Parex Resources, Inc. (OTCPK:PARXF) Q4 2020 Earnings Conference Call March 4, 2021 11:30 AM ET
Michael Kruchten - Senior Vice President of Capital Markets and Corporate Planning
Kenneth Pinsky - Chief Financial Officer and Corporate Secretary
Imad Mohsen - President and Chief Executive Officer
Ryan Fowler - Senior Vice President of Exploration
Eric Furlan - Chief Operating Officer
Conference Call Participants
Travis Wood - National Bank Financial, Inc.
Gavin Wylie - Scotiabank Global Banking and Markets
Al Stanton - RBC Capital Markets
Good morning, everyone, and welcome to Parex Resources Fourth Quarter Earnings Call and Webcast. Yesterday, Parex released its unaudited financial and operating results for the quarter ended December 31, 2020. 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. Mike Kruchten, Parex Resources Senior Vice President of Capital Markets, I would like to mention that this event is being recorded. 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 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 pass on the meeting to Parex Senior Vice President of Capital Markets and Corporate Planning. Please go ahead, Mr. Kruchten.
Thank you, operator, and thanks to everyone on the line for joining myself and the senior leadership team for our Q4 and year-end conference audio webcast. We appreciate your support of Parex Resources. On the call today, we have Imad Mohsen, Parex' new President and CEO; Ken Pinsky, Chief Financial Officer; and Eric Furlan, our Chief Operations Officer.
Before we start our Q&A session, Ken Pinsky will provide a brief overview of our financial results for the year-end 2020. I will then discuss the 2021 guidance and outline the future growth areas, and Mr. Imad Mohsen will overview – just provide an introduction of his time in Parex. Ken?
Thanks, Mike. I'll begin by stating that our priority during the COVID-19 pandemic continues to be the health and safety of our employees, our contractors and the communities neighboring our operations. 2020 was a year of turbulence and uncertainty for companies and industries worldwide. Parex continues to focus on its key success driving factors of balance sheet strength, return of capital to shareholders and sustainability.
Parex remains in a strong financial position, exiting 2020 with results as follows: Parex generated net income after-tax in 2020 of US$99 million or C$0.97 per share. Our earnings were down from 2019 due to reduced global oil prices and reduced production volumes. But nonetheless, I was very pleased to report net income for 2020 given the challenges that industry has faced.
Reporting net income this year very much shows the sustainability of our business in all commodity price scenarios. 2020 production averaged 46,500 boe per day, a 12% reduction from the previous year production of 52,680 boes per day and that was attributable to voluntary shut-in production from the COVID-19 pandemic and lower capital expenditures.
Our crude oil and natural gas reserves for 2020 were an increase of 18% in the PDP reserves per share, and 14% increase in 2P reserves per share. We generated PDP and 2P reserves fund flow from operations recycle ratio of approximately 2.5x, which is excellent considering Brent crude prices averaged $43 a barrel in 2020. Lastly, our 2P reserve life index was extended to 11 years, which added to our sustainability.
2020 was highlighted by Parex realizing strong operating netbacks in this challenging commodity price year. The operating netback of approximately US$21 per boe resulted in funds flow provided by operations of approximately US$297 million that in 2020 capital expenditures of US$121 million generated free funds flow of US$156 million. We applied our free funds flow to repurchase approximately 10% of our float or 13.9 million shares. 2020 marked the third year that Parex has renewed its normal course of issuer bid or share buyback. Since 2017, Parex has repurchased approximately 34 million shares, returning C$643 million to our shareholders.
Let's look at the share buyback along with our business results. Since the end of 2017, our crude oil and natural gas reserves and production have increased materially. Our working capital has doubled. We don't have any bank debt and our share count has been significantly reduced. Parex had significant growth optionality and financial resiliency and we planned it that way. We exited 2020 with working capital of US$320 million and US$200 million undrawn credit facility. Finally, Parex has no commodity price relative hedges in place at the end of 2020 and at present. Parex will fully participate in the higher crude oil prices we are seeing today.
Thank you, Mike, and back to you.
Thank you for the 2020 overview, Ken. I will now discuss our 2021 guidance. Parex is on an exceptional financial position and the company continues to maintain its best-in-class balance sheet with full exposure to 2021 strip oil prices. As we move into 2021, Parex will be focused on repurchasing the maximum number of shares fulfilling the 10% NCIB annual limit for our total of 12.9 million shares. In January and February of this year, we have already repurchased 2.4 million shares.
