- Petroamerica made a transformative deal by acquiring Suroco Energy, and addressed all the challenges it was facing.
- This acquisition significantly strengthens and diversifies the company's asset base.
- Now, Petroamerica has everything: strong production growth, high netbacks, stellar balance sheet with a strong cash position and an aggressive management.
- With management focused on continuing to grow, the tremendous valuation gap with the peers can close anytime and Petroamerica's shareholders stand to benefit a lot.
(Editors' Note: Petroamerica trades on the Toronto exchange under the ticker PTA.TO, with $CAD 825K average daily volume).
I am always a sucker for anything that is fundamentally strong while trading at an irrationally depressed valuation, no matter where it trades (i.e. US, Toronto, London, Sydney). Venturing off the beaten path around the world has been a very exciting journey, that has rewarded my followers and me quite handsomely over the last twenty months I have been writing for SeekingAlpha.
Colombia has been one of my best destinations of this lucrative investment journey around the world. The following table demonstrates the reasons why:
Of My Article
Price On The
Of My Article
They say that a criminal always returns to the scene of the crime. Therefore, I had to return back to Colombia in order to find the next big winner for my portfolio. And I found it. Let's welcome Petroamerica Oil (OTCPK:PTAXF), which is a grossly undervalued Colombian gem with a pristine balance sheet.
Given that I have been closely monitoring the energy sector in Colombia over the last two years, I am a strong believer that this is an opportune time to deploy capital to this strong growth energy company. Right now, an investor is paying depressed multiples to get access to the stock, while the company's potential is through the roof.
Investors should note that Petroamerica's primary listing is on the Toronto Stock Exchange under the ticker PTA with an average daily trading volume of approximately 3,000,000 shares, according to Google Finance. The company also trades in the US under the ticker PTAXF.
The Transformational Deal With Suroco Energy
In late June 2014, Petroamerica finalized its offer and confirmed its intention to proceed with its proposed business combination with Suroco Energy (OTC:SROYF), a growing junior producer whose assets are located in the Putumayo Basin in Colombia.
First, this acquisition gave Petroamerica four blocks in Putumayo and boosted the company's production and 2P reserves by approximately 50% and 100% respectively.
Through that deal, Petroamerica also addressed both the single asset risk and its relatively short RLI (Reserves Life Index), while the company added operatorship, given that Suroco was qualified as a restricted operator in the 2010 bid round. On top of that, the combined company intends to apply to become an unrestricted operator over the next months.
Furthermore, it matters a lot to me the fact that Suroco's technical team who has gained substantial experience working in Ecuador will remain part of the combined company. This will facilitate Petroamerica's potential expansion to Ecuador, if needed.
And believe it or not, I owned Suroco Energy. I bought Suroco at C$0.29 in early April 2014. And I was preparing a bullish article about Suroco, when the stock was halted suddenly one day in late April 2014. I suspected that Suroco was the next acquisition target during this vibrant M&A activity in the Colombian energy patch over the last two years.
But I was shockingly surprised to see that Petroamerica's first acquisition offer was just C$0.57 per share. The analysis I was writing for that bullish article, had all the facts why Suroco should be sold at C$1 or higher. This is why, I emailed the company and its CFO (Mr. Travis Doupe) several times, explaining him why they should not accept this low ball offer. In addition, I let them know that I was not going to vote in favor of this low ball offer.
I was glad to see that the first offer was improved a few weeks later and Petroamerica offered C$0.80 per share. And that was another triple digit return from a Colombian energy stock. I do have all these emails to Suroco and its CFO (Mr. Travis Doupe), and they are available to all doubting Thomases anytime, if needed.
The fact that I owned Suroco and I was writing a bullish article about it when the deal was announced, was also the reason why I had stored in my database several pictures from Suroco's previous website. I incorporated those pictures in the following paragraphs. These pictures are not publicly available anymore and Suroco's website does not exist anymore either.
