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On today’s Breakouts report, there are 30 stocks on the positive breakouts list (stocks with positive price momentum), and 27 securities are on the negative breakouts list (stocks with negative price momentum). Once again, energy stocks dominate the positive breakouts list with 27 of the 30 names from the energy sector.

Discussed today is an energy stock on the positive breakouts list - Parex Resources Inc. (PXT-T). Year-to-date, the share price has rallied 39 per cent, closing at a record high on June 8. Of the 27 energy stocks on the positive breakouts list, Parex has the highest forecast return. The stock has a unanimous buy recommendation from 11 analysts with a 41 per cent price return forecast by the Street.

In the near-term, the share price may be due for a pause. The relative strength index, RSI, is at 71. Generally, an RSI reading of 70 or higher reflects an overbought condition. The share price is currently trading near a major ceiling of resistance at $30.

A brief outline on Parex is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based Parex Resources is an oil-weighted company with operations focused in South America. More specifically, it holds interests in exploration and production blocks in Colombia. The company has a significant land position with approximately 5.8-million net acres.

Important to watch is Colombia’s presidential election results. On June 19, there will be a second round runoff in the Colombian presidential election given that no candidate received over 50 per cent the votes. Gustavo Petro received 40 per cent of the votes in the first round. At Parex’s Annual General and Special Meeting held on May 12, president and chief executive officer Imad Mohsen commented on the election: “Mr. Petro, who is left leaning and indicated that he will stop new exploration contracts is one of the potential leading parties to win the election. What has changed for Parex? This is not our first election in Colombia. We’ve got three or four of them. There are things we can control. So we did take a preemptive move by securing new contracts or the ones that will not be awarded…We think we are good for Colombia where we operate, whether it’s in the projects we do, the employment, the cash and taxes we paid to the government and the effect we create in terms of social projects… And we think we will be able to thrive regardless of the election outcome.”

Investment thesis

· Attractive production growth profile. Management forecasts production growth of 17 per cent in 2022. In the first-quarter, production averaged 51,688 boe/d (barrels of oil equivalent per day). Management expects to exit this year with production of over 60,000 boe/d, positioning the company for a strong 2023.

· Strong cash flow generation.

· Attractive dividend yield, currently at 3.3 per cent with a potential special dividend paid at year-end, if appropriate.

· Healthy balance sheet. At the end of the first-quarter, Parex had no debt and working capital of US $287-million.

· Active on its share repurchase program.

· 100 per cent unhedged oil producer that benefits from a rising oil price environment.

· Potential key risks to consider: 1) political risk; 2) volatility in commodity prices; and 3) inflationary pressures (management has secured long-term fixed rate contracts for its rigs and secured long-lead items, which insulates some rising costs).

Quarterly earnings and outlook

After the market closed on May 11, the company released first-quarter financial results that were relatively in-line with the Street’s expectations. During the quarter, production averaged 51,688 boe/d with 96 per cent weighted to crude oil and 4 per cent to natural gas. This represented a 4 per cent sequential increase and 10 per cent year-over-year increase. Cash flow per share was $1.73, relatively in-line with the consensus estimate of $1.74. The company has six drilling rigs with a seventh rig slated for the second-quarter. For the second-quarter, production is anticipated to be between 52,000 boe/d and 53,000 boe/d.

Management raised it outlook for 2022. Management is guiding to average production of between 54,000 and 56,000 boe/d this year, up from its previous guidance of between 52,000 and 54,000 boe/d. Capital expenditures (Capex) is targeted to be between US $525-million and US $575-million, up from its prior guidance of between US $400-milion and US $450-million. Management noted in earnings release that less than 4 per cent of its updated capex guidance was attributed to rising costs.

Returning capital to shareholders

In May, management announced a 79 per cent dividend increase, lifting its quarterly dividend to 25 cents per share, or $1 per share yearly, equating to a current annualized yield of 3.3 per cent.

During the first quarter, the company repurchased 4.4 million shares through its share buyback program. Over the past three years, the company has repurchased the full 10 per cent of its NCIB, which management expects to continue in 2022.

Management is committed to returning capital to its shareholders, on the first-quarter earnings call, chief financial officer Ken Pinsky remarked: “Our focus is building our track record of returning capital to shareholders and improving the long-term strength of our business. For the 2022 share buyback, we plan to repurchase the full 10 per cent of our normal course issuer bid, or NCIB, which is expected to reduce our fully diluted shares to around 110 million at the end of the year, which compares to approximately 165 million fully diluted shares in 2017. This represents an over 30 per cent reduction of our total shares outstanding over the past five years, while still growing our annual production from 35,000 barrels a day in 2017 to 55,000 barrels a day target for 2022. On top of the share buybacks, we are now ratcheting up the quarterly dividend as we look to fulfill our long-term capital allocation framework, which is to return at least one-third of our total funds flow from operations to shareholders, which represents approximately 100 per cent of free funds flow. We define free funds flow as funds flow from operations less our capital expenditures. Yesterday, we announced a substantial nearly 80 per cent increase to our record dividend to 25 cents per share per quarter. We believe this makes us competitive among dividend-paying companies and extremely competitive when you look at both the NCIB plus the dividend.”

