Pacific Rubiales: A Deeply Under-Valued Colombian Diamond In The Rough

| About: Pacific Exploration (PEGFQ)
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The largest independent oil producer and explorer in Colombia is Canadian domiciled Pacific Rubiales (PEGFF.PK). It is also the second largest oil producer by proven reserves and daily production after Colombian government controlled Ecopetrol (NYSE:EC). Like its peers, its share price has failed to perform on the back of investors becoming more risk averse and avoiding investments in what are perceived to be high-risk operating environments. Pacific Rubiales has also been affected by the gyrations of the Colombian peso, which has fallen in value because of a strengthening U.S. dollar and ongoing Colombian government policy aimed at reducing its value.

There has also been growing speculation that Pacific Rubiales will lose the license for its flagship Rubiales Field in Colombia in 2016 when that license comes up for renewal. All of which has affected investor confidence in the company. Despite these issues, it is clear that the recent sell-off of Pacific Rubiales, which has seen its share price slump by almost 23% for the year-to-date, has created a deep-value investment opportunity for the long-term risk tolerant investors, offering potential upside of almost 49%.

The investment case for Pacific Rubiales

I last reviewed Pacific Rubiales in January 2013 and concluded that the company was heavily undervalued by the market offering potential upside of just over 49%. While I have revised and lowered my indicative price per share since then, Pacific Rubiales has fallen further in value to be down by 23% for the year-to-date and as a result still offers potential upside of 49% for investors, albeit at a lower indicative fair-value.

The plunge in Pacific Rubiales's share price in combination with the company's solid proven reserves and production has left it with some compelling valuation metrics. The most prominent is that it is now trading with an enterprise value to proven and probable reserves (2P) of 15 times. This is significantly lower than the industry average enterprise value to proven and probable reserves for equivalent sized oil and gas producers of around 22 times. It highlights that on the basis of its reserves alone Pacific Rubiales is significantly undervalued by the market at this time.

The company also has continued to generate solid growth in production while having in place an impressive diversified exploration and development program, which historically has had a high success rate. When all of these factors are taken into account when determining Pacific Rubiales's indicative fair-value per share using a net asset value (NAV) methodology, the company at its current market price offers investors potential upside of 49%.

There are also a number of emerging catalysts that will allow Pacific Rubiales to realize this upside for investors. These catalysts include its cost control program which will see the company's netback per barrel increase, ongoing growth in production and a diverse exploration program. The company is also in the process of boosting its investment in mid-stream assets in Colombia. These investments will further diversify its revenue stream, provide additional cost savings and more than likely be spun off in the future to unlock further capital as well as value for shareholders.

In addition to which, Pacific Rubiales is also seeking further acquisitions to boost its reserves and further drive savings through cost synergies and economies of scale. Any acquisition will also minimize the impact associated with the unlikely, but potential loss of its 42% share in the Rubiales Field in 2016.

Finally the improving security situation in Colombia since the commencement of peace talks between the leading belligerent group, the FARC and the Colombian government, has seen the risk of production outages due to sabotage and other terrorist acts diminish significantly.

Company profile and background

Pacific Rubiales commenced operations in 2004 and is focused on onshore oil exploration and production with its key assets located in Colombia. The company also has a diversified exploration and development assets in Brazil, Peru, Guyana, Guatemala and Papua New Guinea.

Currently, the majority of Pacific Rubiales's production assets are located in Colombia in the Llanos Basin centered on the Rubiales and Quifa fields, obtaining 98% of its production from these assets. Along with which the company has extensive exploration assets in the Colombian departments of Arauca on the Venezuelan border and Putumayo on the Ecuadoran border, as the chart below illustrates.

Source: Pacific Rubiales Investor Handout July 2013.

Pacific Rubiales also has offshore production and development assets in Peru, which it operates in partnership with BPZ Resources (NYSE:BPZ), which can be further explored in my earlier article on BPZ Resources. These assets contribute the remaining 2% of Pacific Rubiales's oil and gas production.

