Parex Resources Inc. (OTCPK:PARXF) Q4 2021 Earnings Conference Call March 2, 2022 11:30 AM ET
Mike Kruchten - Senior Vice President of Capital Markets & Corporate Planning
Imad Mohsen - President & Chief Executive Officer
Ken Pinsky - Chief Financial Officer
Eric Furlan - Chief Operating Officer
Conference Call Participants
Luke Davis - RBC
Good morning, everyone, and welcome to Parex Resources Fourth Quarter and Year-End 2021 Conference Call and Webcast. [Operator Instructions]
I would now like to turn the call over to Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning at Parex. Please, go ahead, Mike.
Thank you, operator, and good morning, everyone. On the call with me today are Imad Mohsen, Parex's President and CEO; Ken Pinsky, Chief Financial Officer; Eric Furlan Chief Operating Officer; and Ryan Fowler, Senior Vice President of Exploration.
I would like to remind you that this conference call includes forward-looking statements and 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 sedar.com. All amounts disclosed today are in U.S. dollars, unless otherwise stated.
Please go ahead, Imad.
Thanks, Mike, and good morning, everyone. As we reflect on 2021, we are extremely proud of our record results and our team that's consistently executing in both Calgary and in Colombia.
Looking back, we started the year at approximately 45,000 barrels a day, increased our capital budget significantly and exited that same year at roughly 51,500 barrels a day production rate.
Substantially, with increasing our production, we also saw an increasingly constructive global commodity price environment that ultimately contributed to Parex generating annual funds flow from operations of US$578 million, which was a record and the largest in the company's history. More to come, I would add.
During the year, I'm pleased to say that we materially improved the depth and the quality of our land inventory. We acquired 18 new blocks in 2021, Colombia Bid Round, as well as expanded our strategic partnership with Ecopetrol in the Northern Llanos, which combined represent a nearly 4 times increase in our total acreage in Colombia.
Parex is now the largest independent acreage holder in Colombia. We see this development as a cornerstone to our long-term strategy and vital to our commitment to grow our Colombia LNG, oil and gas production.
Other noteworthy achievements for the year include our corporate ESG initiatives that Mike will briefly talk about, as well as our return of capital track record that Ken will touch on. Therefore, I make some final remarks on our outlook -- before I make some final remarks on our outlook, as well as Parex positioning for 2021 and the long term, please go ahead Mike.
Thanks, Imad. In 2021, we advanced our climate-related disclosures, such as the inaugural Task Force for Climate-Related Financial Disclosure report achieved above industry average ESG ratings from major providers such as Sustainalytics, CDP and Bloomberg.
Critically, during the year we publicly committed to a 50% reduction in our greenhouse gas emissions by 2030 and Parex is actively progressing on its ambition to become one of the least greenhouse gas emissions intensive oil and gas exploration companies.
In 2021, we made progress towards this equipment -- this commitment reducing our greenhouse gas intensity from our operated assets by approximately 14% and a total reduction of approximately 35% from our 2019 baseline.
Moving forward, we expect to see more reductions from advancing the implementation of geothermal energy, full lines to reduce transportation needs, gas plants to reduce flaring and energy efficiency initiatives.
Taking a step back and really looking at sustainability at its core, with the current volatility that we are seeing in energy markets today and considering the follow-on effects of that, Parex is in a position where we can do our part to provide secure, reliable and environmentally-friendly energy. Plus we can do that while continuing to improve the local communities, where we operate.
On that note, we look forward to 2022 and update our stakeholders throughout the year, as we look to continue advancing our ESG story and meeting our overall sustainability objectives.
I will turn it over to Ken to briefly describe our recent results and return of capital track record.
Thank you, Mike. We closed 2021 with a strong fourth quarter, where we generated record funds flow from operations of $168 million, that was up 200% quarter-over-quarter. I'll add that Brent averaged in Q4 2021, approximately $80 a barrel. And as Imad will tell you we remain unhedged to global oil prices.
Quarterly net income was $96 million, while Q4 2021 production averaged nearly 50,000 barrels a day and that was up 7% quarter-over-quarter. Over the full year 2021, we generated over $300 million of free funds flow and continue to add to our return of capital track record.
We paid a special dividend as well as initiated a quarterly regular dividend last year, which was just increased by our Board to 12% in February. During the year, we also repurchased 10% of our company's public float, which marked the third year in a row where we have bought back the maximum allowable shares pursuant to our number course issuer bid programs.
At the end of February 2022, Parex has now returned over CAD 1 billion to shareholders through share repurchases. Since 2017, we have reduced the fully diluted share count by over 25%, repurchasing over 47 million shares, at an average price of less than CAD 20 per share compared to our close yesterday of CAD 28.89 per share for reference.
Stating it in another way, when we start buying back shares in 2017, we had an excess of 164 million fully diluted shares outstanding, which by year-end 2022, we expect to have approximately 110 million fully diluted shares outstanding. To add, over the same period, our oil and natural gas production has grown by approximately 32%. We continue to have an unmatched balance sheet ending the year with no debt and working capital of $326 million plus an undrawn $200 million credit facility.
