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Executives

Wayne Foo – President & CEO

Kenneth Pinsky – CFO

Barry Larson – COO

David Taylor – EVP of Exploration and Business Development

Mike Kruchten – Vice President of Corporate Planning and Investor Relations

Analysts

Nathan Piper – RBC Capital Markets

Darrell Bishop – Haywood Securities

Justin Anderson – Desjardins Capital Market

Jamie Somerville – TD Securities Inc.

Parex Resources Inc. (OTC:PARXF) Q2 2014 Earnings Conference Call August 6, 2014 11:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Parex Resources 2014 Second Quarter Financial and Operating Results Conference Call and Webcast. I would now like to turn the meeting over to Mr. Wayne Foo, President and CEO of Parex Resources Incorporated. Please go ahead, Mr. Foo.

Wayne Foo

Thanks, operator. And thank you all for joining us this morning. With me today is Ken Pinsky, our Chief Financial Officer; Barry Larson, our Chief Operating Officer; Dave Taylor, our Executive Vice President of Exploration and Business Development; and Mike Kruchten, our Vice President, Corporate Planning and Investor Relations.

Before we begin, I'd like to mention that this call is being recorded as it will be available for playback on the company's website at www.parexresources.com. I'd also like to remind you that all of the company's consumer's disclosure documents maybe found on SEDAR or the company's website, these documents provide more complete information than what maybe discussed during the call this morning.

Any remarks made by management during this call may contain forward-looking statements that are based on the expectations, current beliefs, and assumptions of management regarding the company's future growth, results of operations, production, future capital, other expenditures, plans for and results of drilling activity, environmental matters, business prospects, opportunities, and transactions. Forward-looking statements involve significant known and unknown risks and uncertainties which are fully disclosed in the company's disclosure documents as previously mentioned. Information discussed today is made as of today's date and time, and the company assumes no obligation to update or revise this information to reflect new events or circumstances except as required by law.

Yesterday we released our unaudited financial and operating results for the quarter ended June 30, 2014, copies of the company's consolidated financial statements and related managements discussion and analysis or MD&A are available under the company's profile at www.sedar.com and on the company's website at www.parexresources.com.

The format for today's conference call will be a question-and-answer session with our audience. So operator over to you for the questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) The first question is from Nathan Piper. Please go ahead, your line is open.

Nathan Piper – RBC Capital Markets

Good morning, guys. Couple of detailed questions for me either of a bigger picture, but first of all, given your reserves increase, what would be a reasonable DD&A run rate to go with? And obviously, it's gone – it's ready to go direct significantly but is the current rates are good assumption going forward? And then secondly, what is talking about these terms of things and as your mix of oil gets slightly heavier, what's a sensible discount to assume on your realizations?

Kenneth Pinsky

Hi, Nathan, this is Ken. DD&A rate running forward, we had the first – the second three months of the year, $27.46 a barrel, likely to still go down as that's a cash generating unit which DD&A is based upon on, so Llanos will start to see more production coming from that, it has a lower DD&A rate than the rest of the assets. So 25-ish per barrel but again, it's something to future development capitals and things that aren't exactly transparent from quarter-to-quarter but 25 is probably a pretty decent number the run would going out. And your second question was again?

Nathan Piper – RBC Capital Markets

Yes, obviously, some of you oils are little heavier than the slate was previously, just to get a rough idea of what your disconnect to Brent might be, I mean it's not a huge deal but it's just – trying to get bit of a rough deal on that?

Kenneth Pinsky

Yes, again, if you look at our realized prices, we've been taking a discount to Brent from Q2 2013 to 3% to Q2 2014 to 4.5%, 4.7%. So if you run a range 4% to 5% for the going out that price is pretty reasonable. The market does change in Columbia, we do a pretty good job of getting our oil in a small discount to Brent but there will be some changes going forward, right now we're seeing is more pipeline capacity, when it's all up and running, and with more capacity we tend to have better realization but sometimes realization are seen in our transportation line being less on a barrel basis and the differential stayed flat. We gear modeling basically all in differential and transportation that come in around that Brent minus $20 to Brent minus $21 a barrel number, but in our financials we have to brace it up with two differential transports. Does that give you some sense?

