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

Hello, everyone. Thank you for joining us, and welcome to the Parex Resources Q3 2026 Operational and Financial Results. [Operator Instructions] I will now hand the conference over to Mike Kruchten, Senior Vice President of Capital Markets and Corporate Planning. Mike, please go ahead.

Good morning, and welcome to Park Resources Third Quarter 2026 Conference Call and Webcast. On the call with me today are our President and Chief Executive Officer, Imad Mohsen; our Chief Financial Officer, Cam Grainger, and our Chief Operating Officer, Eric Furlan. [Operator Instructions] As a reminder, this conference call includes forward-looking statements as well as non-GAAP and other financial measures, but the associated risks outlined in our news release and MD&A, which can be found on our website or at sedar+.ca. Note that all amounts discussed today are in U.S. dollars, unless otherwise stated. I will now turn the call over to Imad. Please go ahead. .

Thank you, Mike, and good morning, everyone. The third quarter marks an important milestone for Parex, representing our first full quarter of integrated operations following the acquisition of Frontera E&P assets. Together with the addition of production from the Middle Mag, through our partnership with Ecopetrol, we have fundamentally changed the scale of our business, delivering a step change in production and establishing a stronger foundation. . I'd like to share 3 key highlights from our quarter. First, integration of the Frontera assets is progressing well. We are leveraging the expertise of our combined teams and tracking towards gains across G&A, marketing, procurement and tax, with synergies expected to ramp up in the fourth quarter. As our integration progresses, we are forecasting even greater synergies in '27. Given our current progress, we expect the next year, we will deliver the higher range of our previous estimates -- we will deliver over the higher range of our previous estimate of $20 million to $50 million. Beyond this, we are identifying opportunities to drive greater capital efficiency across our expanded portfolio, improving our financial performance. Second, our organic growth pipeline is strong, supported by recent exploration results. This year, we have had a 70% exploration success rate in Eastern Llanos and 100% success rate across the rest of our portfolio. I'm very encouraged by the size and the potential of our Eastern Llanos discoveries. We believe they represent our most significant exploration success Llanos 34. While current production is constrained by infrastructure capacity, we see substantial upside as we advance our development, operation and [indiscernible] strategy. Eric will provide more detail on these plans shortly. Third, operational momentum continues to build, supported by strong production from our asset base across the portfolio. We expect to meet our production guidance for the second half of the year, and to end '26 with our highest production ever. We are also getting close to spudding our first Llanos foothill exploration well, a significant growth catalyst expected in 2027. As we look ahead, the strength of our recent exploration results and the growing potential of our transformed portfolio, reinforces our optimism about the future. We believe Parex is entering in an exciting new phase. We have an opportunity to grow faster, make our business much larger and realize the full value of our portfolio throughout much more capital-efficient investments. With that, I'll turn over to you, Eric. Please go ahead. .

Thanks, Imad. In the third quarter, production averaged over 83,000 BOE per day, reflecting our first full quarter of Frontera volumes. With production at nearly 86,000 BOE per day in October, we expect to maintain this upward momentum throughout the fourth quarter, positioning us to exit 2026 strong and deliver within our full year guidance range. . Let's look at what's driving this momentum. Following the spudding of our first wells at Casabe and Llanito in the Middle Magdalena, we began earning 50% of the base production in late October as part of our agreement with Ecopetrol, which represents approximately 7,000 barrels per day of net production. As we realize the full rates in the last 2 months of the year, these low decline volumes will strengthen our production base. In these fields, we are also pursuing opportunities to enhance recovery and optimize field performance. This will be through water flooding, horizontal drilling and polymer surfactant applications to support our long-term growth. At Block 111 in the Eastern Llanos, we have the strong sense of optimism. Production is currently sustained at roughly 6,000 barrels per day and constrained by egress. While wet season conditions limit our ability to accelerate activity as fast as we would like, follow-up work in accessible areas this quarter has further strengthened our confidence in the field's growth potential. With the dry season approaching late in the fourth quarter, we plan to ramp up activity in the New Year, targeting approximately 2,000 barrels a day of incremental production by year-end. To support growth in 2027, we plan to drill 20 new exploration development wells over the next 12 months, highlighting the scale of this area where we hold 100% working interest across more than 1.6 million acres. To help unlock this new corridor, we are sanctioned and are progressing with the construction of new infrastructure, including tuck offloading facilities and a 10H pipeline with capacity of approximately 40,000 barrels per day. This investment will establish a multi-field production hub to support the area's growth and long-term development. Turning to gas. We continue to advance our strategy, supported by a new discovery at BM1 near the [indiscernible] field during the quarter. Initial testing delivered encouraging rates of 22 million cubic feet per day of gas and 3,000 barrels a day of oil or roughly 6,600 BOE per day. We expect to tie in the well to the existing La Belleza facility by year-end to begin production, which based on testing today has strong condensate to gas ratio. Building on this success, we are advancing plans for a dedicated gas export pipeline in the area targeted for operation by mid-2027. The pipeline will support increased field production and allow us to monetize up to 25 million cubic feet a day of currently reinjected gas, capitalized on attractive pricing in Columbia's supply-constrained domestic market. Lastly, following the commencement of civil works in the Piedmont in Colombia's Llanos foothills, we are preparing to spud our first [ big well ] by year-end, providing further visibility into gas growth in 2027. With that, I'll turn it over to Cam..

