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Toyota (NYSE:TM) has them, Flight Centre has them and now Colombia is having one. I'm talking about a Red Tag deal. These are deals that are almost too good to be true, and Petrominerales (OTCPK:PMGLF) is offering investors one of these fantastic deals. The stock is trading down around the $12.50 mark, which is a significant discount on all metrics (which I will go over in a bit).

Petrominerales is not innocent in all this, not by a long shot! Since the mid point of 2011, it's as if it has been drilling exploration wells with its eyes closed (MARCO..... POLO..... MARCO.... POLO... OK DRILL). However, with each exploration miss, the stock has been punished far beyond reason. Exploration is a tough business and misses are going to happen (I, for example, have drilled 3 exploration wells in my own backyard and all I've found is an old Nike shoe. I have 2 more wells scheduled for this year and I'm excited about the prospect of finding the other shoe). The truth of the matter is, the markets are discounting the stock for little to no further exploration success going forward and for this reason I am extremely excited about owning it. Expectations are so low that any exploration success could catapult this stock up 50%-100%. A double from $12.50 is not a stretch; when Petrominerales was firing on all cylinders and finding oil everywhere, including behind management's ears, the stock hit a high of over $40 a share. I think Petrominerales has a great chance of regaining its old exploration touch. It was an early entrant in Colombia and Peru, and it has some of the best land positions among the big players in Latin America. Lets look at its land positions and its remaining exploration wells to be drilled this year.

Exploration Land:
2 million acres in Colombia (100% Working Interest)
9.5 million gross acres in Peru (5.4 million acres net)

2012 Exploration Wells
AreaCurrent InventoryDrilled in 2012Drilling Plan for the Rest of 2012Remaining 2012 Unrisked UPIIP Targeted (MMBBL)
Deep Llanos - Corcel type prospects323735
Deep Llanos - Foothills prospects24-2100
Central Llanos & Putumayo24214
Peru2411128
Total104611267

(Figures taken from Petrominerales Corporate Presentation (pdf) - Annual General Meeting May 10, 2012)

MMBL = Million Barrels

UPIIP = Undiscovered Petroleum Initially In Place

Not too shabby! Petrominerales is looking for almost 270 million barrels of oil for the rest of this year and this is excluding its development drilling program at Yanec, Orito, and Neiva and its heavy oil prospects. Also I'd like to point out that Petrominerales is in very strong financial state, with a strong balance sheet, a working capital surplus and its exploration drilling is fully funded.

Let's look at some more fundamentals:

Trailing P/E4.28x
12 Month Forward P/E3.72x
2011 Price to Cash Flow1.9x
2012 Price to Cash Flow est1.73x
Q1 average production34,047 boe/day
Operating Net Backs Q1 2012$79.74
Net Asset Value Full Risked$25.13/share

(NAV calculations do vary among analysts and change depending on production disruptions/misses and exploration success as it is the net present value of future cashflows [discounting the revenues less operating costs]).

Petrominerales is dirt cheap on all of these valuation measures. To me, the most telling sign that an oil and gas company is cheap is the cashflow multiple it trades at. And at under 2x cashflow, Petrominerales is extremely cheap. Let's look at some of its small/midsize cap peers:

Legacy Oil And Gas (OTCPK:LEGPF) (Canada):

P/E: 47.2x
CFPS: 5.9x

Gran Tierra Energy Inc (GTE) (Latin America):

P/E: 12.6x
CFPS: 4.1x

Pacific Rubiales Energy Corp (OTCPK:PEGFF) (Latin America):

P/E: 8.6x
CFPS: 4.8x

Petrominerales is trading at more than half the valuation of its closest peers, and I think that this gap has to close. Petrominerales was a premium name in the Latin American E&P space, but because of a series of exploration misses, it has been punished to levels that make it a screaming buy. As bullish as I am on Petrominerales, I do caution you not to jump in full throttle. The macro economic picture with the debt crisis in Europe and the slowing in China does leave room for the downside for all oil and gas stocks, so I'd do what I always recommend and buy into Petrominerales slowly. This is a great level to initiate a position but there is nothing to say it can't get cheaper due to macro economic factors.

Disclosure: I am long Petrominerales (TSE:PMG), Legacy Oil & Gas (TSE:LEG) and Gran Tierra Energy (TSE:GTE).

Source: Red Tag Deals - Petrominerales