Nathan Piper – RBC Capital Markets

Absolutely. And then, the products that – sorry, broader question. On the acreage that you're awarded and the 2014 licensing rights, and I maybe also Llanos standard [ph], specifically on their, your Magdalena acreage, and is the game plan here to try and get access to in a sense longer life assets or a different play type, just to provide a bit of portfolio – to give you a bit of a portfolio, and indeed given to what commitments took the VMM-9, I mean what is so exciting that has got you committing to spend that much money?

David Taylor

Hi, Nathan, it's Dave. Yes, exactly right. We're trying to expand our portfolio, get into new opportunities that provide more significant upside on the exploration in terms of target sizes. VIM-1 is an opportunity we had spotted, as far as the bid around but we have been looking at some analogs fields in the area and review those within some detail. The play on that block appears to carbonate fringing in a plate over a large basin structure that's been identified on some of the 2D seismic, there has been a couple of wells drilled into it, one of them looks like it's got some bypass play and as well, so we see that as a light oil play. We'll shoot a significant 3D seismic program over that and draw a well into that, probably not until 2016 by the time we get a well down. There is also a secondary play there which is a tighter sand play or gas condensate, should that happen to be enough conventional play then that would be unconventional terms would be much better than the conventional royalties. We had a bit of royalty on that block as you're aware, we've been 17% at higher royalty, we'll be offset by better transportation costs because we're closer to the coast there. So that's the type of opportunity we see there.

On Block 9, of course we have Block 11, a 100%, it was an unconventional block but interestingly enough there is actually three plays on the block which is one of the reasons we're interested in it as much as we are. There is the unconventional La Luna play which we've been able to not bid to the block and that's why we've put that up from a conventional block. There is also the conventional play that's the similar types of play what we see on VMM-11 that we're getting ready to cast, that once we get the environmental permit in place, and get a well drilled there. Then we also see another structural play on the block, I won't discuss that too much detail right now, that's storage. So we see three plays, there is a five well commitment but with three plays we see a number of leads and prospects on these three different plays. We also require a large 3D seismic program, we start over that to fully evaluate the block, it's a pretty large block and the nice thing about this block, at the end of the day is if this was been on a work commitment basis so that the royalty is going to be the 8% plus 1% x-factor, so it would be a low royalty rate block.

And then just to touch base on one LLA-10, we've lifted that block a few times in the past with some of our drilling that we've seen down on Block 34, with some of the different play types we've noted down there. We see a fall trend running through that block, with several prospects along, including features that look like low side closures, that's a bit of a complex wall trend. But what we like about it is, we've got a commitment to drill one well, we paid 89% to 44.5% but the good thing about that is if it's successful, you basically de-risk the trend through the block and several other additional prospects that will be available for drilling there. The spot data on that was going to depend on the EIA, the EIA is still in for discussion with the annual rate now but we're just working on, and in fact, there is a meeting going on right now in our other Board room to discuss our right nature right now.

Yes, one of the – along the lines of question on the middle Mag blocks, the – what we plan with people is that in aggregate VMM-11 and VMM-9 are both ten time shifts, and so we have a commitment to drill wells on both walks, under the bid guidelines, the NH categorize VMM-9 as an unconventional block and we had to bid wells in the building blocks that were set by them, they were $22 million wells, we couldn't bid 1.1 well at extra commitment. So that's why we got to where we are, but I think if you looked at our North American operator who had a $90 million commitment on a ten time shift position with multiple objectives, it wouldn't change by the theory.

Nathan Piper – RBC Capital Markets

Understood. And then, sorry, just to clarify on LLA-10, so with the fair wind on the EIA approvals, near term we can look for a well this year on the block?

