Parex Resources Inc (TSX: PXT) is engaged in the exploration, development, and production of crude oil in Colombia, and derives its revenue through the sale commodities, such as crude oil and natural gas.  The Corporation brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential.

Key Investment Rationales:

• Bullish FY22 Guidance: For FY22, the company expects a higher demand for crude oil, which is likely to result in a 13% y-o-y growth in the production of 53,000 barrels of oil equivalent per day (boe)/day from 46,998 barrels of oil equivalent per day (boe)/day in FY21. Additionally, the company expects its funds flow provided by operations (FFO) at USD 716 million, which is significantly higher than USD 578 million in FY21. The company also provide guidance wherein it is targeting to distribute a dividend of USD 0.54 per share in FY22, as compared to USD 0.50 in FY21.

Source: Company Presentation

 

• Growth in Production and Reserves: The company has solid operating metrics and expects its production per share to grow by 17.6% CAGR from FY17 to FY22E and reflects a strong production profile. Moreover, the company has constantly increased its oil reserve base since 2017, and the continuation of the above trend is likely to support the company’s upcoming production. Notably, the company’s PDP Reserves per share is expected to grow 20.8% on a CAGR basis from FY17 to FY22E. 

Source: Company Presentation

• First movers advantage from the acquisition of 18 new blocks: During FY21, the company acquired 18 new blocks across Colombia Bid Round and also expanded the strategic partnership with Ecopetrol S.A. for a 50% interest in the Arauca and LLA-38 blocks. With these new ventures, the company has become the largest independent acreage holder in Colombia. Moreover, the company is focusing on capital investments in these land bases in order to secure future exploration and production programs. As per the management, due to limited accessibility, the company is likely to get the first mover’s advantage once it commences its operations.

• Strong surge in operating netback: In Q4FY21 and FY21, the company reported its operating netback of USD 46.79/boe and USD 42.53/boe, respectively, which is significantly higher than USD 24.76/boe and USD 20.84/boe, respectively. This was supported by the higher realization of crude oil prices along with a robust cost structure. Operating netback is calculated by deducting all the operating expenses from the average realized price. Hence, a higher netback suggests an improved operational performance.

• Higher cash flows:  In FY21, the company reported a higher cash flow of USD 534.3 million, significantly higher than USD 290.0 million in FY20. The growth was primarily driven by strong growth in net profit amounting to USD 303.1 million, as compared to USD 99.3 million in FY20. A higher cash flow would support the company’s overall liquidity and would help the company in dividend distribution, CAPEX expansion and working capital requirements.

• Impressive margin profile: The group reported improved operational efficiencies and posted better margins than the industry, which is a key positive. EBITDA margin and operating margin stood at 73.1% and 56.9%, respectively, in FY21, higher than the industry median of 42.2% and 20.5%, respectively. Net margin stood at 33.7% in FY21, considerably higher than the industry median of 9.1%. Additionally, elevated international crude oil prices are likely to support the company’s upcoming margins, which is a key positive.
  

Risks associated with the business:

Volatility in international commodity prices would likely hinder the realization and would subsequently dampen the overall performance of the group. The Company's current and future proved reserves might decline unless the Company is able to acquire or develop new reserves. 

 FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Elevated Revenue: For FY21, the company posted its revenue of USD 900.1 million, which is considerably higher than USD 527.9 million in FY20. This growth was primarily driven by a higher average realized price of USD 60.97/ boe, significantly higher than USD 32.44/boe. This was partially offset by lower average daily sales of 47,509 boe/day in FY21, as compared to 49,322 boe/day in FY20.

• Increase in cost and expenses: The company reported an increase in costs, and hence total expense stood at USD 388.3 million in FY21, higher than USD 347.5 million in FY20. This was primarily due to an increase in production costs, higher general and administrative expense, coupled with a higher Impairment of exploration and evaluation assets costs, partially offset by Transportation expense and purchased oil expense.

• Higher Net Income: Despite a rise in total costs, the company reported a higher income before income taxes of USD 503.8 million, as compared to USD 173.3 million in FY20, supported by an elevated revenue, partially offset by higher net finance expense. Net income stood at USD 303.1 million, surged from USD 99.3 million in FY20, due to elevated income before taxes, partially offset by higher income taxes (USD 200.7 million v/s USD 74.0 million in FY20).

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 23.62% stake, Fidelity Management & Research Company LLC and Dimensional Fund Advisors, L.P. are the major shareholders in the company with an outstanding position of 6.76% and 2.80%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

   Valuation Methodology (illustrative): EV to Sales based metrics

Analysis by Kalkine Group

 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

 

 

Stock Recommendation:

By 2022, the company is targeting to enhance its net operated production by 50%, while its current operational focus is on traditional near-field exploration in the Llanos basin and advancing conventional oil in place exploitation projects in the Magdalena basin. These are expected to improve the company’s upcoming operational metrics, which is a key positive. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). We have considered peers like Torex Birchcliff Energy Ltd, ARC Resources Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of PXT at the closing price of CAD 27.84 on March 10, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 10, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 11, 2022, price as well. 

  Technical Analysis Summary

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Disclaimer

 

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