Petroamerica's assets cover 11 block portfolio of approximately 1 million gross acres in the two most prolific basins of Colombia, the Llanos Basin and the Putumayo Basin, as illustrated below:
The company's assets in the Llanos Basin are shown below:
This Basin hosts the company's flagship asset, as illustrated below:
And the company has 3 discoveries under appraisal located in El Eden and El Porton Blocks, as illustrated below:
And these are the company's assets in the Putumayo Basin, that were acquired through Suroco:
Let's have a closer look at these Blocks that Petroamerica acquired from Suroco:
1) Suroriente Block: The Suroriente Block covers approximately 90,000 acres and produces light and medium gravity oil from three oilfields (the Pinuna-Quillacinga field, the Cohembi field and the recently discovered Quinde field).
In fact, this Block was Suroco's gold mine. Producing wells in the Pinuna-Quillacinga field have multiple oil-bearing reservoir zones, with the production derived from the Villeta U and T sands, with an average oil gravity of 29 degrees API. The Cohembi field produces from the Villeta 'N' sand with average oil gravity of 19 degrees API. And in terms of the Quinde field, several gushers were drilled there over the last months, as discussed in the next paragraph.
The water injection in the Cohembi oilfield commenced in December of 2012 in the Cohembi-1 well, and the expansion of the secondary recovery injection scheme continued in 2013. The expansion continues in 2014, and the comprehensive reservoir studies indicate a waterflood at Cohembi will result in a significant increase in recovery and booked long-life reserves.
Potential to further increase those values by polymer injection is the subject of a third party consulting study that is currently ongoing and will be completed in 2014.
2) Putumayo-2 Block: The PUT-2 Block covers 96,666 acres of land and is on trend with several producing oilfields, as illustrated below:
"Source: Platino Energy website"
Several prospects have been identified and mapped in this Block. The prospects that are located towards the northern portion of the Block are structurally related to the transition to the Foothills area and the prospects located further south are structurally related to the Foreland area.
3) Alea 1848A Block: The Alea 1848A Block has a total area of approximately 75,000 acres and is located northwest of Suroco's producing Suroriente Block. The Block has three legacy exploration wells which were drilled between 1964 and 1988. Each of the wells encountered multiple reservoir intervals in the Villeta Formation and all three wells had hydrocarbon shows.
4) Alea 1947C Block: The Alea 1947C Block has a total area of approximately 58,000 acres and is located northeast of Suroco's producing Suroriente Block. The block has a single legacy exploration well which was drilled in 1968. This well proved the existence of a hydrocarbon column in the Villeta 'N' sand, and the presence of thick porous reservoirs in the Villeta U and T sands.
Suroco's Quinde Field Is A Game Changing Oil Discovery
Given that Suroco's website does not exist anymore, I would like to provide some insight about Suroco's Quinde wells in the Suroriente Block. In short, Suroco's Quinde wells are gushers and provide needle-moving production.
Thanks primarily to these wells, Suroco's production was rising by leaps and bounds in late 2013 and early 2014, as shown below:
(Net Before Royalty)
Thanks also to the Quinde wells and positive response to increased water injection in the Cohembi field, Suroco revised upwards its forecast production numbers for 2014 and estimated in early 2014 that it would exit 2014 at approximately 3,300 bopd (net before royalty).
Let's see now some more details about these game changer wells in the Quinde field:
1) The Quinde-4 well was drilled in December 2013. Gross production for the recently drilled Quinde-4 well averaged 2,676 bbls/d for the first 20 days of March 2014, and has recently been increased to over 2,900 bbls/d as the electric submersible pump installed in the well has been increased to a higher operating frequency.
2) The Quinde-6 well commenced drilling on March 13, 2014. The well successfully encountered 32 feet of net oil pay and no indication of an oil water contact. After being placed on production with a submersible pump on April 29, the Quinde-6 well has stabilized at over 2,300 bbls/d with zero percent watercut.
3) The Quinde-7 well was the first well in the Quinde East pool. In June 2014, the Quinde-7 well was tested at a stable rate of 800 bbls/d by natural flow. The Quinde-7 well was equipped with an electric submersible pump and commenced production at an approximate rate of 1,500 bbls/d into the existing Quinde production facilities. The Quinde-7 well reached initial rates of 4,400 bopd, and the well is now producing at a rate of more than 3,500 bopd, according to the latest corporate news. If this is not the definition of a gusher, I do not know what is.
