Parex Resources Q3 2026 Earnings Call Transcript

Parex Resources (TSX:PXT) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Parex Resources reported strong third-quarter results, marking the first full quarter of integrated operations following the acquisition of Frontera E&P assets, contributing to a production increase.

The company is progressing well with the integration of Frontera assets, expecting synergies of over $50 million in 2027, primarily from taxation, G&A, and marketing efficiencies.

Production averaged over 83,000 boe per day in Q3, with expectations to maintain upward momentum and end 2026 with record production levels.

Recent exploration success includes a 70% success rate in the Eastern Llanos and a new gas discovery at VIM-1, with plans to tie into existing facilities by year-end.

The company plans to invest in infrastructure, including a 10-inch pipeline and truck offloading facilities, to support growth in the Eastern Llanos.

Financial pressures from FX appreciation and increased operating costs are viewed as temporary, with expectations for cost moderation as market conditions normalize.

The company is focusing on disciplined capital allocation, optimizing the portfolio, and leveraging lower-cost barrels to reduce overall operating expenses in 2027.

Future strategies include growth through exploration and development projects in the Eastern Llanos and further integration of Frontera and Middle Magdalena assets.

Full Transcript

OPERATOR

Hello everyone. Thank you for joining us and welcome to the Parex Resources Q3 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 Kruchten, Senior Vice President of Capital Markets and Corporate Planning. Mike, please go ahead.

Mike Kruchten (Senior Vice President of Capital Markets and Corporate Planning)

Good morning and welcome to Parex 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 Vice President Engineering, Eric Furlan. Telephone participants can press star one at any time 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 in US dollars unless otherwise stated. I will now turn the call over to Imad. Please go ahead.

Imad Mohsen (President and CEO)

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 Magdalena. 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 three 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 toward 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 2027. Given our current progress, we expect that next year we will deliver over the higher range of our previous estimate of 20 to 50 million dollars.

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 the Eastern Llanos and a 100% success rate across the rest of our portfolio. I’m very encouraged by the size and potential of our Eastern Llanos discoveries. We believe they represent our most significant exploration success since Llanos 34. While current production is constrained by infrastructure capacity, we see substantial upside as we advance our development, exploration, and egress 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 2026 with our highest production ever. We are also getting close to spudding our first Llanos Foothills 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 reinforce our optimism about the future. We believe Parex is entering an exciting new phase. We have an opportunity to grow faster, make our business much larger, and realize the full value of our portfolio through much more capital‑efficient investments. With that, I’ll turn it over to you, Eric. Please go ahead. Thanks.

Eric Furlan (Vice President Engineering)

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 Janito 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 two 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 waterflooding, horizontal drilling, and polymer‑surfactant applications to support our long‑term growth. At Block 111 in the Eastern Llanos, we have a 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 and 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 have sanctioned and are progressing with the construction of new infrastructure, including truck offloading facilities and a 10‑inch 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 VIM‑1 near the La Belleza 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 to date, has a 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, capitalizing on attractive pricing in Colombia’s supply‑constrained domestic market. Lastly, following the commencement of civil works in the Piedmonte in Colombia’s Llanos foothills, we are preparing to spud our first Big E well by year‑end, providing further visibility into gas growth in 2027. With that, I’ll turn it over to Cam.

Cam Grainger (Chief Financial Officer)

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 significantly wider differentials in Brent and WTI, which is strongly correlated to Colombia’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 Niño 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 and 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 Colombian peso collars covering approximately 50% of our Colombian 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 progressively 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.

Imad Mohsen (President and CEO)

Thank you, Kam. As we approach year-end and 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 Resources’ growth potential. Activity delivered in 2016 has helped to fundamentally reshape our portfolio. We strengthened our position to deliver near-term production growth while pursuing larger opportunities that could take the business to the next level.

Importantly, we believe the broader outlook is increasingly favorable. This is supported by a stronger commodity price environment and a more constructive policy and investment climate in Colombia. Combined with our expanded portfolio, strong operational foundation, and many organic growth opportunities, we believe Parex Resources 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 the 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 this period of significant transformation for Parex Resources. The integration of Frontera has been a 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

We will now begin the 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, we ask that you pick up your handset when asking a question to allow for optimum sound quality. 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 the line of Greg Pardee with RBC Capital Markets.

Greg, your line is open. Please go ahead.

