Multilateral Drilling And Colombian Resource Upside Will Reshape This Underappreciated Producer

Catalysts

About Parex Resources

Parex Resources is an independent energy producer focused on oil and gas assets in Colombia.

What are the underlying business or industry changes driving this perspective?

• Growing use of multilateral and horizontal wells in Colombia, including the country's first four leg multilateral and the upcoming multilateral program in Putumayo, points to higher capital efficiency per dollar invested. This can support future revenue and earnings compared with traditional vertical development.
• Large oil in place positions in Putumayo and Orito, with references to more than 1.8 billion barrels in place and over 1 billion barrels at Orito, combined with low historical recovery factors and new waterflood and injection programs, create room to increase recoverable volumes over time. This is geared toward higher long term reserves, revenue and funds flow.
• Near field exploration success in 2025 with a 75% success rate and continued work in Llanos 111 using cost efficient rigs gives Parex a visible pipeline of potential low cost additions to the drilling inventory. This can support production stability and help protect net margins by spreading fixed costs over more barrels.
• The alliance with Ecopetrol in the Llanos Foothills and progress on pre drill work for a first foothills well tie the portfolio to large scale onshore gas and oil opportunities. Any successful outcomes there would be geared toward higher long term production, reserves per share and potentially stronger earnings power.
• Farm in activity across Orito, Area Sur and Occidente in Putumayo, including low cost recompletions and shallow horizontals with current production rates cited in the hundreds to 1,500 barrels per day gross, shows a model focused on lower upfront spend per well. This can support improved recycle ratios, stronger net margins and more resilient funds flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Parex Resources compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Parex Resources's revenue will grow by 47.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 28.7% today to 19.0% in 3 years time.
• The bullish analysts expect earnings to reach $542.1 million (and earnings per share of $5.36) by about April 2029, up from $255.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.8x on those 2029 earnings, down from 7.2x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 17.9x.
• The bullish analysts expect the number of shares outstanding to decline by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy oil benchmark differentials such as Vasconia widening to around US$8 per barrel or more for long periods could reduce realized pricing on Colombian production. This could pressure revenue and compress net margins even if Brent remains at higher levels.
• The multilateral and horizontal drilling thesis in areas like Putumayo and Orito is still early and described as proof of concept. If these wells underperform or prove harder to replicate at scale, the expected inventory depth and recovery uplift may not materialize, which would limit future reserves growth and earnings.
• The business is highly concentrated in Colombia and is pursuing additional Colombian M&A to become the largest independent Colombian focused producer. Any changes in local regulations, fiscal terms or operating conditions could have an outsized impact on cash flows, net margins and the value of acquired assets.
• The plan relies heavily on enhanced recovery and waterflood programs in mature reservoirs to manage decline rates and reduce sustaining capital. If these projects deliver weaker than expected results over time, Parex may need higher drilling and maintenance spend to hold production flat, which would weigh on free funds flow and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Parex Resources is CA$39.0, which represents up to two standard deviations above the consensus price target of CA$30.34. This valuation is based on what can be assumed as the expectations of Parex Resources's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$39.0, and the most bearish reporting a price target of just CA$24.7.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $2.9 billion, earnings will come to $542.1 million, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$26.02, the analyst price target of CA$39.0 is 33.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.