Parex Resources (PXT.TO) is a Canadian oil producer with a focus on its operations in Colombia. Thanks to an ultra-low production cost and a very robust balancer sheet, Parex’ share price is less volatile than some of its peers.


Parex1 
Source: stockcharts.com

Excellent financial results in the first quarter

Parex was able to increase its production rate to almost 32,600 barrels of oil-equivalent per day in the first quarter of 2017, of which 99% consisted of crude oil. The company is one of the culprits which are boosting the oil production rate, keeping the oil price relatively low, as Parex increased its production rate by approximately 5% on a Q-o-Q basis, and almost 15% compared to the first quarter of last year.

The total revenue was approximately US$150M, resulting in net revenue of $137M after taking care of the royalty payments which are due on the oil production results. What’s really remarkable is the company’s low operating expenses, which came in at $92.3M. Considering Parex produced a total of 2.9 million barrels in the first quarter, this represents a total production expense of just over $30/barrel. But as you can clearly see, the ‘pure’ production cost is just $15.4M, or just over US$5 per barrel.

That’s right, Parex Resources is producing crude oil at less than $6/barrel, and it’s mainly the transportation expenses ($12/barrel), the depreciation charges ($8.5/barrel) and the G&A expenses (almost $3/barrel) which are the main operating expense.

Parex2 
Source: financial statements

That being said, the bottom line still shows a net income of US$40.1M, or 26 cents per share. That’s approximately C$0.34 per share using the current exchange rate. A great result, and the company’s cash flow results are confirming Parex’ low-cost nature.

Excluding the changes in the company’s working capital position, the operating cash flow was approximately US$68M, which is an amazing result. The total capex in the first quarter was approximately 36M, resulting in an adjusted free cash flow of approximately US$32M.
Parex3 
Source: financial statements

Keep in mind the capex was relatively low as Parex is just getting started on its expansion drill and well program, so the average capital expenditures in the next few quarters will very likely be substantially higher as Parex has been guiding for a $200M capital program. Yes, this will reduce the free cash flow, but you should also keep in mind the production rate (and thus the operating cash flow) will increase.

We think Parex will end 2017 with an exit rate of 40,000 barrels of oil per day, so using the average oil price from the first quarter, the operating cash flow will increase by approximately 25% to $85M per quarter (excluding tax payments). This should be more than sufficient to cover additional expansion capex programs.

An exceptionally strong balance sheet and continuously increasing reserves secure its future

Besides the low production cost, the balance sheet is another reason why Parex’ share price is less volatile than some of competitors. Whilst most other producers have quite a bit of debt on their balance sheets which increases the all-in production costs of the oil (as the interest expenses would also have to be divided by the total amount of oil that has been produced), Parex is in an excellent shape.

The balance sheet obviously does contain some liabilities (tax and decommissioning liabilities), but there’s not a single dollar of debt on the balance sheet. It only gets better, as the cash position of almost US$185M acts as an incredibly strong financial buffer for Parex Resources.
Parex4
Source: company presentation

And finally, the company’s technical team has had considerable exploration success lately, and the company’s reserves continue to increase. Back in 2016, Parex produced a total of approximately 10 million barrels of oil-equivalent, but the team was able to add no less than 41 million barrels to the reserve statement. Despite the higher production rate, this boosted the reserve life to approximately 10 years, up from 8 years at the end of 2015 despite the depletion of the existing reserves during 2016.

That’s an excellent result, and we would expect Parex’ reserve life to increase to at least 10-11 years by the end of 2017. This would be an excellent achievement, as the new reserve life will be based on the higher exit rate of approximately 40,000 barrels per day.

Investment thesis

Long story short, Parex’ internal cash flow is high enough to cover the company’s capital program which will boost its production rate by thousands of barrels per day. Considering the company’s balance sheet also boasts a very strong cash position of in excess of US$180M, the current market capitalization of US$1.75B is actually pretty low as the Enterprise value is less than US$1.6B.

As long as Colombia remains a safe place to operate in, Parex will be one of the better oil companies out there.

Disclosure: the author has a long position in Parex Resources and plans to add on every dip.

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