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

My name is Mike Kruchten. Welcome to our Llanos Foothills Review. As a reminder, this presentation has forward-looking statements, with the associated risk outlining the advisory at the back of the presentation. It's in the [ tree ] font. Give it a read. We wanted to invite you today to outline the opportunity that Parex has captured and begun to execute. I think what makes me excited to share this news is that we generally believe that we have added to our portfolio game-changing exploration with world-class resource, reduced geological risk, access to existing infrastructure, and it's connected to high netback premium markets. So for today, I'll click through our agenda. For the next 35 minutes, you're going to hear from our leadership team, who will provide an update on the Parex/Ecopetrol agreement framework, why we see a step change in our Llanos Foothills exploration portfolio, and how does this fit within our broader growth strategy in Colombia? Afterwards, we'll have time for questions. Positioned for the next growth chapter. I told you I'm really excited about this Foothills opportunity. Let me tell you why. I see an analog to the opportunity we captured back in 2012 with Block 34 in Cabrestero. I want you to recall that when we acquired those exploration blocks, the market wasn't overly excited, and it took time to have that value realized. But in the end, and the end is probably only halfway there, we've generated 120 million barrels of production. And in 2P, we have equal amount going forward. We've delivered operating cash flow -- free cash flow after CapEx of around USD 3.5 billion. We think we have another opportunity like this, a watershed moment that could transform our Colombian growth strategy. This title is delivering on our gas strategy. Back in December 2022 in Bogotá, we outlined our strategy. And it is important to measure how are we're progressing against that. There are 3 key elements were: utilize exploitation and technology, and we've done that with horizontal, waterflood, better drilling techniques like mud; two, capture liquids-rich gas opportunities; and three, deliver outsized exploration potential. So this -- I think this framework today is really going to focus on those 2 elements. And I think it shows how we're progressing the strategy that we've laid out about 1.5 years ago. We view this agreement as a game changer because we see larger reserve potential sizes and a lower corporate risk profile. And importantly, our objectives are fully aligned with Ecopetrol and the government's agenda. Next, we're going to walk through these 4 key pillars of this agreement and why it's important to shareholders. Lastly, Imad will wrap up with strategy and timing. With that, I'm going to turn it over to Katie to start off.

Thank you, Mike. Good afternoon. My name is Katie Bernard. I'm part of the Parex executive team leading New Ventures. But before I walk you through the framework of this agreement, I wanted to take a moment just to convey how excited we are by this incredible opportunity. The agreements that we have entered into with Ecopetrol are the result of the last 2 years of work. The collaboration, which you'll hear about between Ecopetrol and Parex over this period, has forged the strong relationship that we see today. And this has been made possible by cross-functional teams within Parex and the Parex and Ecopetrol working groups, whose energy and tireless enthusiasm have enabled us to deliver this opportunity. So the chart that you see on my left was presented by Ecopetrol at the natural gas conference in Cartagena the week before last. It was on the day of our joint press release. It demonstrates the significant gas shortfall that Colombia is expecting over the next 5 years. The government is proactively looking for multiple solutions to address the shortage, and our strategic alliance with Ecopetrol represents an integrated strategy to develop the potential of the Piedmonte trend. It's an efficient solution in terms of cost and time to deliver an in-country solution due to its focus on optimizing infrastructure, as Mike mentioned, and its large concentration of HiPos prospectivity. In addition to securing future gas supplies for the people of Colombia, there are 2 other key drivers for Ecopetrol and the government. Supporting the energy transition. The government and Ecopetrol see gas as playing a pivotal role in accelerating Colombia's energy transition and combating poverty. As we know, gas is seen as a low emission and economically viable fuel, which is consistent with the government's environmental initiatives and aligned with the ESG focus of both Parex and Ecopetrol. Making use of existing infrastructure. I'll be speaking more to this in the following slides, but the main point is that our Foothills collaboration makes use of infrastructure and facilities that is significantly underutilized. This slide provides an overview of the key elements of the agreement. Operatorship. Parex has been given the vote of confidence to be the operator across the whole trend. This is reflective of our proven track record, most recently displayed in Arauca and Capachos and built upon our existing relationship with Ecopetrol. Harmonization. The agreement harmonizes everything that you can see in the outlined area on the map. This provides access to potential discoveries and ring-fences the entire 250-kilometer trend, giving Ecopetrol and Parex access to contiguous acreage. For reference, the area includes everything outlined in the original MOU. Two key areas for Parex in the agreement are Sirirí. That's in the north of the outlined area, which is where the producing Gibraltar field is located and the Niscota exploration area in the south of the trend. I wanted to call these out as some of the best prospects in our portfolio are found in these areas. I think it's also important to note that Ecopetrol is currently in the process of legally obtaining the Niscota block through an extension of their current Piedmonte block. So in a nutshell, this agreement enables Parex to further high-grade