David Taylor

That really will depend on the environment permitting. There is some organic [ph] deficiency so they had to go back to ANLA, and there will be a clock ticking on that but we do have to get our wells spot within a 110 days of panel approving EIA. So if that happens tomorrow for example, then we would have it done this year if it's not a good for delayed into early 2015.

Nathan Piper – RBC Capital Markets

Understood, thank you very much.

Operator

Thank you. The next question is from Darrell Bishop from Haywood Securities. Please go ahead.

Darrell Bishop – Haywood Securities

Hi, good morning, gentlemen. I have two quick questions here. The first question is a bit of a bolt underneath, and with respect to the new unconventional block awarded there in the middle Mag. Just curious as to when we can expect to start to see some new slow from the work being done on this or the other unconventional blocks? I know you mentioned there were commitments, so I'm just curious around some timelines on news flow. And the second question here is, just more of a general market question, I mean the stock has been a pretty good performer here in a weak market, now that you're pushing that $2 billion market cap range, are you starting to see an increasing debt of institutional interest looking at the story? Thanks.

David Taylor

Hey, I can talk a little bit about the VMM-9 and the timelines. Basically we have to get the block signed, so that the DD&A so that will take a couple of months spend, I'm assuming that type of the paper works shouldn't placed on the side of the blocks, then build – probably a FAS [ph], which will allow us usually up to six months to sort of any above ground issues that may or may not exist. So sometimes you get out here and start working with communities I'm sure. So I would say mid next year sometime we'll probably be getting into a position to share the seismic program, and the seismic program looks like it will be fairly extensive, and at that point of time we devaluated and get ready to start drilling in 2016 roughly. The other unconventional blocks, the more block we are a leading environmental permitting issues there, so probably we won't be drilling that until 2015. And then over in our deeper area in Llanos, we are – we drilled a few wells and we're just in the middle of evaluating right now, so we'll let them comment on status of those wells.

Mike Kruchten

It's Mike Kruchten. In regards to the investor base certainly, we see '15 as institutional story and we're not pertaining to be a retail story. We certainly have agreed the depth of our institutional more – one key event we had this year was in late June, we're added to the 17 genext [ph] composite index, that has a lot of buying and key license scale, especially we look at size of the corporation now – we recently 2014, we drilled 20,000 barrels a day, and the reserve life index approaches 7 years, also put I think part on the radar of the LLA institution [ph].

Darrell Bishop – Haywood Securities

Excellent, that's great. Thanks guys.

Operator

Thank you. The next question is from Justin Anderson. Please go ahead.

Justin Anderson – Desjardins Capital Market

Hey, guys, thanks for taking my call. I'm looking for a comment on the shut-in or production constraint, field such as Adalia, Rumi, Celtis, Celeus. And I was hoping that you guys give us an update on the cause of the constraint of those fields, and as well as the approximate sudden capacity of the fields?

David Taylor

Justin, Adalia is up and running and producing, it's been that way for over a month now. Rumi, we're doing some work over work on it, so we're changing the pump out, so that should be on screen here at sometime and produce normal course, no issues with producing that well except to change the pump. Celtis, I think it's more of a water treatment just get some facilities in place which produce that well, it's not a big well in our portfolio anyways. We're likely to produce about three to quarter barrels a day, and so that's pretty insignificant for us. And that's about it, as of now we're doing a press release, and as you know, we've always have spare capacity, so when we do get any sort of short-term shut-in for any reason, caused or non-caused by the company, then we tend to just maintain our production burns from other fields.

Justin Anderson – Desjardins Capital Market

Okay, great, thanks guys.

Operator

Thank you.