The company also has an extensive portfolio of geographically diversified exploration assets across Latin America and Papua New Guinea as the chart below illustrates.

Source: Pacific Rubiales Investor Handout July 2013.

These exploration and development assets total around 14.4 million net acres across the six countries where it holds assets.

Pacific Rubiales possesses considerable proved and probable reserves, with 337 MMBOE of proved reserves (1P) and 517 MMBOE of proved and probable reserves (2P). This makes it the largest operator by 2P reserves in Colombia after Ecopetrol, and compares favorably to its peers, particularly its Colombian peers such as Petrominerales (PMGLF.PK) and Gran Tierra (NYSEMKT:GTE), as the chart below illustrates.

Source data: All companies listed FY Financial Filings and Reserves Report 2012 and 2013.

Another impressive aspect of Pacific Rubiales's operations is the company's ability to continuously grow its proved and probable reserves as illustrated by the chart below.

Source data: Pacific Rubiales Reserves Reports 2008 to 2013.

Since commencing operations in 2004, Pacific Rubiales's proven and probable reserves have grown considerably to now be 517MMBOE, with much of this growth having occurred over the last five years. This gives Pacific Rubiales a compound annual growth rate (OTCPK:CAGR) of almost 31% over that period for its 2P reserves. While for the same period, proved reserves have a CAGR of almost 24%.

In 2012 alone, Pacific Rubiales reported that its proven reserves had increased by 27% YoY, with a phenomenal production replacement rate of 407%, essentially highlighting that Pacific Rubiales's proved and probable reserves are growing at a faster rate than its production is able to deplete them.

All of which indicates, that Pacific Rubiales has had considerable success in building its reserves to viable and profitable levels. While historical performance is no guarantee of future performance, it certainly indicates that Pacific Rubiales is doing something right and I believe the company is well positioned to continue growing its reserves at this rate.

This strong growth in the company's reserves has given it some compelling valuation metrics, with an enterprise value that is 15 times its 2P reserves as illustrated by the chart below.

Source data: Pacific Rubiales, Petrominerales, Gran Tierra, Husky Energy and Ecopetrol Financial Filings 2Q13, Yahoo Finance and Fidelity.

Both Pacific Rubiales enterprise value of 23 times 1P reserves and 15 times 2P reserves makes it appear cheap in comparison to its peers, with only fellow Canadian Husky Energy (HUSKF.PK) trading at a cheaper multiple for its 2P reserves. These multiples are also well below the industry average for similar sized oil explorers and producers, underlining just how cheap Pacific Rubiales is at this time.

Recent news and events

Since my last article on Pacific Rubiales, there have been a number of positive developments that further enhance its outlook. The most important development has been the receipt of an environmental license from Colombia's environmental regulator, allowing the company to increase water injection at the Rubiales field by an additional 1 MMbbl/d. Such a significant increase in water injection will allow the company to grow production at the field by almost 5%, which bodes well for growing revenues and profitability.

Pacific Rubiales also announced that a new investment partner, the International Finance Corporation (IFC), a member of the World Bank Group, has agreed to invest $150 million into Pacific Infrastructure. Pacific Rubiales holds a 56% controlling interest in Pacific Infrastructure, but once the investment is completed, this will be diluted to 41% and the IFC will hold a 27% stake. The key focus of Pacific Infrastructure is the development of crucial oil and gas transportation and storage facilities in Colombia. IFC's investment will be used to develop Pacific Infrastructure's primary assets, including the Puerto Bahía terminal on the bay of Cartagena on the Caribbean coast of Colombia and the OLECAR pipeline.

