Parex Resources, Inc. (OTCPK:PARXF) Q4 2018 Earnings Conference Call March 7, 2019 12:00 PM ET
Dave Taylor – President and Chief Executive Officer
Ken Pinsky – Chief Financial Officer
Eric Furlan – Chief Operating Officer;
Ryan Fowler – Senior VP, Exploration and Business Development
Conference Call Participants
Adam Morton – RBC Capital Markets
Ian Macqueen – Eight Capital
Gavin Wylie – Scotiabank
Jenny Xenos – Canaccord Genuity
All participants please standby. Your conference is ready to begin. Good morning, everyone, and welcome to Parex Resources Fourth Quarter Earnings Call and Webcast. Yesterday, Parex released its audited financial and operating results for the quarter and year ended December 31, 2018. Like all Parex disclosure documents, the complete financial statements and related MD&A are available on the company's website at www.parexresources.com and on SEDAR.
Before turning the meeting over to Mr. Dave Taylor, President and CEO of Parex Resources Inc., I would like to mention that this call is being recorded. So it 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 Parex assumes no obligation to update or revise this information to reflect new events or circumstances, except as required by law. [Operator Instructions]
I would now like to turn the meeting over to Parex President and CEO. Please go ahead, Mr. Taylor.
Thank you, operator, and thanks to everyone for joining our Q4 conference call and for your support of Parex. With me today in the meeting are Ken Pinsky, Chief Financial Officer; Eric Furlan, Chief Operating Officer; Ryan Fowler, Senior VP, Exploration and Business Development; and Mike Kruchten, Senior VP Capital Markets and Corporate Planning. Before we start our Q&A session, I'd like to provide a brief overview to our shareholders on our financial results for the year ended 2018. I'll also provide an operating update, discuss the 2019 guidance and outline future potential growth areas.
I'd like to begin by saying that we're very happy with the underlying fundamental strength of our business in Columbia. Our core Southern Casanare oilfields, the SoCa assets, continue to grow in both reserves and production and are delivering significant free cash flow. In 2018, the company delivered record funds flow from operations of US$383 million against the capital program of $302 million. This includes annual free cash flow of US$81 million, surpassing the significant production milestone of 50,000 barrels of oil per day; year-over-year oil production growth of 25%; increasing our underlying value, as measured by our independently audited reserves, the highlights from that include proven reserves year-over-year, volume increase of 27%, proved plus probable year-over-year volume increase of 14%.
Our FD&A cost on the proved reserves basis was $7.04 a boe and that includes FDC cost, giving us recycle ratio of 4.5x. Repurchase of over 2.75 million shares, adding new inventory to our portfolio with a farm-in of the Llanos basin and CPO-11 block and the acquisition of the Fortuna block in the Middle Magdalena Basin and maintaining a debt-free balance sheet with the year-end working capital of $219 million, which provides multiple options for us to grow our business in 2019.
I'd like to give a brief operational update and highlight some of the key projects we're making significant progress. We continue to be active on our core Southern Casanare assets, that's Block 34, 32 and Cabrestero, where three drilling rigs are currently operating. We have approximately 21 wells planned for these assets in 2019. In this area, a flow line from Block 34 into the key Colombian export pipeline system is expected to be commissioned in April as a major step in reducing our transportation footprint and securing our takeaway capacity.
We've had excellent exploration success at Capachos, which is in a difficult but opportunity-rich operating area. We've been able to demonstrate our operational strengths here, where we are producing and selling light crude oil and have drilled a successful multizone exploration well at Andina in 2018. Currently, the Andina Norte exploration well, which is targeting a new undrilled compartment, is drilling ahead at approximately 16,000 feet. We're planning to set the next string of intermediate casing in the next few days prior to approaching the target objectives.
We expect to have results during April of 2019. We're also preparing to start our other drilling programs targeting growth opportunities in the Middle and Lower Mag basins, at Aguas Blancas, Fortuna, [indiscernible], De Mares and VIM-1 and in the annals basin on CPO-11.
