Parex Resource (TSX: PXT) is a Canada-based upstream company. Its operational interest lies in crude oil exploration, development, and production in Colombia. Through foreign subsidiaries, the company holds interests in onshore exploration and production blocks totaling approximately 2.7 million gross acres.

Revenue Mix

Businesses                                                          Geographic

Investment Rationale

• Strong Sequential Quarter Performance: During the first quarter under consideration, the company reported solid financial performance as compared to the previous fiscal quarter, with net revenue jumped by 38% to USD 46.67 million, driven by a 35% surge in the oil reference price from USD 45.25/bbl to USD 61.32/bbl, and 42% surge in oil and natural gas revenue. However, revenue was partially offset by poor royalty revenue. Fund flow from operation soared up by 57% to USD 29.98 million.

• Rewarded Shareholders through Buy Back: The company utilized a portion of free funds flow to purchase 3,501,685 of the company's common shares for a total cost of USD 60.1 million (average price of CAD 21.11/share) pursuant to the company's normal course issuer bid program. Moreover, since 2017 Parex has repurchased an aggregate of 35 million shares, returning CAD 667 million to shareholders. Under the current NCIB, which began on December 23, 2020, Parex has purchased 3.4 million shares out of the maximum amount of 12.9 million shares.

• Applying Free Cash Flow to Accelerate Exploration Portfolio: Higher Brent oil prices to date in 2021 and Parex' unhedged oil price exposure is expected to contribute to a significant increase to Parex' 2021 funds flow provided by operations, compared to the 2021 budget guidance released on November 4, 2020. With estimated higher FFO, along with an increasing cash position and a debt-free balance sheet, Parex is strategically accelerating the assessment of its portfolio of operating assets through increasing exploration and appraisal activity to provide for a strengthened future development inventory.

• Solid Jump in Operating Netback: On a sequential-quarter basis, the group's operating netback increased by USD 12.62/boe or 53% to USD 37.38/boe vs a Brent benchmark crude increase of USD 16.06/bbl. The company considers operating netback to be a key measure as it demonstrates Parex' profitability for all cash costs relative to the current commodity price.

• Top Tier Balance Sheet: The company is virtually debt-free with a strong liquidity position. At the end of the March quarter of fiscal 2021, the group's current ratio, which gives perspective about the company's liquidity position, stood at 3.63x, improved from 3.61x on December 31, 2021, and also significantly better than the industry median of 1.03x. Moreover, the quick ratio stood at 3.60x, which shows the quality of liquidity is quite good as it is not because of a higher inventory pileup.

• FCF Yield of 7.36% Implies Strong Margin of Safety: Free Cash Flow is one very strong financial measure to gauge the financial health of the company. Further, higher free cash flow implies the ability of the company to generate higher free cash for the investors, which reduces dependence on debt capital as it can fund its operations and capex through internal accruals. Also, a higher Free Cash Flow yield implies a greater margin of safety to investors as the company can pass through the challenging times. In the case of PXT, LTM Free Cash Flow yield stood at 7.36%, which is gigantically higher.

• Technical Indicator reflecting Potential Upside: After taking strong support at the 200-day SMA over the last few trading session, the prices have moved up, and a Bull Sash kind of pattern appeared on the daily price chart on the last trading session. Bull Sash is a pro gap kind of opening after series of bearish trends or sideways trends. Moreover, the leading momentum indicator, the 14-day RSI, is moving higher after taking strong support near 40, which implies that the trend is no more bearish.

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The company is significantly exposed to the volatility in the oil prices; hence volatility in oil prices would affect the group’s performance. Further, the company’s main exposure to foreign currency risk relates to the pricing of foreign currency denominated in Canadian dollars and Colombian pesos, as the Company’s functional currency is the US dollar. The Company has exposure in Colombia and Canada on costs, such as capital expenditures, local wages, royalties, and income taxes, all of which may be denominated in local currencies.

Financial Highlights: Q1FY21

Source: Company Presentation

• Quarterly average production was 46,779 boe/d (96% crude oil), an increase of approximately 3% on a per basic share basis over the previous quarter ended December 31, 2020.
• Production decreased 6% on a per basic share basis over the prior year comparative period as a result of the Company reducing capital investment in the low oil price pandemic environment of 2020.
• Overall, the Company’s benchmark Brent crude oil price increased by USD 10.27/bbl, while revenue increased by USD 14.33/boe in the first quarter of 2021 as compared to the first quarter of 2020. The increase in revenue relative to the Brent crude benchmark increase is mainly the result of stronger Vasconia crude oil pricing (and thereby a lower differential to Brent oil price) and decreased wellhead oil sales in the quarter as compared to the comparative period.
• In the first quarter of 2021, the Company’s benchmark Brent oil price increased by USD 16.06/bbl, while revenue increased by USD 15.85/boe. The decrease in revenue relative to the Brent crude oil benchmark increase is mainly a result of increased wellhead sales in the quarter.
• Oil and natural gas production for the first quarter of 2021 averaged 46,779 boe/d, a decrease of approximately 14% from the comparative first quarter of 2020 and comparable to the fourth quarter of 2020.
• For the three months ended March 31, 2021, the cost of transportation on a per boe basis has decreased to USD 3.43/boe from the fourth quarter of 2020 of USD 3.74/boe and decreased from the comparative period in 2020 of USD 4.04/boe.
• Recognized net income of USD 47.5 million compared to net income of USD 56.2 million in the previous quarter ended December 31, 2020, and a net loss of USD 3.8 million in the comparative quarter of 2020.
• Fund’s flow provided by operations was USD 125.0 million (USD 0.96 per share basic) as compared to funds flow provided by operations of USD 97.3 million (USD 0.69 per share basic) for the prior year comparative period; FFO increased in the current quarter due to higher global oil prices.
  

Top-10 Shareholders

Top-10 shareholders in the company held around 24.14% stake. Fidelity Management & Research Company LLC, and The Vanguard Group are among the largest shareholder in the company and carrying an outstanding position of 6.96%, and 2.62% respectively. The institutional ownership in “PXT” stood at 50.51%, and ownership of the strategic entities stood at 2.48%.

Valuation Methodology (Illustrative): EV to Sales base Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:  Parex Resource has built upon strong fundamentals, with a solid margin profile, generating a higher return to its shareholders and a consistent compounder with strong reserve per share growth backed by asset performance and exploration success.

Moreover, higher crude oil prices to date in 2021 are expected to contribute to a significant increase in the company's 2021 FFO. With higher FFO, along with increasing cash position and a debt-free balance sheet, Parex is strategically accelerating the assessment of its portfolio of operating assets through increasing exploration and appraisal activity to provide for a strengthened future development inventory. The planned 2021 capital expenditures are split between maintenance, development/appraisal and exploration/new growth programs. The midpoint of the 2021 production guidance reflects year-over-year production growth of approximately 3% as compared to 2020 average production.

Also, as the oil economy is getting back into shape with demand approximately recovered to pre-COVID level, and the recent rally in the oil & gas prices reflects the gradual recovery in the energy market, PXT is well-positioned to capitalize on the trend.

Further, technical indicators are also indicating that the PXT shares are no more in a bearish trend as they took strong support at the 200-day SMA, and the 14-day RSI has not moved below 40.

Therefore, based on the above rationale, bullish technical signals and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 20.57 on July 29, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on July 29, 2021). Source: REFINITIV Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at July 30, 2021 price as well.

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Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.