After completing operations at Quinde-7, the rig commenced drilling the Quinde-8 well from the same surface pad.
And the good news does not end here:
1) Suroco evaluated the resource potential of the Quinde Villeta N sand in the Suroriente Block, effective March 1, 2014. Based on 3D seismic amplitude mapping, core analysis, and performance analysis of the Quinde-4 well, the discovered oil initially in place in the Quinde West pool is estimated to be 25.3 million barrels of oil, and the economic contingent P50 resources are estimated to be 7.1 million barrels of oil.
2) As linked above, Suroco also estimated the undiscovered oil initially in place in the Quinde East pool to be 17.7 million barrels of oil and the unrisked prospective P50 resources to be 5.7 million barrels of oil.
These amazing results received from the Quinde field so far have reinforced and underlined the importance of this world-class asset. The Quinde prospect is still at its infancy, and it is clear that it offered transformational potential for Suroco. As such, this new oil discovery will be the core driver for Petroamerica's production and reserves growth over the coming years. Petroamerica has a fully funded multiple well program in order to vigorously pursue the development of this prospect and unlock its growth potential effective late 2014.
The Balance Sheet Is Pristine
Petroamerica is in the enviable position of having a stellar balance sheet with zero net debt, a low-risk multi-year drilling inventory (thanks to two recent reserves upgrades that will be presented in another paragraph) and plenty of running room in two proven oily Basins.
Pro forma Suroco's deal, the combined company has approximately 858 million basic shares outstanding, produces approximately 9,000 boepd (~97% light/medium oil and NGLs) and owns 11.8 MMboe of 2P reserves (~95% light/medium oil and NGLs).
Petroamerica is also a cash machine that has been printing money over the last couple of years. After a profitable 2013, the trend continued in 2014. Petroamerica's net income was $6.4 million and $24.4 million in Q2 2014 and H1 2014 respectively. Given that Suroco was also profitable in Q1 2014, the profitability of the combined company will definitely continue for the remainder of 2014. Currently, Petroamerica has a cash balance of approximately $63 million after accounting for the Suroco acquisition costs, which results in negative net debt of approximately $35 million.
It projects a combined 2014 cash flow from operations of approximately $116 million, which fully funds the combined CapEx for 2014 of approximately $85 million and results in free cash flow of approximately $36 million.
Thanks to this growing free CF:
1) The company initiated a share buyback program in late March 2014 and is authorized to purchase up to approximately 10% of the public float.
2) The company says that it will continue to pursue new business opportunities to both enhance its current and projected land holdings to provide additional future growth.
It must also be noted that the company's netbacks are very high, as illustrated below:
It is clear that Petroamerica generates a higher margin per barrel of oil produced than the oil-weighted companies operating in Canada and the US. More importantly, a high netback allows the company to fully fund its capital program from cash flow and cash on hand. Petroamerica does not need to fund capital expenditures through debt and thus can maintain the strength of its balance sheet.
These high netbacks is the result of the following factors:
1) Petroamerica's production consists of light and medium oil.
2) The company is indexing its oil price to Brent that has been consistently trading at a premium to WTI over the last years.
3) The bottlenecks that were hampering the production growth of the Colombian producers until 2011 have been resolved. Fortunately, oil transportation infrastructure in Colombia has caught up with production over the last years. Last year, the Bicentenario line began operating, while the Ocensa pipeline was expanded. Calgary-based Enbridge (NYSE:ENB) is also considering building a line to Colombia's Pacific coast. And according to Parex's CEO: "At present there is lots of excess capacity in pipelines."
The Valuation Is A Steal
In this paragraph, I will compare Petroamerica to its peers. Due to the increasing M&A activity in Colombia over the last two years, there are not many companies left with light oil-weighted production and assets exclusively in Colombia. This is why, I had to broaden a bit the criteria as below:
1) The peers are either big junior producers (production at approximately 10,000 boepd) or small intermediate producers.
