Parex Resources Inc. (TSX: PXT) is an energy company, that engages in the exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential.  

Key Highlights:

• Decline in liquidity: During Q1FY22, the company stated a decrease in cash and cash equivalents to USD 362.10 million against the cash and cash equivalents of USD 378.33 million in Q1FY21. Also, the free funds' flow declined to USD 82.99 million in the same period (Q1FY22) when compared to USD 85.37 million in pcp. The decrease in the cash and cash equivalents and the free funds flow implies the company might face serious concerns to manage its business operations smoothly and carry out its growth plans.

• Increase in royalties payment: The group reported an increase in the total royalties paid of USD 83.14 million in Q1FY22 against the total royalties paid amounting to USD 25.57 million in Q1FY21. Also, the per-unit royalty increased to USD 17.70/ boe (barrel of oil equivalent) during Q1FY22 as compared to USD 6.13/ boe in Q1FY21. The increase in the royalties expenses was on account of the higher WTI prices of USD 95.71/ bbl (barrel) used as a benchmark in Q1FY22 as compared to the WTI of USD 58.13/ bbl in Q1FY21. 

• Increased expenses: During Q1FY22, the company reported an increase in the total expenses to

USD 117.12 million as compared to the total expenses of USD 85.61 million in Q1FY21.  The production expenses increased to USD 29.33 million in the same period (Q1FY22) against the USD 24.41 million in pcp, and the surge in the oil purchased to USD 10.40 million in Q1FY22, against the oil purchased in Q1FY21 stood at USD 2.58 million, etc resulted in the higher total expenses which partially offsets the impact of increased revenue in Q1FY22. 

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported increased expenses of USD 117.12 million in Q1FY22 against the overall expenses of USD 85.61 million in Q1FY21. The rising royalties of USD 83.14 million in the reported period (Q1FY22) against the royalties of USD 25.57 million in Q1FY21, also putting downward pressure on the net revenues, which is a concern for the group. During Q1FY22, the company’s cash conversion cycle stood at 59.6 days which is way higher than the industry median of 2.2 days, showing that the company is taking a lot many days to convert its investment in inventory into cash, which is a key negative. Also, the company reported lower cash and cash equivalents along with free funds flow in Q1FY22 as compared to Q1FY21, which is a major concern.  On the valuation front, the stock is measured on the EV/ Sales based valuation multiple and we have considered Frontera Energy Corp., and Oasis Petroleum Inc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of PXT at the last closing price of CAD 29.89 on June 07, 2022.

One-Year Technical Price Chart (as of June 07, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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