our portfolio and significantly increases our chance of exploration success in prospects that have both size and scale. Sorry, I moved forward too quickly. Next slide. One of the important attributes in this framework and Foothills opportunity is existing infrastructure that's readily available, including pipelines and facilities to get to attractive markets such as Bogotá. So as you can see from the map, there is a key pipeline, the OBC, the dark pillar, running from the top to the bottom of the trend, operated by Cenit, which is a subsidiary of Ecopetrol. The OBC is relatively new. It became operational in 2013. It's significantly underutilized. It's large, 42 inches in diameter, so comparable to the long-haul export pipelines in Canada, such as Keystone, which means it can provide egress for the whole of the trend. There are existing facilities along the trend that future discoveries can be tied into, and it's accessible to prospects, reducing costs and build time. For an example, Arantes is only 6 kilometers away. Importantly, it's now approved for multiphase use, following efforts that were spearheaded by Parex and Ecopetrol to demonstrate its feasibility to carry liquids and gas. The government demonstrated its support back in December 2023 by introducing a resolution for -- to allow for multiphase use. With that, I'll turn it over to Eric and to Ian to speak about the Foothills and its compelling resource potential.

Thanks, Katie. Good afternoon, everyone. I'll introduce myself on a lot of new faces. I'm kind of the old guy in the company. I've been here since 2003 Petro Andina days for those who remember Petro Andina and then, of course, right through to Parex. So I know I've been here about 21 years with this group of people. I had the pleasure of developing the billion-barrel field we found in Argentina and similarly, the billion-barrel field that we found in the Southern Casanare. And I'm going to have the pleasure of developing this one also. So let's talk a little bit about our excitement and why we're so excited. And this slide says a lot of it. Typical to Foothills takes discoveries anywhere in the world. They're generally large, prolific, high productivity per well. You can see on the graphic, the Foothills was developed early on in Colombia, and then it stopped and we'll talk a little bit about that. But you can see it at its peak, just under 1 million barrels, 1 million BOE a day from discoveries. And you can see on the map on the right where those discoveries were. And the interesting part of the map of the right is you've got a series of discoveries in the south and then you've got a few sparse discoveries in north and nothing in between. And so that's the really interesting part because you don't find that in other foothills trends anywhere in the world. It's generally quite a contiguous development of new discoveries. This is what Parex sees for opportunities here. We already have a very large number of opportunities filling in the trend. We know this trend continues, and finding the right spot to drill is what we're focusing on refining these prospects. But that's why we're so excited about this technically. So the big question is, historically, there were very large pools, very prolific. Why did it stop? Like why hasn't this trend fully developed? Like it was here in Canada fundamentally in the '80s and '90s. A few reasons. Looking at the time line at the top, you can see that a lot of discoveries, '80s, '90s, the peak production around 2000 and then everything paused and nothing happened, and there's a number of reasons for that. One was the contracts. A lot of the contracts at the time and Niscota, for example, had a kind of contract where the gas was 100% royalty. So basically, the government took all the gas. There were historic contracts, not unlike some of the old contracts here in Canada from the '50s and '60s where you gave the gas away. Our technical and surface access, challenging drilling, challenging areas to get into. But that is our strength. So Parex has a real strength with accessing socially difficult areas and drilling very complex wells. And we're doing that as we speak right now in our Northern Llanos property. And at the time, the market was oversupplied. So there was enough gas. The contracts weren't lucrative. It was a tough area to work. So there wasn't a big drive to move it forward. What's changed today? A number of things have changed. Katie already covered my last point, which is the market had lots of gas, but where they are today is really troubling for the country to see the current projection. What's changed? We have competitive contracts today. These are like most modern contracts in Colombia for oil, they are very competitive on a worldwide scale for royalties taxation. So they're modern contracts and there's infrastructure in place. So that multiphase pipeline, the 42-inch pipeline that goes down the whole trend, you can imagine if you're trying to develop a raw trend with no infrastructure, the amount of investment that would take. But we've got the entire infrastructure. Technical and surface access. Again, I don't have to say enough. We've accessed on the time line above. You can see after the exploration paused, there was a Colombian peace agreement in 2016. And if you look at what's happened since, we've been a big part of that, Parex has. Restarting Capachos, having activity in Capachos, restarting Arauca, where we currently have 2 rigs operating. And so we have the ability socially to access, and we have the ability to drill these wells. So right now, on the 2 wells we're drilling right now, we're at pacesetter rates as far as execution of that program. So -- and of course, we've just spud or we spud this year the Arantes well. So we are active in the Foothills. So it's all come together for us with a partnership with Ecopetrol, the infrastructure, our ability to get into areas and execute. And so that is why we're so excited about this opportunity. And to get into some of the details, I'm going to let Ian Zapfesmith come up and talk about some -- a few technical aspects as to why we're so excited.