2) They have light oil-weighted production coming from onshore assets.
3) All their producing properties are located in South America, and all or most of their production is coming from Colombia.
Based on these criteria, here are Petroamerica's peers:
1) GeoPark Limited (NYSE:GPRK).
2) Amerisur Resources (OTC:ASUXF).
3) Canacol Energy.
4) Parex Resources.
5) Gran Tierra Energy (NYSEMKT:GTE).
Here is some more information about Petroamerica's competitors:
1) GeoPark's core properties are in Colombia, Chile, Brazil and Argentina, as shown below:
"Source: GeoPark website"
More than 50% of GeoPark's production is coming from Colombia.
2) Amerisur's assets are located in Colombia and Paraguay, as illustrated below:
"Source: Amerisur website"
It must be noted that Amerisur's production is currently coming only from Platanillo Block, which is neighboring Suroco's Suroriente Block (now Petroamerica's).
Amerisur's second Block (PUT-12) in Colombia that might become a producing property in 2015, is also very close to Suroco's Blocks (now Petroamerica's).
3) Canacol's assets are in Colombia and Ecuador, as illustrated below:
4) Parex is a Colombia-focused company whose assets are in Colombia and Trinidad, as shown below:
5) Gran Tierra gets approximately 80% of its production from its Colombian properties, while its assets are spread out in Colombia, Brazil, and Peru, as shown below:
To calculate the Net Debt and the Enterprise Value accurately, I took into account the working capital surplus or deficiency ($1 = C$1.097, 1GBP=$1.66). Now I will proceed with the calculations based on three key metrics:
1) Per EV/Production: Here is the table with the first key metric:
(100% light oil)
(~98% light/medium oil)
(99% light oil/liquids)
(70% light oil)
(~76% light/medium oil)
(~97% light & medium oil/liquids)
(*): Estimate, based on the latest corporate guidance.
(**): Pro forma the equity financing of May 2014.
(Amerisur, Gran Tierra,
Parex, Canacol, GeoPark)
Based on the average metric above, Petroamerica's enterprise value would be: $76,278/boepd X 9,000 boepd = ~$687 million.
2) Per EV/2P Reserves: Let's check out now the table below with the second key metric:
(100% light oil)
(98% light/medium oil)
(~95% light & medium oil/liquids)
(~49% light oil)
(44% light/medium oil)
(97% light oil/liquids)
(**): Pro forma the equity financing of May 2014, linked above.
(Amerisur, Gran Tierra, Parex) (*)
(*): It excludes GeoPark and Canacol because their reserves are not oil weighted.
Based on the average metric above, Petroamerica's enterprise value would be: $25.23/boe X 11.8 MMboe = ~$298 million.
3) Per EV/EBITDA: Let's check out now the table below with the third key metric:
($ million) (*)
(*): Estimate, based on the latest production guidance.
(**): Pro forma the equity financing of May 2014, linked above.
(***): For calendar 2014.
(Amerisur, Gran Tierra,
Parex, Canacol, GeoPark)
Based on the average metric above, Petroamerica's enterprise value would be: 5.25 X $170 million = ~$893 million.
To sum it up, this is Petroamerica's enterprise value based on the average metrics of the peers:
1) Per EV/Production = $687 million.
2) Per EV/2P Reserves= $298 million.
3) Per EV/EBITDA= $893 million.
Based on the average metrics of the peers, Petroamerica's enterprise value should be: 687 + 298 + 893 = 1878 / 3 = $626 million.
Since Petroamerica's net debt is negative and currently stands at approximately $35 million, the market cap will be approximately $661 million. Dividing this market cap by 858 million outstanding shares, I get $0.77/share or C$0.85/share (1 USD = 1.097 CAD).
Given that Petroamerica's current price is C$0.39/share, there is an upside of approximately 115% from the current levels.
Grossly Undervalued Per NAV
Thanks to the updated mid-year reserves report that was released on August 19th (linked above), I will estimate Petroamerica's NAV as below:
2P Reserves (MMboe)
2P Reserves (C$ million)
(C$ million) (Low Estimate) (**)
Working Capital Surplus
Shares Outstanding (million)
Net Asset Value Per Share (C$)
(*): 1 USD = 1.097 CAD
(**): 400,000 net undeveloped acres X C$500/acre = C$200 million.
