Parex Resources (TSX:PXT) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.

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Summary

PXT executed strategic transactions including a $725 million acquisition of Frontera, adding 37,000 barrels of production and aiming to become Colombia's largest independent E&P company.

The company expanded its partnership with Ecopetrol in the Magdalena Basin, committing $250 million over five years, increasing production potential by optimizing mature fields.

First quarter production averaged under 45,000 boe/day, with expected improvements by the end of the second quarter. Exploration in the Putumayo region is progressing with successful well results.

PXT reports Q1 funds flow from operations at $114 million, with expectations of incremental free cash flow from strategic transactions and a focus on maintaining a strong credit profile.

The company anticipates 3-5% base growth with potential for higher returns, maintaining a stable dividend, and prioritizing debt reduction. Long-term strategic partnerships and acquisitions are central to future growth.

Full Transcript

OPERATOR

Hello everyone. Thank you for joining us and welcome to Parex Resources Q1 2026 Operational and Financial Results. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Mike Crookton, Senior Vice President, Capital Markets and Corporate Planning. Mike, please go ahead.

Mike Crookton (Senior Vice President, Capital Markets and Corporate Planning)

Good morning. On the call with me today our President, and Chief Executive Officer, Imad Molson, our Chief Financial Officer Cam Granger and our Chief Operating Officer, Eric Furlan. Please note that at any time telephone, participants on the call can press star one to submit a question. As a reminder, this conference call includes forward looking statements as well as 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 sedarplus.ca. Note that all amounts discussed today are US dollars unless otherwise stated. I'll now turn the call over to Ahmad. Please go ahead.

Ahmad

Thank you Mike and good morning everyone. Over the first half of 2026, Parex executed a series of strategic transactions that have positioned us to become Colombia's largest independent E&P company. These transactions were designed to add complementary assets that enhance our scale, deepen our portfolio, strengthen the profitability and duration of our business for long term growth. Starting with the Frontera transaction for $725 million. This $725 million acquisition adds roughly 37,000 barrels equivalent today of highly accretive production with strong industrial logic and compelling synergies. It materially increases our reserves inventory and strengthens long term production visibility while being secured at an attractive valuation. Importantly, we are bringing in a deep bench of core technical talent and operational capabilities that will further strengthen our organization and enhance our ability to execute across the large asset base. The transaction also supports more efficient capital allocation across the portfolio enabling us to direct free cash flow from mature assets toward our highest return development and exploration opportunities. Secondly, the expanded partnership with Ecopetrol with Magdalena and the Magdalena Basin we have entered into an agreement with ecpatrol that allows Parex to earn a 50% participating interest in the Casabe and Jannito blocks in Colombia's Magdalena basin through $250 million gross capital investment commitment over five years with with no upfront acquisition cost. The transaction further expands our strategic partnership with Ecopetrol and reinforces our long standing collaboration in Colombia. These mature fields currently produce approximately 15,000 barrels a day and offer significant long term upside through enhanced oil recovery, water flood optimization and development drilling initiatives. The transaction provides a proven operating base with clear path to incremental production growth. Leveraging PARCS established track record of enhancing recovery through the application of proven technologies. Upon completion of these strategic transactions, PARCS is expected to become the largest independent Colombian focused exploration and production company with average production of 82,000 to 92 to 91,000 boe a day, nearly doubling corporate production alongside a land position exceeding 7.9 million acres and significant long life reserves. This expanded business provides a scale, inventory depth and financial capacity to drive superior long term returns while enabling more disciplined allocation toward our highest return opportunity. With that, I'll now turn it over to Eric to speak on our current operations. Eric, please go ahead.

Eric Furlan (Chief Operating Officer)

