Parex Resources Inc.

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. If you would like to ask a question during this time, Simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mike Crookton, Senior Vice President of Capital Markets and Corporate Planning.

Good morning, everyone, and welcome to PARCS' third quarter 2024 conference call and webcast. On the call with me today are our president and chief executive officer, Ahmad Moulton, our intern chief financial officer, Cam Granger, and our chief operating officer, Eric Furlan. Please note that at any time, telephone participants on the call can press star one to submit a question. 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 cedarplus.ca. Note that all amounts discussed today are U.S. dollars, unless otherwise stated. I'll now turn the call over to Ahmad. Please go ahead.

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 rearview mirror and focusing on optimizing performance across our portfolio. The path forward is taking into account the 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 increased to increase our midpoint guidance from 29,000 DOE a day to 49,500,000 DOE a day, representing an additional 2,000 DOE per day for the first quarter, including an allowance for social disruptions. In conjunction, our conservative focus has resulted in updated our capital guidance, leading to projected higher fee fund flow of $220 million at midpoint of guidance range. Following reset expectations, I'm encouraged by our key effort 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. Thanks, Ahmad. 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 Cabristero, 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 Cabristero, 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 gross, 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 Kapachos, our latest well came online late in the quarter with strong results. The well is producing roughly 5,000 BOE per day gross, 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 spot in the coming weeks. Turning to our biggie exploration, We're continuing to progress the advantage prospect at Block 122. The wall is now at roughly 17,750 feet. We are expecting to have preliminary results by year end, following a successful operational sidetrack. With that, I'd invite Cam to please go ahead.

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 are now anticipating 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 Tapachos, as well as the deferral of the Hedra prospect at BIM 1. For the fourth quarter, we expect capital to be between $85 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 dividend, 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 Ahmad for final remarks.

Thank you, Kam. In the shorter term, I'm excited about the emerging results from our IANOS 32 program. As well as that, we should be reaching the total depths on our first foothill prospect in the coming weeks. Additionally, the production stability and performance we are seeing from our key assets, 934 cadastral capacitors, is encouraging. As we think about 2025, our focus is setting an achievable budget that centers on lower risk development and exploitation 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 to date. The Paris 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.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeremy McCrea with BMO Capital Markets.

I've got a couple questions here for you. I'll start with just some high-level guidance in that. Is there any timeframe 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 actual team issues, have you made any progress in finding some potential solvents here that could resolve that? And then just lastly, with the Ronti's just with the successful sidetrack um 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 hey good morning jeremy thanks thanks for asking the questions um i'll open up with the guidance on 25. obviously you know we're we're happy to see you know 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 contacts about our return to capital. And 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 Ferling is going to talk about Arantis and Arauca.

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 stimulation technique and that will be happening here in the next few weeks. In Arantis, 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 case 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 drill down the perspective zones. Yep.

Thanks, Chris.

The next question comes from the line of Alejandro Demichelis with Jefferies.

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 Janus 34 in terms of those horizontal worlds, how much kind of decline we should expect from Janus 34 over the next couple of years?

Yeah, as far as Block 34, I know there's some variability this year, but overall, the major assets in SoCal 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, a 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 Cabristero, we have the polymer expansion plan for 2025, and our partner in Block 34 is looking at the same. So, you know, the strategy in 34 and Solca 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 in 2021 This year, you know, some of the sharp because are associated not with the major assets in Soka, but in some of the horizontal drilling we've been doing in Mirador Reservoir. Those walls are very prolific and they're very economic, but they do have higher declines, you know, wells that can go from 3000 barrels a day to under 1000 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.

Okay, and in terms of cash flow generation, because you're talking about bringing UR and kind of CapEx activities into the N34, would that also impact some of the cash flow generation that you get from there?

For the most part, 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 up front. The up front 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. Now, the nice part about that is You know, we can put the polymer in, see how it works. We've proven that it works in Cabristero. We've proven that there's no operational issues with injecting polymer into these reservoirs at these depths. And so from that perspective, it's a pay-as-you-go kind of investment. And as long as you keep seeing the returns, you keep injecting. So it's not a big amount of risk capital. And if it performs like it does in Cabristero, we see a strong economic benefit.

So in our mind, The SOCA assets will be a cash cow for years to come because the main investment was to build the infrastructure for water flood and the flood related to it. And these are mostly behind us. I mean, we upgrade facilities here and there, and we do stuff for kids for injection. But overall, they are very cash flow positive. And they are the assets that do understand, together with cataches, our capability to have a sustainable business.

That's great. Thank you.

Your next question comes from the line of Chris Jones with Haywood Securities.

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 Echo Patrol 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 Columbia? And then just sort of high level, what is the rationale behind a potential M&A strategy if there is one?

