Resilient and leveraged to the upside
Despite macro headwinds, Parex Resources Inc (TO:PXT)’s operational strength is evident from material production growth in 2015 and a 114% increase in 2P reserves. Production guidance of 26.5mb/d (representing 18% growth y-o-y) has room for upside if exploration is successful, while the $145-155m should be fully funded at around $50-60/bbl oil prices. Our remodelled valuation indicates a RENAV of C$9.5/share, indicating upside to the shares even without exploitation of 3P reserves, which we see as likely in time and would take valuation to $10.2/share. Importantly, we see this value increasing in the coming years as production increases, supported by recovering oil prices.
2015 production has started well
Q115 saw exploration success, with the Tilo-1 commencing long-term testing at the end of March. This should add to the Q115 production of 26.7kbd and bodes well for the company’s ability to hit guidance, even with a reduced investment programme. Further exploration is ongoing, with Rumba-1 currently drilling as one of the 11 wells planned in 2015, many of which are in blocks with production and well-understood geology.
Remaining cash flow neutral
We have adjusted our modelling to reflect the recent macro environment. The company took proactive steps to adapt to lower prices with a reduced investment programme to keep within cash flow. We now reflect higher 2P reserves and more robustly model exploration value. We assume Brent $58.5/bbl in 2015, which should provide enough cash flow to largely cover the $145-155m capex bill. Should prices sustain at these levels or higher, Parex has a significant drilling inventory of 62 well locations to develop 2P reserves and can react to exploration success. The company can therefore be flexible in adjusting as the environment develops.
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