Part of the fun of writing these articles is finding companies like Parex Resources Inc. (OTCPK:PARXF) to introduce to you. Parex shares rebounded around 25% from December 2021 lows, but their Q-4/2021 report did not seem to inspire investors. The stock has largely stalled over the past two months and is currently selling at a 10% discount from recent highs.
The company is the largest international oil operator in Colombia with a lease of over 5mm of an acre, with years of development potential ahead of it. They recently increased their dividend and have a plan to reward shareholders with additional increases and share buybacks. Parex can do this in part thanks to its debt-free “fortress balance sheet”. They are ramping up production and have a fully unhedged cash flow funded capital program in this favorable environment.
What’s not to like?
Analysts are bullish on the company, with 9 out of 10 covering it, calling it a buy. Price targets range from C$27.19 to C$43.19 and imply a 20-80% upside for the stock. We will make our own estimate later in this article.
The thesis for Parex
With its focus on Colombia, there is a need to review the policy environment with respect to oil and gas development. Latin American countries are notorious for political upheaval and for targeting foreign oil operators. This does not appear to be the case with Colombia which, given its 2040 plan to add 3 boe (barrels of oil equivalent) by 2040, seems remarkably clear-headed when it comes to resource development. One could only wish for this clarity of vision in the oil-producing countries a few thousand kilometers to the north.
A Reuters article included a bullish quote from Armando Zamora, president of the National Hydrocarbons Agency (ANH) regarding the development:
Adding these reserves will ensure Colombia’s energy self-sufficiency, said Zamora, who spoke on the final day of a virtual forum organized by the Colombian Petroleum Association (ACP).
“We expect to heavily replace current reserves by plus or minus 150%, which would add 3 billion barrels over the next 20 years,” Zamora said.
This does not mean that the risks of exploitation in Colombia are not present. They are. Colombia presents risks of political insurrection, as we have mentioned in previous articles. The advantage for Colombian operators is that the government, at least, is not fighting them tooth and nail.
Colombia certainly realizes that national security begins with energy security.
Let’s move on to Parex then. In this beneficent context, we find a company with a huge piece of land on which to build their base. As noted in previous articles, the Magdalena, Castilla and Vasconia rough grades broadly fall into the API 18-30 severity category, which we also noted is in high demand in El Norte. The company was the successful bidder for the 2021 rental cycle in Colombia, which saw the area of Parex quadruple.
Their long experience of working in these basins gives them a head start in the evaluation of these lands for development. From their comments in the slide below, they have thick, tight ranges that lend themselves to long horizontal and multilateral wells. Radial drilling – in-reservoir blast tunnels and stimulation techniques – suggests water-flood or perhaps miscible-flood type operations in an EOR operation for heavy crude.
They have increased their production by approximately 12% in 2021 to 51,000 BOEPD and plan to aggressively pursue development of new acreage acquired in the 2021 lease cycle. further leveraged its 2021 alliance with Ecopetrol SA (EC), in the northern Llanos basin, where it plans to exploit medium to light gravity crude oil.
Parex CEO Imad Mohsen commented on the Q-4 call regarding acreage collection and the Ecopetrol alliance:
Over the course of the year, I am happy to say that we have significantly improved the depth and quality of our land inventory. We acquired 18 new blocks in 2021, Colombia Bid Round, and expanded our strategic partnership with Ecopetrol in the Northern Llanos, which combined represent an almost 4x increase in our total acreage in Colombia.
A final point in what I consider to be a fairly compelling case for Parex is its ability and specific plans to return capital to shareholders. With the increase in cash flow seen over the past year with prices above $60 for Brent, the company has aggressively repurchased shares and reduced the number of shares by 32% since 2017. As shown in the slide below, production grew at a CAGR of 17.6. % and 1P resources increased by 20.8% CAGR, while at the same time, the number of shares was reduced by 32%. This is wealth creation for investors!
Imad Mohsen, CEO of Parex, comments on the capital allocation plans for 2022:
Building on our track record of returning meaningful capital to shareholders, we want to make it clear that we aim to return at least one-third of the free flow of transactions to shareholders through share buybacks and dividends. With this philosophy at current strip prices, Parex expects to return approximately 40% of the 2022 annual FFO to shareholders. The remaining free flow from operations will be invested to grow the business and replenish development inventory to support future capital return activities.
Parex generated a record cash flow of $168 million in the fourth quarter, up 200% quarter over quarter, or $568 million for the year. Quarterly net profit was $96 million. Over the course of 2021, it generated over $300 million in free fund flow and continued to add to its capital return record, as previously reported. For 2022, the company forecasts FFO of $760 million, driven by both Brent prices up 20% from 2021 averages and increased production.
Parex has a strong balance sheet at year end with no debt and working capital of $326 million. They also have an undrawn $200 million credit facility.
Their capex budget of $277 million for 2021 has been increased to $425 million for 2022, reflecting their optimism about ROI metrics with Brent prices above $100 a barrel.
The main risks for Parex lie in the current political changes in Latin America. For now, the government’s plan for 2040 provides assurance that the company will be able to pursue its operational objectives.
The company has done a good job of anticipating and fixing logistical requirements, so it can avoid some of the supply chain delays that affect some operators. CEO Mohsen comments in this regard:
We have secured rates under long-term contracts to have equipment in place to meet our capital investment program for years to come. It’s – it gives you a warm feeling to see when the last rigs in Colombia will be under contract.
We increased critical organizational capacity by hiring significant staff in Calgary and Bogota. I remember an increase of about 30% in Calgary in 2021 to help us scale up our programs.
And finally, we have placed orders for long-lead items for the foreseeable future. This includes casings, wellheads, steel, compressors, turbines, etc. In order to provide installation from a short supply chain – and relative disruption and head against cost inflation in the future.
We have all seen the impact that the supply chain has on the industrial scene. It has not spared oil operators, and Parex’s proactive stance could be a catalyst for their anticipated growth.
Your takeaway meals
The company is trading at
Update:I think based on a 10mm stock cut in 2022, and their C$760mm OCF FFO forecast and pristine balance sheet, they deserve a multiple in the 5X range. This would equate to a stock price of CA$35, or about US$28. The dynamics of the sector could take it even higher, but let’s not get carried away.
I love that Colombia provides such a secure foundation for oil development as you will find in the world today. Having an objective that includes energy independence gives operators some certainty about the possibility of investing in their country.
I rate the company as a buy at current prices and recently took a small position for growth and eventual earnings.