It's a pretty well known fact that oil producers around the globe are hurting. Oil prices have slid to fresh 10 year lows and many small producers are either struggling to stay alive or have already fell. Others are selling out at fire sale prices just to get out as quick as possible. Of course this also means that there are others who are healthy enough to be buyers right now. One of these smart companies is Gran Tierra Energy (NYSEMKT:GTE). The small Colombian producer has been utilizing its healthy financial position and low oil prices to expanded its core operations.
Obviously those who have been following the company have heard about the acquisition of Petroamerica (OTCPK:PTAXF), which was announced in November. The deal was closed this past week with Gran Tierra announcing it had acquired all issued and outstanding shares. As pointed out in previous articles this acquisition is a big deal for the company. It has added significantly to both the near-term and long-term growth of the company.
As I highlighted before I think this was a very good strategic move by the company. Utilizing this low price environment to pick up solid operations to add to their own is an excellent move by the company. However, the company didn't just stop with this smart strategic move. This past week it also announced it would acquire PetroGranada Colombia Limited. The rationale for this acquisition is based off the fact that the company obtained a 50% working interest in the Putumayo-7 Block when it bought PetroAmerica. With the PGC acquisition it will receive the other 50% working interest of the block and become the sole operator. Below is a small breakdown of the acquisition.
Gran Tierra has also agreed to pay $4M extra if the 2P reserves under the Putumayo Block end up meeting or exceeding 8MMbbls. Obviously management sees potential in the undeveloped land with the company claiming in the release it believes it to be in the top 25% of its exploration portfolio. This year the company will be drilling one developmental well on the block as well as two exploration wells. In total the company has plans for 3 exploration wells in its base guidance for 2016, the 3rd one being located in the Llanos-10 Block.
This would bring us to the latest bit of news from the company. It just announced its capital budget and guidance for 2016. Its base capital budget for the year will $107M.
However, the company is being flexible in this environment and has also created a discretionary growth capital plan as well. This is a very solid move as no one can be certain where oil prices will move this year. Being able to be flexible limits downside for the company while adding potential upside. It has identified $61M worth of growth projects that if Brent prices recover may be deployed in the second half of the year. So what does the company consider commodity prices recovering? In the guidance it claims it would need Brent prices to be (average) $52.50 to complete both the base capital plan as well as the discretionary growth plan with just funds flow alone. If Brent prices are not able to recover that much the company would expect to be able to fully fund its base capital plan with just funds flow at $40 Brent prices.
The expectation at $40 Brent for the year would be 20% WI production growth over 2015. The high-end of guidance has the company exiting 2016 with a WI production rate of 30,000 boe/d. While a good chunk of this production is obviously from the acquisitions it is still forecasting decent organic growth considering its midpoint average production guidance for 2016 is 28,250 boe/d.
Financially the company continues to be in a good spot even after the acquisitions. While one would have to be optimistic that Brent can make it back to $40 this year, even if it never sees $40 the company should be fine. After factoring out both acquisitions the company claims working capital to be $97M currently. This means that even if the company generated $0 in funds flow for the year it would nearly be able to fund the entire base capital plan anyway. The company continues to have a $200M undrawn credit facility at its disposal as well. It expects to not use any of this if Brent averages $40.
Barring any large surprises the company looks completely healthy at the beginning of this year. It remains debt-free and is flexible to the upside of crude prices. I believe the recent moves by management are prudent with the company looking to not only be fine in the near-term to survive this downturn but also to be able to capitalize big time when Brent prices move higher at some point in the future.
In conclusion, the company has made some very strong moves over the last few months. Both acquisitions add near-term value as well as tremendous long-term value to the company in my opinion. Guidance and the budget for this year look very sensible and even in the most extreme case the company looks to be fine financially this year. If Brent is able to make a decent comeback this year the company of course will benefit greatly and more so than others in the industry seeing as it's a low-cost producer. Although 2016 looks to already be a very dim year for oil, Gran Tierra looks fine to ride oil back upward in the future.
Disclosure: I am/we are long GTE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Always do your own research before investing.