while continuing to deliver shareholder value and meet ongoing global energy demand. We enter into another strategic partnership with Expatrol, whereby PARCS earns and operates a 50% interest in two blocks in Northern Columbia, Arroca and LLA 38. PARCS' independent qualified reserve engineer, GLJ, recognized company interest 2P reserves, or approved plus probable reserves, of 7.8 million barrels of light medium crude oil, along with futures only capital of approximately 70 million. The initial work plan, which we hope to commence in 2021, will be funded by PARCS, and consists of drilling two development wells in the Arouca field, and one exploration well, and a further capital program of 75.8 billion, which us and Expatrol will determine how to allocate. I would now like to pass the meeting over to our present CEO, Ahmad Mohsen, to go over the second half of 2021 outlook. Please go ahead, Ahmad.

Thank you, Ken. Barracks is in an exceptional financial position, as can be explained, and doesn't currently have any hedging in place, so that allows us to reap the full potential upside of strengthened oil prices. As we move into the second half of 2021, Barracks will be focused on appraising our recent discoveries and extensions. Key projects include continuing our appraisal well program on Cadastral, in which drilling commenced in June. So far, we are very encouraged by the initial results. We plan to start our significant capital program in Aralca province, beginning with at least 6 development and exploration wells in Capachos, followed by the Ectopetrol Partnership work on Aralca block. On Fortuna, we are drilling a multilateral well, Berlanegra one, on the Olini formation. We are applying proven but new technologies to Colombia to assess areas with significant oil in place. Accelerating the installation of facilities to enable the production of compressed natural gas for La Beleza discovery. We are expecting production to begin at restricted rates in Q4, and we expect to have initial results from our Planadas I exploration wild in September. Initiating quarterly dividends of 2.5 cents per share. We believe this is a material milestone for Perixx. Demonstrating our confidence in our portfolio and our commitment to shareholder returns. 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. Please press star 1 at this time if you have questions. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Adam Gill from Paradigm Capital. Please go ahead.

Thank you. Gentlemen, just in terms of the dividend, obviously it's a pretty small payout of your overall fund flow. I was just wondering if you could frame how you guys are thinking about you know, potential dividend increases, what type of targets, whether it be earnings or funds flow, to potentially see that dividend go up over time. Thank you.

Yeah, thanks, Adam. You know, the dividend was instituted along with our buyback. As Ahmed said, we wanted to demonstrate our return of capital mantra, which is what we've been operating on for the past three years. And we've bought back 20% of the stock net of ALTI or long-term incentives exercises and therefore issues from treasury stocks. So that's a big number of a stock of the share buyback. And going forward, the board wanted to have another lever to return capital to shareholders, and so we instituted the dividend. We have our annual strategy session with them in the fall. And with that, we'll look at our five-year plans, where we think commodity prices are going, and then how we want to return excess capital to the shareholder. We always will have a return of capital strategy, and how the dividend will fit into that. With more clarity, we'll report back to the market later in the fall after that strategy session. But for now, the yield is about a 2.5% to 2.6%. It's kind of in the range, but, you know, we would see ourselves in time, you know, potentially transferring some money from the buyback to the dividend. But that is something we'll discuss with the board along with our banker plans.

Okay, thank you.

Thank you. Once again, you may press star 1 if you have a question. There are no further questions. We do have a question now from Harry Noddleman from HDN Capital. Please go ahead.

Yes, good morning. Perhaps you can just elaborate on the prior question. Are you going to be, I guess, multiple parts. First off, how much cash would you like to keep on the balance sheet for the proverbial rainy day? The next question is, as you do this five-year plan, are you going to use different price assumptions and then from that with the free cash you generate, determine whether a higher dividend or a variable dividend and or an accelerated buyback comes into play? Just any other clarity you can add, because it's remarkable that you can buy back 3% of your company and still build cash. And yet, for all intents and purposes, the stock wouldn't know what you're doing.

So let me start with the first part of the question. In terms of the cash we have on the balance sheet, we don't want to keep decreasing into We are very comfortable with the levels we are at now. The tool to use the cash other than first our profitable investments is to return money to shareholders and the tool for that is the buyback. Dividends is a fixed commitment on a much longer term. What the board will consider going forward in terms of what dividend levels and if we increase it at what pace Beyond the commodity prices, it's also our long-term investment program and how we want to grow the business and have a long-term, sustained business that only goes in one direction. So it is multifaceted. We do take always reasonable price of mine, which is, what is it, Ken? $55.65?

We like the budget right down around $60 a barrel, and we do run low case scenarios, and we run high case scenarios, yeah.

But for me, it's not just a low-in-price question. It's a combination.

