T-D's opinion
Event Yesterday morning, Petroamerica announced an agreement to acquire Colombia-focused PetroNova Inc. (PNA-V) through an all-share arrangement. Impact: SLIGHTLY NEGATIVE. We believe the deal makes sense for both parties, but we view the price being paid by Petroamerica as relatively full and are lowering our target to C$0.20 (from C$0.25) as a result. We view the deal as dilutive on near-term cash flow and NAV metrics, largely because we view the reserves being acquired (all on two blocks with very high "X Factor" additional royalties in the Llanos Basin heavy oil belt) as holding little value in a low oil price environment. However, we see significant exploration upside potential in PetroNova's other assets (the Tinigua and PUT-2 blocks in the Caguan-Putumayo Basin). We like Petroamerica increasing its exposure to the N Sand play and its interest in the PUT-2 block to 100%, complementing the Putumayo Basin assets that were acquired with the acquisition of Suroco Energy last summer. We also like that the Tinigua block (40% working interest) comes with at least two high impact exploration wells to be drilled without requiring capital thanks to a previously negotiated farm-out with Pacific Rubiales (PRE-T). In addition, with PetroNova already qualified as non-restricted operator in Colombia, we are optimistic that Petroamerica will be able to use this qualification to its advantage. We welcome Petroamerica's decision to action a previously approved 1-for-10 stock consolidation following the closing of the deal (expected in late July). We plan to adjust our estimates for the consolidation once it is confirmed. TD Investment Conclusion We remain attracted to Petroamerica’s relative valuation (at a discount to other Latin America-focused E&Ps on NAV metrics despite what we view as a dilutive deal to acquire PetroNova) and its exploration drilling upside potential (increased if the proposed transaction proceeds), with most of the costs of two high impact exploration wells to be funded by others. We believe these positive attributes more than offset significant financing risk and the sub-optimal control that the company has as a result of being a non-operator for most of its assets.