The TSX is soaring in 2024. The main Canadian stock market index is experiencing double-digit year-to-date gains of 11.4% as of this writing. Energy stocks, which make up the second-largest sector weighting in the TSX helped fuel the index’s performance with a 20.7% year-to-date gain.
Despite a significant run-up in TSX energy stocks so far this year, one non-index stock, Parex Resources (TSX:PXT), remains incredibly cheap and touts a juicy dividend yield that’s attractive to passive-income-oriented investors. Its management is actively repurchasing shares, making it an attractive option for value-oriented investors seeking bargain buys while discounts are still available.
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Parex Resources: A cheap TSX energy stock sharing rich cash flow with investors
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 the largest independent oil producers in Colombia. PXT stock appears incredibly cheap following a 16% drop in market price over the past month, despite an 80% improvement in the company’s free cash flow during the first half of this year.
Investors were spooked by the impact of water flooding and temporary production shut-ins, combined with some underperformance at Arauca wells during the second quarter. However, these events had a minimal impact on the overall operation, as Parex Resources is on track to meet the lower end of its production guidance for 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 sustain productivity this year despite the temporary operational challenges experienced during the first half of the year.
Most notably, investors who consider valuations recognize that Parex Resources stock trades at a cheap forward price-to-earnings (P/E) multiple of 4.5, which compares favourably to an industry average P/E of 14. Additionally, new investors can buy PXT stock at half its tangible book value, given a recent price-to-tangible book value multiple of 0.5. Shares appear too cheap to ignore, considering their price-to-free-cash flow (P/FCF) multiple of 3.8, which compares well against an industry P/FCF multiple of 16.4.
PXT is a profitable stock that generated a return on equity (ROE) of 16.5% last year, yet the market underprices its cash flow. Management is actively repurchasing shares as it believes the stock is significantly undervalued relative to its intrinsic or fair value.
Can you resist the 8.9% dividend yield on PXT stock?
Colombian oil and gas stocks generally trade at cheap valuation multiples on the TSX, even if they pay hefty cash dividends to investors. Parex Resources pays a $0.385 per share quarterly dividend, which should yield a staggering 8.9% for investors who buy the TSX energy stock at current discounted prices. The juicy dividend could boost total returns on the energy sector growth stock during one’s holding period.
The company paid out nearly 52.9% of its free cash flow per share in dividends during the first half of 2024. The dividend looks well covered by recurring cash flow as long as oil prices remain cooperative.
Compared to a passive-income investment in a TSX Composite exchange-traded fund (ETF), which could generate a 2.9% dividend yield, PXT stock can triple the yield at a much cheaper valuation. Why cheaper? The TSX Composite has an average P/E multiple of 21.3, while PXT stock trades at a historical P/E of 4.5.
Investor takeaway
Valuation perspectives rule the markets, and investors may heavily discount TSX energy stocks that operate from Colombia for perceived jurisdiction risks. However, money is fungible, and if dividends are important sources of returns to you, it doesn’t significantly matter whether the dollars come from Albertan oil fields or Colombia. As Parex Resources stock stands right now, cash flows from Colombia are cheaper to buy than those from Western Canada, yet the dividend checks could be equally juicy.
