Parex Resources Inc. (PXT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Parex conference call. I would now like to turn the meeting over to Wayne Foo. Please go ahead, Mr. Foo.

Thank you, operator. Good morning, everyone, and thank you for joining us. I'm sure that most of you have seen the press release this morning, noting that Dave Taylor has elected to retire from Parex effective as of the AGM in 2021. This coincides with Dave's 65th birthday and is in accordance with his long-term career plan and his long-standing discussions with our Board. Dave has been an essential member of the Parex team. We truly wouldn't be where we are without him, and we thank him for all his contributions since 2007. Dave, would you like to take a few minutes to reflect on the day?

Thanks, Wayne. It is hard to believe that I'm at this stage. But as you'll have seen in the press release today, I'm excited to announce that I'm officially retiring effective at the AGM in May 2021. You should know, as Wayne noted, that when I was promoted to President in 2015 and took on CEO responsibilities in 2017, I did indicate to the Board at that time that I likely plan to retire at 65, and that timing hasn't changed. After 40 years of working in this industry, retirement will bring a new chapter to my life. It will be a chapter that I'm still writing, and because I'm healthy and happy and I plan to be active and travel the world once we can get back to doing that again. I've been fortunate to have had a very rewarding career in this industry for my time learning the ropes with Big Oil at Exxon and Imperial early in my career to tracing through the jungles of Africa looking for deals in mid-career to most recently leading Parex as President and CEO and working in the fantastic country of Colombia. I'm very proud of the Parex organization and what it's accomplished in its 11-year history. We have become, through the dedication and hard work of all our employees and stakeholders, one of the most successful oil companies in the world today. As we move through the COVID crisis, Parex will emerge in a very strong position to continue this success well into the future due to the strong foundation we have built with our very competitive asset position in Colombia, our industry-leading balance sheet. I've gotten to know many of you very well through my tenure as President and CEO, and I hope our paths will cross again in the future. I'll turn it now -- turn the call back to Wayne now.