As previously released, we expect the 2019 capital expenditures to be fully funded by funds flow from operations with working capital being retained, traditional growth opportunities and to buyback outstanding shares as deemed appropriate. Our 2019, guidance is highlighted by 20% year-over-year production growth, targeting 52,000 to 54,000 barrels of oil per day and generating approximately $450 million to $500 million of cash flow at $60 Brent prices.
Our CapEx program is estimated at $200 million to $230 million, evenly split by development, appraisal and exploration categories, including funding for new projects that we have in our business development offer. The budget plan generates a record amount of free cash flow, likely higher than $250 million.
And our expected debt-adjusted per share growth rate will likely be industry-leading. We have tremendous optionality to allow us to invest in additional growth opportunities and return cash to our shareholders. And I'm pleased to announce that in our current NCIB program, initiated on December 21, 2018, we have purchased for cancellation over 5.5 million shares and returned over CAD 100 million, which is significant progress in achieving our 2019 target of repurchasing 10% of our flow.
With this brief introduction, I'd like to turn the line back to the operator to start the Q&A session. Operator, over to you.
[Operator Instructions] The first question is from Adam Morton from RBC Capital Markets. Please go ahead.
Yes, good morning guys. Thank you for taking my question. Firstly, on CapEx of $300 million for last year, I believe this is below guidance. Was there a delayed drilling or was there significant cost savings? And secondly, you mentioned the pipeline tie end on Block LLA-34. Do you expect to see any significant cost savings or mainly just a reliability and risk management in operation? Thanks.
Thanks for the questions, this is Ken. With respect to CapEx, $300 million, it's kind of at the low end of our range. Every year, we have some timing issues around the fourth quarter, first quarter, and so no – nothing was canceled, nothing really specific that I can put a mind to, but we do typically tend to have some timing issues over the year-end. The question with respect to the pipeline that we expect to have commissioned or a flow line from Block 34 that ties into the Colombian export system. We are not forecasting today any real savings. That was more of a egress option for us. The field there is just getting too large not to have a pipeline connected.
We do expect, over time, we'll start to see some savings, and it does reduce our exposure to inflation from increased trucking tariffs over time. So that was really what got us to do it, not instant savings today.
Okay, that is good thanks.
Thank you. Your next question is from Ian Macqueen from Eight Capital. Please go ahead.
Good morning guys. Just a quick question on Andina Norte. I didn't – for whatever reason, I had missed the 19,100 foot TD projection on that well. It used to be that 16,000 for Capachos was going to be a challenge for you, but this is obviously a deeper well. I guess structurally, it's just lower. My question really is, in terms of intervals, what's your prognosis for Mirador, Guadalupe and Unai and how do you see going that extra basically 300 or 3,000 feet? Is it going to be – is there significant additional risk with going to 19,100? And can you still get, say Mirador or Guadalupe zones even if you don't to 19,100?
Okay. Ian, this is Ryan Fowler. First of all, the 19,000 feet is a measured depth here, and this is a long-reach well. So actually our TBD for this is very similar to Andina.
And so we still have the option to test all of the zones that were successful at Andina, and we have a plan that kind of allows us the optionality to go to the deeper target, depending on the results in the shallow targets.
And that – to get to 19,000 is to the base of the unit, I would resume, or the projected zone in the unit?
Yes it is.
Okay. So we would drill through the three upper zones there, the Mirador and the two Guadalupe, and see what that looks like and see how the wellbore is looking and then make a decision based on what we saw in the shallow or whether we deepen or not. So it's just an option to go deeper.
Okay, that’s great. Thanks very much. I appreciate that.
Thank you. The next question is from Gavin Wylie from Scotiabank. Please go ahead.
Just two quick questions for me. Just one on the Capachos drilling program. There's only one well in the budget this year. Is that the Andina Norte well? And the second question is, if Andina Norte is successful, is there any other follow-up appraisal – excuse me – that you could do in the area or exploration that you could do in the area over the next, say, 12 months, assuming that you probably have to get some additional stuff permitted for that? But just if there's any follow-up that could be put into the 2019 program?
Second question, just on the SoCa, it's the 21 wells. Out of that 21, is there a number that you could kind of give us a sense of as to what is being drilled outside of current 2P? That would be great.