Greg Pardee (Analyst)

Yeah, thanks. Good morning. Thanks for the rundown. I know it’s still early and you’re probably in your budgeting process, so don’t want to steal anything away from the capital markets day. But in broad strokes, what is 2027 and what does the program look like? And maybe what are the, you know, perhaps the biggest contrasts with 2026, where, you know, transactions obviously dominated a lot of what you were doing.

Mike Kruchten (Senior Vice President of Capital Markets and Corporate Planning)

Good morning, 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 Resources, and we see this as a much lower-decline base than what we had before. I think the key change for 2027 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.

Greg Pardee (Analyst)

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

Mike Kruchten (Senior Vice President of Capital Markets and Corporate Planning)

Well, certainly the key well, which we expect to spud before year-end, is the Piedemonte. 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.

Imad Mohsen (President and CEO)

Can I add to that the program in the 111 and Eastern Llanos 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 Piedemonte well. But if you look at the volumes they’re pursuing and the 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 to date, we’ve been building the base for next year’s production and guidance. And one part which will help, for example, is the gas sales. We are connecting the Belleza and the new discovery in La Bonita all the way to the coast where today’s spot prices are crazy. We’re talking $30 per MMBtu, but if you look at the longer-term trend, you’re thinking more closer to $15 per MMBtu.

But even that, to get that kind of volume 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 reduce our maintenance capital by reducing the decline rates.

Mike Kruchten (Senior Vice President of Capital Markets and Corporate Planning)

And maybe I’ll just add, Greg, you asked about the big change going into 2027, mimicking Imad’s comments. What we’ve been doing so far is building the base, following the decline, taking our base assets to a 15% decline or lower. 2027 is going to look like a lot of grassroots exploration and development growth. We’re excited about our 111 program. 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 2027 as a growth year with growth coming through the drill bit.

Imad Mohsen (President and CEO)

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 netback we have in the whole portfolio, both because of the quality of the light oil that is sold at a premium, but also because of almost no water. So that means your energy costs are minimal. In fact, all of the wells we have right now in the Eastern Llanos are flowing on natural flow. So there are 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.

Greg Pardee (Analyst)

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

Eric Furlan (Vice President Engineering)

I mean, Greg, it’s Eric here. You know, we would look at our base decline at 15%, and maybe that’ll shallow up further from there. You know, one of the big changes obviously over the last years: Parex Resources’ historical large fields are in shallow-decline mode just due to natural progression, polymer, and waterflood 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 the deal with Frontera, and they are helping lower that decline further.

Imad Mohsen (President and CEO)

And the same applies to the assets we got in the Mid Mag from farming with Ecopetrol. That’s probably similar to the declines of the Frontera assets.

Eric Furlan (Vice President Engineering)

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

Imad Mohsen (President and CEO)

So if I compare to last year, to complete your question, last year was close to 25%. A couple of years ago was north of 30. To be now at a 15% decline rate by the addition of all these assets and the investments we made makes our cash flow much more predictable in a way on a longer-duration period, as well as reducing significantly our maintenance capital.

Greg Pardee (Analyst)

Understood, thank you very much.

OPERATOR

As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Daniel Guardiola with BTG. Daniel, your line is open. Please go ahead.

Daniel Guardiola (Analyst)

Thank you. Good morning, Nina and Mike and Pim. I have a couple of questions. One is on cost inflation. I would like to know if you can share with us how much of the cost pressure that we saw in the quarter is genuinely temporary, as you highlighted—FX appreciation, wider differentials—versus actual structural factors associated with the newly acquired asset base of Frontera. And perhaps more importantly, what level of unit cost should investors consider sustainable heading into 2027?

So that’s on costs.

Cam Grainger (Chief Financial Officer)

Hey Daniel, it’s Cam Grainger here. Just on the cost pressures we’re facing, there’s really two components. It’s the FX, the Colombian peso appreciation, which when we look at our netback, it’s basically added in the quarter kind of $3 as far as cost there. And then also on the power side, power prices contribute about $2 as well. So those pressures we think will subside here over time. But those are the two components, two pressures we’re facing right now.

Imad Mohsen (President and CEO)

So two things on that. One is, I mean, you’re very familiar—your bank in particular is very familiar—with how much hedges right now trade for long-term electricity prices, which are probably half of today’s peak. So the market expects that over time these costs will go down. And with our fuel cost, some of the costs are related to the higher oil price, so the reverse is true now that the oil prices are going down. And on foreign exchange, we do take lots of hedges on that too.

Some of them are coming, like I think 50%, in quarter four. Yeah. And finally, I think on an average basis, these new volumes we’re getting from all these discoveries, whether they are Eastern Llanos or selling gas out of VIM, have very low cost per barrel. I would say five times less than the average barrel outside.

