Dave Taylor - President and CEO Ken Pinsky - CFO and Corporate Secretary Mike Kruchten - VP of Capital Markets and Corporate Planning Eric Furlan - Senior VP of Engineering Ryan Fowler - Senior VP, Exploration and Business Development

Nathan Piper - RBC Capital Markets Darrell Bishop - Haywood Securities Jenny Xenos - Canaccord Genuity

Thank you, operator. Good morning.

This is Dave Taylor, President and CEO of Parex Resources. Thanks for joining us today for Parex third quarter earnings conference call.

With me today are Ken Pinsky, Chief Financial Officer; Mike Kruchten, VP Capital Markets & Corporate Planning; Eric Furlan, Senior VP of Engineering and Operations; and Ryan Fowler, Senior VP, Exploration & Business Development. The format today is a conference call with questions and answers.

So we're opening the lines to questions right away.

I've got a few questions, if I may. Just starts off on Capachos.

Obviously a great result. But keen to understand what you think you have learned from it.

Firstly, just on the side track, wanted to understand why that was purely due to drilling reasons or were you surprised by some of the rocks you encountered? And also could you give us a bit more detail on the slightly higher API that you encountered rather than guidance I guess?

And then lastly, what the drilling outlook is for 2018 on Capachos? And what kind of facility capacity you might install there?

I've got some other nitpick questions, but maybe start off on Capachos if that's okay.

Okay. I will ask Eric and Ryan to comment on this.

So, Nathan, with regards to the drilling, we did have a bit sticking event. Exactly what caused it, we don't know.

But the bit got stuck and it required us to leave the bit in the wellbore. And at the time, we thought it would be easier just to sidetrack rather than try to recover that bit, it was a small assembly left in the hole.

So that was the reason for the sidetrack. Overall the drilling went very well.

It went according to plan. Our engineering design and a lot of upfront work played out very nicely.

And the rest of the drilling went very well. In fact, up until the last point, the drilling had gone very well.

We were about 25% overtime on the well. So originally targeting about $15 million for the well and is up at $20 million.

For the next well, we're looking to target again $15 million for a well that's a little bit more complex, Capachos-2 well. And I'll comment quickly on the well attachment and Ryan can add on any additional parts we have learned from the G&G and field size perspective.

The test was limited to basically two days because of the facilities we had on location. So the facility's maximum capability was at about 3,600 barrels a day, which is what we tested the well to.

It was tested on natural flow. We did have real-time recorders that showed a downhole condition of the well bore cleaning up.

So no pressure depletion noted, very, very strong well, obviously with a 20% -- 21% drawdown at the rates recorded. So what we've learned so far is we have a very high productivity well and now we need to put it on on long-term tests to learn more about the long-term performance from the reservoir.

Yes, Nathan in terms of the higher API, we are about 180 feet above the offset well in terms of the elevation that the reservoir came in here, and that's about what we expected from our structure mapping. The data from the original well is somewhat uncertain.

And so we like this number we've got now for a 39 API, it's what we're measuring. And we will assume for now that that's the right answer for this pool.

Okay. Did you have a final point on what you've learned on the geology side?

No, you were just asking about 2018 outlook for the next year?

Yes.

Sorry. And that question was specifically referring to the Capachos area.

So, we are going to be spudding, as we have said, the Capachos-2 well shortly here. We're just in the final parts of the rig move.

So we expect to spud that shortly. After that we will be moving forward with the Capachos Norte drilling into early 2018.

And then continuation of the drilling will continue as results dictate either follow-up on discoveries or continue our exploration of the trend.

Okay. Sorry.

The reason, I am going to double check something with it. The facilities you are going to install at Capachos over the next -- over 2018, what's the capacity of those?

So the facilities that we will be installing, clearly the long-term facility's size will depend on all of the well results. Because as we've indicated, we've got the existing sort of PUDs that we're looking at.

But we've also got a pretty extensive exploration program in the area. So as far as facilities in the upcoming year, we're going to be installing capability of -- in the short term to allow us to produce at 2,000 to 5,000 barrels of oil per day.

And then once we get the stable trends, handling the gas and processing the gas will be the next step. And then we will expand the facilities and install them in such a way that they are modular and we can expand our way up to any size we like in a relatively short time frame.

And then just to move on to Block 34. I guess you set out this year to delineate the trend at Jacana and Tigana.

Are you fully through that now? Are we getting towards a point where you know where everything is?

