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Inside the Market Tuesday’s TSX breakouts: A stock that’s rallied 34% with a further 37% gain expected

On today’s TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and 20 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appears on the positive breakouts list. The share price has rallied 34 per cent year-to-date with a further gain of 37 per cent anticipated. With 10 recent buy recommendations, the security highlighted below is Parex Resources Inc. (PXT-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

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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. Management views Colombia as an attractive region given its extensive oil resources, stable and supportive political environment, and positive fiscal regime. The company has an attractive production growth profile with production rising 25 per cent year-over-year in 2018; oil and gas production averaged 44,408 boe/d (barrels of oil equivalent per day) in 2018, of which 99 per cent was oil.

On the fourth quarter earnings call, the president and chief executive officer David Taylor Growth outlined management’s key objective from its solid free cash flow generation, “We have lots of places potentially [where] we could use the free cash flow. The first thing we'd like to do is if we have some exploration discoveries, which we hopefully will do with a fairly extensive program we have. We haven't budgeted any capital follow-up for those discoveries nor we included any production in our guidance for that. So one of the uses of cash would be to actually follow-up drill some appraisal wells, facilities, et cetera. The second would be to add new growth blocks. Hopefully, would be through a bid round that's coming up or a farm-in that maybe we can spend cash this year on. Thirdly, would be business development opportunities. Fourthly, would be to buy back additional stock and probably the lower rank use would be for dividends.”

Parex is expected to report its first-quarter financial results in May. The cash flow per share estimate is 76 UScents and production is forecast to come in at approximately 51,100 boe/d. In the recent Management’s Discussion and Analysis, management forecast average production during the first quarter to be at least 50,000 boe/d, rising to over 51,000 boe/d in the second quarter. Positive drilling results could be a catalyst for the stock.

Returning capital to shareholders

The company does not pay its shareholders a dividend. However, it has repurchased shares as part of its share buyback program. On the fourth-quarter earnings call held on March 7, management indicated that they had repurchased 5.5-million shares in its current share buyback program that expires on Dec. 20, 2019. In Dec., the company announced it can purchase up to 15,041,319 shares under its current buyback program.

On the fourth-quarter earnings call, the chief executive officer Ken Pinsky remarked on management’s priorities for the use of free cash flow, “When we look at capital allocation, we want to still grow the business through 50,000 barrels a day… potentially through to 70,000 over time, but on a measured pace, …and we also like buying back our stock because that adds instantly to cash flow per share and instantly to reserves per share. As shareholders, we're very keen on those two metrics increasing. So I think right now, our choice is to take excess cash flow or free cash flow and use it to buy back our stock and use it to then see [what] we can do with the business in the future but we wouldn't say no to a dividend forever. It's just that right now, I think we have better usage for that cash.”

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Analysts’ recommendations

This stock with a market capitalization of $3.3-billion is actively covered by 10 analysts. Since releasing its fourth-quarter financial results, 10 analysts have issued buy recommendations.

The firms providing recent research coverage on the company are as follows in alphabetical order: Canaccord Genuity, CIBC Capital Markets, Cormark Securities, Eight Capital, GMP, Haywood Securities, Paradigm Capital, Peters & Co. Ltd., RBC Capital Markets, and Scotiabank.

Revised recommendations

In April, Ian Macqueen, an analyst at Eight Capital, increased his target price to $34 from $32.25.

In March, Gavin Wylie, an analyst at Scotiabank, lifted his target price to $29 from $27.50. GMP Securities’ Cody Kwong raised his target price by $1.50 to $30.

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Financial forecasts

The Street is forecasting production of roughly 53,000 boe/d in 2019, rising to approximately 59,000 boe/d the following year. The consensus cash flow per share estimates are US$3.55 in 2019 and forecast to increase to U.S. $4.12 in 2020.

For 2019, management is guiding to average production of between 52,000 and 54,000 boe/d in 2019, up 20 per cent year-over-year, and cash flow of between US$450-million and US$500-million at $60/barrel Brent prices. Capital expenditures (Capex) is targeted at between US$200-million and US$230-million and free cash flow is anticipated to exceed U.S.$250-million.

Valuation

The stock is commonly valued on a price-to-net asset value basis and also on an enterprise value-to-debt adjusted cash flow basis.

The average one-year target price is $30.10 based on the 10 recent recommendations, suggesting the stock price has 37 per cent upside potential over the next 12 months.

