South America has always been an exciting place for exploration and production (E&P) companies. Several big oil discoveries have taken place there, primarily helping Venezuela, Colombia and Brazil to rise on the list of oil-producing nations worldwide.
One of the main players in Colombia is Parex Resources Inc.(TSE:PXT), which is conducting activities on its 1.3 million gross acres in the Llanos Basin of Colombia and 219,000 gross acres onshore in Trinidad. Parex applies proven technology used in the Western Canadian Sedimentary Basin throughout basins with large oil-in-place potential, focusing on light-oil production.
Things keep improving in Colombia
The latest encouraging development positively impacts all of the E&P players operating in Colombia. The government of Colombia and left-wing Revolutionary Armed Forces of Colombia (a.k.a. FARC) rebels have agreed on land reform after more than six months of peace talks. This agreement marks an important step forward in the peace process, and hopefully on that points towards ending half a century of conflict and further strengthening the stability and safety in this country.
However, it is indisputable that the current government under President Santos has already made significant steps in restoring political stability. Former President Uribe secured billions of dollars in US aid in the last decade used for the military to reduce the FARC’s impact on the country. The army has increased its size in the oil-producing regions, therefore improving security.
Currently, the rebels’ sabotage has a much lower impact on Colombia’s oil output versus a few years ago. Police seized the rebels’ tanks along with crude and destroyed the refineries where guerrillas processed crude to use in cocaine production. Military strikes have weakened FARC and pushed them deeper into the jungle. E&P companies were also experiencing long delays in permitting but permitting times have been slowly improving lately as the government is adding more manpower.
Parex Resources Inc.(TSE:PXT) and the fundamentals
Parex Resources Inc.(TSE:PXT) produces 15,000 barrels of oil per day (bopd) and holds proved and probable (2P) reserves of 16.1 million barrels (MMbbl). The company’s crude oil reserves are located in Colombia’s Llanos basin. The company hasn’t recorded yet any reserves in Trinidad where it works together with Niko Resources Ltd. (TSX:NKO). By the way, I pointed out few weeks ago why Niko Resources Ltd. (TSX:NKO) was grossly undervalued at $6.50.Niko Resources Ltd. (TSX:NKO) stands at $8.70 as of this writing thanks to some good news that hit the wires lately. Niko Resources Ltd. (TSX:NKO) announced a significant gas and condensate discovery in the KG D6 block off the eastern coast of India where the company holds a 10% WI.
Alan Knowles, an analyst with Haywood Securities, said the discovery may boost Niko Resources Ltd. (TSX:NKO)’s reserves by 31% to 96% compared with the end of 2012, representing $225 million to $700 million in value to the company. Niko Resources Ltd. (TSX:NKO), with its partners Reliance Industries and BP plc (LON:BP), will embark on the appraisal program in the next few months in order to evaluate the options for developing this discovery.
Parex Resources Inc.(TSE:PXT) had total long-term debt of $90 million (including convertibles) and a cash balance of $26.8 million as of March. With an enterprise value of $524 million, Parex Resources Inc.(TSE:PXT) trades at $35,000/bopd and $32.55/bbl of 2P reserves. Both key metrics are low given also that the company realizes Brent pricing for its light-oil production and reserves.
The Colombian deals
The undervaluation of Parex Resources Inc.(TSE:PXT) is also obvious thanks to the area deals. For instance:
1.) In 2011, Gran Tierra Energy Inc.(NYSEMKT:GTE)acquired Petrolifera Petroleum for $195 million or ~$54,700 per barrel of oil equivalent (boepd). Petrolifera was producing 3,564 boepd (81% oil and liquids).
Gran Tierra Energy Inc.(NYSEMKT:GTE)’s production growth seem to be on the right path. The company just announced very good drilling results from Peru and expanded its core acreage in Brazil by acquiring three onshore blocks in the recently completed Brazil Bid Round. This year, Gran Tierra Energy Inc.(NYSEMKT:GTE)’s production is expected to average 20,000 boepd (96% light oil) net after royalty.
2.) In 2012, Partnerre Ltd (TSX:PRE)acquired Petromagdalena for $225 million, or ~$62,500/boepd (95% oil and liquids).
3.) In 2012, Pacific Rubiales Energy also acquired C&C Energia for ~$620 million through a combined offer, paying ~$54,000/bopd for production of 11,500 bopd (100% light oil) and ~$33.7/bbl for 18.4 MMbbl 2P reserves.
Pacific Rubiales is Colombia’s biggest independent oil producer. It has gone from extracting 14,000 boepd in 2008 to 128,000 boepd in Q1 2013, and production is going to rise further in coming years. As part of this production growth plan, Pacific Rubiales recently expanded its acreage in Brazil where it was awarded three offshore blocks.
4.) In 2012, Canacol Energy Ltd. (TSX:CNE)acquired Shona Energy, paying $158 million for 2,300 boepd production (100% natural gas) or ~$68,700/boepd. Canacol Energy Ltd. (TSX:CNE)plans to spend CapEx of $67 million in calendar 2013 on drilling, work-overs, seismic, production facilities, and pipelines in Colombia and Ecuador, anticipating net average production before royalties of between 7,500 and 8,500 boepd by year’s end.
Looking ahead
Parex guides for full-year 2013 average production to be approximately 15,000 bopd, which can be achieved within the existing 2013 capital expenditure budget of $210 million. The company’s annual CapEx is fully funded out of cash flow. In Q1 2013, Parex enjoyed strong operating net-backs and generated $60 million in fund flows from operations.
This helps Parex maintain a strong balance sheet without increasing its leverage. Parex will retain the annualized long-term debt/cash flow (D/CF) ratio well below 1x, which is quite controllable.
A normal course issuer bid is also ongoing, as Parex believes that its current valuation doesn’t adequately reflect its value given its production, reserves and growth prospects.
Foolish round up
After all, I am just stating the obvious. Parex sells at a big discount and merits a move upward. It is also one of the Colombian producers that is well positioned to capitalize on the strengthening political stability and operational security in Colombia. However, patience might be required when investing in Parex because nobody can predict how long this stock will keep flying under the radar.
Nathan Kirykos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nathan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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