Thanks, Eric. Funds flow from operations, or FFO, for the third quarter was $196 million, supported by strong commodity pricing and added production from Frontera's assets, offset by wider oil differentials, higher diluent and diesel costs, higher power costs and Colombian peso appreciation. FFO was also temporarily reduced by a crude oil inventory build of 315,000 barrels during the quarter, which had an estimated impact of $10 million. These volumes were sold after quarter end and the associated FFO benefit will be reflected in our fourth quarter results. Production remains in line with management expectations, with our second half production outlook maintained at the original guidance midpoint of 86,500 BOE per day. We have achieved significant exploration success across our portfolio, creating opportunities to accelerate growth. In response, we are strategically increasing capital across several areas of the portfolio to maintain operational continuity for follow-up activities, setting us up favorably for 2027. We have also revised our broader financial outlook to reflect evolving market conditions. These primarily include increased commodity price volatility relating to significant wider differentials in Brent and WTI, which is strongly correlated to Columbia's Vasconia benchmark. The current environment has also contributed to higher operating costs, driven by increased diluent and diesel expenses associated with higher oil prices. Seasonal El Nino conditions resulting in higher power costs and appreciation of the Colombian peso. We view many of these pressures as transitory rather than structural. As commodity prices moderate and market conditions normalize, we would expect crude oil differentials in certain operating cost pressures, particularly those linked to oil prices to moderate. Accordingly, we believe the current cost environment is not fully representative of our underlying cost structure. To manage our exposure to currency movements, we have implemented Columbian peso collars covering approximately 50% of our Columbian peso denominated costs for the fourth quarter of 2026, and have begun building a hedge position for 2027. Operationally, we continue to look for ways to improve efficiency, including exploring new fuel and electricity options. From a marketing perspective, we are also finding ways to get more value from our lighter crude by using it for diluent blending to improve margins. We acknowledge that these represent many moving parts, and we are focused on providing more clarity around underlying assumptions to improve predictability moving forward. In parallel, we continue to advance the integration of the Frontera transaction and bring the Middle Magdalena assets into our operating portfolio. We recognize that these assets carry a relatively higher underlying operating cost structure, creating an opportunity for Parex to aggressively optimize the combined portfolio. Our focus is on aligning operations, improving efficiencies and leveraging our broader operating platform to drive down operating costs over time. As we work through this process, our priority remains on translating our expanded production base into stronger margins and increased free cash flow. Disciplined capital allocation and strong operational execution will remain central to our approach as we continue to optimize the portfolio. These efforts position us to generate higher free cash flow in Q4 compared to Q3. With that, I'll turn it back to Imad for closing remarks.

Thank you, Cam. As we approach year end, we are focused on completing the integration of our businesses, delivering our 2026 plan, and building for 2027 and beyond. Looking ahead, I'm very confident in Parex growth potential, activity delivered in '26 has helped to fundamentally reshape our portfolio. We strengthened our position to deliver near-term production, growth while pursuing larger opportunities that could take business to the next level. Importantly, we believe the broader outlook is increasingly favorable. This is supported by a strong commodity price environment and more constructive policy and investment climate in Colombia. Combined with our expanded portfolio, strong operational foundation and many organic growth opportunities, we believe Parex is well positioned to create significant long-term value. On December 9, we look forward to hosting our Capital Market Day in Colombia. We will present opportunities in our larger portfolio and our plans to grow production increase free cash flow and strengthen our balance sheet. To close, I want to recognize the hard work and commitment of our employees through the period of significant transformation for Parex. The integration of Frontera has been substantial undertaking but we are making steady progress and remain focused on realizing the full potential of the combined companies. I also thank our shareholders for their continued support and confidence in our team and strategy. This concludes our formal remarks. I would now like to turn the call back to the operator to start the question-and-answer session for the investment community.

