Gran Tierra Energy: Excellence Of Execution

| About: Gran Tierra (GTE)

Those of you who were wrestling fans in the 90's will understand why I want to call Gran Tierra Energy Inc the Bret "The Hitman" Hart of oil companies. These guys are the excellence of execution. They go into an oil field, they bounce off the ropes a few times, then they administer the sharp shooter and BANG, oil comes out!

On February 27th, Gran Tierra Energy Inc (NYSEMKT:GTE) came out with its fourth quarter earnings. And Gran Tierra's year over year numbers were very impressive and demonstrate the company's ability to successfully grow earnings, production and reserves. Some highlights:

  1. Revenue and other income increased by 60% to $597.4 million in 2011 compared with $374.5 million in 2010

  2. Net income grew by 241% from the prior year to $126.9 million, representing basic net income per share of $0.46 and diluted income per share of $0.45.

  3. Funds flow from operations increased 57% to $319.0 million in 2011 from $203.1 million in 2010

Gran Tierra is in excellent financial shape with zero debt and $351.7 million in cash and cash equivalents. Gran Tierra's strong funds flow from operations shows the company's ability to self fund its exploration and development activities. Gran Tierra is also executing on its goal to diversify its exploration out of Colombia. Colombia still represents about 80% of its production base, but Gran Tierra recently announced two more farms in agreements with Petroleo Brasileiro SA (NYSE:PBR) and Statoil ASA (NYSE:STO) for offshore properties in Brazil. Gran Tierra also has large land areas in Argentina (natural gas) and Peru. Peru is the most exciting area of exploration for Gran Tierra as the company is hunting for elephants. Now before I start getting nasty e-mails from animal activists, let me explain what elephant hunting means in the oil patch. An elephant is a billion barrel oil find, and that is what Gran Tierra is hunting for in Peru. The company has an exploration well scheduled to be drilled in Peru in the second half of 2012, and more in 2013.

In the last month, Gran Tierra has had a great reserve update and great year end numbers. But the market hasn't rewarded the stock with much upside. I believe that the market is grossly undervaluing the Gran Tierra growth story. Gran Tierra's management has stated that production will grow again this year and we're looking at production in the range of 26-27,000. This, coupled with 10 exploration wells to be drilled in 2012 (four in Colombia, three in Argentina, one in Peru and two in Brazil), gives us to understand we have significant catalysts to the upside. Gran Tierra is also trading well below its net asset value which is well above $9 a share. With its strong production growth, some exploration success, strong financial position and a significant discount to net asset value we can easily see a 50-60% upside move in Gran Tierra's stock this year. I've written previously about my opinion of GTE's growth and I believe it to still be true.

Happy elephant hunting.

Disclosure: I am long GTE, PBR.