The development of these assets will reduce bottlenecks and the dependence on a single export terminal, while facilitating increased access to international markets. With the closing of the IFC investment, Pacific Infrastructure is in a position to acquire debt financing of approximately $350 million in order to proceed with the next stage of the development. This gives Pacific Rubiales a substantial lead over any other operator (with the exception of government controlled Ecopetrol) in the control and development of crucial and much needed oil transportation and storage infrastructure in Colombia.

Pacific Rubiales also announced the discovery of oil in the Bilby-1 exploration well in the Karoon Blocks in the offshore Santos Basin in Brazil. The company has a 35% interest in the five offshore blocks where this well is located, with the remaining controlling interest being held by the project operator, Australia's Karoon Gas (KRNGF.PK). The estimate for the 2C contingent resources for this well, were also recently upgraded by 85% to 135 MMBOE, all of which bodes well for further increases in Pacific Rubiales's reserves as that well and the blocks are further developed.

Financial performance, despite declining, remains strong

Over the last year, Pacific Rubiales's financial performance has fluctuated significantly on the back of a weakening Colombian peso and softening crude oil prices. However, as the chart below illustrates, despite these difficulties, Pacific Rubiales was able to deliver an impressive performance in the second quarter 2013.

Source data: Pacific Rubiales 2Q12 to 2Q13 Financial Filings.

For the second quarter 2013, revenue fell by 16% QoQ but remained flat YoY, despite crude prices softening significantly YoY. This can be attributed primarily to Pacific Rubiales's net oil and gas production continuing to grow significantly YoY.

But despite the decline in its financial performance, Pacific Rubiales has been able to maintain some solid margins particularly in comparison to its peers. For the second quarter 2013, Pacific Rubiales had an EBITDA margin of 57%, which is superior to many of its peers as the chart below illustrates.

Source data: Pacific Rubiales, Petrominerales, Gran Tierra, Husky Energy and Ecopetrol Financial Filings 2Q12 to 2Q13.

This is a particularly solid EBITDA margin and indicates that despite the softening in the price of crude and the decline in the value of the Colombian peso, Pacific Rubiales's operational profitability remains strong.

Pacific Rubiales's strong balance sheet leaves it well positioned to make an acquisition

A particularly pleasing aspect of Pacific Rubiales is the company's solid balance sheet. At the end of the second quarter 2013, Pacific Rubiales had almost $439 million in cash and cash equivalents, which is an 80% increase QoQ. But Pacific Rubiales's long-term debt has also increased by 60% QoQ to $1.9 billion. The majority of Pacific Rubiales's long-term debt - equal to 86% of its total debt - is not due for repayment until between 2021 and 2023.

This significant increase in long-term debt can be attributed to Pacific Rubiales currently seeking a Colombian oil acquisition, with a preference for a low density crude producer. Such an acquisition will not only build reserves but also allow the company further reduce costs through the economies of scale and synergies available.

Despite this increase in long-term debt, Pacific Rubiales's risk multiples remain acceptable and underscore the strength of its balance sheet as the chart below illustrates.

Particularly appealing is Pacific Rubiales's low debt-to-equity ratio of 0.5 and its debt-to-EBITDA ratio of less than one, indicating that the company is not heavily indebted particularly in comparison to its operating profit. This indicates that Pacific Rubiales is positioned to be able to increase its debt as and when required, such as when it finds a suitable acquisition target. The current ratio of greater than one is also reassuring for investors and indicates that Pacific Rubiales is more than capable of meeting its current debt repayment requirements.

Production continues to grow strongly

A particularly pleasing aspect of Pacific Rubiales's operations is that the company has been able to increase production for the last four consecutive quarters. This saw second quarter 2013 production grow by 13% QoQ and 30% YoY as the chart below illustrates.

Source data: Pacific Rubiales 2Q12 to 2Q13 Financial Filings.

Production will also continue to grow with the company having been granted the required environmental license to increase water injection at its flagship Rubiales Field by an additional 1 MMbbl/d. This is the largest producing field in Colombia and Pacific Rubiales has a 42% working interest with the remainder held by Ecopetrol. The increased water injection is projected to see an increase of around 5% in gross production in the Rubiales Field.