Thanks, Eric. I'm not 21 years, I'm 16 years with the company. I worked with Ryan Fowler, who most of you probably knew from before. So yes, this is old stomping ground for us in terms of Colombia. I'm going to get you into some of the details associated with the exploration opportunity here in the Foothills. You've heard about the macro story. I want to explain a little bit about what the structure of the Foothills looks like at a high level and why that's important for everybody to understand. So this cross-section you're seeing here is moving from the west with the mountains, as you can see and were heading east into the planes on the far right side. And we have 2 main zones that we're talking about, the triangle zone, I'll explain why it's called that and the basement structures, right? And on the left side here, we're actually seeing the reservoir intervals have been brought to surface by faults and eroded away, so there's no more potential to the west at this point. As we head to the east, we can see that we get the section of stacked zones in the middle, we're calling triangle zone. It's called that because there's a fault west-dipping on the top here. Another fault that's east-dipping on the right, those are the 2 flags in the triangle and then the basin fault, that's called the triangle zone. It's known throughout the world that way. And why is that important? As you can see it, we know where this opportunity lives. I can walk along the surface and I can see these folks. I know the space that I'm exploring for. And then what you'll see inside is you've got these multiple sheets. Let's talk about those sheets for a bit. On the far right side, you'll see that there's one green polygon. That's one sheet, okay? A thrust sheet or a fault sheet, we'll call it. And that represents basically a series of reservoirs that live in this space, just like at Capachos and Arauca, you hear us talk about the Mirador, the Barco, Une, Guadalupe. One sheet will have all of those reservoir intervals in it on the east side. And the basement structures tend to be one, okay? So that's the opportunity you have out there. And actually, a couple of the biggest fields that exist in Colombia, Cusiana, Cupiagua are that style of track, right? When we come back into the triangle zone, the formation of the triangle zone is because multiple sheets stacked on top of each other. So you can have 2, 3, 4, 5 of these sheets stacked on top of each other. Why is that important? When I go to explore, I've got multiple targets to go after with a single well rather than just 1. Now we'll look in some detail here on the 2 different parts of the story. So Arantes that we're drilling today is an example of the basement structure on the east side, right? And you can see where that trend is highlighted in pink on the far right side there. So these tend to be simpler targets to drill because you don't have the complexity of the interbed or the other sheets on top of you. Because it's a single target, they tend to have a slightly higher risk because you've got one shot, you just have to get the mapping right and target it right. Historically, we've got chances and successes that live in sort of the 10% to 30% for that type of play. And again, I reiterate that they are some of the biggest in Colombia as of now, and it's certainly something that we're targeting moving forward with within our portfolio. The triangle zone. So from the portfolio standpoint for Parex, this deal has really brought this part of the Foothills trend into our portfolio with triangle zone. Again, we can see, as I mentioned before, we've got our stacked sheets. So it's like having multiple Capachos' or Araucas, all stacked on top of each other. I said we know where it lives because we can walk through the mountains on that topography map. I can highlight it to you. It's very obvious. So that part of the story is good. Then we also get to drill our well and we intend to have higher chances of success on this play. We're saying over 40%. And that's because multiple shots at being right, right? When you go to drill your well, there's multiple stacks that live there. And to give you a sense of context, I mean, you've heard us talk about our big 'E', small E story. The small Es that we're excited about because they have a high chance of success, that number. But instead of 2 million barrels, we're talking 100 million, 200 million barrel opportunities, right? That's the transformative opportunity. That's why we're so excited because this is something that you don't find laying around. As we were alluded to, generally, these things get picked up pretty quick. But because of the situation in Colombia, it hasn't been chased. So that's what we're excited about. Now Profundo is going to be a well that will drill in 2025 next year, top of the portfolio, high chance of success opportunity, actually testing underneath, already discovered hydrocarbons. So that's going to be exciting for Parex going forward. And then the Niscota area to the south that we have the AMI with that Katie referred to, that is another piece. That's the polygon that's on the very bottom here highlighted. And that's a spot where we have more of this triangle zone stacked opportunity. So that's what we'll be looking forward to, sort of reiterating each of these prospects. We've heard people talk about SoCa, each of these could be SoCA size. I mean these -- this opportunity is not something you find laying around very often. So it's great that we have the opportunity to get our hands on it. And through the skill sets that the company has and have demonstrated in the past, yes, it's great to be here. So at this point, I'll hand it over to Imad.

