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Good morning, everyone, and welcome to Parex Resources Second Quarter 2023 Conference Call and Webcast. My name is Michael Kruchten, Senior Vice President of Capital Markets and Corporate Planning at Parex. On the call with me today are Imad Mohsen, Parex's President and Chief Executive Officer; Ken Pinsky, Chief Financial Officer; and Eric Furlan, Chief Operating Officer.
This quarter, we are pleased to offer a new online video webcast in addition to the regular conference call telephone line for analysts. [Operator Instructions] 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. All amounts discussed today are in U.S. dollars unless otherwise stated. Please go ahead, Imad.
Thank you, Mike. I would also echo your comments regarding our terrific sustainability efforts. Moving on, as Ken briefed -- sorry for that. Let's start again. Thank you, Mike. Good morning, everyone. Before I turn it over to Ken for an overview of our quarterly financial and operational results and to Mike for his comments on our ninth annual sustainability report. I'd like to share some opening remarks regarding the progress of our overall strategy. I will end the call with comments on the momentum that we are building in the Northern Llanos as well as our updated 2023 guidance and outlook.
In the first half of 2023, I am proud to say that we continue to progress the 3 core pillars of our strategy. First, exploitation and technology. In SoCa, we are seeing success from the horizontals that we have drilled. And we are continuing to progress our waterflood plants. Also in Llanos 38, we had an oil discovery in the C7 reservoir on 1 of our quick-hit wells where we have spud the follow-up horizontal well to maximize recovery.
On the gas strategy part, we are making concrete progress in our discussions with Ecopetrol regarding the MoU. And we also made the decision to expand the facility of VIM-1 in 2024. And third, on Big 'E' exploration we did drill and test the Chirimoya well at VIM-43, which was the first of the 3 Big 'E' wells for the 2023 program. Despite the well not delivering the outcome that we hoped for, we continue to see significant exploration upside potential in Colombia. We plan to spud 2 more high impact Big 'E' wells in the second half of 2023 with more to follow in 2024.
With that said, I continue to be excited about our trajectory and the organic opportunity set that we have in Colombia for the next -- for both development and exploration. With that, please go ahead, Ken.
Thank you, Imad. Despite production impacts experienced in the Northern Llanos at our Capachos block, the second quarter delivered strong operational and financial results that highlight the robust profitability derived from our Colombia operations. Funds flow provided by operations was USD 155 million, which was lower than prior quarters, primarily due to a decline in global crude pricing, notwithstanding our production volume growth. Average Q2 2023 production of 54,120 BOE per day was up 6% compared to Q2 2022, and up 5% from the prior quarter. Estimated average production would have been close to 58,000 BOE a day, if it not for the temporary shut-ins experienced at our Capachos block that were outside of our control. The net effect was lost production and drilling progress at both Capachos as well as Arauca, which overall had an [indiscernible] impact of approximately 3,500 or 3,800 barrels of oil equivalent per day on the quarter. Imad will discuss the annual impacts and the update to our guidance later in this call.
Production per share increased by 14% year-over-year, which was supported by the higher production levels and the reduction of shares through our normal course issuer bid or NCIB. Year-to-date 2023, we have repurchased approximately 3.6 million shares or approximately 3% of the floating. As a mechanism to return free funds flow to the shareholders over and above our CAD 0.375 per share quarterly regular dividend.
We ended up the quarter with a slight working capital deficit which we expect to turn to working capital surplus by year-end due to expected higher funds flow from operations, which will be due to increased production, higher benchmark oil prices and our narrow differential for our heavy crude stream. All the while capital expenditures are forecast to remain flat based on our first half 2023 run rate. With that, I will pass it on to Mike to provide a brief ESG update.
Thanks, Ken. As part of our commitment to delivering superior ESG performance and disclosure, we are now pleased to release our ninth annual sustainability report, which for the second year in a row, integrates the task force on Climate-related Financial Disclosure or TCFD. Some noteworthy achievements from our 2022 report are making progress against our 2030 emission intensity target of 50% and by achieving a 37% cumulative reduction in GHG emissions from our 2019 baseline and investing over $5 million in the communities where we operate.