Cam Grainger (Chief Financial Officer)

Which helps balance off our total portfolio as we added, you know, Frontera volumes that tend to have higher operating costs. So our growth will help stabilize the overall OPEX for the company. For 2027, you know, our initial view is we will have lower OPEX costs than where we currently stand, and there’s a couple key factors there. If you just assume a lower oil price in 2027, that will help reduce the OPEX, and then adding the new lower-cost barrels, as Imad said—Eastern Llanos, the gas production—will also contribute to lower costs.

Daniel Guardiola (Analyst)

Okay, perfect. Thank you, guys. I have another question on Frontera, and I know Matt, you touched on this in the presentation and its own synergies. Now let’s imagine if you could provide a breakdown of where the expected additional savings from these acquisitions are coming from and so far how much of these total synergies have already been captured and when we should expect to see the full benefit to flow through your EBITDA.

Imad Mohsen (President and CEO)

So if you look at the synergies, some of them come through the taxation, I would say more than half. Then you have synergies coming from G&A that’s just starting because we are, in fact, busy with some rationalization of the duplicated positions in the company. There are synergies related to supply chain and contracting, and we’ve seen some of these start to come together. I mean, I give you an example of one tariff contract where we doubled the income from that.

So there are a number of things coming together on all these fronts. Did I forget anything big here? Marketing. Yeah, marketing. We’re doing very well. We started to replace the naphtha that Frontera used to buy with our own lighter oil, so that you mix two oils that were over spec and under spec, and you can go into the pipeline without spending money on it. I’d say a dollar a barrel or so. If you add all that, I would say in 27, we’ll be above the 50 million upper end of initial estimate this year.

We already captured a good part of these numbers I’m talking to you about. However, it was partially offset also by the one-off costs of integration, severance, and the transaction itself. So you probably wouldn’t see all of that. In fact, you see a limited amount of that this year in terms of cost also because you don’t have the full year when you run some of these numbers. But next year we expect more than 50 million bucks of free cash flow extra.

Do you want to add anything? Great, thank

Daniel Guardiola (Analyst)

Thank you. Just a last one on capital allocation. We have spoken many times in the past that your priority right now for the free cash flow is to deleveraging your balance sheets. But considering where your leverage is right now, I wanted to ask you, and also considering the market reaction right now where you are trading at, if perhaps you may also consider to reactivate your buyback.

Imad Mohsen (President and CEO)

I don’t know. On a personal level, I can tell you it’s a buying opportunity. There is a balance between buybacks as such, which I think, if you look at the math, makes complete sense. You’re spot on. And the desire we have internally and with the board, but also from other investors, say it’s a very volatile world. Why don’t we first bring our debt to below half a turn and then use that after that moment to restart buybacks. I think we’re still more on the safe side where we’d love.

I think this market reaction will not last forever, but a stronger balance sheet will. And we need to just stay consistent with ourselves on that front. Danielle, one more thing is certainly as we look forward into 2027, I think we view if we can add growth projects at a better, I’ll say, capital efficiency or better valuation than our current valuation, we also would have a preference for capital allocation to grow in our overall business. So two more points. I think when we invest this year, I don’t know, more than 120 million bucks in carry activities, we’re paying back 60 million bucks of liability, or 70 million bucks of liability, this year. So in addition to the debt repayment we’re delivering this year, we are reducing our liabilities. So we’re using this opportunity also to make the company a little bit safer. The biggest synergy, in my view, on Frontera that doesn’t come out in direct numbers is the capital allocation.

We moved so far three rigs, probably four to come, from wells that would deliver 150 barrels a day for, let’s say, half a million bucks, to places like Isanianos, where the wells will probably cost, completed, $3 million base—so double—but they will produce anywhere between 1,000 and 3,000 barrels a day. So. And that capital allocation question you will also see in the capital efficiency next year and beyond, because, yeah, we have very, very good opportunities now to deploy our capital on the combined optimized portfolio versus two separate entities.

Daniel Guardiola (Analyst)

Okay, guys, thank you very much for the answers.

Imad Mohsen (President and CEO)

Thank you.

OPERATOR

There are no further questions at this time. I will now turn the call back to Mike Kruchten for closing remarks.

Mike Kruchten (Senior Vice President of Capital Markets and Corporate Planning)

Thank you, operator. I appreciate everyone joining our call today. If you have any further questions, feel free to reach out to me. Have a great day.

OPERATOR

This concludes today’s call. Thank you for attending. You may now disconnect.

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.