At the time of writing, Petroamerica trades at C$0.39, and the NAV of C$0.76 per share (low estimate) represents an upside of 95% from the current levels.
I must also point out that the aforementioned market value of C$500/acre is very low, given the fact that Petroamerica's acreage (Llanos, Putumayo) is surrounded by producing oil fields. To give you an idea, Canacol Energy sold part of its undeveloped acreage to ExxonMobil (NYSE:XOM) for C$850/acre back in early 2012. Canacol's acreage was in the Middle Magdalena Basin and had zero production or reserves associated with it. As also linked above, Canacol sold two more sections of its undeveloped acreage (zero production, zero reserves) in the Middle Magdalena Basin for C$1,250/acre and C$3,300/acre in 2012 and early 2013 respectively.
The Strong Management Is Here
Petroamerica has a strong management team with a very long experience in the energy sector. For instance:
1) Mr. Navarrete, President and CEO, has over 24 years of oil and gas experience through his extensive career in Ecopetrol (NYSE:EC), Colombia's state-owned energy company with a market cap of $70 billion.
Mr. Navarette has held various positions with Ecopetrol, namely: E&P Executive Vice President, Production Vice President and Reservoir Manager. During his tenure at Ecopetrol, he was instrumental in leading and consolidating new business opportunities and for taking Ecopetrol public. Mr. Navarette was also responsible for the development of producing oil fields through his association contracts with BP (NYSE:BP), Chevron (NYSE:CVX), Petrobras (NYSE:PBR), Meta Petroleum (a subsidiary of Pacific Rubiales Energy which operates the Rubiales oil field, Pirri and Quifa), Occidental (NYSE:OXY) and others.
Mr. Navarrete has also held several board positions with some of the subsidiaries of Ecopetrol: Ecopetrol America, Ecopetrol Peru, Ecopetrol de Brasil, Savia (Peru) and Hocol S.A.
2) Mr. Wagner, the CFO, has worked with many international oil and gas companies including EnCana (NYSE:ECA), Talisman Energy (NYSE:TLM) and Sherritt International (OTCPK:SHERF), supporting operations in Brazil, Cuba, Colombia, Australia and Norway.
3) Mr. Gillcrist, the COO and Executive Vice President Exploration, has more than 24 years experience worldwide in exploration & production, including extensive exposure to Colombia. Prior to joining Petroamerica, Dr. Gillcrist worked for CEPSA (Compañia Española de Petroleos, S.A.) where he was the Group Exploration Manager. CEPSA is a Spanish integrated energy company with international assets. CEPSA is Spain's fourth-largest industrial group, and acquired Coastal Energy (OTCPK:CENJF) for $2.2 billion in late 2013.
Mr. Gillcrist has also worked for the oil independents LASMO, and Union Texas Petroleum, and has evaluated exploration and production projects throughout South America, Europe, Africa and the Far East.
The Insider Ownership And Frank Giustra
First, the basic insider ownership is 3.4% (pro forma Suroco's acquisition). Given that the company currently has approximately 858 million basic shares outstanding, the insiders' basic stake is approximately 29.2 million shares, which translates into approximately C$11.4 million, based on the current price of C$0.39 per share. Obviously, the management team has enough skin in the game and is incentivized to grow Petroamerica and sell it for the highest possible price.
Second, the insiders keep adding to their positions. According to the Toronto Stock Exchange, an insider bought 246,000 shares at approximately C$0.37 (average) a couple of days ago.
Last but not least, a Canadian tycoon, Frank Giustra, is an experienced natural resources investor who is a large and independent shareholder of Petroamerica. Aside from being the founder of Lionsgate Films, he is a proven natural resource developer, having created no less than 5 billion-dollar commodities firms.
Giustra looks for a management team with a track record of success and likes to back them early: "Then I watch and see if they deliver on their promises".