Thanks, Dave. So as part of its stewardship responsibilities and looking ahead to Dave's retirement, the Board initiated an exhaustive search process. The search considered the long-term requirements for the company, building on the strengths of our assets and financial situation, but also considering the challenges that are facing our industry over the coming decade. It was a global search and extremely thorough, and I'd like to thank the directors who participated in that process as well as the members of management who supported and participated in the effort. As a result, Mr. Imad Mohsen was selected to join Parex as President and CEO with an expected effective date, February 1, 2021. Subject to navigating the complexities of immigration regulations and with the added complications of COVID-19 protocols, Imad will arrive in Calgary for that start date, and his family will relocate from the Hague to Calgary during the first half of 2021. Imad was selected on the basis of his demonstrated leadership and specific capabilities and strategic planning, operations and application of ESG principles. An engineer by education, he has a strong track record of leading successful exploration and exploitation programs with material additions of new resource. In selecting Imad, it was clear to the Board that we're not seeking to rewrite the history of Parex. We're looking to build on our incredible success to date and to work together in writing the next chapter of that history. And looking at that next chapter, we should probably start with our view of the world in which we find ourselves. I mentioned that a key parameter in laying out our search criteria was our assessment of the strategic landscape that we face for the coming decade. 2020 has been a landmark year for the E&P industry, and for me, unlike anything since 1986. In 2019, strategic scenarios were peacefully contemplating whether peak oil would occur in 2035 or 2050 or some other possibility. In 2020, the discussion has shifted to whether we're now already past peak oil. In 2020, the societal shift, known as the energy transition, is changing character. Activism of past years is giving way to policy actions. Aspirational goals are being set by governments around the world. And major participants in our industry are shifting their portfolios and position for a faster transition to a low-carbon world. Capital markets are essentially closed for E&P. This doesn't seem to be the typical closure that occurs at the bottom of price cycles. It appears to be a structural change related to a lack of historic returns compounded by a trend to decarbonization of portfolios by investment managers. Capital may not bounce back to the sector as it has in the past, and E&P companies will face ever-greater challenges to gain or retain investor interest. With no line of sight to new capital for future activity and E&P profitability is key, companies must generate cash flow adequate to maintain or grow their asset bases while providing return of capital to investors. This is best achieved by having access to fresh, low-cost resource in jurisdiction with good -- in jurisdictions with good fiscal regimes. That requires successful exploration programs and business development activity that brings upside opportunities and not just mature resource. Parex and its precursor have succeeded by achieving those objectives consistently over the past 18 years. Sustainability has become an overreaching framework. Strong assets can only be effective as they're worked with a social license that is underpinned by strong ESG fundamentals. Profitability is only valued if there is a clear path to maintaining those returns over the long term. Staffing is and will be a greater concern as we see our industry overall challenged to show attractive long-term career prospects. Against that backdrop of potentially shrinking markets, greater regulatory load and limited access to capital and talent for best-in-class performance, there is still a requirement to maintain or grow the asset base while maintaining profitability. I'm now in my sixth decade working in this industry, and this strategic landscape is as challenging as anything I've dealt with. Imad will be joining the strong existing team at Parex to jointly design the path the company will follow. The challenge in designing that path, and generally, for leadership in today's landscape is to drive their companies to perform while concurrently steering them to transform in order to thrive in the future. We already see this unfolding in oil and gas as unconventional players consolidate to reduce costs today, while extending and rescheduling and reconsidering development of their inventory. The super majors layout plans for huge shifts towards a low-carbon future, and as financial institutions, regulators and NGOs, all act in their own ways to drive changes in the way this business functions. At Parex, we have always performed well with a history of best-in-class operating, financial and ESG performance. Our core Colombia business will continue to run as it has. The current business plan and the 2021 budget remain in place, and execution is already underway in the field. That strong performance shelters us from a requirement to transform, while at the same time, it provides us optionality to do so if, when and as advantageous. With our strong foundation, we can both perform and transform, and we have flexibility to choose the path we want. In today's landscape, it's not really a choice to transform. It's an imperative. Companies are often good at expressing their own view of what makes their own performance outstanding. We found an open letter from Cambridge in -- from February 2020. It was an interesting summary of what perform means to an investor, and in their case, an activist investor. They highlighted 5 performance components required for future relevance. The first, visibility to returning 100% of enterprise value to shareholders within 10 years. Second, commit to reinvesting less than 70% of cash flow. Third, reduce leverage targets to 1x cash flow or below. Fourth, align management compensation with shareholder interest. And fifth, allocate capital with an understanding of the environmental impact. This is actually a statement on the requirement to perform and transform. Parex has adopted most of these principles well before they became fashionable or required. Some have been in our DNA since founding and others were adopted as recently as 2018, and we continue to be guided by these values. Our Colombia business is at the heart of delivering that performance. There is nothing wrong with that core business. In fact, our performance would suggest that it's right. This free cash flow supports sustainability and return of capital plus optionality for further transformation. Exploration in Colombia has been