PRE CEO Ronald Pantin

PRE CEO Ronald Pantin

The second largest oil producer in Colombia, Pacific Rubiales Energy (TSX:PRE), has agreed to buy light oil producer Petrominerales (TSX:PMG) for $1.6 billion in an all cash deal that represents a 56% premium for PMG shareholders. The transaction also implies a value to Petrominerales of $47,000 per flowing barrel.  Each PMG shareholder will receive $11 per share in cash, plus one common share of a newly formed E&P company that will hold Petrominerales’ current Brazilian exploration assets and $100 million in cash. PRE will assume nearly $640 million in net debt. Further details can be found in the news release. Read: Pacific Rubiales Announces Strategic Acquisition of Petrominerales.

“This is a natural fit,” said David Neuhauser, a managing director at Livermore Partners Inc., to Bloomberg. Neuhauser continued, “Pacific needs the light oil, and Petrominerales needs the capital to develop their vast acreage. Should be very positive for both companies.”

Light oil in Colombia is critical to Pacific Rubiales as a diluent for the company’s heavy oil production (127,555boe/d in Q2/2013).  Petrominerales offers 21,539 bopd of light oil production from Colombia and Peru as well as approximately 100 light oil exploration targets. PRE CFO Carlos Perez told Bloomberg in August that they “have been looking at Petrominerales for years but the problem is the declining rates they have,” (see Rubiales Would Consider Buying Light Oil Producer, CFO Says).  It appears that, in the end, PRE couldn’t resist the valuations offered by PMG.

Also, Petrominerales is heavily leveraged (it has $750 million in debt and a $550 million market cap) and as a result was working to reduce costs and shore up cash and so was unable to properly develop its asset base.  With PRE’s financial flexibility, they should be able to achieve upside on the development assets they are acquiring as well.  Add to this the fact that PMG offers access to key strategic oil pipelines, and you start to see why PRE pulled the trigger.

This opens up other light oil producers for consolidation in Colombia, in particular those operating in the highly productive Llanos Basin. Now that Petrominerales is gone, Canacol (CNE:TSX)Parex (PXT:TSX), and Petroamerica (PTA:TSXV) come into focus.

Today’s transaction also highlights the valuation disconnect currently being experienced by Colombian light oil producers. Although they offer attractive topline pricing (Vasconia, very similar to Brent), some of the highest netbacks in the entire oil and gas industry (over $70 per barrel in the case of PXT/PTA’s Las Maracas field, for example), and are able to optimize their decline rates better than they have in the past, these companies still trade at fractions of their historical multiples as well as those of their North American peers.

Expect shares of PXT, PTA and CNE to do well tomorrow.

Here’s the 5 year Pacific Rubiales chart:

PRE Chart

PRE data by YCharts

Disclaimer: These are opinions and not advice. All figures approximate and all facts to be verified by the reader. Do your own due diligence.