RE: wiggling"PSE has immediate upside from exploration in about 1.5 months."
It’s only upside if it works out. There is no guarantee that LCD will come through. It is no slam dunk.
"PEG has the political risk of renewing a concession that ends in 2016 and the political risk of bidding for new heavy oil blocks."
The renewing of the concession is not a factor to me. Are you going to hold this thing for 9 years? I doubt it. Once PEG reaches 170,000 bod the growth rate will drastically slow b/c it will be too big. That is expected to happen in 2010. That’s 6 years prior to the concession contract ending. So the real upside is from today to the end of 2010. So sell it in 2010, 6 years before you have to worry about such things. There is also no guarantee that they won’t get an extension.
Unless you forget PSE was bidding on the same heavy oil blocks. So by your definition, PSE would be exposed to the same political problems.
"They also have to build a much larger pipeline which is an easy target for rebels unhappy with the current government."
This is not Iraq, where pipelines are above ground and exposed. The pipeline will be underground and its cost is only US$185 net to PEG of which 70% is already financed by lenders and the combined company will have $220 million in cash. Funding is not a problem and neither are rebels.
If the rebel situation was such a problem then how would PSE’s gas pipeline be any safer?
"What happens if PEG fails to grow production at their projected rate?"
What happens if LAC doesn't produce 180 mmcf/d like PSE thinks it will? You are kidding yourself if you think PSE doesn't have execution risk.
I can understand your frustration with the SP move today. I own PSE as well. But the deal does make sense to me once I went through the numbers. At first I didn't like it either and the market killed it today b/c PEG shares tanked on the news of more dilution and we are being paid in PEG stock 8.85:1.
But the math tells me its a good deal 1-2 years out. So I go with the math. Emotional trading does nothing positive as it usually forces you to do the wrong thing.
So short-term it sucks and longer-term its great. Now you have to ask yourself am I a trader or an investor? And act accordingly to your situation.