Pacific Rubiales is also expecting to see production from its Peruvian operations in the Block Z1 in offshore Peru, in which it has a 49% interest, improve over the remainder of 2013. This increase in production will come from the drilling development campaign that has commenced in that Block in the Corvina Field and the Albacora Field. But it should be noted that any increase will not be particularly significant with that Block only contributing around 2% of Pacific Rubiales's total net production.

All of which bodes well for the company to be able to continue increasing production, with the company's CEO Ronald Pantin indicating that Pacific Rubiales is on-track to exceed its 2013 production target. This will greatly assist the company's sale volumes and revenue and make up for the recent decline in the price of crude.

Continues to obtain a high average price per barrel of oil

This is particularly the case when it is considered that Pacific Rubiales has been able to consistently obtain a high average price per barrel over the last five consecutive quarters as illustrated by the chart below.

Source data: Pacific Rubiales 2Q12 to 2Q13 Financial Filings.

The decrease in the average price per barrel by almost 6% QoQ and 5% YoY can be attributed to softening in the price of crude over the first half of 2013.

Pacific Rubiales also continues to receive an average higher price per barrel, than the majority of its peers as the chart below shows.

Source data: Pacific Rubiales, Petrominerales, Gran Tierra, Husky Energy and Ecopetrol Financial Filings 2Q12 to 2Q13.

By consistently obtaining high average prices per barrel while being able to continue reducing costs, Pacific Rubiales is able to generate a solid netback per barrel.

Netback per barrel remains steady despite softer crude prices

Despite declining for the last three consecutive quarters, Pacific Rubiales was still able to deliver a solid netback per barrel of $63.31 for the second quarter 2013. The company's netback has remained flat QoQ but declined by 20% YoY as the chart below illustrates.

Source data: Pacific Rubiales 2Q12 to 2Q13 Financial Filings.

Despite the decline in the price of crude, the company's cost reduction initiatives are now gaining traction and this is why there was no further decline QoQ.

A key driver of Pacific Rubiales being able to maintain a solid netback in an environment where the price of crude has softened is reduced transportation costs. These were created by the company receiving increased capacity at the OCENSA pipeline. Another key driver is a significant reduction in diluent cost.

The reduction in diluent costs can be attributed to Pacific Rubiales using a higher volume of its own light crude oil for dilution and lower volumes of purchased natural gasoline for diluent, resulting in a lower overall blending ratio of around 13%. In addition, the commencement of blending facilities at the Cusiana Station has allowed Pacific Rubiales to reduce dilution from 18°API to 17°API at the Rubiales field, thus reducing the overall costs incurred on transporting diluents.

It is also expected that this netback will improve over the remainder of 2013 with a rebound in the price of crude combined with the company's cost initiatives gaining further traction. In addition, this netback will also continue to grow as Pacific Rubiales is able to realize the cost savings from its investment in Colombia's oil and gas transportation infrastructure.

The current second quarter 2013 netback also is well above the average for mid-cap oil and gas explorers and producers and one of the best among its peers as the chart below illustrates.

Source data: Pacific Rubiales, Petrominerales, Gran Tierra, Husky Energy and Ecopetrol Financial Filings 2Q12 to 2Q13.

This high netback and its continued growth, bodes well for Pacific Rubiales's profitability. This indicates that it is a superior investment in comparison to many of its peers, particularly those operating in North America, which typically generate a netback of between $40 to $50 per barrel.

A diversified exploration and development program holds considerable potential

One of the most promising aspects of Pacific Rubiales is its diverse exploration and development program. The company has a range of geographically diverse exploration and development interests in Brazil, Colombia, Peru, Guyana, Guatemala and Papua New Guinea as the chart below illustrates.

Source: Pacific Rubiales Investor Handout July 2013.