I mean, I guess probably no given the oil downdip keeps deepening. But, yes, I just wanted to get your assessment on how that is progressing?

And looking into next year, how much more still needs to be done?

Nathan, we're continuing to drill there. I mean, as we drill this thing out, we continue to delineate the edges of it, the downdip extends.

We are not finished yet. There is between two and four more wells to drill this year and a continuing program of mixture of delineation and development wells next year.

But our goal in terms of defining where the edges of the pool are, I think we're very close to it. And the two to four more wells that are remaining this year will get us almost all the way there in terms of understanding the extent.

And I'll just add to that, Nathan, saying really the focus has been drilling at three major areas along the trend in the Tigana Norte area where we've got this exceptional performance that we can't explain as we're trying to drill it to explain it. The next part, of course, is that whole block between Tigana and Jacana, there was about a 3-kilometer gap there between the pools with well control.

So the Tigana Sur Oeste-7 well is right in the middle of that gap and we're currently testing that well or about to start testing that well. And then of course the Jacana delineation that's been a focus this year.

So we do have continued delineation underway along the whole trend to try to understand our goal, which was to understand the true ultimate size or get as close as we can this year.

And just to continue that discussion, we've got two new exploration wells on the Cabrestero block that we've talked about as well, continuing to try and understand the trend as it goes further, so beyond the limit of the fault and down to that stratigraphic trapping edge to the south. Yes, so there's still some appraisals at even our Llanos 34 that's required.

And moving on a little bit then on the pipeline, what kind of size of pipeline, there has been discussions about before, but what's the kind of capacity of the pipeline that you think you are going install there?

So the latest design...

Flowline, sorry.

So the latest design would be a 16-inch size diameter flowline, that would allow us to tie in the production from Llanos 34 directly. Capability wise depending on the pumps that are installed along the line, but for that size of line, the capabilities from the block for that size of line would be in excess of 75,000 barrels a day.

So we see it as an expandable beyond that. So the 16-inch line will give us essentially full capability to evacuate the amount of crude that we want.

And maybe if I can ask some sort of Ken type questions. What kind of differentials are you assuming next year Ken and what kind of impact will the pipeline have on your cost base?

Differentials, so the Vasconia differential from Brent we're assuming a $4 to $5 range. Our last cargo went out at 392 per barrel which is the December delivery.

So roughly that's what we're seeing. Trying to predict the differential is really tough.

There's all sorts of inputs to it. But $4 to $5 is what we've got.

And then as far as the pipeline goes, it's not so much the economics are there. Right now, the Colombian situation is, you have all -- you have the new pipeline expansion, the Ocensa P-135 expansion.

Certain people took capacity on that we did and so they're quite sort of keen to find volumes. So we're seeing a very competitive environment for selling our crude especially at Tigana and Jacana crude, which is -- which gets blended with that of Vasconia and then gets exported out.

So we're getting very, very good prices right now without the pipeline. The issue is with a field that big at some point you need to pipe it in so that you could have sureness of evacuation as well as at some point we expect you'll see pipeline become the better way to shift that oil out and to monetize it.

So currently we would see no difference in our economics with the pipeline. But in the long term, we think it provides both safety, sureness of delivery as well as at some point we expect to see some better economics.

And maybe a final one, if I may. So is 2018 the year you're likely to introduce a dividend given your guaranteeing production growth in 2018 right now?

No plans on that.

No drop there in the background?

No plans on that. What we are doing is we'll look at our working capital, we'll look at our business and we'll look at our growth.

And we'll look at which shareholders are looking for their oil and gas investment and we'll see what adds the best calculation of the cap mix so to speak, is it growth, is it reserve identification, is it a dividend, is it a share buyback. So every year, we have a strategy session with our board.

And that's what the questions we asked and what they ask us is how are we getting -- how are we paying the shareholders this year. So right now, no plans for dividend, but we'll keep monitoring that along with all the other options which I spoke about.

I think, Nathan covered off a number of questions there. But just in sticking with Capachos, could you remind us the farm-in terms of when you'll be fulfilled on earning net 50% working interest from Ecopetrol?

Secondly, I wanted to get some sort of a number with respect to the allocation of capital to Capachos for 2018. I mean, if there are six growth wells there plus facilities, it's probably north of $100 million in capital.

Just want to see if you had guidance from Ecopetrol that they are willing to come along for their 50% working interest after [indiscernible] reached as well. And then finally, were there any issues from a security perspective with respect to your first well and you foresee anything from a go forward on a surface rights method?

