Gran Tierra Energy: Leading The Way And Increasing Buybacks

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

Gran Tierra Energy has had a difficult time and has been driven down with overall oil prices.

The company is investing heavily in its business, both in finding new assets and in converting its existing assets into more reliable reserves.

The company has taken advantage of recently low share prices to aggressively buy back shares.

I expect the company to generate strong returns going forward .

Gran Tierra Energy (NYSEAMERICAN: GTE) is an oil company headquartered in Calgary, Canada. The company’s operations are centered around South America, primarily Colombia and Ecuador. As we’ll see throughout this article, the company’s impressive portfolio of assets, and their growth potential, are worth significantly more than the prices that the company is currently trading at.

Gran Tierra Energy - Gran Tierra Energy Investor Presentation

Gran Tierra Energy Portfolio Overview

Gran Tierra Energy has an incredibly impressive portfolio of assets.

Gran Tierra Energy Portfolio - Gran Tierra Energy Investor Presentation

Gran Tierra Energy has an impressive portfolio of assets. Despite production difficulties, the company still anticipates overall 2019 production of roughly 37 thousand barrels or 3% above 2018 production. The company was originally aiming for production roughly 6-7% higher, however, the company ran into issues with protests and field pumps. Still, the company has an impressive line of assets and is growing cash flow.

The company’s impressive portfolio of assets consists of 70 million barrels of 1P assets and 215 million barrels of 3P assets. The company’s reserves have continued to grow as the company has continued to invest over the past several years. That is an incredibly impressive portfolio of assets that support a half a billion company earning more than $300 million in annual funds from operations.

Gran Tierra Energy Historic Improvements

Gran Tierra Energy has a long history of impressive results.

Gran Tierra Energy Portfolio Improvements - Gran Tierra Energy Investor Presentation

Gran Tierra Energy has managed to improve production by 56% in 4 years, while simultaneously growing all three classes of reserves by even more. The company is focused on expanding its exploration abilities going forward, while improving the reliability of its reserves from 3P to 2P to 1P. Going forward, that’ll allow the company to continue growing its production.

More importantly, the company hasn’t achieved this by massively diluting its shareholders. The company’s NAV per share has grown significantly, with current NAV more than double the company’s share price. I expect the company will continue to recover towards its NAV going forward. Overall, growth in the Colombian reserves/production should result in long-term shareholder value creation.

Gran Tierra Energy Future Growth

Now that we have an overview of Gran Tierra Energy’s assets and its historic results, it’s time to continue by discussing the value for the company, its future growth potential.

Gran Tierra Energy Spare Capacity - Gran Tierra Energy Investor Presentation

The most impressive and necessary aspect of Gran Tierra Energy’s future growth is the company’s focus on its transportation assets. Transportation can be a major part of the expenses for a young oil company, and Gran Tierra Energy is focused on keeping expenses low. The company has strong prices linked to Brent, and overall dropping production from Colombia have allowed the company to keep its costs low.

Gran Tierra Energy Capital Investment - Gran Tierra Energy Investor Presentation

At the same time, Gran Tierra Energy is focused on an aggressive capital investment program, taking advantage of the double-digit returns it tends to gain from its investments. The company plans to invest roughly $330 million, funded entirely by the company’s cash flow.

This should provide an indication of how strong the company’s cash flow profile is. The company has a market cap of $520 million, and is spending 60% of its market cap in annual capital spending, capital spending funded by its cash flow, earning double-digit returns. The company is investing that across its portfolio. However, some of its most exciting projects such as its Acordionero water injection and infrastructure.

Overall, the company’s 27 development wells should allow production from its main Putumayo and Acordionero wells to increase significantly. Lastly, the company is also spending more than $100 million on exploration capital, which should allow it to increase its overall reserves and improve its existing reserves.

Lastly, in terms of long-term growth potential, the company is investing in Ecuador and expects exploration to start in 2020. The company’s Ecuador investments are a continuation of its Colombia assets, which should help its income to grow going forward. I am incredibly excited to see how these massive investments turn out for Gran Tierra Energy over the coming years.

I expect that these results will be incredibly rewarding. For example, double-digit returns after the first year of investment means $40+ million in annual returns, which means an almost 10% growth in cash flow for the company for each year of these investments. This should allow strong returns for shareholders.

Gran Tierra Energy Shareholder Results

Gran Tierra Energy should generate strong returns for shareholders, the company has been taking advantage of its low share prices to aggressively buyback shares. Gran Tierra Energy repurchased 3.2 million shares last week, or roughly 1% of its outstanding shares in a single week. This shows how quickly the company is taking advantage of low share prices.

Gran Tierra Energy Share Buybacks - UK Regulatory News

What’s even more impressive is if the company stopped its exploration and development spending for the next 2 months alone, it could repurchase double-digits of its assets. That shows the impressiveness of the company’s repurchase program that should reward shareholders.

Gran Tierra Energy Debt - Gran Tierra Energy Investor Presentation

The company has also kept debt to EBITDA levels fairly low, with $600 million in debt, and net debt to EBITDA just 1.4. Keeping debt levels low, would allow the company to continue to invest in its business and repurchase stocks, while handling the potential negative effects of a downturn.

Conclusion

Gran Tierra Energy has seen its stock price continuously fall as the company has been punished along with global crude prices. However, what investors aren’t paying attention too is how well the company is executing its goals. The company’s stock price has dropped to the point where it can comfortably invest 60% of its market cap into projects with a double-digit return on ROIC, while funding that investment from the cash flow.

At the same time, the company has been taking advantage of its share price to buyback shares. The company bought back 1% of its shares last week, and I’d like to see that continue going forward. Going forward, I expect that contrarian investors who invest now with a long investment horizon should be able to generate strong returns on their invested capital.

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.