The company has announced two dividend increases in 2022. The CFO stated on the earnings call that no additional dividend hikes are anticipated in 2022; however, a special dividend was possible, “To manage working capital, we would look to special dividends at the end of the year, if that’s what we need to do.”

Analysts’ recommendations

This small-cap stock with a market capitalization of $3.5-billion is covered by 11 analysts, and all 11 analysts have buy recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: Balanz Capital Valores, BMO Capital Markets, Cormark Securities, Eight Capital, Haywood Securities, Paradigm Capital, Peters & Co., RBC Capital Markets, Research Capital, Scotiabank, and Stifel Canada.

Revised recommendations

Month-to-date, two analysts have revised their target prices – both higher.

· Paradigm’s Adam Gill raised his target price to $40.25 from $39.50.

· Scotiabank’s Kevin Fisk increased his target price by $1 to $38.

Financial forecasts

The following financial figures are expressed in U.S. dollars.

According to Bloomberg, the Street is forecasting cash flow per share of $8.29, up from $4.60 reported in 2022, rising to $8.68 in 2023.

Valuation

The stock is commonly valued on an enterprise value-to-debt adjusted cash flow basis.

The average one-year target price is $42.25, suggesting the share price has 41 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $33.49 (from Balanz Capital’s Oriana Covault), $35, $38, $40, $40.25, $42, $44, two at $45, $48 and $55 (from Eight Capital’s Phil Skolnick).

Insider transaction activity

On May 30 and June 1, chief operating officer Eric Furlan exercised his options, receiving a total of 22,500 shares at an undisclosed price, and sold 22,500 shares at an average price per share of approximately $28.27 with 162,879 shares remaining in this particular account.

Chart watch

Year-to-date, the share price has rallied 39 per cent with the stock price closing at a record high on June 8. Despite this remarkable gain, the stock’s performance is trailing the 47 per cent price return for the S&P/TSX Energy Index.

The share price is currently trading near a major ceiling of resistance at $30. In March, the share price came close to the $30 level but was unable to extend above it (close at $29.67 on March 7). If the share price manages to break and hold materially above $30, the next major resistance level is around $35. Looking at the downside, there is technical support around $25, close to its 200-day moving average at $24.38.

In the near-term, the share price may be due for a pause. The relative strength index, RSI, is at 71. Generally, an RSI reading of 70 or higher reflects an overbought condition.

ESG Risk Rating

According to risk provider Sustainalytics, the stock has an ESG risk score of 29.5 as of Nov. 26, 2021. A risk score between 20 and 30 reflects a ‘medium risk’ rating.

Positive BreakoutsJune 8 Close
ARX-TARC Resources Ltd22.14
BTE-TBaytex Energy Corp8.75
BIR-TBirchcliff Energy Ltd12.32
BNE-TBonterra Energy Corp13.01
BLX-TBoralex Inc43.69
CEU-TCES Energy Solutions Corp. 3.01
CPG-TCrescent Point Energy Corp13.46
ERF-TEnerplus Corp22.63
GTE-TGran Tierra Energy Inc2.62
HWX-THeadwater Exploration Inc. 7.93
IMO-TImperial Oil Ltd72.54
JOY-TJourney Energy Inc7.71
KEL-TKelt Exploration Ltd8.04
LUC-TLucara Diamond Corp0.70
MKP-TMCAN Mortgage Corp18.24
NVA-TNuVista Energy Ltd13.94
OBE-TObsidian Energy Ltd. 14.90
POU-TParamount Resources Ltd39.97
PXT-TParex Resources Inc30.01
PKI-TParkland Fuel Corp39.36
PSK-TPrairieSky Royalty Ltd19.98
PD-TPrecision Drilling Corp106.93
SU-TSuncor Energy Inc53.33
SGY-TSurge Energy Inc13.37
TVE-TTamarack Valley Energy Ltd. 6.36
TGL-TTransGlobe Energy Corp6.61
TCW-TTrican Well Service Ltd4.78
VET-TVermilion Energy Inc31.41
WCP-TWhitecap Resources Inc12.54
YGR-TYangarra Resources Ltd3.81
Negative Breakouts
APS-TAptose Biosciences Inc1.20
AR-TArgonaut Gold Inc1.01
BHC-TBausch Health Companies Inc. 11.28
BU-TBurcon NutraScience Corp0.75
CWB-TCanadian Western Bank29.75
CSH-UN-TChartwell Retirement Residences11.73
CL-CNSXCresco Labs Inc. 4.28
D-UN-TDream Office REIT21.90
DRM-TDREAM Unlimited Corp40.00
ENGH-TEnghouse Systems Ltd27.14
ERE-UN-TEuropean Residential REIT4.36
GCM-TGran Colombia Gold Corp. 4.11
HUT-THut 8 Mining Corp.2.72
KRR-TKarora Resources Inc. 4.31
DR-TMedical Facilities Corp8.09
MI-UN-TMinto Apartment REIT17.24
NTR-TNutrien Ltd. 110.89
RCI-B-TRogers Communications Inc62.79
REAX-XThe Real Brokerage Inc. 1.72
TCN-TTricon Residential Inc14.47
TUD-XTudor Gold Corp. 1.48

Sources: Bloomberg and The Globe and Mail

Please note that this is not an investment recommendation.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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