Okay Gavin it’s Eric here. With regards to the Capachos, Andina, we are evaluating what the next steps are in the area for the drilling rig. We've had very good performance in the area. We've got a rig that's operating very well in the area. So with Andina Norte, the challenge is going to be, this target is a long-reach well and to drill additional follow-ups, we will likely need to build additional surface location, which would push any follow-ups to Andina Norte to the end of 2019 at the earliest. We are currently working our technical models on the existing tools that would be Sur, Central and Andina, things like simulation models to see what is the optimal development, can we take advantage of the rig in the area at the moment to complete some additional work?
So we're in the middle of that work to look at what our final budget may look like. As far as Block 34 and wells in Block 34, the budget is currently split out between mainly development wells and appraisal wells. So even though we're drilling wells within boundaries of reserves, the critical information that we gather as we start doing development here is what is the rock fitness, what is the reservoir quality, and how does it change. So it is one of our uncertainty still in our reserves reports for these areas.
So when you look at the range of reserves from the 1P to the 3P, they're a function of really three things: the outline; what's in the outline; and performance and recovery factor. So a lot of the wells we're drilling, although aren't outside of the boundaries, will tell us a lot about the rock boundaries themselves. There are a handful of wells that are still drilling outside of even the 3P boundaries that we are drilling right now in addition to exploration wells in the whole SoCa area.
That’s great. Appreciate the clarity. Thanks.
Thank you. [Operator Instructions] The next question is from Jenny Xenos from Canaccord Genuity. Please go ahead.
Good morning. I noticed that in Q4, you had a significant increase in transportation costs due to selling oil and cargoes versus at the wellhead. What drove that decision to choose this marketing strategy in particular? Was it to bring down inventory? And why was it done in Q4 when oil prices collapsed? And finally, what should we expect for your marketing strategy in Q1 and for the rest of the year?
Hi, Jenny, it’s Ken. Timing of cargo exports are little bit out of our hands and any increase in transportation is offset by decreasing the differential. Effectively, we are in Brent minus $17, Brent minus $16.50 at the wellhead, which has been pretty constant throughout the year. It's actually Brent minus $15.5 right now because we have corneous pulled in. But the way the accounting rules have changed on is you can't just go by transport. You got to put transport a realized price net of Brent together all the time to see where we're really moving or how our realized price of the wellhead is moving.
And it hasn't moved that much as a percentage of Brent towards dollar per barrel of Brent. And we will continue to do about 14 or 15 export cargoes in 2019. We think we have the timing down. But every once in a while it's not you miss it out by a week, it becomes January's cargo not December's cargo.
So that's the type of timing we're looking at. We have our oil in the tanks at the export location at Cadenas, and sometimes the ship shows up early, sometimes it shows up late, but it's all within 10 days or two weeks. But on a quarter-end basis, it could make a bit of a difference, can't it, because you either have the inventory build or you have a dry down. So really timing is a little bit out of our control, and you can't read too much into it.
Okay, understood. Thanks for that, Ken. And I noticed that your commitments over the next 12 months were reduced substantially beyond the level of your capital expenditures in Q4. Could you give us a little bit of color on that? Was it something in particular that you did there that resulted in such a substantial reduction?
It's just our BMM 9 block, as you're aware, it's an unconventional block. And because the unconventional licensing in Columbia is murky right now, it's actually been suspended. And so once in suspension, it didn't seem to make any sense to have it on our exploration commitment schedule for something we can do this year. For instance, we didn't have it in our budget this year because we knew it's in suspension.
So we just cleaned up our note disclosure to put a note into the one to three year category. Arguably, I could've put it out to the five-year category because we don't see next year, for instance, having any more clarity on that unconventional license.
But that's the answer to your question.
And what was that exploration commitment that was taken out over the next 12 months?
Yes, I'd say our – we've always had it on our principal properties list, and they're I'd say $9.9 million.
And that's a 2014 bid round block.
Okay. With regards to Andina Norte, is it drilling according to schedule? Or were there any issues encountered during drilling that resulted in any sort of delays? Or is it progressing as you expected?