According to the link above, Giustra also notes that: "Now Petroamerica forecasts 30,000 bopd over the next couple years." And he believes the projection is realistic based on management's track record, so he is calculating what the company could be worth. This is how he ends up saying that Petroamerica is a 10-bagger from the current levels.
However, he notes that: "The way to get 10 baggers is not by waiting until they have achieved 30,000 barrels. You have to recognize a few things before your typical institutional investor or analyst, who waits for all the proof before he or she invests."
Petroamerica is not Giustra's first Colombian energy venture. In 2008, he seeded Serafino Iacono's Pacific Stratus Energy, with $5 million in early stage capital. Today that firm is Pacific Rubiales, Colombia's largest non-state owned oil and gas firm. Giustra says: "I like to focus on something and make sure it's worth my while. Wheaton River was the same idea, a great management team with nothing when we started."
Wheaton River, which Giustra and Ian Telfer took over in 2001, went on to become Goldcorp, and spin out Silver Wheaton, creating tens of billions of value for shareholders over the decade that followed.
Reasons For The Current Mispricing
Petroamerica was penalized due to the following two reasons:
1) The Warrant Overhang: Petroamerica's trading discount has also been attributed to a significant warrant overhang. The company had almost 88 million warrants at an exercise price of C$0.35 with an expiration date in early May 2014.
However, the C$0.35 warrants expired, while the next warrants that expire in October 2014 have an exercise price at C$0.75, which is almost 100% higher than the current levels of C$0.39.
2) Relatively Low RLI (Reserves Life Index): As of December 2013, Petroamerica had a relatively small reserve base (2P reserves of 4.9 MMboe), and their reserve life index was 2.1 years.
However, this issue was addressed in August 2014, when Petroamerica announced a mid-year update by external reserves auditors GLJ. According to that update:
A) Petroamerica's 2P reserves grew by 20% and were 5.9 MMboe as of June 2014, compared to 4.9 MMboe as of December 2013.
B) Thanks to the gushers in the Quinde field of Suroriente, Suroco's 2P reserves grew by 87% and were 5.9 MMbbls as of June 2014, compared to 3.1 MMbbls as of December 2013. Suroco's 2P reserve life index also increased from 4.0 years to 5.4 years.
Thanks to this news, Petroamerica's RLI currently is 4.5 - 5 years.
1) Production Growth: It will be organic growth and growth through acquisitions. Let's see some more details:
A) Organic Production Growth: In June 2014, the company's CEO stated that Petroamerica plans to more than double output in two to three years after buying Suroco Energy. In fact, he expects Petroamerica's production to rise to 20,000 bopd (100% light/medium oil), as the takeover gives the company access to the southern Putumayo Basin in Colombia.
On that front, the company just announced a rich exploration and development drilling program for the remainder of 2014 and the early part of 2015, as outlined below:
Quinde - 4 wells
Cohembi - 4 wells
Petroamerica will participate in the drilling of up to six exploration wells in the second half of 2014. Two are targeting high impact low-side fault closures in the Llanos (Langur-1 and Garza Roja -1), two conventional Llanos foreland fault traps (Crypto-1 and Zampona-1), and two N-Sand prospects in the Putumayo Basin (Cohembi North-1 and Trampa Mixta-1). Additionally, the company will partner in approximately 8 development wells in the Quinde and Cohembi fields.
B) Growth Through Acquisitions: According to the previous link, the CEO also stated that the company is on the lookout for more acquisitions. I do not know whether the expansion will be within Colombia, but as noted above, Suroco's technical team who has gained substantial experience working in Ecuador will remain part of the combined company. And this will facilitate Petroamerica's potential expansion to Ecuador, if needed.
Furthermore, Mexico's marginal oil fields have emerged as a potential catapult for Colombia-based juniors seeking Latin American expansion, according to consultancy Wood Mackenzie. Wood Mackenzie's head of Latin America upstream research, Ivan Cima, said onshore blocks would draw interest from small and mid-sized firms present in Colombia and put Petroamerica on the list. "They could see Mexico's marginal fields as a natural transition point," Cima said.