Pacific Rubiales has 14.4 million net acres across these locations comprised of 76 exploration blocks with 4.3 billion BOE certified prospective resources and 168 million BOE in contingent resources. The details of these blocks are set out in the chart below.

Source: Pacific Rubiales Investor Handout July 2013.

In Colombia and Peru alone, its onshore exploration and development properties hold considerable promise being located across the Sub-Andean Basins - one of the richest hydrocarbon trends in the world - as the chart below illustrates:

Source: Pacific Rubiales Investor Handout July 2013.

It is estimated that there are between 30 to 70 billion barrels of heavy oil in the trend in Colombia alone. Pacific Rubiales currently holds 26 blocks in the trend in the Llanos and Putumayo basins in Colombia and the Maranon and Ucayali basins in Peru.

For 2013, Pacific Rubiales has allocated $1.7 billion to its exploration and development program. Of this, 29% has been allocated to exploration, 30% to development drilling and the remaining 41% to infrastructure and facilities development as illustrated in the chart below.

Source: Pacific Rubiales Investor Handout July 2013.

For the first half of 2013, Pacific Rubiales completed 13 wells of which 5 were dry, giving it a success rate of 62%. This is significantly lower than Pacific Rubiales's historic drilling success rate of over 80%, but should increase as the company steps up its drilling and exploration activities.

Of the 13 wells drilled, seven were exploratory wells, the details of which are illustrated in the chart below.

Source data: Pacific Rubiales MD&A 2Q13.

Pacific Rubiales has some particularly impressive exploration assets and a drilling success rate that is the envy of many other oil and gas exploration and production companies. The large majority of these exploration and development assets are located in the Sub-Andean Basins which is believed to be one of the richest hydrocarbon trends in the world. All of which - despite the decline in drilling success rate - bodes well for Pacific Rubiales to be able to grow its proved and probable reserves through both exploration and development of existing fields.

Increased investment in midstream assets diversifies income and drives reduced costs

With Colombia being an infrastructure poor country oil and gas producers are reliant upon using the existing oil pipeline infrastructure in Colombia to transport their product. The majority of this infrastructure was originally owned and controlled by Colombian government majority-owned Ecopetrol. But Pacific Rubiales along with Petrominerales and a consortium of other investors have gradually been investing in the country's oil and gas transportation infrastructure.

This has allowed those companies to establish a significant moat given the long development times, costs and difficulties associated with constructing that infrastructure in Colombia's mountainous and jungle terrain. It has also given Pacific Rubiales the opportunity to diversify its income stream while being able to leverage off that infrastructure to reduce transportation costs. This is a key contributing factor to the solid netback that Pacific Rubiales has been able to generate despite the softening of crude prices.

Currently, Pacific Rubiales owns a 33.8% equity interest in Oleoducto Bicentenario de Colombia S.A.S (OBC), which is a special purpose company promoted by Ecopetrol. The company is responsible for constructing the Bicentenario pipeline, which will run from Araguaney in the central Colombian department of Casanare to the Coveñas export terminal in the Caribbean. The pipeline is expected to be operational by the end of 2013 and will add 450,000 bbl/d to Colombia's existing oil pipeline transportation capacity.

Pacific Rubiales is also leading the development of a port and pipeline facility for Puerto Bahía and the OLECAR pipeline, illustrated in the chart below.

Source: Pacific Rubiales Investor Handout July 2013.

Puerto Bahía is a greenfield liquids import-export terminal with a 3.3 MMbbl storage and cargo handling facility located on the bay of Cartagena, which is one of the largest trade hubs in Latin America. The OLECAR pipeline project is a 130 kilometer 30-inch crude oil pipeline with an initial transportation capacity of 300 Mbbl/d that will connect Puerto Bahía's facilities with Colombia's principal crude export terminal in Coveñas.