rightsized by Dave and his staff to effectively work the portfolio. Options exist to do more, especially with the resumption of bid rounds in 2019 and 2020. Our overall portfolio risk will continue to be managed to avoid the gambler's ruin problem that results from taking on extreme risk. We have the opportunity to generate that balance. And at Parex, exploration has been and will remain an investment, not just the bet for a pun. How do we transform something that's already working? Well, I'd like to just quickly look at 2 examples of things where we can find new perspectives without abandoning our successful legacy activities. I'd like to look at questions that we've had around market diversification and business development. Parex has been by design, a pure play, single country, single commodity operator, largely with exposure to Atlantic Basin heavy oil. With that kind of significant volatility related to one commodity contract that we have traditionally managed by maintaining 99% balance sheet strength, our strong performance allows us to continue along that course and also to consider undertaking some transformation. Diversification of markets requires perspective that goes beyond just considering commodity mix. Parex was founded as an oil company for the same economic and logistical reasons as its precursor. Oil trades at a premium to gas in 9 years out of 10, and oil can generally find a market anywhere in the world. But oil, and especially, heavy oil or high carbon, and by their nature, will be targeted for reduction in the energy transition, while low carbon fuels will be favored. For us, commodity diversification to this point has largely been a result of our efforts and not an intent that guides our efforts. Diversification of commodity is already underway in Colombia because what we have found with gas and gas liquids at La Belleza is happening. If we wanted to consider further transforming our markets, we would first be required to evaluate and target an optimal mix that would allow us to thrive in the future energy business. Our gas has largely been sold at the wellhead, and that's been done to maximize the value of related liquids production. Transforming that approach would require a strategic evaluation before further exposing the company to the value of secondary markets, such as electricity or hydrogen or other benchmarks in the local market. As momentum gathers around the energy transition, it will be important to frame our intents. But within those intents, we will remain a hydrocarbon production company. But our markets for sale of that energy may evolve considerably over the coming decades. In terms of business development, Parex acquisition of new properties has been focused in Colombia, and Colombia will continue to be a focus area. Our interest has successfully been directed to assets with upside that considerably exceeded the purchase cost. Where possible, we have used work commitments to earn in part or all of the acquired interests. We will continue to apply those principles for M&A evaluation. With the once-in-a-generation disruption now underway in international exploration and production, we will be open to, but not driven to considering opportunities in new jurisdictions where we can leverage the skills of our team, our cultural performance and our deeply imbued ESG values. To be attractive, those opportunities would require the same attractive mix of high-quality resource potential and good fiscal regime that has enabled our success in Colombia. To attract new capital internally, a venture would be evaluated on the basis of how it complements the core Colombian business, not on how we displace it. So against that background, what does Imad bring to this? In his online profile, it talks about diverse overseas experience, oversight of large staffs, oversight of large capital budgets, successful transition to a smaller company and CEO experience in a private equity environment. What I've learned through my many interactions with Imad, who's deeper than just the work experience and is very applicable to the challenges that we face as outlined above, Imad is a transformational leader. From a character standpoint, he is a person who leads by getting to know the people that he works with and building a sense of team. He believes in empowering people and trusting them. Imad understands working in both the developed and the developing world. He was born in Lebanon, educated in Paris, and has lived and worked in country, in Nigeria, Egypt, the U.S. and the Netherlands. He is very easy to talk to and connects well with people of all backgrounds in formal and informal settings. Although admitting that he doesn't speak Spanish, he speaks 6 other languages, and we hope that he'll add Spanish as number seven. He's a strong believer and applier of ESG principles. Beginning in 2003 as sustainable development adviser for Shell and the Hague and continuing through his further experiences with Shell and then with Tulip, he's demonstrated a clear grasp of how ESG principles are fundamental to success in any contemporary E&P ventures. Imad knows that fresh resource is critical for sustainability, and he believes that opportunities still exists for significant new discoveries. In his last position, his efforts to strategically assemble working interests and offsetting lands on a large offshore prospect resulted in the largest gas discovery in 15 years in the Dutch North Sea. That was on a block that had initially been entered to blow down an old deal. Innovative development followed applying zero-emission principles, renewable generation and remote operation of an unmanned platform, which combined to enable quick approvals and construction. Similar ESG-focused principles were applied to onshore exploration in Germany, and that appears to have led to an oil discovery that's larger than any in recent decades. It's an unfortunate aspect of our 2020 world that FaceTime is used to describe an app far more often than the old sense of the word, being in the same room and gaining the measure of someone in person. It's my sincere hope that we'll navigate the immigration maze with good speed, and I'm looking forward to Imad arriving at a few -- arriving a few weeks after the holidays to begin his transition with Dave. I'm confident that as each of you have an opportunity to meet and engage with Imad to get face-time, you'll see, as I did, that he brings complementary skill sets and a leadership style that will draw -- that will build upon, draw out and enhance the strengths already present in Parex. I thank you for your time today and look forward to your continued support of Parex as we execute our 2021 capital program. And move through to the conclusion of this leadership transition. If there are any questions, I'm happy to take them. So Mike, I'll turn it back to you.

