The Heat Is Rising at the Colombian Energy Patch
By Nathan Kirykos - December 3, 2012 | Tickers: GTE, PRE, PTA, PMG | 0 Comments
Nathan is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
I enjoy moving off the beaten path to unearth value in sectors, places, and areas where most investors have largely ignored. In this article, I will focus in the out-of-favor Colombia because:
M&A is getting hotter in this South American country again lately driven by the domestic playersPacific Rubiales (TSX: PRE), Canacol Energy, and Gran Tierra (NYSEMKT: GTE).
There have been some significant oil discoveries there recently and some of them have boosted the market cap of the companies involved.
Colombia looks to raise output by expanding in areas once dominated by guerrilla groups.
Political and Business Environment Improvement
These are the factors which impact the investment climate in Colombia:
The current Government under President Santos has restored political stability.
Former President Uribe secured billions of dollars in US aid in the last decade that was used for the military to reduce the FARC's impact on the country. The army has increased its size in the oil producing regions, therefore improving security. Currently, the rebels' sabotage has a much lower impact on Colombia's oil output versus few years ago. Police seized the rebels' tanks along with crude and destroyed the refineries where guerrillas processed crude to use in cocaine production. Military strikes have weakened FARC and pushed them deeper into the jungle. Eventually the rebels opened peace talks in Oslo in October and they plan to continue the negotiations with the Colombian Government in Havana next month.
Columbia has deployed 5,000 soldiers to protect the Bicentennial Pipeline. The pipeline will run from oil fields in the province of Casanare to the port of Coveñas, and will be the country's longest one with a 125,000 bopd capacity. According to Ecopetrol, this pipeline will be completed by April 2013.
A second pipeline, the Pacific Pipeline, could be operational by the end of 2016, according to the engineering firm Enbridge. It will have a potential capacity of up to 400,000 bopd. Speculation has suggested that Chinese companies are interested in supporting the initiative, in order to reduce both the costs and time periods for importing Colombian crude.
These major pipeline improvements made Ecopetrol to incorporate Cenit S.A.S. in Sep., a wholly owned subsidiary company specialized in hydrocarbon transport and logistics in Colombia, in order to manage pipelines in the country.
Producers in Colombia were experiencing long delays in permitting but permitting times have been slowly improving lately as the Government is adding more people here.
These are the latest deals in Colombia:
1) Gran Tierra acquired Petrolifera Petroleum in 2011, paying $195M or $60,000/boepd (81% oil & 19% nat gas).
2) Gran Tierra also acquired Solana Resources, paying $675M or $200,000/boepd (90% oil & 10% nat gas).
3) Canacol acquired the private Carrao Energy, paying $69M in Nov 2011.
4) Pacific Rubiales acquired Petromagdalena in June 2012, paying $60,000/boepd (95% oil & 5% nat gas).
5) Canacol acquired Shona Energy in Oct., paying $158M for 2,300 boepd production. It also expanded significantly its acreage in Colombia and Peru.
6) Pacific Rubiales acquired C&C Energia two weeks ago. C&C Energia was acquired for $45,000/boepd.
I wrote an article about C&C Energia in Aug. for another online publication, I pointed out how grossly undervalued C&C was at $5.80 back then. Actually, I had bought it at $5.70 two weeks earlier and I hadn't found another online article about C&C which became public through an IPO in 2010. Its recent acquisition by Pacific Rubiales at almost $9 confirmed my opinion just 3 months later.
Several discoveries have taken place in Colombia recently. For instance, Petroamerica Oil(TSXV: PTA) has a storm of exploration success that propelled its share price 200% lately. These discoveries boosted Petroamerica's production to 2,800 bopd as of today. Petroamerica has been on my radar since February and I bought few shares in May. Now, I wish I had bought a lot.
Companies with significant potential
Petrominerales (TSX: PMG) It holds 2M acres in Colombia (100% WI) primarily at the Llanos Basin and 6.4M net acres in Peru. Some failures in 2012 lowered production to 27,000 bopd currently. It has EV=$1.3B so it trades 2x the Funds from Operations annualized and for $48,000/bopd. Petrominerales pays a dividend with a yield 6% currently and it has initiated a share buyback program since May.
Canacol Energy After the acquisition of Shona and the oil field in Ecuador, Canacol has diversified its production base significantly. The combined company has net 2P reserves and deemed volumes of approximately 32 MMboe and 3.3M net acres. Canacol anticipates exiting calendar 2012 at 6,600 boepd. It is pursuing three exploration drilling programs on the Cedrela (Caguan-Putumayo Basin), LLA23 (Llanos Basin) and VMM2 (Middle Magdalena Basin) Blocks currently. Canacol owns three blocks (Santa Isabel 90% WI, VMM 2 40% WI and VMM 3 20% WI) in the Magdalena Basin and they expose Canacol to a large, unconventional oil shale in the thick La Luna formation analogous to the Eagle Ford formation of Texas. This play has received considerable attention from international players lately. VMM 2 is associated with Exxon Mobil and Shell works on VMM 3. The first results from the Mono Arana 1 well on VMM 2 Block are very encouraging as the rig met 85 ft of potential net oil pay. The consortium continues drilling the well to a total depth of 12,500 ft in order to reach the La Luna and Tablazo intervals.
"The early bird gets the worm" expresses my investing approach and it has rewarded me handsomely thus far. If this approach is coupled with strong fundamentals, then we have the perfect mix. I believe this mix applies both for Canacol and Petrominerales at their current levels ($0.31 and $7.80 respectively) and the value driven investors don't have to overlook them.