RE:TDTD commentary:
Petroamerica Oil Corp. (PTA-V) C$0.30
Suroco Acquisition Brings Production and Putumayo Exposure
Event
Yesterday, Petroamerica announced an agreement to acquire Colombia- focused Suroco Energy Inc. (SRN-V) through an all-share arrangement. The company will host a conference call at 11am Eastern Time today to discuss the transaction, but we do not expect the conference call to materially change our views.
Impact
MIXED.
We view the proposed acquisition of Suroco as dilutive on near-term cash flow and NAV metrics, which is the main reason why we are reducing our target price to C$0.45 from C$0.50.
However, we see strategic benefits and upside potential that likely justify the price being paid. In particular, the combination with Suroco diversifies Petroamerica’s current production away from the Las Maracas field (reducing concentration risk), and Suroco’s Putumayo Basin reserves will increase the company’s average reserves life (improving medium-term business sustainability and growth prospects).
In addition, with Suroco already qualified as restricted operator in Colombia (and management targeting unrestricted operator status), we are optimistic that the combined company will be able to operate more efficiently and continue to expand its asset base.
Finally, we are also optimistic that the combined entity will have a lower cost of capital than both of its predecessors.
Concurrent with the deal being announced, Petroamerica published its year-end 2013 financial results and reserves (with a short operations update), all of which was roughly in line with our expectations.
TD Investment Conclusion
We are attracted to Petroamerica’s relative valuation (particularly on EV/DACF and following a share price sell-off in reaction to yesterday’s deal announcement), high netbacks, and potential for free cash flow generation. Through 2015, we expect a decline in production from the core Las Maracas field to be roughly offset by development of existing discoveries and potential new discoveries (depending on exploration drilling results).
The largest upside potential that we see to valuation in 2014 is associated with higher-risk exploration wells, including the Crypto-1 (expected to spud in Q3/14) and Suroco’s Canelo Sur-2 well that could be tested over the coming weeks.