As the company works to continuously enhance its ESG performance and disclosure, this year's report sets targets within 4 core priorities: communities, GHG emissions and climate, people and culture and water. The hard work and dedication exhibited by our teams in both our ESG initiatives and reporting reflects our commitment to responsible resource development. I encourage those interested to explore the complete report, which is now available on our website. And with that, I would like now to return the call back to Imad for some final remarks.
Thank you, Mike. This is a paragraph I was looking at in the beginning. I would also echo your comments regarding our terrific sustainability report. Moving on, as Ken briefly mentioned, the company has faced social-related challenges throughout the first half of the year in the Northern Llanos, which resulted in temporary shut-ins at both Capachos and Arauca. Through continuous engagement with stakeholders, community leaders and government officials, both assets have been fully operational since late June, and we are exiting the quarter with positive momentum.
At Capachos, we are ramping up production on wells already drilled, notably Capachos 3, Sur-4 and Andina-2, which are the main drivers to increase production on the block. And at Arauca, we are optimistic about our multiyear drilling campaign and have made the decision to accelerate our program thereby bringing a second rig on to the block. We are currently drilling our Arauca-15 well which is at 11,500 feet and expected to TD in late Q3. And we are expecting to spud Arauca-8, our second Big 'E' well in the 2023 program in the late Q3 as well.
Turning to our 2023 guidance. The aforementioned shut-ins are estimated to have combined impact on the company yearly production of approximately 3,100 barrels a day. We experienced slower-than-expected production from SoCa assets because of higher downtime, both technical and social. When we originally set guidance, we widened it to take into account -- to account for uncontrollable aboveground factors, which, in my mind, constitutes an approximately 3 to 4 months deferment of our growth plans. Given the duration and the extent of the shut-ins, we are updating our 2023 average production guidance to 54,000 BOE to 57,000 BOE a day. Our capital expenditure guidance also being updated to a range of $450 million to $475 million. The tightening of our prior guidance was driven by the standby costs associated with the shut ins and the increased spending at VIM-43 exploration well, mainly because of the testing.
Looking forward, the remaining of the year, I'm encouraged by our company's momentum and the work our team is doing to build the strategy foundations for future upside. Having just returned from Bogota last week, where we had extremely productive meetings with Ecopetrol and the relevant ministries I'm pleased with the progress that we are making to leverage the value of our MoE. In Q4, we have plans to spud the third and final Big 'E' exploration well of the 2023 program Llanos 122 called Arantes , which is a prospect under our MoU and located in the foothills of Colombia. This opportunity excites me because imagine just the long-term potential of the Western Canadian foothills had only been controlled by 2 partners.
To finish, as a part of the ongoing Colombian peace process, a bilateral cessation of hostilities is set to come into effect today, which is encouraging and should help the long-term stability in some of our key operating regions. My outlook is that we are well positioned for a strong back half of 2023. Our updated guidance implies Q4 2023 production rates that exceed 60,000 barrels a day, and that puts us back on track to deliver on our 3-year plan objectives.
I want to thank -- our employees in Calgary and Colombia for their hard work and our shareholders for their continued support. This concludes our final remarks. I would like now to turn the call back to the operator to start the Q&A session for the investment community. Thank you.
[Operator Instructions] Our first question will come from the line of Anthony Linton with Barclays.
I guess maybe just to start on the capital budget side. Final cost for the Chirimoya well was $49 million or about 10% of the original allocation, how do you think about that 10% of the budget going towards Big 'E' for the balance of the year and then into 2024.
Thanks, Anthony, for that question. When we look at the Big 'E', we have roughly $50 million allocated to Big 'E' every year. And Chirimoya, we had cost overruns on line and certainly the decision to case and test it added extra capital to that. One factor was this was 100% working interest well and most of our other wells going forward are going to be 50% working interest. We're comfortable with that $50 million allocation as we go into '24 as a good proxy for how we'll allocate the Big 'E' as we go forward.
