CA - Parex Resources: Invest While It's Still Low

2023-04-17 10:33:12 ET

Summary

• Parex Resources has a market capitalization of more than $2 billion and no debt, with continued massive FCF generation.
• The company can cover its respectable dividend and capital expenditures at $60/barrel, capital expenditures that enable continued growth.
• The company has managed to reduce its outstanding share count substantially, and we'd like to see it continue doing that.

Parex Resources (PARXF) is a small cap oil company, with a $2.25 billion USD market capitalization. The company has an impressive portfolio of assets and it's been focused especially on expansion in Colombia. As we'll see throughout this article, the company's impressive and growing portfolio of assets will enable increased shareholder returns.

Parex Resources Overview

Parex Resources is the largest independent O&G company in Colombia, with a number of exploratory opportunities.

( Source: Parex Resources Investor Presentation )

Parex Resources has a debt-free balance sheet which adds significant strength to the company. It enables the company to opportunistically make acquisitions and it enables to handle a downturn with substantial additional strength. The company's target return is 100% of FFF to shareholders, that's something you can only get from a company that doesn't have debt.

The company has just under 55 thousand barrels/day in average production and 5.5 million net acres of land. The company has just under 110 million shares outstanding, with a 6% dividend yield. We expect the company to be able to continue reducing its outstanding shares, highlighting its overall strength.

Parex Resources Track Record

The company has a strong track record of delivering shareholder returns, even through a volatile environment.

The net metrics, more so than production and reserves, and the per-share numbers. The company has managed to more than double production per share over the last 5-years and overall production has grown roughly 60%. The company similarly managed to more than double reserves per share as reserves increased only 60% in raw terms.

The company saw production drop from 2019 to 2020 as a result of the impact of prices. It managed to stabilize that going into 2021 and increased that into 2022. It'll be able to increase production going forward.

The company is focused on continually lowering its share count while returning capital. In 2022 the company returned $384 million CAD through primarily share repurchases, and its target is $400 million in 2023F. That means the company's target is a 13% yield. The company is aiming for a total of $1.7 billion returns and plans to continue increasing it.

The company has managed to aggressively reduce the share count. From 2017 to 2022 it managed to reduce its share count from 164 million shares to 110 million shares, a massive 33% reduction in share count.

Parex Resources 2023 Growth Guidance

The company's 2023 guidance will enable increased shareholder returns and cash flow.

The company is targeting 60 thousand barrels/day in production, 15% growth vs. 2022. That's spread across the company's impressive portfolio of assets, primarily with the company's operated assets. The company expects $450 million in capital expenditures, down 18% YoY, which is incredibly impressive given its target for production growth.

The company's fund flows target is $750 million at $80 Brent, which leaves substantial cash flow after capital expenditures. The company's 65 wells, centered across major growth basins, will support future shareholder returns. The company has originally quadrupled its acreage while working to improve operations and increase water flood.

Parex Resources Future Shareholder Returns

Taking the company's 2023 guidance, we expect direct shareholder returns to increase.

The company has the ability to drive substantial shareholder returns going forward. LLA-34 is declining in production, but it'll be made up by other assets, especially in the Northern Llanos where the company is spending a massive 30% of its capital spending. The company is spending $10s of millions on exploration on top of its core capital, which will help returns.

The company has identified 15 high-impact opportunities. From 2023-2025 the company expects $1.2 billion in cumulative FFF enough to drive almost 50% in total shareholder returns. 2023E is expected to be the weakest year for the company, but it's expecting to improve its business substantially in the 2024-2025 time period.

Thesis Risk

The largest risk to our thesis is crude oil prices. The company manages to cover capital spending at $60/barrel and generate strong FCF at $80/barrel. Above that, FCF increases substantially. However, prices have dropped below the $60/barrel level and stayed there in the past. That could substantially hurt the ability to drive shareholder returns.

Conclusion

Parex Resources has an impressive portfolio of assets. The company is the largest independent O&G company in Colombia and it's focused on continued expansion there, where prior conflict has kept things closed off. That's something that puts the company is in an advantaged position. It's quadrupled its acreage in the last several years.

The most important thing for investors to pay attention to is whether the company can achieve its production growth targets for 2023. Additionally, it's whether the company can maintain its FCF and share repurchases. However, if the company spends that FCF, as long as it's there, with no debt, we expect strong shareholder returns.

Overall, that makes the company an impressive investment.

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