[Sent to Premium Subscribers October 20, 2014]
Investors waiting for money to flow into the mining sector may want to consider some alternative trading ideas in the interim.
Colombian focused oil producer Petroamerica Oil Corp. (PTA.TSXV) offers a good risk-reward profile at its current valuation.
With $65 million cash and $35 million debt, Petroamerica trades at $210 million enterprise value (market capitalization - cash + debt). Over 2014, the company expects to produce an average of 6,600 barrels oil per day (bopd) with plans to grow to 30,000 bopd over the next 2-3 years. Comparable South American firms of that size are worth over $1.25 billion.
The company has seven high-impact exploration wells planned for the next six months that could triple the current proven and probable (2P) reserves base of over 10 million barrels. This is part of a 24 to 36 month runway of drilling inventory already in the portfolio that is significant for a company of Petroamerica’s size.
Petroamerica’s valuation is cheap relative to its peers both in Colombia and internationally. The recent oil price decline has put further pressure on energy companies across the board, but this decline is even more dramatic in the Colombian sector. Petroamerica’s stock has been cut in half from $0.44 to $0.24 over the past six weeks (last at $0.27).
Even at lower oil prices, Petroamerica’s operating netbacks remain over $50 per barrel. They have always received a premium for their high-quality light oil which can be used as a diluent in Colombia’s heavy oil pipelines. They expect to exit 2014 with $50 to $60 million in cash and growth is expected to be fully-funded internally.
Investors pay attention to executive chairman Jeff Boyce, a Calgary oil patch leader, who bought approximately 1.8 million Petroamerica shares at prices between $0.28 and $0.30 over the past month. Investors also look to Frank Giustra, the well known resource investor and philanthropist, who co-founded the company and is still a major shareholder (read Giustra's thoughts on Petroamerica here).
But Petroamerica's Chief Operating Officer Ralph Gillcrist, a PhD Scotsman with a career focused in the Colombian oil sector, has been instrumental to the company’s turnaround and successes thus far.
Dr. Gillcrist is an operations executive who also works with Chief Financial Officer Colin Wagner and Mr. Boyce to communicate with shareholders (Chief Executive Officer Nelson Navarette is Bogota-based and focused on in-country relations and operations).
One question Dr. Gillcrist has been getting lately refers to the company's capital structure with 871 million shares outstanding after the recent acquisition of Suroco Energy. While he couldn’t comment for legal reasons, it just makes sense the shares will be consolidated in the near future, possibly at the upcoming annual general meeting in November. I’m optimistic the optics of that move could enhance the share price over time. Dr. Gillcrist reminds me that drilling success is a lot more important. Lower oil prices would also inevitably continue to hurt the stock.
The company has been criticized in the past for their lack of operatorship (an important aspect to any takeover story) and the company’s relatively low reserve life index (number of years they could produce at current levels without another discovery). With the acquisition of Suroco, Petroamerica has made steps to address both of these concerns. Unfortunately (or fortunately if you are a buyer) oil price volatility has scared many investors out of the space temporarily, depressing share prices further.
Colombia is an underappreciated and not fully understood sub-sector of the international E&P space. Concerns about security, infrastructure challenges and political instability have weighed on the Colombian oils since they peaked in 2010/2011. With most concerns being unfounded, the Colombian space offers investors with patience and a healthy risk appetite the opportunity to make many times their initial investment.
The Petroamerica that Ralph Gillcrist presented at the Subscriber Summit is undervalued, delivering on promises and drilling seven exploration wells in the next six months. Market volatility has made it all the more interesting.
Read a transcript of Ralph's presentation below, review the PDF, and watch his video.
Ralph Gillcrist, Executive Vice President, Business Development and Chief Operating Officer, Petroamerica Oil Corp (PTA.v)
Recorded October 9, 2014 in Vancouver, Canada, at 11:40am PST
Ralph Gillcrist: It's a pleasure to be in Vancouver. I also have to thank Tommy and Keith for allowing me to showcase Petroamerica to such a well attended investor conference.
The company has been in existence now for five years. We have all of our assets in Colombia, and we are listed on the TSX-Venture Exchange. In those five years, we have worked hard to get the portfolio to where it is today. And that is 12 blocks, distributed over 2 basins, covering more than a million gross acres with multiple exploration drilling targets that we hope to test in the next six months.
During the last three years or so, we have had exploration success in the Llanos Basin. Our success rate has been more than 60% using 3D Seismic and that has enabled us to get production up to more than 6000 barrels a day this year.