Second, delivering on our capital program of US$165 million to US$185 million. The key components are advancing the VIM-1 La Belleza discovery with two new wells, civil works and other infrastructure to further assess the block. Next, assessing and expanding our Boranda play, delivering low cost, high margin production and cash flow and evaluating opportunities to expand our capital program and deploy a portion of our expected surplus cash flow.
Lastly, we want to demonstrate top quartile ESG performance, which includes reducing greenhouse gas emissions, working to improve the social conditions in the communities where we operate and providing transparency in our governance.
With this brief overview, I would like to introduce you to Imad Mohsen, Parex' President and CEO. Imad joined Parex following the retirement of Dave Taylor, who will remain an advisor to Imad until our AGM on May 6.
Thank you everyone on the call. I am pleased to have joined Parex. I appreciate your support for the company. As Mike mentioned, I arrived in Calgary and joined Parex in early February, and I’ve spent the past month meeting staffs, shareholders and learning about the exciting opportunities within our portfolio. Hearing both Ken and Mike, probably you could say it was a good timing.
My vision for Parex is to continue to build and strengthen our Colombian operation, the foundation on which Parex was built. Moving forward, we will continue to evaluate new conventional oil and gas opportunities given the financial, technical and social access advantages that Parex have developed. We remain committed to being a socially responsible company that generates best-in-class shareholder returns. I believe my experience in successfully applying industry-leading ESG approaches will complement our existing ESG values that accelerate this transition.
I am excited to assume this executive leadership position and look forward to closely working with our management team and employees, meeting our shareholders, partners and other stakeholders either virtually and hopefully in person this year.
With this introduction, I will now turn the line back to the operator to start the Q&A session. Operator, over to you.
Thank you. [Operator Instructions] The first question is from Travis Wood from National Bank Financial. Please go ahead. Your line is open.
Yes. Good morning, guys. Mike, you touched on kind of the packing order of allocating that free cash and the capital allocation priorities. What needs to give to see the CapEx go higher and maybe chase some growth or rather what's holding that back in this type of Brent environment?
Well, there's a couple of things that we need to work through first. One is actually getting the access and we are still in a COVID situation, so we need to ensure that we work safely with our communities. We are assessing what opportunities that we have that can enable us to accelerate some of that growth. We feel we've underinvested. As Ken mentioned, we only spent C$140 million last year, which was less than 50% of our fund flow from operations. So we'd be happy to take some of that cash flow that we have this year, which is in surplus of after CapEx end our share buyback program and apply it to new projects. So we're in the process of doing that now.
Yes. So we're looking at – if we want to accelerate capital, we're looking at exploration and appraisal versus just developing. We like to explore it. As Mike said, we got a little bit behind last year because of COVID. So we have some dollars we could cash up. But we're not ready to talk about that in any detail right now.
Okay. That's fair. And could you – I know it comes up now, and again, around dividend just sitting on this much free cash in this type of environment, dividends, special dividends, obviously the number one priority continues to be the buyback as you highlighted. But does that come up in the boardroom at all in this type of environment?
Not really, no. We talk to our shareholders all the time and our shareholders don't bring it up. We get questioned from the capital markets participants like yourself about would we consider it. And I think, we would consider it at some point. But right now, I think we're happy with returning capital through the share buyback. We have been disconnected. Our share price was disconnected we felt from where our commodity prices had gone and the operations underlying the business. So we still think it's a good value for the company’s buyback and stock. But it is something that – we have a strategy session every year with the Board that's in default. And so typically that and other methods of return to capital get discussed. But it doesn't come up all the time. That's for sure. And so we'll look at it again this fall.
Okay. Appreciate that. And for what it's worth, I think your investors or clients appreciate the discipline around the capital. I mean, one of the reasons it's performing well today has been strict on that CapEx for what it's worth. So thanks for taking the questions.
Thank you. Next question is from Gavin Wylie, Scotiabank. Your line is open.
Yes. Thanks, guys. Just a bit of a follow-up, and then maybe a second question for me on that too is, the base capital program that you've outlined in the guidance. How has that spread through the year for 2021 just in terms of the like kind of a quarterly allocation basis? And then should you put the surplus cash into work or to work? How does that CapEx look in terms of adding into the program? Is that mostly going to be layered into kind of late Q3 by the time you can actually get going? Or is it going to be Q4?
