Is Battered Energy Stock Parex a Buy for Its 11% Yield?

Many energy stocks are still soaring or gliding after flying high, pushing down their yields. However, there is at least one exception to this trend.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published February 28, 2025 3:30 pm EST

| More on: PXT

The answer to this question is not a simple yes or no, as there are many factors at play here. Parex Resources (TSX:PXT) is dissimilar to most energy stocks in Canada, primarily because it operates exclusively in Colombia. However, it may be subject to the same market sentiment, at least to an extent. However, it might still be a promising buy, especially considering its mouth-watering 11% yield.

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The company

Parex is one of Colombia’s most prominent (especially among the independent ones) energy companies. It has operated in the country since 2009 and has a significant land position and market presence. Its average product of a little over 45,000 barrels of oil equivalent per day (boe/d) might seem mild compared to Canadian giants. Still, it’s an impressive number considering the company’s size and market capitalization.

It’s a modest-cost producer with the flexibility to manage its capital if prices go down (per barrel). The company also engages in exploration and development activities across Colombia, constantly adding to its production portfolio.

Although its financials have been a bit inconsistent, it’s still very attractively valued. With a price-to-earnings ratio of just 3.8, it’s one of the most undervalued stocks in the Canadian energy sector. Another edge is the lack of debt. The company holds minimal debt, and its cash and investments far outweigh that number.

Is Parex worth buying?

Parex is trading at a massive 52% discount from its five-year peak. One factor that triggered this slump was the company’s less-than-ideal future outlook. While it is a weakness, it reflects the lack of correlation between most energy stocks in Canada and Parex, as it went entirely against the sector-wide performance and sentiment.

The benefit of this slump, apart from making the stock tastefully discounted and valued, is that it pushed the yield up to 11%. The yield is attractive enough on its own, but one thing that makes it even more appealing is the financial sustainability. Both the payout ratio and the company’s outlook, considering a modest oil price, ensure that it would be able to afford its dividends with a healthy surplus unless oil prices fall by a massive margin. Even then, it might still have more room than its Canadian counterparts.

This yield is enough reason to consider this stock, but its recovery potential is also worth taking into account. The stock can double your capital just by making a full recovery, and everything else (including dividends) would be a bonus.

Foolish takeaway

It’s essential to keep in mind that while its lack of correlation with the energy stocks operating in Canada is a strength in certain areas, it might also lead to unique vulnerabilities. Instability in the region, sanctions, and certain other factors might cause the stock to suffer, while Canada-based energy companies might remain safe. However, the risk is outweighed by the reward, at least for now.