Additionally, earlier this year, in July, we made a transformative acquisition of a company called Suroco [Energy], and I think we have demonstrated to the markets that we are able to carry out transactions that are very accretive to our current shareholders.
In a snapshot, we are estimating that we will produce this year, on average, 6600 barrels of oil per day, mostly light oil, and we are anticipating that we will exit [the year] at 7400 barrels of oil per day this year.
If you look at the 2P reserves of the company, you can see that the Suroco acquisition more than doubled our 2P reserves base. At the end of 2013, the company was sitting on 4.9 million barrels of 2P reserves, and with Suroco, we have added 5.9 million barrels, to give the company more than 10 million barrels of 2P reserves on its books today.
If we look at the market cap, with the recent market turmoil, we have seen 1/3rd of our value wiped off in the last two weeks. What has that done, it means that we are now trading at a level of value that is equal to our proven reserves base. So I would say, a tremendous buying opportunity.
Our cash position today is $67 million dollars in the bank. We have a very under-leveraged balance sheet, with $35 million in Canadian debt, that expires in April of next year and we are currently looking to change out, and insider ownership is around 3%.
The Suroco acquisition was particularly transformative. I think it addressed a number of the market concerns that we had before, with concentration risk, sustainability, in terms of a short reserve life index, running room in the exploration portfolio, and the ability to operate our business.
The transaction has increased our Reserve Life Index from 2.8 to 4 years. As I mentioned earlier, we have more than doubled our 2P reserves base. With both Suroco and business activities that we have been undertaking ourselves, we now have a full portfolio of drilling opportunities for the next two to three years. We have added with the Suroco acquisition a really exciting new play in the Putomayo Basin, and in my career of 25 years, I would say it is exceptional for a small company to be able to build such a significant land position in a seismically driven amplitude play, where we have a definite lead on our competitors in terms of understanding how the play works, and the technology.
My view has always been to focus. I like to understand the geology, I like to understand the basin. That's how we started out with our focus on the light oil trend in the deeper part of the Llanos Basin. We are adding new plays in the Llanos basin. Again, in the Putomayo [Basin], we now have more producing assets, and huge potential in this amplitude driven play that will play out in the next year or two.
In terms of our guidance and balance sheet, as I mentioned, we are looking to produce 6600 barrels of oil per day this year, we are looking to spend $53 million dollars, including the Suroco spend, post transaction. That's equally split between exploration and development and additional $7 million for appraisal work.
You can see from our cash position today of $67 million plus the projected cash flows coming in for the 3rd and 4th quarters, and the remaining spend that we anticipate being fully funded and exiting the year with between $50-60 million dollars depending on where the oil prices settles.
I should add that our net-backs are some of the best in the world. Our netback for this year will be around $52-$54, depending on where the oil price settles.
If we look at projecting the growth of the company, in the dark green and the light green, you can see our 2P reserves production profile, and what the Suroco acquisition has done, it has given us a stable production base for the next two-three years of around 5000-7000 barrels a day. We plan to use the cash flow generated from that production to invest in and unlock enormous upside potential in exploration. We feel that on a risked basis, we can be up at 15000-18000 barrels a day, with some exploration success, in the next 18 months ago.
I mentioned earlier that we have a number of exploration catalysts. We will be drilling 4 wells in the Llanos basin, and 3 exploration wells in the Putomayo basin. These are high impact wells, targeting 29 million barrels of mean, un-risked, working interest reserves for Petroamerica, so potentially tripling the current reserves base.
What's our vision moving forward? We would like to build the company. We think scale is important today in Colombia. We would like to build the company to levels of between 20-30000 barrels a day, with a 2P reserves base of more than 30 million barrels, a sustainable reserves life of more than 5 years. We think we can do that through a combination of organic growth, as we have demonstrated from within the portfolio, and selective acquisition when the market conditions are right.
So finally, what's the value proposition? To cut to the chase, the vital signs of this company are strong. We have a healthy balance sheet. We have cash on the balance sheet, we have projected cash flows and production, we have a lot of catalysts coming up in the next six months, 7 high impact exploration wells, targeting new plays both in the Llanos and Putomayo basins. We have a very experienced management team that has always delivered on its promises, and I think it's a tremendous bargain-basement opportunity today.
Petroamerica Oil Corp Cautionary Note
Editorial Policy, Disclaimer and Disclosure: Resource Opportunities is written, edited and published by Tommy Humphreys, 602-1228 Homer St., Vancouver, BC, V6B 2Y5. Tel: (604) 697-0026 www.ResourceOpportunities.com
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