reportRaymond James Equity Research Canada - Aug 27, 2010
Gran Tierra Energy GTE-TSX | GTE-AMEX
Moqueta-2 delivers the goods. Moqueta 4 in the works Rafi Khouri, B.Sc., MBA rafi.khouri@raymondjames.ca 403.509.0560
RATING STRONG BUY 1
Target Price (6-12 mths) 10.00
Closing Price 6.25
Total Return to Target 60%
Event
Gran Tierra recently reported flow test results from the Moqueta 2 well in Colombia. The well flow tested 1,077 bopd from two zones (850 bopd from 18 ft in the Middle Caballos and 227 bopd from 16 ft in the Lower Caballos). The well also tested 5.1 mmcf/d from seven feet in the Upper Caballos. Current company production from the Putumayo is curtailed to between 5,000 and 7,000 bopd pending repairs to the third party OTA export pipeline (expected to take up to ~2 weeks). The company also announced farming into Put 1 block for a 55% operated interest.
Action
We are maintaining our STRONG BUY rating with an unchanged C$10.00/shr target price.
Analysis
We view the Moqueta 2 news as another positive confirmation of the materiality of the Moqueta discovery. With the well having confirmed the productive presence of oil in both the Middle and Lower Caballos - with no oil/water contact yet identified - we are confident that our current estimate of a 5 million to 10 million boe discovery is achievable once all appraisal wells have been drilled (the company does not provide specific guidance as to structure un-risked potential). We are also of the view that the materiality of the Moqueta pool is further confirmed by the company’s preliminary plans for a fourth Moqueta well. We would not expect the company to drill 4 wells on Moqueta unless internal expectations for this structure were material.
Valuation
Our target price reflects our risked NAV of C$9.69/shr. With Gran Tierra currently trading at ~30% premium to our calculated 2P NAV, we would definitely recommend that investors looking for free optionality on Colombian exploration trade out of Petrominerales (PMG-TSX, UNDERPERFORM, price: $25.40) (trading at ~75% premium to our calculated 2P NAV) and into Gran Tierra. While we anticipate that both companies will deliver exploration success over 2010/2011, we calculate that most of the potential upside from Gran Tierra’s program is offered as a free option at current levels (assuming a 7 million discovery on Moqueta).