Thank you, Wayne. Operator, we're on standby for questions.

[Operator Instructions] The first question is from Gavin Wylie from Scotiabank.

Wayne, actually, a lot of the questions were answered, and really appreciate that level of detail. I know that these are early days and many questions will be tough to answer as Mr. Mohsen makes his transition in. But I'd like to get your guys' view on what the Board saw in him specifically versus, say, other candidates? And what are the skills that you think will be most beneficial to Parex's future? And as a follow-up to that, what are the key priorities that you and the Board have set forth or cast Mr. Mohsen with over the next little bit here? And then specifically looking at future acquisitions, does this create a much wider net for you guys geographically? Could you start to look to North America across the pond, let's say, Europe or other places of that nature? And then again, how do you see that mix between gas oil changing? And is there a place for renewables in that medium- to longer-term strategy? Dave, just as a personal note, it's been an absolute pleasure over the last 13 years to work with you, and truly wish you the best on your future endeavors. And hopefully, we'll see it -- see you soon at some point, but definitely wish you the best.

Thanks a lot, Gavin.

Well, Gavin, that was a very comprehensive question. So I'll take a stab through it, and I'll probably miss some things, and you can redirect at the end. What did we see in Imad? I guess I'd have to say that the first thing we saw was his ability to engage. He's a very engaging person. He has a sense of competence and humility that comes across immediately. In terms of his work experience, one of the challenges with recruiting people out of larger company environments is that they have not made the transition to an entrepreneurial business. They haven't made the transition away from the support of a large organization or they sometimes seek to rebuild it. We looked at what Imad has done with Tulip in the North Sea. He's shown that he can make that transition. He can assemble a team, and he can perform with a best-in-class entrepreneurial organization. We saw his desire and his interest. I think one of the features of the industry is as we sit today is it's hard to come by capital. And there's a sense, opportunities will emerge, but finding the financing is unclear. Imad understood the strength -- the financial strength of Parex and the discipline that we've exhibited to this point. And he was able to articulate how he considered being able to leverage that strength, but also an appreciation for the requirement to preserve it. So he understands that balance. And he's at a point in career where he has a considerable runway and the ability to take the company forward for a good long time. In terms of the priorities for the future, Gavin, I highlighted that the industry is going through a significant dislocation right now. There are a lot of opportunities. I think that I also characterized that there's nothing wrong with what we're doing in Colombia, and we see opportunities there and growth prospects. We're looking and open to going beyond Colombia. We're looking and open to going beyond Latin America, but it would be based on the ability to establish a core business that's complementary, similarly attractive that can be built into something material and sustainable. And that's more important for us than geography at this point. And I think that will emerge as we see the coming year or years play out. To this point, there still seems to be a dislocation in simple bid-ask terms. A lot of deals are being done for strategic reasons, and they're unconventionally structured. We're going to evaluate those going forward. And I think we have the expertise to do that. In terms of the mix of commodities, as I mentioned, historically, we've been 95% to 99% oil. That's changed partly because of the results we've had at La Belleza. We've drilled a structure that had, had well shows and prior wells, and we've come up with something that looks like gas liquids. So we are getting diversified. And no, it's not -- we're going to have to look at how to take that forward strategically rather than just driving it from a portfolio standpoint. If we see success in some of the major prospects in our portfolio over the next year to 1.5 years, the team has characterized that we'd probably arrive at something that's 20% gas. From my standpoint, I think that still leaves us as an oil play and expose primarily to global oil prices. But it also provides the opportunity to participate in a different commodity market and have a presence in Colombia, which is gas short and developing policies to rely on more gas. So I think we're positioned with what we need. The strategy will emerge as we go through this transition over the next 6 months.

Yes, absolutely. That's very, very thorough. Just the last point is just to step into renewables. Does that decision predominantly hinge on the economics or the returns being at least competitive with what is in the portfolio currently? Or do you think that there is a place that just at some point, that may have to be somewhere where you guys directionally move? That's it.

Well, I didn't discuss renewables. And that to -- there's a primary driver and a derivative driver. I think I discussed that Imad has a history with renewables in order to enable production and to consider the impact of the production. But from our standpoint, consideration of renewables as a primary outcome would be economically driven. And we are looking at ways to -- and we have a geothermal -- smaller geothermal pilot underway, that's looking at how we can capture the unique aspects of the high-temperature water that we have in the Llanos Basin. We have other things that we would consider as ancillary investments. But if we were to target programs strategically at renewables, they have to be economically based, and I haven't seen anything that suggests we're at that point yet.

[Operator Instructions] The next question is from Al Stanton from RBC.

And as Gavin said, very comprehensive. Wayne, I think you understand the challenges that we're all faced with at the moment. Often when it comes to management changes, the actual story comes out over a bear further down the road. But I suppose, putting this in one way or another, I mean, bringing in an external candidate suggests that you're looking to add something that didn't already exist. So -- and I get at what you were talking about with respect to gas and also the geography, and I can understand the idea to look outside of the existing management team. And because Parex isn't a company that's in crisis, I wouldn't be anticipating any other additional changes. And I would be surprised if Imad is bringing a team or colleagues with him. So it would be interesting to hear your view on that. And then I suppose the other thing is, I remember some of the conversations I've had with Dave, and he's not been a fan of the dividend. I was wondering if Imad would have a vote on whether there is a dividend policy or at least a dividend payment policy? And whether there is potential for greater change?

Okay. Well, I'll take some of that as statements and some of that as questions. So I won't disagree with the statements that you've made and the question extend is dividend. The choice of the dividend policy probably resides more at the Board than with the CEO. And the Board's guidance to management has been that the company should have a way of providing payment to shareholders. There should be a defined expectation of a return of capital to the shareholder. And we've done that over the last several years through share buyback. We frequently ask the question as to whether that's the appropriate mechanism. And considering a dividend, the most important aspect is sustainability, a non-sustainable dividend has far less value than a share buyback. And what you're seeing is our focus on longer strategic term, you're seeing Dave and the team having built a portfolio that looks at some pretty significant long-term targets that will be drilled up over the next year to 3 years. And as we go forward and we look at the cash-generating potential of the assets in future years, we'll continue to evaluate the best way to return capital to the shareholders. But we are committed to returning it in some form.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Mike Kruchten.

Thank you very much, operator. Thank you to all for participating on our call and for your continued support. Please feel free to contact me directly if you have any additional questions. Stay safe. Thank you very much.

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