Thank you very much, Ian. Just some introductions here. I'm CEO of Parex. And the guy next to me with a big smile on his face is Ricardo Roa. He's the CEO of Ecopetrol, a company that produces 700,000 barrels a day. The company that's the national oil company in Colombia, so it's their national pride. And that company has given us the privilege of entrusting us to operate the most prolific gas basin in Colombia on their behalf. This is something that doesn't happen lightly. And you can see on the picture the excitement. I don't need to describe, but it's a big deal. It's a big deal for us, as you've heard from Ian and Katie and Eric. That's also a big deal for Ecopetrol and the government because they do have an issue to solve, as Katie explained earlier. So this has been some time in the works, and I would say we are lucky. We are lucky because the gas shortage in Colombia pushed the government to say, how can we solve this now. And we were the people who came out with practical, timely solutions. So there's luck there. But you do make your own luck. And if you remember for the people who have been here in '21, this is a strategy event. We said we're going to leverage our social access. We're going to work by using technology proven elsewhere to bring it to Colombia to reduce cost, drill stuff that others can do cheaper and deeper, go for liquid-rich opportunities and deliver outsized exploration potential. I cannot emphasize how this is even better than the portfolio we got when we captured 4 million acres and 18 blocks. This strategy in '21 didn't change in '22. In fact, what the people were in December '22 at company's day in Colombia, the CEO of Ecopetrol, Alberto Consuegra, came out and said, My refineries need light condensate," light or -- and he knows it doesn't come from offshore to [ sort of dry ]. And he said, "This trend needs to deliver us 150,000 barrels a day of condensate liquid." So they knew they operated Piedmonte for a decade, and they know the potential of that place. And now we are at a point where we can say we are delivering what we said we will reach the long track. For me, this opportunity ticks all 3 boxes in the strategy that we're going to work on. So how did we get there? We started by getting the land positions. If you recall, in '21, we built on the positions we had in '19, and we acquired 18 blocks. These 18 blocks were just before the election where they put a memorandum on new land sales. So we're basically the only private company in Colombia, which has 30 years running room and more prospects than we know what to do with, but it doesn't stop us from high-grading this. That gave us a currency to trade with Ecopetrol result paying tons of money for that position in the Foothills. Our track record technology, as you heard from Eric, we demonstrated already to ourselves and to Ecopetrol that we can drill the deepest well in Colombia. We've done that in Arauca. And with these pacesetter wells that Eric was mentioning, we are doing them at cost and speed that nobody ever jumped off before. So we can execute and we can execute quickly. We -- our strategy that I mentioned before is copy-paste of the government strategy today. They want to reuse existing infrastructure as the [ Monty phase ]. They want to maximize recovery of existing fields using technology. We advocate that and they like us. So what that buys you is a very strong partner and government support. And I would argue that because of that support, we will go much quicker than people imagine. In fact, every agency in Colombia. When I was signing that deal, we had the Minister of Finance speaking about Parex. We had the Minister of Mines speaking about Parex. We had the Roa, the CEO of Ecopetrol, talking about how Parex will solve the country's problems in gas. That gives you the momentum where every agency in Colombia is working with you to take away any roadblocks so it can go quickly. And last but not least, we are the leader in community engagement. We demonstrated in Capachos, Arauca and Arantes that we can go to places that others can't. And that's because our track record of being a good neighbor, delivering our promises to the communities, creating jobs, investing in the community, invest in infrastructure. We are a country leader of private companies when it comes to work for taxes program. We were talking about more than $30 million approved in '23 for government money, tax money going into infrastructure to be deployed in Parex in the Northern Llanos area, for example. That made a difference. And the way it made it was Ecopetrol and the government agreed. If we want to avoid tragedies in Bogotá before the elections, that's a company we can bet on. And they can do it better than we can, which is a huge complement. And that's