Canaccord updateCompany Update
Upgrading PXT to Top Pick; reiterate C$32 target and BUY rating
PXT announced that its strategic review process “did not result in an acceptable proposal”. In other words, there will be no sale or other strategic transaction and the company will continue on. We think that the stock may be down substantially tomorrow, as event-driven shareholders exit the name. We see it as a great opportunity to buy PXT, a premium International E&P name with an unmatched track record of growth and value creation, at current undervalued levels.
What’s next
PXT is going to continue focusing on generating growth in production, CFPS and NAVPS, and enhancing returns for its shareholders – something it has built a strong track record doing over the last six years. Consequently, PXT announced that it is implementing an NCIB to purchase up to 10% of its public float, up to a maximum of ~15M shares, as management believes (and we agree) that the company’s share price does not reflect its underlying value. The company noted that it intends to be a “significant market participant at current share prices”. The cost of the NCIB could be up to ~$212M (using today’s closing price of $14.10), which will be funded by cash on hand and free cash flow. PXT is forecasting a positive working capital of ~$200M by YE and free CF of ~$260M in 2019 under $60/bbl Brent. PXT is also considering implementing a substantial issuer bid in 2019 to create additional shareholder value. It is our understanding that the company is not considering paying a dividend at this time.
In addition, the company expanded its credit facility from $100M to $200M, all of which is currently undrawn. Could it be gearing up for acquisitions or partnerships, and not only in Colombia, but potentially in other parts of LATAM? We think it a real possibility.
Upgrading PXT to Top Pick
With the overhang of the strategic review process removed and a clear path ahead, we are upgrading PXT to Top Pick. We like PXT for its valuation, fundamentals and catalysts.
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Attractive valuation. The stock is down nearly 50% off its peak and now trades at 2.3x 2019E EV/DACF, below peer avg. of 2.9x, despite having the best growth track record in the group. PXT is trading at less than half its 5-yr. avg. EV/DACF multiple of 6.3x.
• Solid fundamentals. Using strip pricing, we arrive at a CNAV of C$24.95/sh for PXT, with potential upside from continued appraisal and exploration. We expect PXT to generate ~25% organic growth in production this year and >50% growth in CFPS, which is among the best results in its peer group. Meanwhile, the company has a rock-solid balance sheet, with $361M in cash, zero debt and a $200M undrawn credit facility, allowing it significant financial flexibility
. • Upcoming catalysts include growth in production, CFPS and NAVPS. We expect Parex will continue to generate significant growth at least in the near to mid-term, meeting and exceeding expectations, as has been the case for the last six years. Another is exploration upside potential, which is excluded from our estimates. Finally, potential JVs, farm-ins, bid rounds and M&A could also generate catalysts for the stock.
We recommend buying the stock at current levels.