TD report on PXT - 9.50 targetParex Resources Inc. (PXT-T) C$6.26 Another Discovery at Tigana; Active Drilling Continues Event This morning, Parex provided an update on its operations in Colombia. In addition to reporting a new oil discovery at Tigana-1 on block LLA 34 (45% non-operated working interest) and positive initial indications from three other wells in Colombia (Akira-6, Adalia-3 and Tigana Sur-1), Parex increased its Q4/13 production guidance to over 17.0 mbbl/d (from 16.8 mbbl/d). Impact: SLIGHTLY POSITIVE Production and drilling operations are achieving slightly better results than we had expected. We see multiple near-term potential catalysts for the stock, thanks to multiple high-impact exploration wells that were recently drilled and are likely to provide test results in late December or early January (see Exhibit 1). Details Production Update: Average production from October 1-December 6 was approximately 17.0 mbbl/d, in excess of prior guidance for Q4/13 of 16.8 mbbl/d (which we had roughly matched with our estimates). Parex expects December average production to exceed 17.0 mbbl/d with the addition of Tigana and La Casona volumes. Following minor delays, the La Casona-1 well began production in early December at restricted rates of 350 bbl/d and 1.5 mmcf/d as facility gas compression and trucking is being optimized. This is Parex’s first gas production, to be utilized to reduce fuel costs at other operations. Drilling Updates: LLA 34 (45% interest): The Tigana-1 well tested 1,600 bbl/d of 15.1 degree API from the Guadalupe formation using an electrical submersible pump, with a 0.8% water cut. Further production history will be required to determine stabilized flow rates and the extent of the reservoir. In addition, electric logging indicated the Energy Producers - Internationals shallower Mirador formation to be a prospective oil reservoir for potential future development. In addition, the Tigana Sur-1 well has encountered oil shows in the Guadalupe and Mirador formations and will be tested over coming weeks. Other: Both the Akira-6 (100% interest, Cabrestero block) and Adalia-3 wells (100% interest, LLA 30 block) have encountered oil pay outside of defined reserve areas. We expect these wells to contribute at least minor reserve additions at year end (subject to testing confirming commercial rates). Exhibit 1. Parex: Summary of Near-term Drilling and Testing Schedule Prospect Block Working Interest Status Rumi-1 El Eden 60% Preparing to Test Adalia-3 LLA 30 100% Preparing to Test Adalia-2 LLA 30 100% Drilling La Casona-2 El Eden 60% Preparing to Test Akira-5 Cabrestero 100% Spud following Akira-6 Akira-6 Cabrestero 100% Preparing to Test Tigana Sur-1 LLA 34 45% Preparing to Test Aruco-1 LLA 34 45% Drilling Tua-6 LLA 34 45% Spud following Aruco Celtis-1 LLA 40 50% Spud following Adalia-2 Source: TD Securities, Company reports Outlook We have assumed reserve additions for the Tigana-1 well, but have not yet adjusted for reserve addition potential from follow-up drilling at Tigana or oil shows encountered at Rumi-1, La Casona-2, Adalia-3, Akira- 6 or Tigana Sur-1. Exhibit 2. Parex: Estimate Changes New Old % Chg New Old % Chg Production (BOE/d) 16,199 17,021 15,789 15,697 1% 19,564 18,973 3% % Natural Gas 0% 0% 0% 0% nmf 2% 2% (3%) Financial ($mm) Cash Flow $68 $67 $261 $260 1% $257 $247 4% Capex $50 $47 $222 $221 0% $244 $242 1% Ending Net Cash / (Debt) ($67) ($46) ($46) ($47) (2%) ($32) ($42) (23%) CFPS - f.d. $0.56 $0.54 $2.07 $2.05 1% $2.06 $1.97 5% Netbacks ($/BOE) Revenue $106.41 $101.38 $103.89 $103.90 (0%) $88.77 $88.72 0% Royalties ($13.75) ($12.69) ($13.76) ($13.77) (0%) ($14.28) ($14.46) (1%) % Revenue 13% 13% 13% 13% (0%) 16% 16% (1%) Opex ($10.06) ($9.53) ($9.86) ($9.86) (0%) ($14.32) ($14.36) (0%) Transportation ($18.72) ($19.00) ($18.25) ($18.25) 0% ($12.00) ($12.00) 0% Operating Netback $63.88 $60.15 $62.02 $62.02 (0%) $48.16 $47.91 1% Base NAVPS C$5.81 C$5.62 3% Fully-risked NAVPS C$10.14 C$10.01 1% Q Our target price for Parex is based on a combination of Base and Fully-risked NAVPS. The unchanged combination of 0.95x Base NAVPS and 0.95x Upside to Base NAVPS is one of the highest multiples in our coverage of International E&Ps due to what we view as strong finances and management. We currently use a range of 0.25x–0.95x in terms of our multiples of Upside to Base NAVPS. Key Risks to Target Price Key risks associated with our target price include business risks of the company and industry, including but not limited to: loss of key employees, drilling success, volatile commodity prices, operating costs, capital cost overruns, product supply and demand, financing/access to capital, government regulations, legislation, unexpected changes in contract/fiscal terms, asset expropriation, royalties, taxes, exchange rates, interest rates, and environmental and weather concerns. Key risks specific to Parex are: Exploration risk is relatively high. Potential regulatory delays in Trinidad are a risk, in our view. Higher-than-average geo-political risk. Action Notes December 12, 2013 Equity Research 46 of 49 TD Investment Conclusion We view Parex’s operations update issued this morning as slightly positive, due to a new discovery at Tigana-1, multiple encouraging oil shows in wells that should be tested over coming weeks, and production trending slightly above our prior expectations. We view Parex as having one of the best combinations of management, assets and finances in our coverage of International E&Ps, reporting some of the highest netbacks — thanks to relatively new discoveries and efficient operations. Parex continues to have success in its exploration and operations program, which has translated into continued reserves growth. In our view, the company also continues to demonstrate that it is well-positioned to make small accretive acquisitions to maintain growth over the medium term. Even excluding potential for further accretive asset additions (which would appear quite possible based on the company’s recent business development performance), we currently expect Parex to continue growing production through at least 2015. Due to growing production and reserves and what we view as an insufficient share price reaction to positive performance year-to-date in 2013, we view relative valuation as compelling on all key metrics, and we increasingly view Parex as a potential take-out target. Potential near-term catalysts include likely continued production growth and further drilling and testing results from multiple wells in Colombia. We view results from the La Casona-2 and Rumi-1 exploration wells as the next key potential catalysts. We maintain our ACTION LIST BUY with a C$9.50 target price.