Pat McKeough recently responded to a Member of his Inner Circle who wanted his advice on a Canadian energy firm with its properties in Colombia.
Parex Resourcesexplores, develops and produces oil across a base of more than 1.6 billion acres. Production and cash flow have risen in recent years, with cash flow alone jumping 82% in the most recent quarter. With a solid balance sheet, the company is looking for ways to enhance shareholder value, reports Pat. That may include the sale of some mature wells, or even of the entire company. He adds that while doing business in Colombia adds risk, this appears to be reduced by the election of a pro-industry President earlier this year.
Q: Pat: What’s your recommendation on Parex Resources, ticker PXT? Thanks.
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A: PAREX RESOURCES (symbol PXT on Toronto; www.parexresources.com) is a Calgary based company engaged in crude oil exploration, development, and production in Colombia.
Parex Resources holds a land base of 1.6 million acres over 21 blocks in Colombia’s Llanos and Magdalena Basins. The South American country’s oil fields have similar geological features to the Western Canadian Sedimentary Basin.
Over the past five years, the company’s cash flow has moved up and down with oil prices as well as its output. Cash flow per share fell 2.8%, from $2.51 in 2013 to $2.44 in 2014. On lower oil prices, it then fell 63.1%, to $0.90 in 2015. Cash flow per share edged up 5.6%, to $0.95 in 2016 before climbing 90.5%, to $1.81 in 2017 as oil prices rebounded. (All figures in U.S. dollars.)
Average daily oil production increased 41.5% in 2014 to 22,526 barrels of oil per day, from 15,854 in 2013. Output again rose in 2015—this time by 21% to 27,434. In 2016, it climbed 8.4%, to 29,715 and another 19.5%, to 35,541 in 2017. Production is expected to increase another 24% to reach over 44,000 barrels for 2018.
Parex’s exploration and development spending jumped 90.1%, to $212.3 million in 2017 from $111.7 million in 2016. The company plans to spend as much as $290 million in 2018 and to drill at least 55 wells, up from 38 a year ago.
Energy stocks: Company pursues self-funded growth through rising cash flow
In the three months ended June 30, 2018, overall production rose 24.3%, to an average 42,625 barrels of oil per day from 34,291 a year earlier. Cash flow jumped 82.2%, to $121.7 million, or $0.78 a share, from $66.8 million, or $0.43. The big increase came from the higher production as well as higher oil prices.
Parex aims to follow a strategy of sustainable self-funded growth from its cash flow. As oil prices rise and cash flow increases, the company invests more in exploration and development. The goal is to maintain a strong balance sheet with no debt. On June 30, 2018, it also held cash of $323.1 million, or $2.08 a share.
Operating in Colombia entails political risk. In February 2018, for the first time in the company’s nine-year history, Parex temporarily suspended operations at the Capachos field due to security concerns. However, in May 2018, Colombia chose centre-right, pro-industry candidate Ivan Duque as its new President in a peaceful national election.
On July 17, 2018, the company initiated a strategic review process to explore and evaluate alternatives with a view to enhancing shareholder value. The review focuses on the potential sale of Parex’s mature Southern Casanare wells, while retaining its exploration assets in that area. It also considers the possibility of returning the net proceeds to shareholders. In addition, the review will examine the possibility of the company’s outright sale.
Inner Circle recommendation: Parex Resources is okay to hold for aggressive investors.
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