Ukraine is hitting Russian oil assets, sending shockwaves through the Brent Crude Oil Index in London — an oil price gauge responsible for 80% of global oil trades. In March, analysts at investment banking giant Morgan Stanley raised their oil price forecasts by 12.5% and expect Brent to climb to US$90 per barrel by summer. Russian production curtailments, combined with OPEC+ supply cuts, are tightening crude supplies and supporting higher oil prices well into the third quarter of this year. This represents an opportunity for two TSX energy stocks.
Brent crude oil generally commands higher prices than North American indices, including the West Texas Intermediate (WTI) oil index. Despite trading on Canada’s Toronto Stock Exchange, Parex Resources (TSX: PXT) and Gran Tierra Energy (TSX: GTE) produce oil from Colombia and price their deliveries based on the Brent Crude Oil Index. Here is how these companies could benefit from rising Brent prices.
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Parex Resources stock
Parex Resources is a $2.3 billion oil miner that achieved a record annual production of 54,356 barrels of oil equivalent (boe) from its Colombian operations in 2023. Its production is priced based on the Brent Crude Index. Higher production and strong Brent prices for 2024 could significantly boost Parex Resources’s profitability and cash flow generation this year.
The company expects production to reach new records as more wells come online throughout the year. In a recent report in February, the midpoint of management’s production guidance for 2024 remained at 57,000 boe — a 5% sequential growth and a new annual production record.
Notably, Parex used an average Brent price of US$75 when designing its current operating budget for 2024. This budget could enable the company to generate approximately US$215 million in free funds flow this year, up from $183 million last year. A sensitivity analysis predicts that free cash flow production could increase from as low as US$29 per boe to US$33 per boe if oil averages US$85 this year. Oil prices reaching US$90 would greatly benefit the company, strengthen its balance sheet, and richly reward its shareholders.
Parex Resources typically returns 33% of its free funds flow to its stock investors through dividends and share repurchases. The company plans to repurchase up to 5% of its outstanding shares this year, while its quarterly dividend currently yields a juicy 6.9% annually.
The small energy stock is currently trading at a cheap forward price-to-earnings (P/E) ratio of 4.1. The average analyst price target of $30 implies a potential upside of more than 38% over the next 12 months.
Gran Tierra Energy stock
Gran Tierra Energy is a small-cap Canadian energy stock that could skyrocket if operations outperform expectations this year. The $313 million oil mining company generates revenue from Colombian production, which is priced based on the Brent Crude benchmark.
Its operations are heavily leveraged. It holds about US$700 million in debt against US$533 million equity on its books. Traders are betting against the stock with a 9% short interest. If Brent continues to rise, short-sellers could be put to shame.
Gran Tierra expects to generate between $40 million and $110 million in free cash flow if Brent averages $80 for 2024. It may generate up to US$160 million at US$90 oil. Free cash flow represents the amount available for debt repayments or share repurchases after capital expenditures. After repurchasing 6.8% of its shares last year, the company could generate more funds for its active share-repurchase program this year.
Most noteworthy, Gran Tierra stock appears undervalued even when considering its high leverage. Its enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 1.9 is significantly below an industry average of 6.1. Enterprise value takes into account the total value of a company’s debt and equity, excluding cash and cash equivalents. Traders have heavily discounted the energy stock’s value. but if Brent crude performs well this year, it could significantly improve Gran Tierra’s profitability, increase cash flow for debt repayment, and enhance the energy stock’s financial profile.
Despite a 35.5% rally during the past month, shares are currently trading at a low forward price-to-earnings (P/E) multiple of 2.3. The average analyst price target on Gran Tierra Energy stock of $15.50 implies a 60% potential upside over the next 12 months.
