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 of 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 

• Growth in Production and Reserves: The company has strong operating metrics and expects its production per share to grow at a 17.6% CAGR from FY17 to FY22E, indicating a strong production profile. Besides that, since 2017, the company has steadily increased its oil reserve base, and the continuation of this trend is likely to support the company's upcoming production. Notably, the company's PDP Reserves per share are expected to grow at a CAGR of 20.8% from FY17 to FY22E.

• Strong surge in operating netback: The company recorded operational netbacks of USD 46.79/boe and USD 42.53/boe in Q4FY21 and FY21, respectively, which are significantly higher than USD 24.76/boe and USD 20.84/boe, against corresponding previous period. This was aided by higher crude oil price realisations as well as a solid cost structure. Deducting all operating expenses from the average realised price yields the operating netback. As a result, a higher netback indicates better operational performance.

• Robust cash flows:  The company recorded a greater cash flow of USD 577.5 million in FY21, which was much higher than the reported cash flow of USD 297.0 million in FY20. The growth was mostly driven by a rise in net profit, which amounted at USD 303.1 million in 2021. The company also reported stronger free cash flows of USD 300.3 million versus USD 155.8 in pcp, over the same reported period. A stronger cash flow would benefit the company's overall liquidity, as well as dividend payout, CAPEX expansion, and working capital requirements.
  

• Registering sequential growth in operating matrix: Despite the unrest environment, the Company maintained its pace and witnessed spirited performance across its operating margin profile in FY 2021. The Company is continuously working closely to carry this winning momentum and has witnessed higher scale on the sequential basis, which is appreciable. Also, its margins are leaping the industry median numbers on all fronts, another significant plus.

• Strong guidance for FY2022: The company anticipates higher crude oil demand in FY 2022, which will result in a 13% year-on-year increase in production to 53,000 barrels of oil equivalent per day (boe)/day, up from 46,998 barrels of oil equivalent per day (boe)/day in FY21. Furthermore, the company expects its funds flow provided by operations (FFO) to be at USD 716 million, up from USD 578 million in FY21, which would be a significant plus.
  

• First movers advantage from the acquisition of 18 new blocks: During FY21, the company acquired 18 new blocks in the Colombia Bid Round and expanded its strategic collaboration with Ecopetrol S.A. to 50% stake in the Arauca and LLA-38 blocks. With these new operations, the company has become Colombia's largest independent land holder. Furthermore, to safeguard future exploration and production program, the corporation is focusing on capital investments in these land bases. According to management, due to limited accessibility, the company is likely to gain the first mover advantage once activities begin.

Risks associated with the business: There are numerous risks associated with the company that can have a significant impact on operations and financial health, including fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, and so on. However, the most significant risk is the volatility of international commodity prices, which could impact the group's overall performance.

 Financial Overview of FY 2021

Source: Company Filing

• Elevated Revenue: For FY21, the company posted revenue of USD 900.1 million, considerably higher than USD 527.9 million in FY20. The growth in revenue was primarily driven by a higher average realized price at USD 60.97/ boe, compared to USD 32.55/boe in pcp.
• Higher operating expenses: In the reported period of FY 2021, an operating expense increased to USD 388.3 million against USD 347.5 million in pcp, primarily due to higher production cost coupled with impairment expenses and share based compensation expenses.

• Higher Net Income: The company reported higher net income of USD 303.1 million, compared to USD 99.3 million in FY20. This elevated net income was mainly due to higher revenues, partially offset by slight increase in operating expenses and higher income tax.

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the pie chart below, which forms around 25.07% of the total shareholding. Fidelity Management & Research Company LLC and Dimensional Fund Advisors, L.P. hold the company's maximum interests at 6.81% and 2.84%, respectively. The company's institutional ownership stood at 47.92%. Higher institutional holding boosts the confidence in the mind of retail investors. 

  Valuation Methodology (illustrative): EV to Sales based metrics

*% 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

The company posted robust growth in its financials in FY 2021, where it grew its top line and bottom-line by 71% and 205% respectively. Furthermore, the firm has demonstrated its resiliency by sequentially strengthening its operational matrix. Even in FY 2021, it outperformed the industry median margin on numerous fronts, demonstrating the company's competitive edge. Additionally, its cash flows improved beautifully, which would aid it to maintain its strong liquidity.

The company anticipates higher crude oil demand in FY 2022, as a result the management raised its production guidance by 13% to 53,000 barrels of oil equivalent per day (boe)/day for FY 2022. This higher production with cost saving measures would enhance its free cash flows also and the management also shared its guidance for higher free cash flows in FY 2022, which is a key positive.

Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 26.01 as on April 7, 2022. However, the 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 April 7, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*Recommendation is valid on April 8, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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