where we are with this deal. This alignment of technical politics strategy, market conditions and yes, sometimes stars align, and we're happy about. So what's the time line now? We're drilling Arantes today. We expect the results to drill the well by midyear. Probably the final outcome of the well will be shared with Q2 results. Following that, we want to drill Profundo. Profundo is the only place where we did carry a while, if you listen carefully to Katie, to get access to Sirirí block. And it is our top-ranked prospect right now in terms of the combination of probability of success, which is very high because it's just below an existing discovery and the size, plus it's being drilled from an existing facility location. So you have pad, you have egress, you have gas process being processed today in that facility for export [indiscernible]. By '25, I would say sometime in '25, Ecopetrol should have gotten by that time the access to a block called Niscota that Ian showed you. They're getting us through extension of Floreña, which is a field to the south. And our understanding is probably a pretty fine way of being approved by the government. Now what the AMI does, it says all that exploration side of the expansion will be 50-50 automatically with Parex. So this is an indirect way for us to get access to the most prolific block in Colombia. This block has been on the dreams of every exploration manager and CEO and Colombian companies for 20 years, and people who are waiting patiently to get free for somebody to pick it up. And I can tell you, some of them told us how jealous and unhappy they are that we're the one who got it for free. So what will happen from that point onwards is, let's say, we get access to Niscota in the second half of '25, what I'd like to have is line up the 6, 7 best opportunities that Ian talked about, have a rig work in their full time in the Foothills and to give you orders of magnitude, rig cost burns $80 million a year. So our share of that is $40 million. So within the $50 million big 'E' spending we said we'll stick to, there'll be another $10 million left with diversification somewhere else. And then keep drilling these, do we find something and then we find some more. One point I'd like to highlight here is the dots that Ian showed you is our view today. We rarely work with just as an Ecopetrol independently say, what are the top 10 prospects? And coincidentally, we came with the same top 10. As you drill there, as you shoot more seismic, as you discover stuff, it will become like some of the other historical trends you've seen in every other place in the planet, 5 will be 10 and 20 and 30. And that's where I want to end. I would say imagine a Canadian company goes back in time 30 years and says, "I got all the foothills. I have partnership with the government 50-50, and I'll operate at all. How would that feel? This is how I feel today, and it is a watershed moment for us. This is game changing in every -- when you look at the stats of the exploration, there was the size, probability of success, speed by which you can get your first discovery. Yes, if you had 20 prospects at 20%, we'll find something. But long term, here you can find something after 1, 2, 3 wells, and that's important for us. And when each one of these 7 or 8 dots that Ian showed you is another SoCA, it's a big deal for us. It's -- that being said, it doesn't change the expectation and capital spend trend that we showed to this group because that one didn't include follow-up on big 'E', just have the cost of big 'E'. Well, what I do in Parex, the question was sustainability. Do you guys -- are going to keep delivering all that cash flow and dividends and buybacks? Or is it going with the dot? Now we solved the short term, I would say, with the exploitation with waterflood technology that gives you the 3 to 5 years plan, which you see 5% here. That one doesn't change. Then came the big 'E' with 18 blocks. We said, "Okay, what happens next, what happens after 5 years?" Yes, statistically enough big 'E' in the $50 million we spend every year to sustain that trend further and maybe give you a chance on the significant bump. What this deal gives us is, I would say, a very credible task to become 3 or 4x the company we are today. And that's what I think Mike meant by calling this the next [ channel 24 ] moment. Some people will get it today, some people will get it in 6 months, some people will get it in 2 years. And depending on when you get them, we'll get different risk profile, but also reward in Parex. But the way I see it, this is the moment where we can see how Parex will become hopefully 3, 4x the company we are today. And that's the reason for our excitement. So thank you for attending, not stay too long. Happy to take questions.