Gran Tierra Energy - Undervalued And Growing Small Oil Company

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About: Gran Tierra Energy, Inc (GTE)
by: The Value Portfolio
Summary

Gran Tierra Energy has had a difficult time since the start of the oil crash. The company has watched its stock price drop by almost 75%.

Gran Tierra Energy has recently acquired PetroLatina for more than $0.5 billion. These acquisitions should support the company's profits over the long term.

Gran Tierra Energy's revenue is more than double the company's capital expenses. The company will have additional cash for either growth spending or additional acquisitions.

Gran Tierra Energy (NYSEMKT: GTE) is a publicly traded oil company with a market cap of almost $1 billion. The energy company was founded in 2005 and has had a difficult time since the start of the oil crash. However, the company has made some strong acquisitions, and as we will see throughout this article, is a good investment as a result of its strong assets and stable financials.

Gran Tierra Energy Oil - Motley Fool

Gran Tierra Energy Strong Assets

Gran Tierra Energy has been spending its existence building up a portfolio of strong long term assets.

Gran Tierra Energy Overall Portfolio - Gran Tierra Energy Investor Presentation

Gran Tierra Energy's assets are centered around Columbia. The company has had strong performance at its Acordionero assets, with production increasing 100% in the 9 months since acquisition to more than 9.4 thousand barrels per day. This has resulted in the company's total production in the Middle Magdalena Valley Basin increasing to 10.3 thousand barrels per day. At roughly 4 million barrels of production annually, that means this region generates more than $0.2 billion in revenue for Gran Tierra Energy every year.

The company has also had continued success at its Costayaco project. The company has successfully completed its 1st horizontal well on the CYC-28 asset with a production of more than 1 thousand barrels per day. More importantly, this is on a water cut of just 5.7%. That is an incredibly low water cut that means that production is likely to continue for a long time. This should provide some support for Gran Tierra Energy's long-term earnings.

The company currently has a 2nd horizontal well that's being drilled that's more than 90% longer than CYC-28. This should allow the company's production to more than double from this region providing the company with $10s of millions of additional annual revenue. The company also has numerous other discoveries and assets that it is working on production. These are all assets that should provide the company with thousands of barrels per day in additional production allowing the company to further increase its long term earnings.

Gran Tierra Energy Acordionero Asset - Gran Tierra Energy Investor Presentation

Looking specifically at Gran Tierra Energy's incredibly valuable Middle Magdalena Acordionero asset, we can see that the company's 2017 2P oil production forecast from the region is 9 thousand barrels per day. However, this is expected to almost double to 16 thousand barrels per day by 2019 and to not drop to below 9 thousand barrels per day by 2024. That means that this region will continue to provide Gran Tierra Energy with growing revenue and profits for the long term.

Looking specifically at the region's profits, we can see that the region has 1P reserve of 19 million barrels. At current annual production of 4 million barrels, the company has enough reserves for approximately 5 years. Looking at the company's 2P reserves (proven + probable reserves), we can see that the company has roughly 12 years of reserves here. This is enough to provide Gran Tierra Energy with stable long term profits.

Overall, Gran Tierra Energy assigns an after-tax value to these reserves of $0.73 billion. Given Gran Tierra Energy's present market cap of $0.91 billion, this single asset alone is worth more than 80% of Gran Tierra Energy's entire market cap.

Gran Tierra Energy Putumayo Assets - Gran Tierra Energy Investor Presentation

Looking at Gran Tierra Energy's Putumayo Costayaco production overview, we can see that the company's current production in this region is 14 thousand barrels per day. The region is Gran Tierra Energy's highest current region of production, however, it's production is anticipated to rapidly decline. While this will be made up over the next few years by increasing production from Middle Magdalena Acordionero asset, it will likely decline past that.

However, this production does not take into account the upside for Gran Tierra Energy from its A-Limestone assets. That means that we can anticipate Gran Tierra Energy's revenue and profits to remain high, at least for the next few years, until oil prices recover.

Gran Tierra Energy Stable Financials

Now that we have thoroughly discussed Gran Tierra Energy's strong assets, let's continue by discussing the company's stable financials.

Gran Tierra Energy Financial Overview - Gran Tierra Energy Investor Presentation

Gran Tierra Energy has a present enterprise value of $1.17 billion, or noticeably more than the company's market capitalization of $0.95 billion. The company has 1P reserves of $1.00 billion and 2P reserves of $1.93 billion. Given that the company is focused on converting its 3P assets to 2P assets and 2P assets to 1P assets, that means we can expect the value of Gran Tierra Energy 1P assets to continue increasing.

These continued increases should support Gran Tierra Energy's stock price which should correlate with Gran Tierra Energy's long-term profits.

Gran Tierra Energy Net Asset Value - Gran Tierra Energy Investor Presentation

Looking specifically at Gran Tierra Energy's net asset value, we can see that the company has net working capital and long term debt of just $0.2 billion. However, the company also has $0.3 billion in proved undeveloped resources which will more than cover this net working capital and long term debt. The company also has more than $2 billion in probable and possible reserves which should support the company's stock price over the long term.

Gran Tierra Energy Capital Budget - Gran Tierra Energy Investor Presentation

Looking specifically at Gran Tierra Energy's capital budget and production guidance, we can see that the company's total capital budget is $0.20-$0.25 billion. Given that the company's anticipated annual revenue more than $0.5 billion, we can see that the company has more than enough cash to cover its entire capital budget. Roughly 40% of this budget is in exploration spending which should help Gran Tierra's earnings over the long term.

As we can see here, even with the company's anticipated production declines, the company is still anticipating growth over 2016 production of in the low-30s percents. We can see the strength of the company's financials from the fact that its revenue is more than enough to cover its capital budget. That should leave the company with more than enough additional capital for operating expenses, acquisitions, or dividends for shareholders.

Conclusion

Gran Tierra Energy has had a difficult time since the start of the oil crash. The company has watched its stock price drop by almost 75% having a significant impact on its shareholders. Despite this, Gran Tierra Energy has taken significant steps to improve its position for the long-term. The company has undertaken a number of large steps to improve its positions once prices recover including the acquisition of PetroLatina for more than $0.5 billion.

Gran Tierra Energy currently has a large number of significant assets that it anticipates to generate more than $0.5 billion in annual revenue. The company has 2P assets worth roughly $2 billion, or twice the company's present market cap. The company earns more than twice its anticipated capital budget for the year, which it could put towards dividends or additional growth.

As a result, we can see from Gran Tierra Energy's strong assets and stable financials why the company is a good investment at the present time.

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.