Reformed Calgary/Bogotá-Based Oil & Gas Junior Hits 65 Feet of Colombian Pay And The Market Responds
Featuring commentary from Frank Giustra, Jeff Boyce and Ralph Gillcrist, three key stakeholders in the company, Petroamerica Oil Corp.
It’s been a tough ride for Petroamerica Oil Corp. (PTA) shareholders, a favorite of well known resource and entertainment mogul Frank Giustra, architect of multiple billion-dollar resource companies. In the three years since PTA debuted on the TSX-Venture Exchange, it’s share price has fallen from highs of more than $.70 cents to lows of just $.08 cents last year, and has traded between $.10- to $.20 cents over the past 8 months. In fairness however, the Venture Exchange has fallen nearly 50% over the last 20 months, but the initial PTA management team disappointed market expectations.
However, on Thursday, August 16th, the company issued a press release (see our Thursday public alert here), which caused a few things to happen. First, the stock price took off 30% to the upside with volume increasing more than 10 fold, secondly, our eyebrows were raised---further inspiring us to investigate the company going into the weekend.
After a few personal conversations with Frank Giustra, Jeff Boyce (co-founder and initial CEO of what is now the $4.5B+ Vermillion Energy Inc. (TSX-VET), and PTA Executive Vice President Ralph Gillcrist, a PhD from the London Royal School of Mines and veteran explorer, here is what we discovered.
To begin with, the Thursday news release announced the results of a new oil well in the Las Marcas Field which Gillcrist regards as, “potentially a company-maker for a company of our size.” The specific well, named “Las Maracas 4”, is located on the company’s Los Ocarros block, which is among a seven block land position found within the underexplored Llanos basin area of Colombia. The significance of this well hit according to Gillcrist, is that it may potentially assist the company in moving from being a 1,500 barrel a day operation, to an over 3000 barrel a day operation (net after royalties) by the end of 2012. It is “Quite significant for a junior oil and gas company, and it certainly propels us into a new peer group of producers in Colombia”, he added.
The Los Ocarros block and all other PTA land positions are focused on the discovery and extraction of light-oil in a basin with an overabundance or heavy-oil production (light-oil being more valuable than heavy oil in Colombia at this time).
Gillcrist further emphasized the importance of the Las Maracas 4 well hit in that not only will it potentially magnify the company’s production output by the end of 2012, but it “removed a significantly large part of the risk associated with [PTA] meeting its production forecasts, and [ensuring] that we're internally funded to cover our exploration, appraisal, and development program for the remainder of this year, and also well into 2013.”
Two Titillated Titans
As indicated, we were also able to reach mining and entertainment mogul Frank Giustra in Vancouver over the weekend, as well as $4.5B+ Vermillion Energy Inc. co-founder, Jeff Boyce, in Calgary by phone.
Speaking briefly before heading out on a family vacation, Frank said, “Of all the resource projects that I am involved with, this is the one I am most excited about.” Frank in all likelihood however, owns millions of PTA shares, and his comments carry a bias.
During a conversation with Boyce on Saturday morning, who serves as PTA Executive Chair, he indicated that, “We’ve attracted talented management, de-risked our project portfolio, and cut our cost exposure. This [Las Maracas] is a major discovery with great follow up potential. Plus we have four large exploration projects that we’re going into later this year and next, that are bigger than this one alone.” Also worth noting, is Boyce’s recent purchase of approximately $150,000 (CAD) in PTA shares over the past six months.
Interestingly, Boyce, Giustra, and Gillcrist also indicated that the starting position of the company was nowhere near as exciting as the position it stands in today.
Engineering a Turnaround
Petroamerica Oil Corp. was founded in late 2009, by what appeared to be a group of part-time managers and directors. Stuffed initially with 6 blocks, and eventually growing to about 13 random but prospective exploration properties in Colombia, the corporate vehicle was saddled with high project carrying costs and it lacked focus--on top of having to deal with dwindling resource finance markets. In late 2010, the company brought in Ralph Gillcrist, and early 2011, Nelson Navarrete, who both helped spearhead an effort to focus the company's property package on the Llanos basin.
When asked about the beginnings of PTA, Mr. Boyce commented that, “The first president was unfortunately not the guy. And there was a parting of ways in early 2011 which caused grief in the marketplace---so I became more actively involved as Executive Chairman. We went out to hire a new CEO, Nelson Navarette, who was formerly second in command at Ecopetrol, Colombia’s state controlled national oil company."
Mr. Gillcrist indicated that Ecopetrol has dominated the Colombian energy industry since the mid-90’s, and that Navarette has, “Been tremendous in terms of facilitating our activities in country in Columbia...[it] was a tremendous coup to attract Nelson to the company...[He] is extremely well respected in the oil and gas industry, and in business and government circles in general in Colombia.”
Editors note: We were unable to reach Mr. Navarette in Colombia over the weekend.
