Parex Resources

Great assets, great results, a buyback disaster

Parex Resources (PXT.TO) has spent $977 million since 2019 to buyback back its own stock, with the share count dropping from130,872,676 in 2020 to 101,615,686 today. That reduction of 29 million shares came at a cost of $33.40 per share. Had the $977 million been paid out as dividends, each 2019 shareholder who kept their stock would have received about $7.45 in dividends.

Instead, those loyal shareholders saw their money go to shareholders who sold into the buybacks, and their shares are now trading at $17.30 a share. Given there were more shares in 2019, and adjusting for the higher number, the share price today would likely have been about $13.50 a share (assuming the same enterprise value as today but with more shares outstanding). Add the notional dividends they did not receive (since that money went to sellers) and their holdings today would comprise a share trading at $13.50 ($17.30 as adjusted above) and a cumulative $7.45 per share in dividends, for a total (without adding anything for the reinvestment of the dividends) of $20.95.

Sure, they would have paid about $2.45 in income taxes if their shares were held in taxable accounts in Ontario, and leaving aside any income earned on the cash balance, they would still have $18.50 instead of $13.15 and been almost 40% ahead.

Parex has sovereign risk putting the value of the shares in question if the government of Colombia turns hostile towards the company, imposes higher taxes or royalties, or denies permits or even nationalizes the company. I doubt any of those events are likely any time soon, but those are not trivial risks. In part, the soverign risk explains why the stock sells at a discount to its intrinsic value, which, using a modified Black Scholes approach to valuing the company’s 169 million boe of reserves as an option, I estimate at about $26 per share.

Parex is an example of a company where the shares trade at a deep discount to intrinsic value but “buybacks” don’t work out well for investors, at least not over a five year cycle. I think shareholders would be better served by a board of directors who, recognizing the market’s inefficiency and the sovereign risk exposure, pays out excess cash flows in dividends which all shareholders receive rather than dividing shareholders into two camps - those reducing their holdings by selling into a buyback and those holding on for long term streams of dividends. The current policy rewarded those leaving and punished those who remained shareholders, a perverse outcome in my opinion.