Yes, the farm-in terms, we pay 100% on the first two wells turn 50% of the block. So we've drilled the first one and the second one will be Capachos-2.

And as you recall, both of those wells were in proven compartments. So we see it as a relatively low risk earning.

Subsequent to that Ecopetrol is responsible for their 50% working interest of future capital. Security wise, we had no issues at all.

In many ways, our timing was very fortunate as well because you may have read that the ELN went into a ceasefire just as we were in the middle of drilling a well. They're going to be in a ceasefire through the end of January, potentially extended beyond that as they try and negotiate a peace settlement with the government.

And with respect to capital allocation, I will just turn that to Mike.

Yes, sure. Darrell, we've listed our growth capital in the 170 million to 200 million range and for that there is approximately $50 million allocated to the Capachos block.

Okay. So that goes around for the four to six wells plus some facilities.

Yes.

And no issues from you've had discussions with Ecopetrol. I assume that their $50 million is there when needed.

Well we have a joint operating agreement with them that we have to put them on notice board. We are working with them on their budget for next year.

So we'll, as we go forward on each well we have to give them notice and we will see what they decide to do. But they're encouraged, let's put it that way, by the result.

Could you please tell us how much of Capachos and Glauca production is included in your forecast for 2018?

Mike?

Sure Jenny. For 2018 Glauca, it's still a relatively minor piece of our forecast for 2018.

It's one of our -- we feel, it's a low-cost entry into that basin and that block. And with Capachos as we said, it's 2000 barrels gross, so that's -- and we're 50%.

So that's 1,000 on the first well. We plan to have another well.

So rig volumes were just over 2000 barrels a day, 2,000 to 3,000 barrels a day.

So 2,000 to 3,000 barrels a day net to you next year?

Yes. So we're looking -- we are going to start -- we're going to spud the second well.

First well we see a 2,000 barrel a day gross, second well we'll call it approximately the same. And then, as Eric mentioned earlier, we'll evaluate as we get into the exploration on the Norte compartment.

Yes Jenny, it's Ken. Remember too we always have the highest pump volume.

So we could lose that 3,000 barrels a day, we wouldn't change our forecast.

Okay, that's good to know.

So Capachos doesn't mean we're increasing our forecast, Capachos doesn't mean we're decreasing our forecast. We manage our production as a corporate target and we're comfortable with our corporate targets.

And as you know, we have all sorts of levers we can pull to meet those production targets. So as the year goes on, we will be comfortable with our production forecast just like we have in prior years.

Understood. And just to confirm you said 4 to 6 wells potentially targeted there next year?

No, that's four to six wells in that group of Capachos, VIM-1, De Mares and VMM-9.

Okay.

Capachos itself will be one to two wells.

Okay, one or two wells on the book. Okay.

Could you give us a little bit more color on the Coyote-1 well? I know that you are -- from the Ecopetrol conference call that you are testing that well now and applying some hydraulic fracturing to it.

Maybe give us a little bit of kind of history of that well? I know it's a reentry what.

What -- why you find this area interesting? What is the potential there?

And what are you hoping to accomplish here?

Jenny, it's a nice way to earn a big block of land, it's a reentry we've talked about. We're planning to drill Coyote-2.

And when we get some more drilling results, we will talk to the market a bit more about it. Right now, it's premature in our view to have any discussion on it.

Okay, fair enough. And what about inflationary pressures?

Are you seeing any at the field level?

Not yet. I mean the Colombian peso has depreciated against the U.S.

dollar slightly notwithstanding the increase in Brent oil prices. And we're forecasting for instance COP to be 3,000 against USD.

Last year we forecasted it to be 2,900 and oil prices have gone up. So we haven't seen it yet.

There's always going to be a pricing pressure for certain types of equipment. But we've managed to get around that because we have a balance sheet that says we can contract rigs for a longer term and people don't have to worry about being paid.

So they like to work with us.

I think the second thing is in the international markets there wasn't as much competitive pressure as activity went down as with North America. So we didn't see the fall-off in pricing like our counterparts in North America.

So there's less pressure on the way up also.

What are you assuming for operating costs in 2018 based on your $55 Brent oil price forecast?

Yes, we're going to see that in the mid $5 range for operating costs.

So essentially flat from the current levels?

Yes.

Thank you operator. I would like to take this opportunity to thank you for your interest in Parex and your continued support of the company.

For further information, we invite you to visit our website or call us. Thanks again and have a good day.

Thank you, operator.