One of our initial red-flag concerns in looking at this company however, was the obvious location of the exploration. Central & South American countries, are becoming ever more nationalistic in today’s economic climate, but once again, our eyebrows remain raised when we see current and former government leaders backing and becoming directly involved with smaller exploration and development companies. Navarette’s standing in Colombian energy and political circles does not appear to be in question.
In visualizing the Llanos basin, our conversations with Gillcrist indicate the oil pools resemble a "string of pearls"---which can quickly assimilate into a larger, central reserve base. “Individual field sizes”, he said, are probably, “Two to twenty million barrels maximum. On a single block of maybe 100 sq. kilometers, we can hope to find three or four of these accumulations, and develop them through a central processing facility---so you can quickly start to aggregate reserves of maybe 20-30 million barrels of these smaller accumulations.” PTA’s land base in the Llanos basin covers over 1.2 million acres.
When looking at the development of in-country energy exploration, Gillcrist added that, “When compared to more mature basins around the world such as the North Sea, or even the Alberta basin here in Canada,” Colombian energy basins are, “Extremely underexplored using modern exploration methods, such as 3D seismic.”
For this reason he sees, “Lots of untapped oil and gas potential---making Colombia very attractive.”
Like other developing countries, energy exploration & production in Colombia in highly fragmented among smaller players, and Gillcrist expects an inevitable consolidation in the sector.
“We'll see the smaller companies starting to merge to be more competitive, to have stronger balance sheets, and I think the general trend of the government in Colombia is they try and attract larger companies”, he further added. For this reason, the 5-year vision of the company is still being refined, “But one of the options would certainly be to look at M&A activity, with companies that would have a sensible fit, with a profile like Petroamerica.”, he noted.
Mineral and energy exploration ventures are known to be extremely risky, and when asked what kept him up at night, Gillcrist said, “Everything keeps me awake at night. The risk of a smaller company (such as PTA), is that if you have a surprise result in one or two of your wells---either the water comes faster than you expect, or there's an accelerated production decline, or there's a mechanical problem with the well itself. Also I would say social unrest in the country---but that hasn’t affected Petroamerica directly, like a few others operating in Colombia(which could effectively shut off your production). I would say these are major risks applicable to any company this size.”
In recent days, a redistribution of oil production royalties from local jurisdictions, back through to the federal government, has created tension in some areas of Colombia. This change has halted and disrupted other oil and gas operations in the Llanos basin, “However, these events by and large appear to have been resolved, and are occurring less frequently”, according to Gillcrist.
As earlier indicated, having on board the former #2 in command of a developing country’s state-run oil company, could add leverage in unseen ways, in our opinion, both on a local and national level when looking at domestic political and social issues.
Short Term Catalysts
In the short and medium term, “Keep your eyes peeled for production test results coming in from Las Maracas 4, as we will be putting that well on stream in the next 2-3 weeks,” Gillcrist adds.
Additionally, on the exploration front, PTA is drilling out “La Casona 1", and a well on the “CPO1 Block" which they anticipate starting before the end of September.
“Those are the things that could really, if we have additional discoveries based on our internal company projections, help us potentially reach 7,000 barrels a day of production by the third or fourth quarter of 2013---assuming we have success. As you're well aware, success is never guaranteed in this business, but we're optimistic.”, concluded Gillcrist.
Despite PTA’s rocky start, sentiment has clearly changed--and it helps to have the backing of big names in the business.
The current PTA market cap is lower than levels in which several of the world’s most successful resource funds have entered. Is it a guaranteed home run from here? Of course not. However, in our opinion, it appears to be more than a shot in the dark, and is certainly worth watching.
Play Interview with Ralph Gillcrist, Executive Vice President of Exploration, Petroamerica Oil Corp.(MP3 link)
We thank all participants, including you the audience, for sharing this story. The resource industry is something all Canadians--and Colombians, should be proud of.
Join resource sector legends, top analysts and over 100 leading mineral exploration companies Sept 27-28, 2012 at the Sheraton Hotel Toronto for the Toronto Resource Investment Conference brought to you by Cambridge House International, the world leader in production of resource investment conferences. Early registration is free at CambridgeHouse.com.
We hope to see many of you there.
Tommy Humphreys and Tekoa Da Silva are the authors of CEO.CA. Humphreys, based in Vancouver, Canada, also serves as a marketing director for Cambridge House International, the world leader in production of resource investment conferences. Da Silva, based in Brazil, is a resource investor and writer, who also happens to be a school teacher. Neither Humphreys nor Da Silva own a position in Petroamerica Oil Corp nor have they been compensated, directly or indirectly, for writing and disseminating this piece. This is not investment advice and contains forward looking statements. Always speak to an investment advisor and due your own due diligence before making any investment decision. All facts are to be verified by the reader. We seek safe harbour.