[Operator Instructions] Your first question comes from the line of Greg Pardy with RBC Capital Markets.

I know it's still early and you're probably in your budgeting process, so I don't want to steal anything away from the Capital Markets Day. But in broad strokes, what does -- what is '27, 2027 E&D, what does the program look like? And maybe what are the -- perhaps the biggest contrast with, transactions, obviously, dominated a lot of what you're doing.

Greg, it's Mike Kruchten. Thanks for the question. I think as we look forward, our outlook for 2027. What we've done is really establish a new base for Parex. And we see this as a much lower decline base than what we had before. I think the key change for '27 will be allocating capital to what we feel are very capital efficient, high growth projects with large margins, and that's primarily in the Eastern Llanos.

Okay. Very good. And then, Mike, maybe if you'll oblige me, just a little bit on the exploration side then. You guys referred to, I think, Piedmont and so forth. Is there any other high impact exploration we should be focused on for next year?

Well, certainly, the key, well, which is going to -- we expect it to start before year-end is the Piedmont. That's really our first well into the foothills, what we call the Triangle Zone, very exciting for us. That is, I guess, our key large exploration well for the year.

Can I add to that, that the program in the 111 Eastern Llanos and in general because we have multiple blocks there. We're talking 15 exploration wells. These are shallow cheap wells. So probably all put together will cost as much as one Piedmont well, but if you look at the volumes they're pursuing and success rate we expect, they also have combined a significant impact on our reserve base and ability to produce and grow. So another thing which will change next year is if you followed our story today, we've been building the base for next year's production and guidance. And one part which will have, for example, is the gas sales. We are connecting the belleza and the new discovery in Labonita, all the way to the coast, where today's spot prices are crazy, we're talking $30 Mbbtu. But I mean we -- like -- if you look at the longer-term trend, you're thinking more closer to $15 MBBTU, but even that to get that kind of volumes through the pipeline to market, and we've already did all the investments, including the pipeline, which is tariff-based will also add to our free cash flow. Finally, I want to reemphasize the investments in technology like polymer, which together with the previous investment in waterflood are helping our reducing our maintenance capital by reducing the decline rates.

I'll just add, Greg, you asked about the big change going in '27, Imads' comments, I mean, what we've been doing so far is building the base following the decline, taking our base assets to a 15% decline or lower. 27% is going to look like a lot of grassroots exploration and development growth. We're excited about our 111 program as as Imad talked about. We have an early start there. We are going to build egress that will not constrain us like this year. So look to '27 as growth year with growth coming through the...

Maybe I want to add one last thing. These new volumes coming from places like the Eastern Llanos have significantly lower OpEx and have the best probably netback we have in the whole portfolio, both because of the quality of the light oil is used as diluent and solvent that's premium, but also because of lack, almost no water, so that means your energy costs are minimum. In fact, all of the ones we have right now in Eastern Llanos are flowing -- natural flow. So there is like multiple impacts on cash flow by getting all these areas on production after the investments we've been doing last year and now in the dry season between Q4 and Q1 next year.

Okay. Yes. Look, you've referred multiple times to the -- just to your decline rates. So there's been a big focus in the company in recent years, but as you mentioned, water flooding, polymer flooding and so forth. So when you look at the combined portfolio in 2027 in terms of natural decline post Frontera and Magdalena and so forth, what does your decline look like now versus maybe it would have been a year ago?

I mean, Greg, it's Eric here. We would look at our base decline at 15%, and maybe that will shallow up further from there. What are the big changes, obviously, over the last years, Parex, historical large fields are in the shallow decline mode just due to natural progression, polymer and water flood EOR. So those are flattening. And the Frontera assets are performing very, very well. They're performing consistent with what we believed when we entered deal with Fontera and they are helping lower that decline further.

And the same applies to the assets we got in the Mag. Farming was Ecopetrol, that probably's similar to the declines of the Frontera assets?

Yes. They are -- the Frontera and mid-Mag assets are on the lower end of our combined 15%. So they are -- the maturity and EOR efforts of our legacy assets, plus adding in all the shallow decline assets has really flattened our base decline.