As we look to 2022, and even while spending on a comprehensive capital investment program, we have expanded our return to capital plan, raising the base dividend this year already as I have mentioned, and we are on track to repurchase 10% of our stock for the fourth year in a row. I'm extremely proud of our accomplishments for 2021 and I look forward to 2022 and beyond.
Now I'd like to turn things back to Imad for some final remarks.
Thanks, Ken. This year the year 2021 was a record year for us, and I'm excited for what is to come for 2022 and the long-term. For 2022, there is no change to our capital expenditure production guidance that we released this past November. We continue to invest across our development, exploitation and exploration programs, with our current production guidance expected to generate a year-over-year absolute production growth of 13% or 23% on a per share basis. Along with our ambitious capital expenditure program, we still expect to repurchase 10% of our stock this year via CIB as Ken mentioned, while also having base distance upside growth potential.
Building on our track record of returning meaningful capital to shareholders, moving forward we want to be clear that we are targeting to return at least one-third of free flow from operations to shareholders through share repurchases and dividends. With this philosophy at current strip prices, Parex expects to return approximately 40% of 2022 annual FFO to shareholders. The remaining free flow from operations will be invested to grow the company and replenish development inventory to support future return of capital activities.
There is an important point I'd like to comment on right now. Over the last year, we have positioned Parex to capitalize on the current market cycle. Parex is 100% unhedged and has a clear first-mover advantage in today's oil and gas markets as we move into 2022. Firstly, we are entering the year having acquired the most extensive land basin in the company's history, for steel I would add.
Second, we have secured rates under long-term contracts to have equipment in place to cater for our capital investment program for years to come. It is -- it does give you some feeling of warm heart to see when the last rates in Colombia are under contract.
Third, we have increased critical organizational capabilities hiring significant staff was in Calgary and Bogata. I would recall around 30% in Calgary in 2021 increase to help us ramp up our programs.
And lastly, we have placed orders for long lead items for the foreseeable future. That includes casings, wellhead, steel, compressors, turbines you name it. In order to provide installation from supply chain short -- and disruptions and the relative head against cost inflation going forward. Combined these actions put us in an extremely competitive position organically to hire the upside opportunities that you are seeing, which is brand pricing that could go well-above $100 per barrel, which I guess is $110 today. So for me not waiting for steel when you're drilling a well that pays back in a month or two gives you huge optionality.
With that, I would like to thank everyone for their continued support for Parex and our employees for their continuous hard work as we execute our strategy. This concludes our formal remarks and I would now like to turn the call back to the operator to start the Q&A session for the investment community. Thank you.
Thank you. [Operator Instructions] We have a question from Luke Davis from RBC. Please go ahead.
Hey, good morning guys. Imad you mentioned preorders for long lead items. I'm just curious if you can provide a little bit of commentary around what you're seeing or forecasting for kind of base inflation through the balance of the year?
And then wondering how long in advance you can order for? Are you just talking 2022? Does that go multi-years? Just a little bit more detail there would be helpful. Thanks.
I would say something like eight months ago, I agreed with the management team that there is -- first for COVID, but also the way the cycle was working that there is a chance for supply disruption. So, what we started to do since that moment, we find our needs with three years in mind, and wherever we could to place orders to fix the terms.
That doesn't mean you don't get any inflation. So, let's say you buy steel pipes, you will be having some indexing on steel prices. But that's very different than having to go and bidding work against that same pipe sitting in somebody's yard where you can get three or four times that inflation.
We're not seeing much inflation right now in Colombia just because of the local conditions on rigs and other items. But I can see some very I can see some signs for inflation going up. But within numbers that doesn't affect our margins any significantly. Do you want to add to that anything Eric?
That summarizes it quite well. I think the big things we've done is secure the rigs especially the big rigs and go forward those are on long-term contracts. And as Imad has alluded to we're not seeing a big inflation component. We secured the critical equipment we need and the pipe for the next couple of years. So, I think we're sitting in a pretty good shape.
And that also expands on surface facility equipment where people we're great enough to say let's order power generation kits or turbines or compressors or even a gas treatment facilities before the wells were put on the ground. I can tell you these things coming to deliver in the coming few months and year. We'll be very healthy trying to expand compared to our competitors.
Got it. That's really helpful. And if I could just ask a follow-up to that. Curious to just get your general thoughts on the upcoming elections here something that comes up a fair bit. So just if you can go through kind of a couple of potential scenarios and kind of where you guys are sitting right now that would be helpful.
Sure Luke. It's Mike Kruchten. Regarding the election, that's going to play out over the next couple of months up into June. Really we're not seeing anything too different than what we saw the path in 2018. There'll be some consolidation of all the candidates that are running. And we really think we're well-positioned to work with Colombia and continue investing heavily in Colombia no matter what the outcome is. We have a very strong land position that gives us lots of exploration running room and production running room over the next five years. And yes, we're -- we think it won't really change our overall strategy.
That’s helpful. Thanks very much.
Thank you. [Operator Instructions] There are no further questions on the phone for now. I would like to turn the meeting back over to Mike.
Thank you very much for all the participants joining our call today. And if you have any further questions feel free to contact me at Parex. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.