Parex Resources (PXT on the Toronto Stock Exchange) is one of the better oil companies out there. With a strong balance sheet and low-cost oil production (which it sells at the higher Brent price, compared to the WTI price), the company could be poised to do great things. A review.
The Q4 2016 results were pretty good
The average production rate in the final quarter of last year was approximately 31,000 barrels per day, which is a substantial increase (almost +9%) compared to the same quarter in 2015. The oil was sold at an average price of approximately $45 per boe, generating a very robust netback of almost $25 per barrel.
The relatively high price was boosted by the smaller differential between the Brent oil price and the price on the Colombian market. The differential averaged just $6.29/boe, compared to in excess of $7.5/boe in the previous three quarters of the year. A lower differential is excellent news for Parex Resources, and we would estimate the incremental revenue directly caused by the smaller differential to be approximately US$3M.
The total revenue in 2016 was approximately $400M, which is 20% lower compared to 2015. The higher production volumes were able to offset the impact of the lower oil price (the net revenue per barrel in 2016 was less than $35/boe, compared to almost $43/boe in 2015). Due to the high depletion and impairment charges, Parex Resources wasn’t profitable, and its bottom line showed a net loss of $46M or 31 cents per share. That’s in line with the previous year, despite a negative impact of $18M on the hedging contracts, the (much) lower oil price and the $23M increase in impairment charges.
Source: financial statements
Fortunately the company’s cash flow result is so much better with a total operating cash flow of $144M and a capex of approximately $112M. Even though Parex was still free cash flow positive (using an average oil price of less than $35/boe), the $112M spent on capital expenditures was sufficient to further boost the production rate. This basically means the sustaining capex (the capex required to maintain the production at a certain level without increasing it) is still substantially lower and is estimated at $50M in 2017.
The production will increase by 20% in 2017, underpinned by strong reserve growth numbers
Parex has one important thing working in favor of the company. Not only is it pretty lucky the oil price in Colombia is based on the Brent price (which is traditionally more expensive than the WTI oil price), but the production cost is exceptionally low due to the excellent quality of the oil blocks and wells. During the financial year 2016, the average (pure) production cost per barrel of oil was less than $5, which is pretty amazing.
Unfortunately Colombia also is a country where some headwinds have to be overcome, and the transportation cost per barrel of oil-equivalent was almost $12. So it’s costing Parex Resources more than twice as much to ship its oil than it costs to produce. That being said, there’s a very clear declining evolution noticeable. Whereas the production + transportation expense was approximately $28.5/boe in 2014, this dropped to $16.5/boe in 2016, which protected Parex’ bottom line.
Source: company presentation
As the oil price is now trading substantially higher than the average Brent price of $45/barrel in 2016, Parex is eyeing another year of production growth. The company expects to further boost its production rate from 29,000 barrels per day in 2016 (which was the average production rate) to 35,000 barrels per day. Using a Brent price of $55/barrel, the anticipated netback will be approximately $20/barrel, resulting in a positive operating cash flow of $700,000 per day, and roughly $250M per year. This will be sufficient to cover the $200-225M in capital expenditures, and will actually allow Parex to add more cash to its balance sheet.
So without having to borrow a single dollar, Parex should be able to increase its production rate by approximately 20% as long as the Brent oil price averages $53/barrel in 2017, and this will be a pretty impressive achievement.
Source: company presentation
At the end of 2016, Parex also announced a reserve increase of 30 million barrels of oil, to 112 million barrels. This means the company has replaced almost 400% of the oil it has produced in 2016, indicating the exploration and appraisal program in 2016 has been extremely successful, and boosted the reserve life index to 10 years (up from 8 years at the lower production rate at the end of 2015).
Source: press release
The company also published the independent review of the value of these reserves, based on a Brent price of $57 in 2017, $66 in 2019 and $74 in 2021. The after-tax PV10 of the 2P reserves (Proved and probable) is approximately US$1.57B, or almost C$15/share. The ‘possible’ reserves could add an additional C$7/share in value, and we would expect the company to continue to add oil to its reserve statement in the near and longer term future.
Parex Resources is currently trading at 1.05 times its after-tax NPV10% (based on a slightly higher oil price in the future, so the PV10 using a long-term flat oil price of $55/barrel will very likely come in lower), and as the company added roughly 30 million barrels of oil to the equation in 2016 – with more to come – Parex is trading at a very acceptable valuation. After all, should the company be able to increase its reserves with an additional 10 million barrels this year, the PV10 value will obviously increase as well.
According to our calculations, Parex Resources should be breaking even on a sustaining level at a Brent price of $36/barrel, which offers a very robust margin of safety.
Disclosure: the author owns a long position in Parex and plans to add more on weakness