Thanks Ahmad in the first quarter production averaged just under 45,000 boe per day while current production levels are below Q1 averages. We expect standalone production to improve throughout the remainder of the second quarter and exit at or above 45,000 boe per day. This growth will be supported primarily in our Putumayo operations and the continued advancement of our exploration success at block 111. With the constructive commodity price environment, our base plan continues to advance. High value opportunities are being accelerated on an opportunistic basis to enhance returns and free cash flow. Our operations in the Puta Mayo continue to progress with particular excitement around the Orito block. Our walls are demonstrating strong performance and are nearly finished. Our multilateral pilot which we expect to start testing in the coming weeks in Block 111 parks has drilled six exploration wells to date with delivering positive results across separate areas. One well has already commenced initial production at approximately 1500 barrels per day of oil. The remaining wells have shown encouraging indicators including oil on logs with testing expected to start in the coming days. All exploration wells were delivered on budget at approximately 2 million all in including drilling pad and mobilization representing an approximate 65% reduction versus typical exploration well costs of around 6 million per well. This improvement was driven by a fast moving rig and streamlined well and pad design reflecting the strong execution coordination of our teams. With these results, Parex is advancing a multi-well development program across three fields with sustained production expected in late Q2 2026. Up to seven development and appraisal walls planned for the second half of this year. Based on the successful start of this campaign, we have identified over 15 prospects on existing seismic surveys. We plan to continue building future Runway with this Trend with additional 3D seismic activity planned in the future and expectations Exploration Focused drilling in the Eastern Llanos to recommence in 2027 while our standalone production base remains strong. The second half of the year represents a meaningful step change in scale as we consolidate the Frontera portfolio and start our work programs in the Magdalena Basin. For the Frontera portfolio in anticipation of closing, the company has initiated integration planning to ensure smooth transition following close of the transaction. Parex will review the acquired portfolio to optimize development and enhanced oil recovery opportunities by prioritizing safe, reliable operations. The transaction is also expected to generate synergies in marketing and tax among other areas, supporting enhanced efficiency and stronger long term returns for the new Magdalene assets. We're working towards completing initial activities to drill the first wells and in the Casabe and Jannito programs. A key near term milestone is spudding of the wells on each block as this is a contractual requirement to enter into production participation for each area. Lastly, we continue to progress our Foothills Exploration program. We are in the early stages of work in the Piedmont Prospect with some level work scheduled to commence this quarter in preparation for a fall 2026 spud. As a reminder, this is the type of exploration where we see game changing potential and enhanced risk and reward profile. While the start of 2026 has been more modest than anticipated, we remain confident in our trajectory supported by a portfolio that is better positioned than ever to deliver high quality inventory and multiple independent development and growth projects. With that, I'll turn it over to cam.

Cam Granger (Chief Financial Officer)

Thanks Eric. Our financial performance this quarter serves as a bridge toward the significantly larger cash generating capacity of the transformed Parex business. First quarter 2026 results were strong on an underlying basis despite the impact of non recurring items. Funds flow provided by operations OR FFO totaled 114 million or $1.18 per share during the quarter. Our Q1 results included a 17 million one time $17 million of one time non-recurring consisting of a $7 million temporary corporate wealth tax,, a $7 million site restoration costs, much of which we expect to recover through insurance and approximately $3 million in project specific G and A expenses. Early in the second quarter we made the tactical decision to unwind our hedge positions, a decision that has so far enhanced participation in the current commodity price environment. The timing of our strategic transactions has been advantageous with commodity prices at current levels, enhancing the value of deals executed. Specifically, the January 1st effective date of the Frontera acquisition is expected to contribute a meaningful amount of incremental free cash flow, helping reduce the net consideration. Another key financial milestone in the first half was the successful placement of a $500 million senior secured unsecured notes due in 2031. The 8.5% notes were priced at par and were strongly over subscribed reflecting strong support from the credit markets and confidence in our transformed Columbia focused company. Given the addition of debt to our otherwise simple balance sheet structure following the Frontera transaction, this financing is a logical step. Going forward we expect to maintain a strong credit profile and with high liquidity and a medium term target net debt to Debitda ratio of 0.5 times or lower. The second half 2026 guidance, which reflects the anticipated impact of both the Frontera acquisition and the Equipatrol partnership transaction, showcases the cash flow profile of the transformed business. Based on a $90 Brent crude assumption, we expect FFO netbacks of approximately 30 to $33 per boe on a half-year basis. FFO is expected to be between 475 million and 525 million and capital expenditures to range between 275 million and 295 million. Please note that the coming quarters are expected to include non recurring integration, transition and financing costs which may impact reported FFO numbers. Looking ahead, our capital allocation priorities are clear. Parex is focused on optimizing capital allocation across its diversified portfolio, targeting 3 to 5% growth from base production plus continuing to advance high impact exploration opportunities with significant long term potential. This is while also maintaining a stable dividend and directing excess free cash flow primarily toward debt reduction. With that, I'll turn it back to Ahmad for closing remarks.

Ahmad

Thanks Kam to close, I want to reiterate the transformation that's underway at Parex and the scale of the opportunity. Today's Parex is positioned to deliver a deep portfolio of development and exploration opportunities, generate substantial free cash flow, expand reserves and establish the company as one of the leading growth opportunities in the global oil and gas sector. Our path forward is centered on five optimizing the base business to maximize value, deliver reliable production growth and leverage proven technology capturing integration synergies from our recent transactions and strengthening the overall scale of the portfolio Growing production through the execution of our Equatorial partnership in the Putumayo and Magdalena, advancing high impact exploration in the Llanos foothills, the starting with the Piedemonte prospect this fall and lastly keeping a disciplined capital allocation framework while maintaining dividends and paying down debt. We are confident this approach will create meaningful long term value for shareholders and all stakeholders. Our partnership with ecopetrol represents one of the company's most important strategic pillars going forward. Today the relationship is broader and stronger than ever, spanning from Capachos, Butamayo, Magdalena foothills and Cauca. Beyond expanding our operational footprint, these Partnerships reflect a shared long term commitment to Colombia and align parcs with one of the region's leading energy operators. With respect to Frontera, I would like to sincerely thank Orlando, his management team, the Board of Directors and all employees for their hard work, professionalism and dedication in building Frontier into the company it is today. We are excited to welcome many new colleagues to Parex and are confident that the next chapter for the combined company will be a strong and successful one. With increased scale, financial flexibility and portfolio depth, Parex is better positioned to deliver profitable growth and long term value creation over time. As we move forward, I also want to thank our employees, partners, shareholders, board of Directors and the communities where we operate for their continued trust, commitment and support. The progress we are making is a result of the dedication and collaboration of many people. Before I conclude my remarks, I would like to recognize our Chairman, Wayne Fu, who is retiring from our Board of Directors. Wayne has been instrumental in shaping PACs over the past 23 years. As a founder and the former Chief Executive of both Petra and Dina, Barracks Predecessor and Barracks Resources, Wayne established the foundation, strategy and culture that have defined the company's success. He has continued to guide Parex as his Chair of the board since 2017. On behalf of the board, management team, employees and shareholders, I want to thank Wayne for his exceptional leadership, vision and dedication. His contributions have been instrumental in building Paris into what it is today and his impact on the organization will be everlasting. We wish Wayne and his family all the very best in his retirement. That concludes our formal remarks. I'll now turn the call back to the operator for questions from the investment community.

