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:

• Strong FY22 Guidance: For FY22, the company expects a higher demand for crude oil, which is likely to result in a 17% y-o-y growth in the production of 55,000 barrels of oil equivalent per day (boe)/day from 46,998 barrels of oil equivalent per day (boe)/day in FY21. Notably, production Growth per share is expected at 29% over FY21. Moreover, the company expects its funds flow provided by operations (FFO) at USD 903 million, considerably higher than USD 578 million 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 18% 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 reported 21% CAGR from FY17 to FY21. In Q1FY22, the company reported its production of 53,288 boe/day, higher than 46,727 boe/day in pcp.

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. The company is targeting to unlock its portfolio by commencing horizontal and multilateral drilling programs along with proven technology required for the operations.

Source: Company Presentation

• Robust growth in operating netback: In Q1FY22, the company reported its operating netback of USD 31/boe, which is significantly higher than USD 37.38/boe in Q1FY21. This was supported by the higher realization of crude oil prices (USD 86.24/boe v/s USD 52.80/boe) followed by an improved 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. Notably, total operating netback stood higher at USD 276.3 million in Q1FY22, as compared to USD 155.0 million in pcp.

• Higher Cash Flows to support liquidity:  In Q1FY22, the company reported a higher cash flow of USD 190.6 million, significantly higher than USD 128.1 million in pcp. The growth was primarily driven by strong growth in net profit amounting to USD 6 million, as compared to USD 47.4 million in Q1FY21. 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 commendable as it ensures better cost-metrics. EBITDA margin and operating margin stood at 76.5% and 64.6%, respectively, in Q1FY22, higher than the industry median of 47.7% and 33.7%, respectively. Net margin stood at 46.2% in Q1FY22, considerably higher than the industry median of 8.5%. 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.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• Elevated Revenue: For Q1FY22, the company posted its revenue of USD 330.4 million, which is considerably higher than USD 196.4 million in the previous corresponding period (pcp). This growth was primarily driven by a higher average realized price of USD 24/ boe, significantly higher than USD 52.80/boe.

• Increase in cost and expenses: The company reported an increase in costs, and hence total expense stood at USD 117.1 million in Q1FY22, higher than USD 85.6 million in pcp. This was primarily due to an increase in production costs, higher general and administrative expense, coupled with a higher purchased oil cost, partially offset by slightly lower Transportation expense.

• Higher Net Income: Despite a rise in total costs, the company reported a higher income before income taxes of USD 210.1 million, as compared to USD 109.4 million in pcp, supported by an elevated revenue, partially offset by higher net finance expense. Net income stood at USD 152.6 million, surged from USD 47.4 million in pcp. A lower income tax expenses also supported the company’s bottom-line.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 25.96% stake, Fidelity Management & Research Company LLC and Dimensional Fund Advisors, L.P. are the major shareholders in the company with an outstanding position of 6.91% and 2.95%, 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:

The stock of PXT carries a dividend yield of ~4.141% on an annualized basis, which looks impressive considering the present interest rate scenario. The company is targeting to pay a quarterly dividend of USD 0.25 per share during 2022, which is higher than the quarterly dividend of USD 0.125 per share distributed during 2021. This is backed up by strong growth in cash flows supported by higher commodity prices and growth in realization price.

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 Canacol Energy Ltd, Secure Energy Services Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of PXT at the last closing price of CAD 24.15 on May 12, 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 May 12, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

*Recommendation is valid on May 13, 2022, price as well. 

Technical Analysis Summary

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