Petroamerica is generating significant cash flows and not getting rewarded for it (Photographer: Daniel Acker/Bloomberg )

Petroamerica is generating significant cash flows and not getting rewarded for it (Photographer: Daniel Acker/Bloomberg )

With shares of Petroamerica Oil Corp (PTA:TSXV) continuing to trade at a deep discount relative to their North American peers, the company has announced a 55 million share buyback to reduce the float by ~10%.  Management announced today that the TSX Venture has accepted their proposal to make a normal course issuer bid to buy Petroamerica shares in the open market.  They will purchase up to 55,175,760 shares from today through to March 23, 2015.

The company intends to finance the purchase with its current cash on hand, which stood at $95 million on March 1st and with the cash they generate from operations.  At current prices (~$0.30 per share), the total cost of the buyback is approximately $16.5 million (if they purchase all of the shares).

Petroamerica is generating significant cash flows from their Colombian light oil assets.  They are producing $80 operating netbacks and with production north of 6,400boe/d, they are making over $500,000 per day in operating cash flow.  Management is guiding a 2014 exit rate of 10,000boe/d (new management has yet to disappoint with guidance).

On that basis, and with an enterprise value of $121.5 million (negative $60 million net debt) they are trading at 0.66x current cash flow and 0.42x 2014 cash flow (based on 10,000boe/d).  Although the international E&P space, in general, has been discounted for a few years now relative to the North American peer group; the discount Petroamerica receives is larger than any other I've come across in the sector.

On an enterprise value per flowing barrel metric, Petroamerica is trading at $19,000.  To put that in context, Canadian oil/gas producers trade at many multiples higher than that, many over $100,000 per flowing barrel.

Petroamerica's growth plan (Image: Petroamerica Oil Corp.)

Petroamerica's growth plan (Image: Petroamerica Oil Corp.)

A perfect example of a Colombian-focused peer is, Canacol (CNE:TSX) which is currently producing 10,550boe/d and generates operating netbacks of only $32 per barrel.  At a $745 million enterprise value ($126.8 million net debt) they trade at nearly 6.0x current cash flow and 5.2x their 2014 exit rate of 12,500boe/d.  On an EV/flowing barrel metric they are trading at $70,380/flowing barrel (3.3 times higher than Petroamerica).

Why the steep discount?  Although on a cash flow basis, Petroamerica seems extremely discounted, they are correctly discounted for having a relatively small reserve base (2P reserves of 5.1 million barrels) and no operatorship.

Given that, management is currently looking for accretive transactions in Colombia's light oil basins to gain operatorship (which is usually crucial for an acquirer) and to grow reserves.  Their current reserve life index is roughly 2.5 years.

They have a number of targets to drill this year and are planning to spend $53 million on exploration and development.

The stock also has nearly 79 million $0.35 warrants coming free trading on May 9th which seems to be one overhang that has put a ceiling on the stock.

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Read: Petroamerica Announces Approval of Normal Course Issuer Bid

Disclosure: The author owns shares and is therefore very biased.  This is not investment advice.  Do your own due diligence.