2) Takeover Target: According to Bloomberg (as linked above), Petroamerica's CEO said in an interview in June 2014, that while seeking more acquisitions to increase production, the company is also open to takeover offers from potential suitors. I quote his statement:
"Our plan is to continue diversifying assets, to operate fields and continue growing. If someone is able to make an attractive offer that shareholders feel represents the correct value, one would have to do it."
The thing is that the consolidation in the Colombian energy sector started roughly in 2011, and the M&A activity has been on the rise since then, given that the business security has been improving dramatically. On that front, let's see some facts:
A) Pacific Rubiales (OTCPK:PEGFF) is the primary suitor in Colombia, and has to replace 60,000 bopd from the Rubiales field. Its agreement with Ecopetrol in the Rubiales field expires in 2016. Even though the company is negotiating a followup deal with Ecopetrol, most analysts treat the loss of production from that field as a certainty.
According to an article (as of August 2014), Macquarie Securities says there is little incentive for Ecopetrol not to take those barrels from Pacific Rubiales. "With almost 100% certainty, Ecopetrol will take the 60,000 barrels that is now owned by Pacific Rubiales," they say.
B) Pacific Rubiales is not alone. According to Bloomberg, Parex Resources is focusing its growth efforts on Colombia and aims to double production in the next five years. Parex's CEO is planning more land and asset acquisitions to boost the company's output to as much as 50,000 bopd, according to a recent interview at Parex's headquarters in Calgary.
Parex's CEO believes that Colombia's stable government and well-understood oil resources make it a better investment than other countries in the region such as Argentina. As linked above, he also said: "To be relevant in the market, you really have to be in the range of 25,000 to 50,000 bopd. Parex's production will grow as much as 20% annually from 17,500 to 18,500 bopd this year".
How do you think is Parex going to achieve this? This is why, I do not expect the M&A activity in Colombia's energy sector to abate any time soon. In fact, I believe the consolidation will intensify over the next couple of years. And I think it shouldn't be long before the predator comes in and takes out its next prey.
And Petroamerica has a strategic advantage as a potential takeover target. Most of Petroamerica's oil production (pro forma the deal with Suroco) is light oil, which is an effective diluent. And diluents have become increasingly important to heavy oil producers in Colombia. For instance, let's recall why Pacific Rubiales acquired Petrominerales in late 2013. Petrominerales' light oil was strategic for Pacific Rubiales to monetize its heavy oil, because Pacific Rubiales expected to save $35 million by using the light oil as diluent to transport its heavy oil.
3) Gross Undervaluation And Recent Analysts' Upgrades: Petroamerica's current valuation has gone to "head-scratching" levels. In fact, Petroamerica is so undervalued that it is borderline criminal, while the bargain hunters are always trying to identify the next multi-bagger.
Both the irrationally depressed key metrics and the recent analysts' upgrades can trigger a rally anytime.
1) Geopolitical Risk: It is an indisputable fact that Colombia's bureaucracy, social stability and business security continues to lag behind that in the US or Canada. But Warren Buffett has said: "Fear is the foe of the faddist, but the friend of the fundamentalist." In addition, Colombia ranks low on my country risk spectrum, and things are way better than in Kurdistan, Nigeria, Argentina or Venezuela.
The current government under President Santos have restored operational security and have really cleaned up Colombia over the last years. Former President Uribe received billions of dollars in US aid, and the security risks have diminished consistently over the last years. The Army is regularly deployed at well heads, oil fields and pipelines to provide security against terrorist attacks.
In late 2012, the Colombian government and FARC engaged in peace talks. Finally, the government and FARC agreed on land reform after more than six months of peace talks. This development points towards ending half a century of sabotages and outright attacks on oil infrastructure, strengthening further the stability and operational security in Colombia.
Moreover, the political landscape is very friendly from an investment standpoint, and the Colombian government has created a business environment that is conducive for foreign investors. This is why, Colombia's oil production has been increasing consistently since 2008, as shown below:
Colombian oil production rose to over 1 million bbl/d in 2013 and will continue to rise over the next years. According to a recent government study, Colombia has a striking potential to produce 13 billion barrels of oil over the next 20 years.