Got it. Okay. Thanks. And then staying on capital, you laid out a pretty comprehensive 3-year plan at your Investor Day in the fall. How do you sort of think about that guidance into 2024 and beyond based on the updated guidance for the balance of the year?
Anthony, I'm going to pass that to Imad to talk more about high levels of strategy, how we see the business.
Yes. I mean, for me, what we did, having seen the disruption in the beginning of the year, is to -- we decided to deliver on our capital program. So what that does is we do spend the CapEx this year as per originally planned with some small variations. But the key is we deliver all the plan, and we come out strong at Q4. Yes, we don't get the full production this year because many of the wells now come end of Q4 or early '24. But we -- that allows us to stick to the spirit of the plan, which is get the production that we said in 3 years and reduce the capital as we go doing it. Lots of the upside will come from just normalizing things that we have now behind pipe and we're bringing into production.
Got it. Okay. And then maybe just 1 more, if I can. The lower effective tax rate, what's sort of driving the change there? And how long is that expected to kick around for?
Ken?
Yes. Thanks, Mike, and thanks, Anthony. What drives it is reduction in production that we had in our guidance. Lower commodity prices and higher Vasconia just reduced taxable income expectations for 2023. But we're still on track on the capital program, and we did a reorganization in the prior year, as you recall, with the Cabrestero reorganization. And so our effective tax rate just comes down by about 3% for '23.
And '24, it will be really driven by what your price expectation is. But if you kept it around $80 Brent, I see the same range as being accurate for 2024 as well, Anthony. And then after that, it's -- the range will broaden out because it depends on how successful we are with the exploration program, production levels and that sort of thing. But for this year and then going into '24 I used the same range that we stated in our MD&A.
[Operator Instructions] Your next question will come from the line of Conrad Bereznicki with Peters & Co.
Can you hear me? I just wanted to know, how should we think about capital allocation in the back half of the year? Is the preference still NCIB after the base dividends? Or could there be some base dividend increases or specials coming?
Thanks, Conrad. When we look at capital allocation, it really is on looking at it holistically on the full year. We have a commitment on the dividend for the year and that annual dividend is really reviewed once a year. When we look at how we're going to return the 1/3 of capital back to shareholders, 1/3 of the funds flow back to shareholders, we take our base dividend.
We subtract that. We're buying back shares. And you can see in the first half of the year, we actually returned about 37% of our overall funds flow back to shareholders. Our goal is 1/3. So we'll adjust that with pricing and realizations as we get through the second half of the year. As for special dividends, it's always an option, but our preference right now would see to fill the 1/3 using the share buyback.
Got it. Just 1 more question. Just around the gas cycling expansion at VIM-1 next year. Just wondering, what does that mean for liquids recovery? And are you expecting for liquids growth from VIM-1 going into 2024?
Great. I will pass that to Eric Furlan.
Thanks, Mike. In VIM, just to remind, we're producing about 20 million cubic feet of raw gas right now and making about 3,200 barrels a day of gross liquids. We are expanding the facility in the operation to triple that. So you could say that operationally, we could get liquids growth up to 10,000 barrels a day and recycling of up to 60 million cubic feet a day. So that is our plan. We're expecting that to be online later in '24, but we're excited about that opportunity, is performing very well for us, and we see it as a great opportunity in '24 for us.
Your next question will come from the line of Luke Davis with RBC Capital Markets.
Just curious if you can provide a little bit more context in terms of the drivers for the protest that caused the shut-ins in the quarter. It sounds like Imad in your closing remarks you suggested there might be some mitigation factors going forward. But what's the likelihood of any of that continuing through the back half? And then as kind of a follow-up, just curious how much downtime you have built into second half guidance as well?
Great. I'll pass that to Imad.