David Taylor

There is a question on the Board about LLA-32, some of our development plans. I'll take it from compass; I don't have my glasses on so I can't read it. I can talk a little bit about, just the current activity there. Kananaskis-1 and Kananaskis-3 are on production, Kananaskis-2 will be testing in gune [ph], there is a deeper gas on, looks like gas condensate is on in that well bore that we need to get cut. Kananaskis-4 which is being drilled is a disposal well is currently drilling, and Carmentea well is on production, and the Calona well is waiting to get put on production. So that's sort of the short-term development activity, we'll be putting those wells on, testing them, producing them for a while and determining what facilities are going to be required to properly produce the fields. We have an exploration opportunities on Block 32, there is at least one that probably tested this year, it's going to be tested in part with our Kananaskis-4, disposal well. And then we some other identified opportunities that will be drilled in 2015 and we're just putting together our exploration program for the next year as we speak.

Operator

Thank you. (Operator Instructions) The next question is from Jamie Somerville. Please go ahead.

Jamie Somerville – TD Securities Inc.

Good morning. Just since you mentioned in the press release, Ken I was wondering if you can provide some more detail to explain how the Verano tax losses work into the equation for your – maybe just provide some guidance as to what your tax rate is going to be over the next couple of quarters?

Kenneth Pinsky

Okay, sure Jamie. Basically, Verano exploration had tax losses in Columbia that were utilized offset by Verano taxable income. They are effectively $75 million to $80 million, U.S., that will cover cash flows coming out of Verano so that Terranova volumes will effectively have a minimal to no tax on them, whereas Restrepo volumes will have count of 16% to 17% effective rate on cash flow tax barring changes in our PP reserves, as the completion rate is based upon that, which are your history of explorations, exploration of success, gargles being written off in the year [ph]. So really going forward to second half, whatever you're forecasting for the Block 32, for Adam, I'm sure are those volumes of Block 34, share those volumes? Those will be track three in your model. For 2014, those losses will be pretty much eliminated or used up by the end of '14. So going forward in '15, we'll be giving guidance to our tax rate when we do our 2015 first year guidance into 2014. Does that give you a sense?

Jamie Somerville – TD Securities Inc.

Yes, that's very clear. Just to confirm, will GLJ would have those tax losses included in the mid year reserves and inauguration trends?

Kenneth Pinsky

Correct. Yes, we just give them – normal course, you give them your tax information; they incorporate that into their models.

Jamie Somerville – TD Securities Inc.

Perfect, thank you. And then just, since you mentioned permitting, waiting on permits on a couple of blocks, VMM-11 and more so, can you clarify that those are – are those the only significant permitting issues that you're waiting on currently and besides that I would like to have is already addressed in detail, but can you maybe give a little more detail in what specifically you're waiting on those blocks?

Barry Larson

Yes, Jamie, it's Barry here. The VMM-11 is running it's due course, we've lied from VDIA [ph], we expect it early in 2015 January if they are worried, no surprises on that today, more for, there is an existing EIA being held by the original owner, and we've – you're just getting that transferred over again, expecting that late this year, really next year. And nothing to mention on any other blocks, I know we have been ordered on other issues.

Jamie Somerville – TD Securities Inc.

Okay, perfect. Some other big deal in the bigger scale of things. Thank you.

Barry Larson

Other than the new blocks and that's an exact normal time course.

Jamie Somerville – TD Securities Inc.

Thank you.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Foo.

Kenneth Pinsky

Operator, it's Ken, we have read a question on the Board here asking us if the bulk of second quarter financial results affected by the increase of inventories and explain the reason to this is little bit more. We did talk about this in our major discussion analysis, and effectively our inventory is through about 121,000 barrels, and subsequently for that in July we reduced them by 30, and we expect as we've explained in the market that will down to sort of quarter four 2013 levels of 120,000 barrels by the end of the third quarter of this year. The reason for that increase was from temporary underlfits at some fields of Block 34, and the mainly indirect results of some of the pipeline maintenance turnaround that happened in the basin that were discussed by other operators, previously. But into the day you would start to see those inventories rolled out slowly, again as I said, we went from a 195,000 barrels a day, or 195,000 barrels inventory at the end of the second quarter to 160,000 inventory, 165,000 inventory at the end of July. So we're seeing those reduce. And that's it.

Operator

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

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