If I could own only one TSX oil stock it would have to be Parex Resources (TSX:PXT). Parex is a TSX-listed company that explores, develops, and produces oil solely in Colombia. While Colombia may not be the most politically stable region in the world, Parex has found a way to operate very efficiently there. This company is absolutely one of the best and it is trading near three-year lows today.
I would buy this for a number of reasons. Check them out below.
This TSX oil stock gets the best pricing
First, Parex is able to garner the best market pricing for its oil. Parex produces a lighter, sweet crude that sells at Brent Crude Pricing. Presently, Brent Crude is trading just around US$30/bbl (compared to Western Canadian Select at around US$19/bbl).
Brent Crude is generally cheaper to transport and refine, so it has broader global demand and garners a premium price. This is very attractive right now, especially given that many North American peers are selling oil at a significant discount or even a loss.
Parex is an efficient producer
Second, Parex has really good oil net-backs, a low cost of production, and production flexibility.
Depending on oil pricing, it can produce a barrel of oil between US$25 and US$35. Even at the today’s glum pricing, it is still producing neutral to positive cash flows. Its net-backs are some the best among TSX peers. It would only take a relatively small, 20% to 25% shift up in oil pricing for Parex to accrete decent cash flows and profits again.
Parex is not a huge operator. It normally produces around 54,300 boe/day. However, due to the conventional nature of Parex’s wells, it is able to easily dial production up or down without degrading long-term productivity.
In a choppy pricing and demand environment, this is really attractive. In April, management noted that it was able to dial down production by 10% to 15%. Consequently, Parex can better preserve its reserves and keep some production for a better pricing environment.
Parex is an out-performer
Parex is one TSX oil stock that has actually grown operational and financial returns over the past few years. Production has doubled since 2015 and fund flows per share has increased 330% over that time. Last year alone, Parex increased FFO per share by 50%.
This growth can’t be expected in 2020, of course. Yet, it does illustrate Parex’s operational capabilities should prices return to a more historical range (US$40 to $60).
It is also nice to note that Parex spent $223 million and bought back around 10% of its share float last year. It still ended 2019 with a handsome $390 million of cash on the balance sheet — pretty impressive for any company, oil or not!
This TSX oil stock is cash-rich and debt-free
That brings up the last point: Parex is rich in cash and has zero debt. This is an envious position to have in a very volatile time, and equips Parex to survive in a lower-for-longer oil environment.
As well, if oil does begin to rise, it can quickly deploy some of that cash into share buy-backs, special-dividends, and/or into well exploration and production growth. Its pristine balance sheet affords it so much flexibility- both on the downside and the upside. Why would investors want it any other way?
The Foolish takeaway
Don’t risk your investment capital on highly levered TSX oil stocks. Why not just own the best? Parex has the best pricing, best net-backs, best historical returns, and best balance sheet. The company reports earnings on May 13, 2020, so I would perhaps wait and see how it is weathering these tough times before buying.
Although Parex operates in a somewhat riskier country, its operations are the least risky of any of its Canadian peers. So for me, that makes it the best TSX oil stock you can own today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Robin Brown has no position in any of the stocks mentioned.