Private Colombian Oil Producer to be Acquired by Parex Resources for $198M

POSTED ON May 13, 2014 BY Tommy Humphreys
CATEGORY Parex Resources, Pat Di Capo, Petroamerica Oil, Stories,

(Shares of Parex are up nearly 110% in the past 6 months amid continued successful production growth)

Parex Resources (PXT:TSX) has agreed to purchase privately held Colombian light oil producer, Verano Energy Limited, in a cash and stock deal valuing Verano at $198 million or $1.25 per share (net). This deal appears to be beneficial for both companies as it provides liquidity to Verano shareholders (sources tell us the stock sold for as little as $0.25 per share earlier this year) and also provides Parex holders with increased working interests in some of their most prospective Colombian oil blocks.

Verano and Parex hold a number of joint interests in the Llanos Basin, including:

LLA 17 - Parex currently holds 40% WI and is acquiring another 23% from Verano
LLA 32 - Parex currently holds 30% WI and is gaining another 40% from acquisition of Verano
LLA 34 - Parex currently holds 45% WI and is acquiring another 10% from Verano

LLA 32 is where Verano has seen the most success including the recent Kananaskis-1 discovery which tested over 3,555bopd of 30 degrees API oil over an 8 hour naturaly flowing test period. The well also encountered some gas in the Une and two zones in the Gacheta which could be used as a field power source and could reduce operating expenses in the Las Maracas and Kona Fields.

Parex is exposed to most of the light oil basins in Colombia making it an attractive player (Source: Parex Resources Inc.)

Verano Energy was created by Pat Di Capo's PowerOne Capital which has incubated the likes of Aurelian (sold to Kinross for $870 million), Auryx (sold to B2Gold for $160 million) and Petrolifera Petroleum (sold to Gran Tierra for $195 million), among many others.

Under the terms of the acquisition, Parex will pay 1/3 in cash ($76 million) and 2/3s in stock ($153 million) and will assume roughly $30 million in working capital surplus from Verano. Based on Parex's 20-day VWAP of $10.88, Parex will be issuing roughly 14.03 million shares to Verano shareholders, making them roughly 11% shareholders in Parex.

According to the news release this morning, the acquisition implies the following valuation metrics:

EV per flowing barrel of oil ~$90,000 (based on current production of 2,200boe/d)
EV per flowing barrel of oil ~$49,500 (based on estimated production at closing of 4,000 boe/d)
EV per 2P reserves ~$56.50 per barrel (based on Dec 31, 2013 2P reserve estimate of 3.5 million barrels of oil)
EV per 3P reserves ~$36.67 per barrel (based on 3P reserves of 5.4 million barrels of oil)

Parex has been actively growing its Colombian oil production with successful drilling in some of the country's most productive oil basins, including the Llanos Basin.

$Petroamerica Oil trades at a fraction of the Verano acquisition value metrics (Source: Petroamerica Oil Corp.)$

Petroamerica Oil trades at a fraction of the Verano acquisition value metrics (Source: Petroamerica Oil Corp.)

Another of Parex's Llanos Basin partners is one of our favorite E&Ps, Petroamerica Oil (PTA:TSXV). Parex is the operator on both the Los Ocarros and El Eden blocks, holding 50% and 60% interest, respectively (both in the Llanos Basin). Petroamerica holds the remaining working interests on each of these blocks.

Los Ocarros is home to the highly productive Las Maracas field which produced an average of 5,266 boe/d (net to PTA) over 2013.

We have said it many times before; Petroamerica is cheap. The company is coming off the recently announced acquisition of Suroco Energy which will give the combined Petroamerica average daily production of roughly 9,000boe/d. The company is expected to trade at an enterprise value of $239.5 million ($30.5 million positive net cash).

Using the metrics implied by the Verano acquisition, Petroamerica should trade at the following values:

Based on EV per flowing barrel of oil of $90,000 = $810 million enterprise value* which is roughly 2.4x higher than current prices (*based on post Suroco acquisition average daily production of 8,967boe/d)
Based on EV per 2P reserve value of $56.50 = $452 million enterprise value** which provides nearly 90% upside from current levels (**based on post Suroco acquisition 2P reserves of 8 million barrels)

Parex will need to continue to grow outside of its organic portfolio in order to deliver production growth now that they are guiding 19,000 to 19,500boe/d. There are only a handful of companies that can offer material upside in value in Colombia and Petroamerica is on the top of that list.

Petroamerica has suffered from a lack of both operatorship and reserves. They gained significant reserves with the acquisition of Suroco as well as the potential to gain operatorship on some blocks as Suroco qualified as an unrestricted operator in 2010. These key attributes being addressed by Petroamerica should help move the company up the value chain, although the market has yet to respond meaningfully. I look at this as an opportunity.

The Colombian oil space has become a very active M&A sub-sector with multiple deals being cut thus far in 2014. Pacific Rubiales, Gran Tierra, Canacol and Parex all need to continue to replace significant levels of production in Latin America and Colombia, specifically.

We wouldn't be surprised to see this level of M&A continue throughout 2014 and into 2015 given the deep value disconnect seen in the space between share prices and the profitability of these light oil producers.

Read: Parex Announces Strategic Acquisition of Verano to Consolidate its Working Interest in Southern Llanos Blocks LLA-32 and LLA-34

The author is long PTA and is very biased. This is not investment advice. Always due your own due diligence.

Tommy Humphreys

Tommy Humphreys, 30, is an entrepreneur, investor and writer from Vancouver, Canada. He founded CEO.CA, a popular junior mining and Canadian finance blog, in 2012. He has been the president of Pacific Website Company Inc., a private marketing and web development company, since 2007. Tommy has authored articles for Globe and Mail, Financial Post and others. He speaks at select conferences. Reach him by email: tommy@ceo.ca. Follow him on Twitter: @TommyHump More →

Twitter: @tommyhump

tommyhump@gmail.com

Tommy Humphreys

Twitter: @tommyhump

tommyhump@gmail.com

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