Shares of Parex Resources Inc. (PXT-T) popped on Thursday after the oil and natural gas producer’s latest financial results underscored analysts’ view that the Calgary-based company would be a “cash flow machine” in the months ahead
The oil and gas producer’s stock rose by as much as 8 per cent to a 52-week high of $23.35 in early trading on the Toronto Stock Exchange on Thursday and is up about 150 per cent from $9.22 about a year ago, its lowest level since early 2016. The stock was trading at around $22.75 midday Thursday.
After markets closed on Wednesday, the company reported net income of US$56.2-million or 42 US cents per share for the quarter ended Dec. 31, down from net income of US$87.2-million or 61 US cents per share a year earlier. The drop was due to the collapse in oil prices amid the economic downturn during the pandemic.
Revenue was US$33.8-million down from US$45.9-million a year ago. Funds flow from operations (FFO), a key measure in the oil and gas industry, was US$81.6-million, a 43-per-cent decrease compared to US$143.3-million a year ago. FFO per share was 61 US cents, which was in line with expectations and compared to US$1 per share a year ago.
The company, which explores and develops oil and natural gas mostly in Colombia, said it’s entering 2021 “in a strong operational and financial position” and expects to repurchase the maximum number of shares in its buyback program this year, or about 12.9 million or 10 per cent, as well as fund its planned capital expenditures. Parex also said it doesn’t have any commodity price hedging positions active for 2021, which is considered positive as oil prices begin to recover. For instance, Brent crude futures are currently trading around US$65 a barrel, about double versus a year ago.
BMO Nesbitt Burns analyst Mike Murphy increased his Parex target to $30 from $28 after the earnings report. He has an “outperform” rating (similar to buy) on Parex and the company is one of his top picks in the mid-cap exploration and production space.
“With Parex being completely unhedged, we are forecasting substantial free cash flow of $335-million ... this year, which should be well in excess of the company’s 10-per-cent share buyback program,” Mr. Murphy wrote, adding that Parex “has consistently delivered returns unmatched by peers and has built up a war chest of cash, giving the company considerable optionality in the medium term.”
Mackie Research Capital Corp. analyst Bill Newman called the company a “self-funding cash flow machine” in a note, while reiterating his “buy” recommendation and $27 target.
“Despite a difficult year, the company continued to generate free cash flow, while maintaining its balance sheet strength, with positive working capital of US$320-million, and no debt at year-end,” he wrote. “In 2021 we expect PXT will generate significant free cash flow which should allow the company to grow production and reserves and to continue its share buy-back program.”
National Bank Financial analyst Travis Wood, who has an “outperform” rating and $35 target price on the stock, noted that guidance for 2021 was left unchanged with a budget of US$165-million to US$185-million to drive production of 47-to-49 million barrels of oil equivalent per day, or about 3-per-cent year-over-year growth.
“Given the recent rise in oil prices, a pristine balance sheet and ample FCF [free cash flow], we would not rule out a modest capital increase at some point (adding high return barrels) or perhaps the introduction of a very modest dividend (this conversation continues to arise now and again),” he wrote in a note. “However, for now, given the attractive valuation and management’s disciplined capital strategy, the buyback remains the priority.”
When asked about the dividend in an analyst call on Thursday, company chief financial officer Ken Pinsky said the company “would consider it at some point. But right now, I think we’re happy with returning capital to the share buyback,” according to a transcript.
Haywood Securities analyst Chris Jones increased his target to $31 from $27.50 after the results, citing in part higher oil prices.
In a note, Mr. Jones described Parex as “one of the better-positioned producers in the sector with no bank debt, $320-million in positive working capital and set to deliver $335-million in strip FCF.”
He also said the company has the “best exploration portfolio in Colombia with [a] high success rate.”
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