Yes. So we are seeing very positive momentum here. As I mentioned, the cessation of hostilities took place or should take place today. President Petro was in Bogota this week together, in fact, was our country manager, Daniel Ferreiro. And we are seeing completely change of the dynamic in the area like -- and we are on the ground. We see how we see how the politics are, how the community mood is -- and it's pretty encouraging to know. That's why we took the decision to bring a second rig to Arauca. We are being invited by the civil society in that area as well as the government to contribute to solutions. One example of that is already, we grew our work for taxes program, which is for Parex to invest government tax money into infrastructure in the area. So last year, we spent $5 million. In 2023, we got $23 million approved. So that's a big overall job. And last month, we've been invited by the Arauca different stakeholders to deliver an additional $20 million of infrastructure works to remediate the damages in roads and infrastructure they had after floods.
So we're becoming really part of the solution. So overall, I would say in terms of the government support the overall social situation, I'm cautiously optimistic. Are there guarantees? No. So we did take that the fact that there is always a larger and predictable element to Colombia. And thus, and that -- we think we are reflecting that in the new guidance.
Thanks, Imad and maybe I'll just comment from a downtime -- to answer the downtime. We are expecting a more normalized downtime going forward of around 5%. That does incorporate some social disruptions but not the major ones and reiterating Imad's comments, we do see a different situation right now in the Northern Llanos and have some confidence moving forward with operations. We currently have 2 service rigs and a drilling rig operating in the area, fairly steady. And so we do have some momentum going forward here.
Great. That's helpful. Just 1 follow-up. I'm just curious if you can frame out. I know you're probably going through the 2024 budgeting process now. But even just directionally, if you could frame out where you expect most of the growth in the portfolio to come from? And if you could sort of frame that on a field-by-field basis that would be helpful.
I'm going to let Imad talk about the overall strategy for 2024.
Okay. Let me start by '23. Like if you start with Capachos and bring it back to pre-shut-in levels, that's a reasonable amount of growth. We have, In general, the quick hits like the [indiscernible] we mentioned that will also keep delivering reasonable amount of production. And we are seeing also very good outcomes in Llanos on the horizontals we've been drilling there and there's many more to come, including this year.
What that does is that sets us up for strong exit. So we mentioned the outlook of above 60,000 barrels a day for Q4. If you just average that and start from there for the year, you're already having reasonable growth year-on-year. On top of that, if I think about 2024, we have different places where we're investing. We are investing in VIM although that will come to the end of the year. We are bringing 2 rigs to our Arauca this year, but most of the production impact will come next year, so there will be growth there. In Llanos, we completed the Cabrestero waterflood, but we are late on the injection volume.
So we're ramping up and we expect to see more of the impact in addition to the horizontals that will continue next year. And of course, there's the Big 'E' and we have big hopes for example, Arauca-8 well coming late this quarter that will help next year. So it is the same thing as the gas and VIM or the gas strategy, the exploration, but also a lot of exploitation based on technology and based on getting the most of our assets. In fact, we're getting better than what we hoped for when we started trying these horizontals and waterflood and oil-based mud you name it. And these quick hits or optimization of big fields like SoCa will only continue. Eric, do you want to add to that?
Yes. Thanks, Imad. I mean we have had a big shift in focus to exploitation activities. I think about our focus in 3 mature fields that were very mature producing about 1,500 barrels a day, 1.5 years ago, they were up over 8,000 barrels a day today. So new technology, looking at all the opportunities, the second time is creating a lot of low-risk opportunity for us to go forward in optimization.
And just 1 follow-up for me as well. Just wondering if you can speak a little bit to capital and where you would expect that to trend going forward?
Yes. Sure, Luke. I think what you can do as you want to look into the future, still reference a 3-year plan. We're on track to deliver that and really set ourselves up well going into the fourth quarter, over 60,000 barrels a day. And what we're aiming for is to improve capital efficiency, and that means really higher production with less capital required as we've made these investments really in infrastructure over the last 2 years.
Your next question will come from the line of Roman Rossi with Canaccord.
