Opinions
Eric Nuttall
Parex Resources Inc.
PXT-T
COMMENT
Mar 11, 2014
Stock price when the opinion was issued
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PXT EPS was $4.32, vs estimates $4.19; revenue of $1.17B missed estimates of $1.26B. But production guidance was lowered. Parex's disappointing operational performance again in 2Q was caused by flooding at LLA-34 and lower-than-expected results at Arauca. Still, solid financial results suggest free-cash-flow momentum may extend into 2H amid a constructive oil price backdrop. Suppressed 1H volume indicates full-year production may be at or below the low end of guidance of 54,000-60,000 barrels a day, amid an operational halt at Arauca. Climbing operating cash should cover capital outlays, which will likely be at the lower end of $390-$430 million range this year. A 32% surge in 2Q free cash underscores Parex's cash-generative profile and should accommodate its annual dividend payout of $115 million (8% yield), suggesting scope for share buybacks in 3Q. But the CFO resignation adds uncertainty, and investors will probably start questioning the dividend. The stock is VERY cheap, but it was cheap three months ago as well. Operational performance needs to improve. We think, while it is generally OK due to the revised valuation and balance sheet, buyers can wait for this to shake out some more.
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The company still is in a net cash position. We do not think a dividend cut is imminent, but we are sure management is discussing the possibility, unless they feel operational setbacks are just temporary. We would still be comfortable holding it at current levels due to its very cheap valuation and balance sheet.
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Tricky. In penalty box based on disastrous year. Dividend needs $80 to be truly sustainable. Based on poor share performance, CEO's job may be on the line. Risk in Colombia, sentiment remains challenged. He owns a very small position, gathering option premiums. Better names out there for new $$.
PXT is targeting average production of 45,000 boe/day in 2025. Capital expenditures will be $300M. Cash flow $445M and free cash flow $145M after dividends. This is essentially down a fraction from Q4 production results. The balance sheet is still strong and cash flow good. The dividend can still be paid IF the company wants to. It has renewed its share buyback. Essentially, analysts comments are reflecting 'lacklustre growth' and this forecast is not likely to be a catalyst for the stock, even though it remains very cheap on all metrics.
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Essentially a pure play in Colombia where they’ve had pretty good drilling success. 18,000 barrels a day and lots of land to drill. The knock against the company has been the very short reserve life, meaning the reservoirs in Colombia are very different from those in Canada. This leads to high productivity in a very short reserve life. The burden on a company to continually add more and more reserves through the drill bit is much higher than it would be in Canada. Since they been so successful last year, they’ve increased their reserve life to 7 from around 4.5, which is a positive. However, it is now trading at a premium to its booked reserve value so you are starting to attribute some value to its exploration, which is fine, but when you contrast this opportunity to some things in Canada, the overall feel of economics is superior in Canada to Colombia. Prefers others.