Written by Brian Paradza, CFA at The Motley Fool Canada
The TSX will rise rapidly in 2024. Canada’s main stock index has recorded double-digit gains of 11.4% since the beginning of the year. Energy stocks, which make up the second-largest sector share in the TSX, contributed to the index’s performance with a gain of 20.7% since the beginning of the year.
Despite a significant increase in TSX energy stocks this year, a non-index stock, Parex Resources (TSX:PXT) remains incredibly cheap and touts a juicy dividend yield that is attractive to passive income-seeking investors. Management is actively buying back shares, making it an attractive option for value-oriented investors looking to snap up bargains while discounts still exist.
Parex Resources: A cheap TSX energy stock that provides investors with high cash flow
Parex Resources produces oil and some natural gas from Colombia’s popular Llanos and Magdalena basins. The $1.8 billion TSX energy stock is one of Colombia’s largest independent oil producers. PXT stock appears incredibly cheap after the market price fell 16% in the last month, despite the company’s free cash flow improving 80% in the first half of this year.
Investors were unsettled by the impact of flooding and temporary production disruptions, as well as some underperformance at the Arauca wells in the second quarter. However, these events had minimal impact on overall operations, as Parex Resources is on track to meet the lower end of its production guidance of 54,000 to 60,000 barrels of oil equivalent per day (boe/d) this year.
The company reported a record production rate of 54,356 boe/d for 2023 and could maintain its productivity this year despite temporary operational challenges in the first half of the year.
Most importantly, investors who consider valuations realize that Parex Resources stock is trading at a cheap price-to-earnings (P/E) ratio of 4.5, which compares favorably to an industry average P/E ratio of 14. Moreover, new investors can buy PXT shares at half the tangible book value as the P/E ratio has been at 0.5 recently. Given its price-to-free cash flow (P/F) ratio of 3.8, which compares favorably to an industry P/F ratio of 16.4, the shares seem too cheap to ignore.
PXT is a profitable stock that generated a return on equity (ROE) of 16.5% over the last year, but the market undervalues its cash flow. Management is actively buying back shares as it believes the stock is significantly undervalued compared to its intrinsic or fair value.
Can you resist the 8.9% dividend yield on PXT shares?
Colombian oil and gas stocks generally trade at cheap valuation multiples on the TSX, even as they pay high cash dividends to their investors. Parex Resources pays a quarterly dividend of $0.385 per share, which should provide an astonishing 8.9% yield to investors who buy the TSX energy stocks at the current discounted prices. The juicy dividend could boost the energy sector growth stock’s total return over the holding period.
The company paid out nearly 52.9% of its free cash flow per share in the form of dividends in the first half of 2024. As long as oil prices hold, the dividend seems to be well covered by recurring cash flow.
Compared to a passive income investment in a TSX Composite exchange-traded fund (ETF) that could yield a 2.9% dividend, PXT stock can triple the returns at a much cheaper valuation. Why cheaper? The TSX Composite has an average P/E of 21.3, while PXT stock trades at a historical P/E of 4.5.
Conclusion for investors
Valuation perspectives drive markets, and investors could see TSX energy stocks operating out of Colombia heavily discounted due to perceived legal risks. But money is fungible, and if dividends are an important source of income for you, it doesn’t matter much whether the dollars come from the oil fields of Alberta or Colombia. As Parex Resources stock stands right now, cash flows from Colombia are cheaper to buy than those from Western Canada, but the dividend checks could be just as juicy.
The post 1 Incredibly Cheap Energy Stock to Buy Now appeared first on The Motley Fool Canada.
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Further reading
Fool contributor Brian Paradza does not own any stocks mentioned. The Motley Fool recommends Parex Resources. The Motley Fool has a disclosure policy.
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