One Mid-Cap Energy Stock to Buy – PXT

Parex Resources Inc. (TSX: PXT) is majorly engaged in the exploration, development, production, and marketing of oil and natural gas. Its key business is focused in Colombia, where it pays a royalty or tax to the government for its operations.

Key highlights

• Higher production: During Q4FY21, the company reported an increase in the average daily production of Crude Oil to 47,910 Barrels of oil equivalent per day (bbl/d) as compared to 44,969 bbl/d in Q4FY20. For Conventional Natural Gas, the average daily production rose to 11,214 one thousand cubic feet per day (mcf/d) in Q4FY21 as compared to 10,038 mcf/d in the pcp. The rise in the average daily production is the key driver for the increased revenues in the reported period.

Source: Company presentation 

• Increase in the Operating Netback: For the Q4FY21 the operating netback rose to USD 46.79 per boe vs the USD 24.76 per boe in the Q4FY20. The improved Netback was primarily driven by net Oil and natural gas sales, which surged to USD 56.12 per boe in the reported period vs USD 33.76 per boe in the pcp. The improved netback shows the company has gained oil and gas revenues after deducting the royalties received and various other costs of production.

Source: Company presentation

• Improved profitability margins: For FY21, the group has reported a stronger set of profitability metrics as compared to the industry median. The company’s gross margin rose to 86.8% in FY21 as compared to the industry median of 57.8%. The operating margin for the reported period of the group stood at 56.9% vs the industry median of 23.3%. It's worth mentioning, the Net margins for FY21 of the company were reported at 33.7% which outpaced the industry median of 10.4%.

Source: Refinitive, Analysis by Kalkine Group 

Risks associated with investment

The majority of the company's exposure is towards Oil & natural gas, in terms of production and revenues, and any sustained dip in the prices along with demand will hamper the financial health of the group. Further, the exploration activities, labor shortage, credit risk are a few of the operational risks the business is facing. 

Financial overview of Q4FY21 (Expressed in thousands of USD)

  Source: Company Filing 

• For Q4FY21, the company reported an increase in its total revenue to USD 261.29 million vs USD 153.62 million in the pcp. The increase in the revenue was contributed by higher oil and natural gas sales for the reported period of USD 315.32 million vs USD 167.26 million in the Q4FY20. The rise was slightly offset by the higher royalty expenses in the Q4FY21 of USD 54.03 million vs USD 13.64 million in the pcp.

• The total expenses for Q4FY21 decreased to USD 110.48 million vs USD 116.15 million in Q4FY20 on account of reduced foreign exchange losses during the reported period. 

• The income before income taxes for Q4FY21 increased to USD 149.3 million vs USD 36.43 million in the pcp.

• For Q4FY21, the company reported Net income and comprehensive income of USD 96.04 million vs USD 56.19 million in the previous comparable period.
  

 Valuation Methodology (Illustrative): EV to Sales based

 Analysis by Kalkine Group

 Stock recommendation 

The stock delivered a positive return of 25.55% in the past three months and 35.72% in the past six months. Recently the company declared a dividend of CAD 0.14 per common share for the first quarter of 2022, payable on March 30, 2022, higher than 12% from the pcp. The group reported higher cash flows from the operating activities of USD 534.3 million in the FY21 vs USD 290 million in the FY20, and increased cash and cash equivalent balances of USD 378.33 million in FY21, from USD 330.56 million in FY20, which portrays the strong liquidity position of the company to meet the operational expenses along with its expansionary plans. The company stated the strong production guidance for FY22 in the range of 52,000 to 54,000 boe/d with an estimated capital expenditure of USD 400 to USD 450 million for FY22.  

On the valuation front, the stock is measured on the EV to Sales based multiple and we have considered Vermilion Energy Inc., Paramount Resources Ltd, Enerplus Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the last closing market price of CAD 26.68 on March 22, 2022. Additionally, 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 March 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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