Pacific Rubiales has also indicated that in the future, it is planning to spin out a portion of these assets while keeping operational control in order to create additional value for shareholders. This promises to unlock further value for existing shareholders at the time that such an activity takes place.

Along with these significant investments in oil infrastructure in Colombia, Pacific Rubiales also has a substantial shareholding in Pacific Coal Resources Ltd ([[VGGGF.OB]]). This holding equals 14.4% of the total share float outstanding and is valued at around $2.8 million. Pacific Coal is currently involved in the acquisition and development of coal assets in Colombia, which is now the tenth largest coal producer in the world.

Oil outlook remains bearish

As discussed in my earlier reviews of Canacol Energy (CAAEF.PK) and Petrominerales, the outlook for oil remains bearish. But demand and prices are expected to spike somewhat with growing tension in the Middle East, in particular in Egypt and Syria. This has seen the U.S. Energy Information Administration (EIA) increase its forecast prices since my last review of Pacific Rubiales.

At the time of writing, it is forecast that the average price per barrel for West Texas Intermediate (WTI) in 2013 will be $97 and in 2014 it will be $93, while for Brent it is $106 for 2013 and $100 in 2014. This represents around an 16% increase over the oil prices used in my last review of Pacific Rubiales and I have factored this into my valuation model used in this review.

But like the majority of oil producers, Pacific Rubiales has implemented a strategy to manage or hedge commodity risk through a series of hedges using price collars. These collars as the chart below illustrates, have a range of $80 to $110, based on the price of WTI, effectively giving the company bottom of $80 per barrel.

Source data: Pacific Rubiales Interim Condensed Financial Statements For 3 and 6 months ended 30 June 2013.

This hedging strategy allows Pacific Rubiales to maintain a given level of cash flow, allowing it to continue funding key capital projects including exploration and development projects.

Shareholder remuneration

Unlike many of its independent oil and gas exploration and production peers, Pacific Rubiales pays a quarterly dividend that was recently increased in value by 50% to $0.165 per share. This gives the company a healthy forward annual dividend yield of just over 3% and this certainly is higher than many of its oil exploration and production peers.

Foreign investors in Canadian companies also need to be aware that withholding tax of 25% is payable on dividends. But this can be reduced depending on the nationality of the investor, and whether there is a tax treaty in place between Canada and the country in which the investor is domiciled. For U.S investors, the tax treaty between Canada and the U.S reduces this withholding tax to 15%. In addition, there is no withholding tax payable for dividends paid to an approved pension or retirement plan, provided they are generally exempt from tax in the country of residence.

Calculating Pacific Rubiales's indicative fair value

Despite being the world's fastest growing major crude producer, Pacific Rubiales has seen its shares slump by almost 23% for the year-to-date. This can in part be attributed to growing investor concern over investing in high risk operating environments in emerging economies. It can also be attributed to specific risks affecting Pacific Rubiales, including the rumored loss of its 42% interest in the Rubiales Field, which provides 68% of its production output.

As the table below illustrates, the market has yet to recognize the true value of Pacific Rubiales and it is currently trading with some compelling metrics, particularly in comparison to its peers.

These compelling valuation metrics include an EV that is only 15 times its 2P Reserves and a price-per-flowing-barrel of $52,000. The EV to 2P reserves ratio is superior to Petrominerales, Gran Tierra and Ecopetrol, while Pacific Rubiales's price-per-flowing-barrel is superior to Gran Tierra, Husky and Ecopetrol. This indicates that the market is not taking into account the fair value of Pacific Rubiales on the basis of its reserves or taken into account the fair value of its existing production.

While these metrics provide a useful picture for investors and indicate that it is significantly undervalued, they do not provide a full indication as to Pacific Rubiales's indicative fair-value. In order to do this, I have determined Pacific Rubiales's indicative fair-value per share using a net-asset-valuation (NAV) methodology.

