Gran Tierra: A Small E&P to Keep on Your Radar

Jul. 5.10 | About: Gran Tierra (GTE)
With the given bearish sentiment in the capital markets, questions about a double dip and deflation are top-of-mind among anyone with an interest in the markets. Looking at opportunities in emerging markets that may not be on the radar could be a good place to pick up big winners for the long term. One of the companies that I have come across is Gran Tierra {Green Land} (NYSEMKT:GTE) , a small oil & gas exploration firm out of Canada with operations in South America (Argentina, Colombia, Peru).

In comparison to the European nations and the United States, South American countries have been able to rebound through 2010, where high growth inflation is more of a concern than a double dip.
2010 will be a year with growth above estimates,
-Economy Minister Amado Boudou
Argentina has enjoyed a robust first half and The Economist is revising its GDP forecast for the full year to almost 6% and is forecasting a 6.5% 2010 GDP growth rate. Economic activity as a whole increased to 9.7% in April YoY, the fastest rate in two years.
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Concerns for the country include high inflation and finding more natural gas resources as demand outstrips supply currently.

Inflation could affect costs for companies in the country as almost 80% of the workers are unionized and many are already looking to increase their rates to keep up with inflation.

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Note: Argentina recently invested in a natural gas pipeline as it currently does not meet its internal demand for natural gas.

Colombia’s largest customer is the United States followed by Venezuela. With Venezuela’s unstable policies, Colombia's relations with Venezuela have been strained. Unemployment is high (11.8%) but the country is rebounding at a faster pace than expected. The forecasted GDP growth for 2010 around 3%-3.5% (

Economic Activity

Oil exploration is part of Colombia’s strategy to become a stronger economy, as President Uribe’s government was able to license resource-rich areas which used to be controlled by rebel groups in the past.


Sovereign Credit Ratings (EIU)

Of the two countries, Colombia has a more favorable stance for oil exploration, which happens to be where GTE gets over 90% of its revenue.
When I look at energy companies I look at a quant screen I’ve developed which is backtested 20+ years with statistically significant results. It has found among others DRQ ($22 April 2009), VLCCF ($14, Feb 2010), NE ($40, April 2010), and CXO ($35, October 2009). The screen is just that, a filter to find firms that may be good values. I cross that with a few other metrics such as:
  • number of analysts (less is better)
  • top-down analysis- (any conflicts)
  • among many other metrics
The screen picked up GTE back in September as a strong buy ($4), now its stating its middle-of-the-pack, but this analysis should help find out where the stock’s bottom could be which is useful if the markets do go for a double-dip.

GTE history

Gran Tierra is a Canadian firm with operations in Colombia, Peru, Argentina, and soon in Brazil. GTE’s main operations are on-land O&G exploration in Colombia and looks to expand into Brazil shallow water in the near future. It has a presence in Argentina where regulatory constraints are limiting growth and it has two blocks in Peru which it will start exploring in 2010.

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Colombia is the source of most of the revenues for GTE with 14,000 barrels of oil per day (bopd) net after royalties coming from here. This is due in part to the regulatory environment; the cost of exploring oil consists of not just E&P costs but also royalties to the government. In 2009 DD&A was unusually high due to a recent buyout but even in Q1 it was $27.58 (based on historical data, it should be closer to $20). Even with this high cost, the breakeven price of oil is $45/barrel, before royalties. Royalties are set on a step scale based on how much oil is sold, and can range between 5%-20%.

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With a favorable regulatory environment in Colombia – one that is more favorable than the United States according to some analysts, Colombia has an extensive exploration plan for 2010. It has drilled two wells so far; the first one came up dry and was plugged in January. The second came up successful and is slated to go online in early 2011.
The last time GTE posted reserves by blocks was in 2007 and since then only provide country level reserves. The Chaza block is the most productive block for GTE and recently had a successful find at the Moqueta-1 well on June 28, 2010. There are two additional sites that GTE will drill at this site.
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As can be seen, there are additional six additional wells that are planned to be explored this year. What is interesting is that the Moqueta-2 and Moqueta-3 were not part of the initial capex plan. Management must feel confident in their research to go ahead with a couple of unplanned sites.
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The issue with Argentina is that the government has put a $45 ceiling on oil, thus anything above $45 is cost prohibitive. From GTE’s 10-K:

Due to the local regulatory regimes, the price we currently receive for production from our blocks is approximately $45 per barrel.

The $45 ceiling seems to be negotiable as it was $40 in 2007 and it seems that GTE does not want o give up on this market as the political environment could change with upcoming elections. Thus GTE is currently getting 800 bpd in Argentina (vs. 14,000bpd in Colombia).

Given the current condition and the fact that the country is growing at a record pace, GTE has made a strategic decision to stay here but has not focused on growing the segment. There is a plan in Q3 to explore a well in the Valle Morado block which is part of a $24m capex plan for Argentina.

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Third Quarter could be an exciting time for Gran Tierra, with exploration of Block 122 and Block 128 in Peru for the first time. These are fairly significant sized locations and there are four sites that GTE will be looking into in the second half. The size of these two blocks is over 3m acres, it is about half the total acreage that GTE has and it is now getting explored!

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These two blocks are located with COP and PBR, a couple of heavyweight players who have bought quite a bit of the area in this region.
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A) ITT Fields > 1BBO EUR
B) Perenco Block 67 2PL: 300mm boe, 100,000 bpd potential. $1.5B project
C) Corrientes 275mm boe EUR

Looking at COP’s exploration map, this is the only site in South America for COP (but it’s not considered a major project either).
Based on a 10% discount rate and valuing the Proven, Probable, and Possible reserves I get a fairly wide price. At $75 I’m getting a fair value $4.52 for 1P+2P. The upside could be as high as $22 if the 3P potential comes to fruition.
Note: This is oil & gas valuation

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Conclusion: This is a stock to keep on your radar, from talking with a hedge fund manager I’ve been told that 3P is a fairly new concept that firms are now publishing. I don’t have an exit price but if GTE gets near $4.50 within the next month I will be buying a position.

Current price: $5.14

Entry price: $4.50

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Disclosure: None