Most energy investors rightly view the Canadian stock market as a treasure trove of investable options to choose from. It is. However, some companies are clearly better than others, and finding the key opportunities that can deliver solid long-term returns has become even more difficult right now.
That’s because while many oil and gas players are considered value stocks by most investors, it’s also true that there are wide discrepancies in both valuations and fundamentals that need to be considered.
In this article, I’m going to dive into Parex Resources (TSX: PXT) and its impressive 10% move higher over the past month.
Let’s dive into whether this move is sustainable and what’s driving outsized investor demand in this particular energy stock.
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Strong fundamentals
When a company like Parex reports an impressive earnings beat, many start to pay attention to this name. Accordingly, I think this stock’s recent surge does appear to be well-supported, and makes sense in the context of some rather impressive numbers this past quarter.
In the company’s second quarter, Parex brought in $1.08 in free funds from operations (FFO) per share, translating to more than $100 million. These numbers are extra impressive, given the rather challenging macro backdrop facing the company, and marginally lower production, which some thought could have led to a decline on this front.
From a revenue standpoint, Parex has brought in $1.2 billion over the past year, making its current market capitalization of around $1.5 billion seem very reasonable. On an annualized FFO basis, this stock is trading at around four times FFO. That’s cheap, even for the energy sector.
What to make of Parex moving forward?
I think Parex Resources presents a compelling investment opportunity for long-term investors who want some energy exposure in their portfolio. With some analysts suggesting this stock could have as much as 75% upside over the course of the next year based on its discounted cash flows alone, if we do see a resurgence in energy prices, this is a stock that could easily provide a double up over a medium-term time frame.
Of course, the energy sector is a relatively risky one to invest in, and there’s always the risk that oil prices will plunge in the face of a recession. But with recession worries tempered of late, this is a stock I think could have the momentum to continue running.