And then the last one is just around the exploration plans for the Llanos Basin and you kind of outlined nicely the Middle Magdalena and the Lower Magdalena plans, but just wondering if you'd give a little bit more of a description on the Llanos Basin and if any of that excess cash and CapEx would go to maybe accelerating some activity there? Thanks.
Thanks. Let's just answer the exploration program first. We have on our line, of course, our Senior VP of Exploration, Ryan Fowler. Ryan, would you like to give a little bit of color on the exploration program in the Llanos Basin please?
Yes. Sure. Can you guys hear me?
Okay, perfect. Hi, Gavin. We have a number of projects in the Llanos Basin that are working forward and they're actually spread all the way from the North to the South end of it. None of them are sort of reaching the key access point right away. We have two exploration wells that are in the program for 2021. We'd like that to be more and we're working towards that. But a lot of our land base in Llanos now is new blocks that we've acquired since the 2019 bid rounds started up again. And so our access to exit year or two to really get moving on those blocks. And so we're going to see that ramp up really more in 2022, but we do have a couple of shots planned for 2021.
Yes. And then we have our exploration, of course, that are been one block coming up and as the rig moves off of Boranda here in the next month or two, and goes to VIM-1 block to continue exploration, and I think one of the wells maybe an appraisal well, but following up on our La Belleza discovery.
Yes. We have significant appraisal programs in both VIM-1 and Boranda as you said in the Lower Mag Basin and the Mid Mag. And those are real technical catalysts for us this year, in terms of things like adding capital as was mentioned by the last questioner.
Yes, potentially. Okay. Gavin, you mentioned capital spend, the profile for your model, you can basically think of it as around $50 million a quarter. And then we always leave ourselves some optionality for Q4 where we tend to have success, sometimes we'd like to add additional capital to build on that success.
And just the final question was just on the – if you can deploy some of that surplus, is that mostly going to be in Q3 or Q4?
That would be correct. If we’re going to do that, we would talk to the market about it and we would give you timing as to when we would deploy that, yes.
Appreciate the color. Thanks, guys.
Thank you. [Operator Instructions] Next question Al Stanton, RBC. Please go ahead. Your line is open.
Yes. Good evening, guys. I think we're all just looking for the same information in slightly different ways. It sounds Mike, like you put in a slight CapEx upgrades $200 million just then. So can you split that also between the dev-ex and exploration? And then also one of the things I was just looking at the documents today this morning and you've got $420 million of CapEx for 2P, you've got a $170 million of exploration commitments, half of which is suspended, so that's only 80. I mean, they sound like big numbers, but you could cover them with 2021 cash flow.
So can we go right back to the beginning [indiscernible], what are we waiting for? Do you need to get in country to see what the opportunities are? Whether they're inorganic or organic. I appreciate the new Chief Executive hasn't been to the assets yet. I'm assuming no one's been in country for a year. So in terms of the logistics, do we need to get COVID passports or whatever we have in Canada and progress down to Bogota and then pull the trigger or do you need a bigger cash pile or you just not taking the opportunities you want?
Hi, Al. I guess you're saying why you're so disciplined. Well we are disciplined, so that's the way it is and that's the way it's always been. And so it's got nothing to do with us going to Bogota. We've been working in Colombia for 11 years. We have 300 folks down there. We have daily communications with them. We love to go to Bogota and work with their stuff in person, but we can get along quite well using virtual. So now we are just being thoughtful and prudent and working through our portfolio and looking at what things we'd like to do and we add the most value as opposed to just rushing off willy-nilly and spending money, we tend to like to invest money.
So that's the comment back to you on that. In respect of capital, you made one comment about might be very rough generalistic, it's approximately $40 million to $50 million a quarter – capital programs even throughout the year. We're still in that guidance that we gave originally, which is $165 million to $185 million in capital. That is our official guidance for this year. If we change it, we will tell you about that at that time, and we'll give programs and justification for that. So we've given you a little bit of color of what we might want to do, what we're working on, but we don't want to go into any more detail than that right now.
The splits of the $165 million to $185 million between exploration and development?
Yes. So when we released our budget in November, we released that based on $45 deck. I think, Brent at the time was around $42. It was effectively about a 65% development, 35% exploration.
Okay. We'll sit and wait. Thank you.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Kruchten.
Thank you, operator. 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 contact myself. Thank you very much 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.