To do this, I have determined the present value of Pacific Rubiales's after-tax cash flows generated by its net proved and probable reserves and then divided this by the number of common shares outstanding. When conducting this valuation, I have made the following assumptions:

  • I have taken Pacific Rubiales's 2P reserves of 517 MMBOE and discounted the difference between its 1P reserves of 337 MMBOE by 50% to represent the average accepted likelihood of those probable reserves becoming proven reserves.
  • I have discounted the future value of the company's cash-flows derived from those reserves by 10%, to determine their present value.
  • I have assumed an average basket price per barrel of oil of $90, representing the outlook for oil.
  • I have factored in a minimum royalty rate of 9% reflecting the standard minimum Colombian royalty rate of 8% (except for heavy oil) and the additional wildcat royalty applied to heavy oil, which has a royalty rate starting at 6%.
  • I have conducted the valuation over a 10-year period.
  • I have calculated the present value of debt and asset retirement obligations using a 3% growth rate (representing the long-term GDP growth rate) over the valuation period, factoring in the likelihood that these will continue to grow in value as the company expands.
  • Despite the particularly positive exploration and development outlook, I have not factored in any increase in reserves from those operations or future discoveries, because of the uncertainty that surrounds oil exploration.

After applying these assumptions and factoring in each of the catalysts discussed, I have calculated an indicative fair value for Pacific Rubiales of $27.45 per share, as set out in the chart below.

At the time of writing Pacific Rubiales is trading at around $18.40 and this indicative fair-value per share represents potential upside of 49% for investors. This clearly makes Pacific Rubiales a deep-value investment opportunity, particularly when the conservative valuation methodology and substantial margin of safety is considered.

It is unlikely that Pacific Rubiales will lose its license for its 42% operating share of the Rubiales Field when the current license expires in 2016, I have conducted a further valuation excluding those reserves. If the worst-case scenario were to occur and Pacific Rubiales were to lose access to the Rubiales Field, then its proved and probable reserves would fall by 19% and cause the indicative fair-value per share to fall to $24. At Pacific Rubiales's current market value, this leaves potential upside of 30%.

Other risk factors

Investor should also be aware of the additional risks that they have to accept when investing in a company that operates in a foreign jurisdiction in what is classified as an emerging economy. Key among these risks are:

  • Currency risk particularly with the Colombian peso now having fallen by around 8% against the U.S. dollar for the year-to-date.
  • There is increased political risk with the bureaucratic and legal system of emerging economies not as transparent as those of developed economies along with higher degrees of patronage and corruption. This could have an impact on Pacific Rubiales's attempts to renew the license for the Rubiales Field in 2016, but Colombia has shown itself to have a strong pro-business, pro-foreign investment environment.
  • Much of Pacific Rubiales's proved and probable reserves are undeveloped, with long lead-times to developing undeveloped reserves to the point where they can be extracted profitably. Hence, there is no guarantee that they will be able to access those reserves profitably.

But Pacific Rubiales's exploration and development risks are to a degree mitigated by the company's high success rate and its diversified exploration and development program.

Bottom line

Pacific Rubiales is an astonishing company that in just over nine years as grown to become the world's fastest growing major crude producer. Yet the market still insists on discounting its true value. The company has not only experienced remarkable growth but has acquired a solid portfolio of operational, development and exploration assets, which only further boosts its future potential. The risk averse nature of investors at this time is understandable, but in the case of Pacific Rubiales, it has created a deep-value investment opportunity for the long-term risk tolerant investor.

When the range of positive catalysts are considered, it is only a matter of time before the potential upside of 49% is realized for investors. These catalysts including a cost reduction program, growing production, a future acquisition and ongoing investment and development in much needed oil infrastructure in Colombia will continue to boost Pacific Rubiales's profitability. As a result, Pacific Rubiales's share price can only appreciate in value over the medium-to-long term.

Disclosure: I am long PEGFF.PK, OTCPK:PMGLF, BPZ, EC. 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.