Yeah, and I think what I want to reiterate, and this is what we've been telling shareholders, is that we are an exploration and production company. We will drill exploration wells, and not all of them will work, but some will, and in the past, they've worked really well, and that added a lot of value to the shareholder. And so we're paying a dividend as a function of a return of capital. as opposed to thinking of us as a dividend-paying company that is in the oil and gas business. So, you know, that dividend is supplementary. And as Ahmad said, it's a long-term, we do it as a long-term commitment. So, you know, moving that around, I know some of our counterparts are talking variable dividends based upon commodity prices, but they'd be more mature dividend payers than we have. And so we're going to, you know, feel our way down and see where the, you know, see what the shareholders want and then see how we can look at this in the longer term. expect of our return on capital strategy.

Great. Thank you. Just an observation, if I may. It would appear that most investors throughout all of energy today don't believe in any terminal value for a myriad of reasons. And my sense is that's the opportunity or one of the many opportunities here. So to the extent that you contemplate buying back more stock quicker, the advantages are relatively obvious. Thank you.

Thank you. The next question is from Al Stanton from RBC.

Please go ahead. Yes. Good evening, guys. Just a couple of questions, if I may. First of all, the one variable that we weren't really talking about in a lower oil price environment is taxation. So I'm curious to know what your views are with respect to the tax rate going forward and how that dovetails with turnover and spending, whether spending is now going to creep up with turnover. So how did that all dovetail? And then, finally, just a question on the lessons learned from the past quarter with respect to marketing and delivering your crew, whether there is any sort of silver lining in working out which routes and which markets to sell it into to maximise realisation. Thank you.

Thanks, Al. I'll answer your second question first with respect to what did we learn about the transportation disruptions. What we learned is that none of the oil and gas business industry was really targeted. We weren't targeted directly. It was the transportation hubs that are upstream of our operations. What it really impacted was our ability to move supplies for our drilling rigs. At the time, we were actually moving into a bigger exploration program. So we were moving rigs around, and that slowed us completely. If we're up and running on the pad, then we usually get word there's a disruption potentially coming or some action, and therefore we can stock up for food and fuel for the rig and not be bothered. We were just caught in the middle of moving rigs. In respect to production, what we know is from tying in by pipeline most of what we call our Southern Kazan area assets, We were at about 35,000 barrels a day of, would I say, disruption-proof, which allows us to do whatever we want to do at any given time. And that was positive, and we kind of thought that's what it was beforehand, you know, because we planned for, you know, events that are unforeseen. And we've also got ourselves up to our run rate. You know, we're at 48,000 barrels a day again today, which is the highest we've been since, you know, COVID, which we're quite happy with. We have four rigs in the field working. There's been no disruption. So Columbia, sometimes it gets noisy, and especially if you look on Bloomberg, you can see things. But in the field, it was relatively calm except for that couple of weeks, two to three weeks, where we had some trucker union activities, which have now ceased, and everybody's back to work. And the government did a very good job, we thought, in addressing that and working directly with the unions on what grievances they have. In respect to your first question, you were breaking up, but I think you were asking about tax rates. And the Columbia Congress is now debating a new tax bill. One of the things they're talking about is increasing the corporate rate to 35% and 31%. That incremental 4% will have some effect on us, but because we continue to invest in the country, it will be relatively minor. I will recall that during the Santos, the previous president's regime, President Santos, we had tax rates as high as 40%. And as long as you're investing in the country, it's like anything else, you're creating tax depletable out, you're creating tax depletion outside your tax. So that's all I have to say about that. Let's see if there's a question.

Yes. I suppose the one bit that you might have missed was the relationship between CapEx and the oil price. Is that going to be re-established?

The relationship we heard between our capital spend and the price of oil, you know, definitely one of the things we wanted to do was actually, you know, COVID slowed our exploration program down. And we are an exploration company, as I said. And Ahmad, when he joined the company, looked at the opportunities and said, we need to catch up for 2020. We agreed. The board agreed. And that's what really drove our CapEx spend. And increasing this year. Yes, oil prices are helpful because you have the influence of cash flow, and as you heard, you know, we do get questions on how much working capital you guys want to build. So, Ahmad, do you have something to add?

Yeah, I mean, here, of course, at $100, there are more opportunities at $20, but the reality is most of our opportunities that we have in the pipeline are extremely robust at all kinds of visible prices in the medium term. So, What happened is we had discoveries before COVID. They were not appraised yet. There were some delays last year. And we see a lot of potential for development, growth, and appraisal. And we want to bring these opportunities forward. Most of the opportunities I mentioned in the chat today were discoveries made a year or two earlier and that need to be appraised. So you have 10, 20, 30 well-developed programs Our view should, if the zoology proves what we think is there, should be robust regardless of the point. Yeah, predictable earth-side breath fluctuations.

Thank you.

Thank you. Donor, for the questions registered at this time on the phone lines, I would like to turn the meeting back over to Mr. Mohsen.

Thank you for your interest in the park and your continuous support for the company. For further information, we invite you to visit our website or follow us. Thanks again and have a good day.

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