Just regarding VIM-43. Now that Chirimoya [indiscernible] the capital commitments still, are you expecting to relinquish the block? Or are you considering any other activities there?
I'll pass that 1 over to Eric.
Sure. Thanks, Mike. We haven't come to a final conclusion there. Of course, we've just tested the well. We're understanding what we saw and looking at that play that we're chasing there and additional play. So we don't have a conclusion there. We don't have any immediate activity planned in VIM-43, but we are looking at all the prospects yet. So that is still to be decided.
Okay. And regarding reaching full capacity -- production capacity at Capachos, when are you expecting to reach that. Does it depend on new wells or just existing well?
Go ahead, Eric.
For the most part or wholly that is existing wells. We have 3 wells that have been basically shut in for the majority of the year so far. Andina-2 is a very prolific well and the entire Capachos shore compartment. So really, this is bringing volumes online with pump changes and final completion and we expect to complete a large majority of that work in August. So we are expecting to go back up the capacity in the very short term.
Okay. Same plan and just a follow up on that. So if I look at your 3-year based development program, you were projecting like 63,000 barrels for 2024. So what's the active rate for 2023?
Roman, we put into our news release with our revised guidance that we want to exit above 60,000 barrels a day in Q4, and that really positions us well for that 3-year plan, where we said we'd be at 63,000 as an average for next year.
[Operator Instructions] Your next question will come from the line of Kevin Fisk with Scotiabank.
The Brent/Vasconia differential narrowed in Q2. I'm curious how you're thinking about the differential going forward.
Yes. Thanks, Kevin. I think traditionally, the Vasconia differential kind of if you look at a 5-year average, it's probably been between $4 to $5 a barrel. We had it much higher at the start of this year. It was about $8 to $10 a barrel. And it's gone down, we've seen even some bids below $4 in the last couple of months here. Differentials, as you know, looking at Canadian differentials is very tricky to forecast. But we are seeing very positive things with the TMX or [Dos Pocos] in Mexico, really moving crude out of the Gulf Coast, which is really the price marker for us. So we're forecasting it to be in this $4 to $5 we go forward here for the rest of the year.
Your next question comes from the line of Samuel Chen with AllianceBernstein.
Just a quick question. If you can help me to understand how are we getting from the 54,000 this quarter to 60,000. I read your press release. We got Capachos for about 2,000, Arauca for about 1,000 a bit and you have the production declines at SoCa. But even if I add a [mobile], we're not getting back to 60,000. If you help me understand that would be great.
Great. I'll pass that to Eric.
Sure. Thanks, Mike. The main areas for our production goals are, as I mentioned already, the Capachos area, that is essentially bringing the field back online. Second, of course, we've mentioned Arauca. Those wells, as I talked about in our Investor Day, historically, have capabilities of 5,000-plus gross per day. So there's a lot of potential there. In addition, we have a very robust program underway in SoCa regarding the horizontal wells.
So we talked a little bit about the horizontal wells we've built. We're exploiting the Mirador reservoir there. That has about 120 million barrels in place, but we have not yet found a good way to produce it. We think we found that now. The horizontal wells are producing well above expectations. So that horizontal program in 34 replacing some of the program we had means that we grow in 34 -- more than replaces declines and grows in 34 going forward.
So -- we've highlighted the main areas we're focusing on. In addition to that, we still have the conventional development going on in Cabrestero and Block 34 that continues to be stayed. We have some of the quick hits, [Lucero]. We are drilling that horizontal as we speak, almost in the horizontal zone. So we expect to have that on production shortly. We know there's oil there. We know it's a very prolific reservoir that will be multi-thousand barrels a day. So when we add it all up, in addition to the key areas we've highlighted and all the other program, that's how we get there. But the very short-term catalysts, I would say are going to be the [Lucero] online and just restoring Capachos. So that in itself is going to be a very big jump for us.
So just a quick follow-up. Can I assume that the roughly 3,000 barrels per day of sequential increase we're seeing from Q2 to Q1. This is just from the partial recovery is not related to any of those enhancements that you just mentioned at the last minute.
