Our view: Parex's updated 2024 guidance was materially weaker than expected, driving a 16% correction. While we revised estimates lower and acknowledge the release was underwhelming, we believe the move is overdone with updated figures looking highly achievable particularly in the context of the Arauca (50% w.i.) discovery. Management continues to emphasize exploration catalysts in 2024, which coupled with a discounted valuation, continue to present a favourable risk-reward profile, though we expect investors will take a cautious tact for the foreseeable future.
Key points:
Guidance well below consensus, prior three-year plan. Parex's 2024 guidance of 54,000-60,000 boe/d came in 8%/8% below RBC/consensus and 10% below management's prior three-year plan (63,000 boe/d). This was in part driven by weaker than anticipated exit volumes in 2023 with Q4 mapping to 57,239 boe/d (98% oil); this was negatively impacted by extended testing, operational delays, and a higher-than-expected water cut on a high-rate well. The updated plan now extends to 2026 and targets annual production growth of 5%+, reaching 65,000 boe/d.
Capital spend higher than anticipated. 2024 capital guidance of $410 million was 9% above the prior three-year plan ($375 million), mapping to a 15% decrease in total spend vs 2023. Management allocated $300 million to development activities/facilities, $90 million to near-field/Big 'E' exploration, and $20 million in carry capital. The updated three-year plan is predicated on annual capital expenditures of $375-$450 million.
Arauca success lost in the headline noise. Parex's Arauca-8 well tested at 9 MMcf/d and over 1,000 bbl/d of condensate in the Une zone (gas test) and over 6,000 boe/d in the Gacheta zone (oil discovery); while potentially meaningful, this has not been incorporated into guidance given uncertainty around on-production timing. Arauca-15 is being sidetracked to an optimal location after demonstrating multiple layers of hydrocarbons; this is expected to be completed late Q1/24 and brought on-stream early Q2/24. Parex expects to drill 3 Big 'E' prospects in 2024: Arantes (LLA-122), Hydra (VIM-1), and Berilo Oeste (LLA-38).
Return of capital remains a priority. Parex renewed its NCIB for 10.2 million common shares through January 21, 2025. The company continues to target a 100% return of excess FFF, built on the company's base dividend (C$1.50/share) with excess FFF allocated to the NCIB. Parex's updated three-year plan incorporates a reinvestment ratio of 54%-66%, generating cumulative FFF of C$1.1B.
Reiterate Outperform, target trimmed to $32/share. Parex continues to trade at a discount to oil-weighted peers (Exhibit 5), and while geopolitical risking is warranted, exploration catalysts alongside a continued focus on Roc present a favourable risk-reward profile, in our view.