OPERATOR

We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from Jamie Somerville of RBC Capital Markets. Your line is open. Please go ahead.

Jamie Somerville

Good morning, can you hear me? Yes. Hi Matt, and congrats on these deals in particular and thank you for the guidance for the second half of the year. I'm just wondering if we can ask about looking out into 2027. I think Cam Granger said something there. Did you suggest we can expect 5 to 10% kind of annual growth going forward and is that, you know, relevant to 2027? And then on the capital expenditures side looking into 2027, you have all this carry capital and obviously it depends a lot on exploration activity. But is you know, half a billion dollars or more of capital expenditures in 2027 a reasonable expectation.

Ahmad

So our long term vision for the combined company is to have 3 to 5% base growth that we do basically using our normal EOR activities and near field exploration appraisal with exposure to transformational upside that can be much higher than that. Now in our view the Capex really depends on the oil price. So if I take the pro forma of Parex plus Frontera without the Magdalena Basin assets at $70 environment that was 500 million bucks. Now of course oil price stay above 100, you have a little bit more flexibility and more opportunistic short payout projects. You can add to that 500 million oil price goes below that might go the other direction. And there's some money that will go into Magdalena as well. So high level, we're not putting guidance out now but I think the half a billion number order of magnitude is a good start point. And of course as we get to know the assets in more detail and build our plans for next year, you'll get a more detailed guidance.

Jamie Somerville

Thank you. Yeah, that's very helpful. Thank you. And then just an asset that is maybe not super material but you have, I think you're increased doubling your interest in it. The VIM-1 asset. Is there still a plan there to ramp up gas production maybe in 2027

Ahmad

just before Eric answers on the plans. It is one of my favorite assets. I really love it. Go ahead.

Eric Furlan (Chief Operating Officer)

We just, you know in Vim. So we just completed the La Belleza-3 well. That well is positioned to and it looks successful on logs and we're about to test it. That well was drilled to help sustain a longer term blow-down period and also provide near term higher liquids recovery over the next year. We are commencing a pipeline and expect to proceed to sales in from, from La Belleza. So that plan is, is, has remained unchanged. We're also drilling another prospect. Currently we're moving the rig to drill an additional prospect on the block that is also expected to be high liquids. Gas. Gas well in anticipation of the bow down and the very strong market prices for gas in Colombia.

Ahmad

So just to give you an idea like Today's producing well, one well is producing the equivalent of 30 million scf a day with more than 3,000 barrels of liquid. So we're talking aboet 9,000 boe or so for the combined company. Correct. Now if we once we drill that third well with additional certainty and we start to blow down the well towards the market, getting the net back higher than netback on oil in my view or similar depending on the oil prices. So this is a real cash generator for next year and beyond as soon as the pipeline is ready. So that's why even if that additional prospect doesn't pan out, we have a very good cash generation. And our plan is we're spending like 6 million bucks a year on water handling and treatment. So one of these wells could become a water injector if they don't produce and cut significantly that OPEX bill. So as an asset for both Frontera and Parks and the new Parks, I think this will be one of our bigger, big cash cows coming forward and with almost no decline.

Jamie Somerville

Yeah, perfect. Thank you. For a number of years. Just to clarify, in terms of startup of that gas blowdown, it's probably more second half, 20, 27 thing rather than first half. Correct. Thank you. Do you know first lay in five people?

OPERATOR

If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. There are no further questions at this time. I will now pass the conference back to Mike Crookton, Senior Vice President, Capital Markets and Corporate Planning.

Mike Crookton (Senior Vice President, Capital Markets and Corporate Planning)

Thank you very much for joining the call today. If you have further questions, you can always reach out at Parex Resources and we'll be happy to help you. Have a great day.

OPERATOR

This concludes today's call. Thank you for attending.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.