So I was going to start by your second question. We're not going outside Colombia. We believe in the capital efficiency, the potential of the asset in Colombia, and we have a huge running room there. On the first question, we've seen in the last six months more assets on offer in Colombia, specifically from Equipetrol, than what we've seen in the last 12 years. And these are assets that Equipetrol has been proposing for farmers where you pay as you go and carry, you don't pay up front, and will deliver potentially good returns if you go in at the right levels. Paris 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 short term, where you have a lower risk, higher return exploration opportunities, But the biggest focus will be also the assets that will have low volatility, high predictability inventory of influence, water, flood, exploitation that could potentially give us long running room and have a visibility on how we maintain modest production growth for years to come onto the biggest foothill upside scale. So the answer is yes, we are looking. It's something we've been working with Egg Patrol on, and we hope something good comes out of it.

Thank you. I'll hand it over.

Your next question comes from the line of Kevin Fisk with Scotiabank.

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. Sure.

Thanks. So obviously, you know, 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 work over. We had a lot of wells go down. It happens looking back over the last few years, you do get the odd quarter or the odd month where you do 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 was a bit exaggerated here in the last quarter and should normalize into Q4. And then the BOE impact obviously will remain until we can show growth again and dilute that fixed OPEX as most of the OPEX is fixed. So going into Q4, I would expect more normal well work over costs and similar BOE impact.

Perfect. Thank you very much.

Your next question comes from the line of Daria Lima with Bloomberg Intelligence.

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 de-risked 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?

Thanks for the question. You know, I guess as far as the fall 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. How much cash do we have? Right now, we have $147 million in cash.

Thank you. Yeah, and maybe on the capital allocation, so you say your dividend payout 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?

Yeah, we plan to continue the share buyback, and any excess over that will go to debt repayment. There will be probably potential nominal nominal debt over the next quarter or two.

Thank you. Just last one for me. Operationally on Janus foothills, could you perhaps comment on the timeline for it and the resource potential you're expecting? And in case of a successful operation, do you expect it to potentially replace the growth that was originally expected from the Arauca? So so.

In terms of the. Around this one right now. The timeline for this first one will be probably in the next before year and we're putting the last case in point before going into the prospect zone. It is still a high risk exploration project. We have one in five chance roughly when we announce it so that we're not counting on it to replace any future growth is upside, but it is 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 e and polymer, as well as some of the opportunities Expatrol are offering that we are considering seriously as a bridge. The longer term for the foothills, and we're talking here 26 plus, would have potential to give us disproportionate growth. And in my mind, Ararca 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 foothills are extremely sizable. the kind of opportunities companies our size normally don't get the chance to touch. And the other wells we're targeting in the foothills beyond Arantis are much higher for BTL success. So they are much less risky. This one was the one that opened the door to the foothills for us. In order to reach the bigger prizes are the lower risk ones. But hey, I'm definitely crossing my finger for every well we drill.

Thank you. That will be all from me.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from Connor Schroeder with Shareholder.

Connor, your line might be on mute.

Yes, I was on mute. 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 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 about 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 for 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?

Let me start by answering the first question. What you probably are seeing right now is a more conservative view on how we deploy CapEx. When we were in the high 50s, we had a number of prolific but high decline wells that we were trying to compensate for. And on top of that, we were aiming for a growth of 7%, 8% a year. view right now is to say, how can we have stable production at a reasonable amount of capital efficiency and lower capex, much lower capex than a 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, you name it, upside. 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 EOR helping, would you require less per barrel investment to compensate for the decline. On the capital allocation, maybe I'll let Mike answer.

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 a share buyback program that really gets us to returning 33% of our funds sold from operations. And 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 awesome and my uh i got one more question my last question is for you guys um last year um with the dividend um you guys after the buyback ended up paying out less this year after increasing it um going forward with that 33 payout ratio and the buyback do you see um like consistent dividend increases of around maybe 10% a year for the foreseeable future? Or do you have a dividend hike increase that you guys are maybe targeting for each year?

Yeah, you know, obviously the dividends under, you know, it's a constant discussion at the board level review and approved. You know, we're basically at a 12% yield right now. So, you know, 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.

We're not going to increase the dividend.

Okay. Yeah, I was just curious. I know that it's one of your guys' core values is the buybacks, and I know you guys have increased the dividends more in the future. So I'm just kind of 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, because the buybacks do provide really good value right now. That's what I guess I was trying to ask.

Right now, we are maintaining, like if you see the announcement for this quarter, we maintain the dividend constant, and the buybacks become the swing while we are strengthening the balance sheet yearly basis where we added maybe 20 million dollars or so in that three days so it's the three components uh and as mike said it all depends on what i put this quarter per quarter i would say the oil price has a lot to do with it that goes to 100 bucks your buybacks cost okay and um 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 kind of worked around or?

Sure, I think the wall you're referring to is one of our biggie exploration walls that we're excited about the Hebrew prospect, and there has been some some social challenges entering the area, and so that wall 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 the rig.

Awesome. Sounds great, guys. You've answered all my questions.

I will now turn the call back over to Mike for closing remarks.

Thank you very much for joining us today. If you have any questions, feel free to contact us personally at PAR-X and have a great day. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.