In addition, officials from several ministries will hold meetings every two weeks to execute a plan to lift daily production by 43,000 barrels by the end of the year, Deputy Energy Minister Orlando Cabrales said two days ago in an interview in his Bogota office. "We're all rowing in the same direction to carry out these steps," Cabrales said. "This shows the importance the government is placing on oil production."
In addition, the geopolitical risk factor impacts all the other Colombian players with much higher key metrics than Petroamerica. And given that Petroamerica will fall prey to a bigger producer over the next couple of years, the intermediate and major energy producers in Colombia (i.e. Pacific Rubiales, Ecopetrol etc.) have never faced any significant or long-standing problems due to security-related issues. They have strong local ties and extensive knowledge of the country in order to navigate successfully through such problems, once they arise.
That being said, the geopolitical risk cannot make the slightest dent in my investment principles. So I can't refrain from participating in Colombia's oil boom, even if the country's risk is higher than Canada's or Australia's. And finally, if you can't take the heat, get out of the kitchen.
2) Commodity Risk: No E&P company is immune to the oil price and Petroamerica is no different. A sustained drop of the oil price will impact Petroamerica's business plan and eventually Petroamerica's profitability.
Although a correction from the current levels of approximately $100/bbl (Brent) is not out of the question, I do not expect the oil price to drop below $90/bbl (Brent) anytime soon.
When it comes to investing in Colombia, my track record speaks volumes. So I assure you that Petroamerica is a diamond in the rough. Or to say it differently, Petroamerica is a "Parex Resources in the making".
Pro forma the deal with Suroco, Petroamerica is one of the fittest publicly-traded oil and gas companies. This strategic acquisition provides added scale and diversity to the Petroamerica portfolio, material exposure to an exciting new play in the Putumayo basin (the prolific N-Sand exploration fairway), and a production and reserves base that complements Petroamerica's with the ability to add significant future growth.
The new Petroamerica, since the acquisition of Suroco, holds interests in twelve exploration and production contracts in the Llanos and Putumayo Basins of Colombia , covering more than one million gross (over 500 thousand net) acres focused on high netback light and medium oil. This portfolio includes a substantial inventory of exploration prospects and leads that will be pursued to support future production and reserves growth for the Company.
Through that deal, Petroamerica also added operatorship, given that Suroco was qualified as a restricted operator in the 2010 bid round. Suroco got the operatorship for the PUT-7 Block that was acquired from Petro Caribbean Resources a few months ago. On top of that, the combined company intends to apply to become an unrestricted operator over the next months.
Petroamerica expects to be able to fully fund internally its operations for the year through the combination of free cash flow and cash-on-hand, while continuing to pursue select new business opportunities that will enhance the existing portfolio and provide additional future growth in its two core areas.
I must also point out the tremendous valuation gap between Petroamerica and Amerisur Resources. First, Amerisur Resources has nothing more than one producing property (Platanillo Block) which translates into zero diversification. Second, Amerisur's Platanillo Block is right next to Suroco's (now Petroamerica's) Suroriente Block which is a gold mine, given that both the Cohembi and the Quinde oilfields are there. Third, Amerisur and Petroamerica have negative Net Debt.
In other words, there is nothing that makes Amerisur better than Petroamerica, and their tremendous valuation gap is beyond any understanding and completely unjustified. The inefficient market is here. The only reason behind this huge gap is the fact that Amerisur's primary listing is on the London stock exchange (ticker: AMER.L), and Amerisur's buyers (mostly European investors) do not have the opportunity to compare Amerisur to Petroamerica and realize the big picture.
If Petroamerica had Amerisur's key metrics (EV/Production, EV/2P reserves, EV/EBITDA), Petroamerica should trade now between C$1.5 and C$2 per share.
After all and as the story gets out, the bargain seekers will not afford to overlook Petroamerica at the current price of C$0.39. The stock has nowhere to go but up, given that Petroamerica's fair price compared to the peer group is C$0.85 per share, while the company's NAV is estimated at C$0.76 per share (low estimate).
Disclaimer: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.