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Individual target prices issued after the company reported its fourth-quarter results are as follows in numerical order: $28 (the low on the Street is from Haywood Securities’ Darrell Bishop), two at $29, five at $30, $31, and $34 (the high on the Street is from Eight Capital’s Ian Macqueen).

Insider transaction activity

Year-to-date, two insiders have traded shares in the public market.

In March, Carmen Sylvain, who sits on the board of directors, completed two small trades. On March 25, she purchased 240 shares at a price per share of $20.87. On March 12, Ms. Sylvain acquired 250 shares at a cost per share of $21.21. These trades lifted her account’s holdings to 1,384 shares.

On Jan. 4, Leo DiStefano, president and country manager of Parex Resources Colombia, purchased 10,000 shares at a cost per share of $16.60, increasing his portfolio’s position to 160,169 shares.

Chart watch

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Year-to-date, the share price is up over 34 per cent, making it one of the best performing stocks in the S&P/TSX composite energy sector index so far this year (ranked number four out of 41 members in the sector).

In terms of key resistance and support levels, the stock price has major resistance around $25, close it is record closing high of $25.31 reached on July 4 2018). Looking at the downside, there is technical support around $20, near its 50-day moving average (at $20.67) and its 200-day moving average (at $19.85).

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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Positive BreakoutsApril 15 close
ACI-TAltaGas Canada Inc. $19.44
ATH-TAthabasca Oil Corp $1.08
BCE-TBCE Inc $60.68
BPF-UN-TBoston Pizza Royalties Income Fund $17.67
BAM-A-TBrookfield Asset Management Inc $64.21
CAE-TCAE Inc $30.49
CNR-TCanadian National Railway Co $122.74
GIB-A-TCGI Group Inc $94.54
CIGI-TColliers International Group Inc $92.69
FN-TFirst National Financial Corp $31.84
FSV-TFirstService Corp $119.57
FTS-TFortis Inc $50.27
GIL-TGildan Activewear Inc $49.50
HLF-THigh Liner Foods Inc $9.00
H-THydro One Ltd. $21.35
IGM-TIGM Financial Inc $36.00
IMO-TImperial Oil Ltd $38.90
IAG-TiA Financial Corporation Inc. $52.19
IPL-TInter Pipeline Ltd $22.33
IPCO-TInternational Petroleum Corp. of Sweden $7.27
LUN-TLundin Mining Corp $7.38
MEQ-TMainstreet Equity Corp $49.95
MFC-TManulife Financial Corp $24.30
LABS-TMediPharm Labs Corp. $5.66
NA-TNational Bank of Canada $62.82
NVA-TNuVista Energy Ltd $5.03
PXT-TParex Resources Inc $21.98
PWF-TPower Financial Corp $32.55
QBR-B-TQuebecor Inc $33.25
QSR-TRestaurant Brands International Inc $88.92
RME-TRocky Mountain Dealerships Inc $9.38
RY-TRoyal Bank of Canada $105.05
SHOP-TShopify Inc $291.67
SLF-TSun Life Financial Inc $53.73
T-TTELUS Corp $50.31
TGO-TTeraGo Inc. $12.03
TFII-TTFI International Inc. $42.75
TRI-TThomson Reuters Corp $80.08
X-TTMX Group Ltd $87.85
TRP-TTransCanada Corp $62.10
TC-TTucows Inc. $119.30
VMD-TViemed Healthcare Inc. $7.49
Negative Breakouts
TRST-TCannTrust Holdings Inc. $9.19
CMG-TComputer Modelling Group Ltd $5.48
CSW-A-TCorby Spirit and Wine Ltd $17.60
CRON-TCronos Group Inc. $21.18
DGC-TDetour Gold Corp $11.88
GCM-TGran Colombia Gold Corp. $3.34
IMV-TIMV Inc. $4.29
LGO-TLargo Resources Ltd. $1.89
NDM-TNorthern Dynasty Minerals Ltd. $0.73
OGC-TOceanaGold Corp $3.95
POM-TPolyMet Mining Corp. $0.65
RCH-TRichelieu Hardware Ltd $21.07
SIL-TSilverCrest Metals Inc. $4.25
SOT-UN-TSlate Office REIT $5.97
ZZZ-TSleep Country Canada $18.92
STLC-TStelco Holdings Inc. $15.47
SOX-TStuart Olson Inc $4.07
TXG-TTorex Gold Resources Inc $13.37
U-TUranium Participation Corp. $4.34
YRI-TYamana Gold Inc $3.30

Source: Bloomberg

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