Hi, Jenny, it’s David. It's a little bit behind schedule. In the intermediate part of the whole, we had some tool failures. We had just a whole bunch of smaller things that have just put us behind. We're probably 20, 25 days behind right now. But we're just about at the next intermediate and things have been drilling better since we've gotten the last intermediate behind us as well. So we see it proceeding without any potential problems going forward, just some intermediate coal problems.
Okay, great. And could you give me a quick update on the status of the Phase I gas blank commissioning at Capachos? And what kind of impact it will have on production capacity in the near term here?
Okay, Jenny, this is Eric. So the construction of the gas line is well underway. We are targeting commissioning kind of in that April time frame. The intent of the gas plant is to capture all the hydrocarbon in the Capachos Andina area. So as a company, we don't want to flare hydrocarbon. So what we are doing is putting this in place that will allow us to capture all of the produced hydrocarbon volumes, generate an LPG stream and generate power for the local area to use all of the hydrocarbon produced.
So what will it do from a production standpoint? Well, it will give us capability by mid-year to handle about 10,000 barrels a day and conserve all of the gas. So that is the main focus. We have no real gas restrictions at the moment from a regulatory perspective. This is just something that Parex follows, a policy of conserving all hydrocarbon where possible. So it will allow us to conserve that, wrap things up.
With that said, Capachos Andina is also a swing field for us as we will – we control our production to meet our guidelines specifically. So it will be one of those control fields that we will use to control our corporate production.
Eric, just to confirm, the 10,000 barrels a day you mentioned by mid-year, that's oil production you're talking about?
Correct. Gross, I'm sorry, yes.
Yes, understood. Great. And final question, if I may. Would you consider substantial issuer bid before your NCIB is completed? And if yes, would you need a separate regulatory approval for it?
Hi, it’s Ken. You would need separate regulatory approval for SIB risk certificates substantial issuer bid. We wouldn't expect that, that would be an issue but you would need approval. It's kind of a 30-day, 35-day process with some press releases and some filings. And really it's like a Dutch arches, so it's kind of an interesting process.
We would look at it. So at the current, the NCIB will be done in 2000 – in August 31, August 30, will be filled. And then we have to wait till December to start the next NCIB. And the NCIB for 2020 is a start of – kind of plea in our view. It's going to be – it's going to happen. So what we do in between the two NCIBs, we would look at doing an SIB. It's going to depend upon a lot of factors, and it's really days in the year yet.
So we're just – it's one of the things we'll look at. We have a strategy session with the board in September and I'm sure that will be something we'll talk about. It also ranks in there with that would we do a dividend at some point? We have a question on that on our screen. Right now, we would favor doing a share buyback over the dividend and investing in some exploration in grow. When we look at capital allocation, we want to still grow the business through 50,000 barrels a day that we are now potentially through to 70,000 over time, but on a measured pace.
And we look at projects that we can do that with and we also like buying back our stock because that adds instance to cash flow per share and instance to reserves per share, and as shareholders we’re very keen on those two metrics increasing. So I think right now, our choice is to take excess cash flow or free cash flow and use it to buy back our stock and use it to then see what we can do with the business in the future. But we wouldn’t say no to a dividend forever. It’s just that right now, I think we have better usage for that cash.
Yes. And one of the questions on the screen is, discuss the use of free cash flow. And that kind of alluding to, and we have lots of places potentially we could use the free cash flow. The first thing we’d like to do is if we have some exploration discoveries, which we hopefully will do with the fairly extensive program. We haven’t budgeted any capital follow-up for those discoveries nor have we included any production in our guidance for that. So one of the uses of cash would be to actually follow-up drill some appraisal wells facilities, etcetera.
The second would be to add new growth blocks. Hopefully, would be through a bid round that’s coming up or a farm-in that maybe we can spend cash this year on. Thirdly, would be business develop opportunities. Fourthly would be to buy back additional stock. And probably the lower rank to use would be for dividends. And like said, there have been two or three questions about the use of free cash flow on our screen. So I think we’ve addressed those now.
Great. Thank you so much for taking my questions.
There are no further questions at this time. I would like to turn the meeting backward to Mr. Taylor.
I’d like to take this opportunity to thank you for your interest in Parex 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 good day. Operator?
The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.