Correct. We have not -- so far in the first half of 2023, our downtime in the Northern Llanos has been significant in the range of about 70%. And so we've been on partial production. And we're trying to get to that full production, and we should be there in the next couple -- few weeks. And as Imad alluded to earlier, we see a different scenario up in the area right now in a different environment that we believe will be able to continue operating with normal downtime and deliver those volumes.
Your next question will come from the line of Oriana Covault with Balanz.
I have 2, if we may go 1 by one, that would be great. And the first is a follow-up with regard to the horizontal drilling in Llanos 34. Just to understand it and see that it has been successful and volumes continue to be steadily going in Llanos. Like when do you expect to reap the benefit of this horizontal drilling program? And when should we see -- what would be a reasonable expected production growth in the area seen in this horizontal drilling program.
Eric?
Thanks, Mike. Yes, the horizontal program in 34, so let me talk a little bit about what our expectations were and what we're seeing. Again, 120 million barrels of oil in place of good quality oil, trying a new technique to extract it. First horizontal well that's been on production for just over 4 months, came on production over 3,000 barrels a day. We expected it to decline a lot more than it has. It's still producing about 2,500 barrels a day.
So we've had payout in about 3 months. The second horizontal well has come online with similar type of performance. And today, we're in the 4,500 to 5,000 barrels a day gross production from a couple of horizontals in Block 34. Both ourselves and our partner are very excited about this development. We have shifted capital based on the results to this horizontal program and are replacing some of the conventional development and take advantage of this horizontal development and adding what another 3 wells that will be online this year in 2023. Now the impact of that is growth towards the end of the year in Block 34.
So more than maintaining decline with a smaller number of wells and actual growth in production. So you're already seeing some of that benefit a little bit of it. Like I said, the second well just came on production about a week ago, so you're not seeing the full potential. But going forward, the exciting part is, for us, not only this program that's going to be 3 to 4 wells firm going into '24, where else can we apply this technology.
We're getting better at it. We're drilling the wells more efficiently for lower cost, and there are a lot of areas that we can use this technology to exploit even in SoCa and I wouldn't be surprised if you see this going into thinner areas in the Mirador possibly areas in the Paleocene. And so we're learning as we're going and getting better, and it's an exciting program for both ourselves and our partners.
Perfect. That's very clear and very encouraging for the area. Just 1 final 1 regarding seeing your cash position dropping below average levels of course, owing to the cash tax payment -- and the tax payments and so on. I just wanted to touch base if you provide like a target cash balance or where do you see an optimal cash balance being of course, the distributions to shareholders via dividends and buybacks for the remainder of the year.
Great. I'll pass that to our CFO, Ken.
Thanks for the question. We -- the dividend and the buybacks are funded from the free cash flow that the generation -- that's generated from the operations. So I don't need cash on hand for that because we're pretty confident on what we're going to generate for the next year and ensure it's subject to commodity prices, but at the same time, We've been through lots of different commodity price scenarios in Colombia, and it's a very profitable business, and we do have control over our capital, is discretionary, our capital expenditures. So I don't look at our beginning cash balances, paying a dividend or anything like that.
And where was it optimal? Well, we like -- traditionally, we run higher than a slight deficit. We do have a $200 million line that we haven't drawn for 6 years with the banks. I don't expect to have to draw at this time either. But I think at the end of the year, if at $80 oil in Vasconia hitting our production -- midpoint of our production targets, we should build our working capital back up to that $50 million to $100 million range. And that means probably $150 million to $200 million of cash because included in that $50 million to $100 million is tax payable for that year, for the current year that's paid in the following year. So cash is always ahead of working capital. If that helps.
with that, I'll turn the call back to Mike Kruchten for any closing remarks.
Well, thank you very much for joining us today and especially in this new format. We appreciate you being on the call. And if you have any questions, please feel free to engage us directly at Parex. And with that we'll close the call, and have a great summer.