CIBC initiates coverage of PTA with a $0.10 targetI saw that today CIBC (David Popowich) initiated coverage on PTA with a sector underperform rating and a $0.10 target price. Here is the executive summary from the report. Email your broker for a copy if you would like the full document.
Executive Summary
As of January 12, we are initiating coverage of Petroamerica Oil Corp. (PTA-V)
with a Sector Underperformer rating and a 12- to 18-month price target of
C$0.10. Our price target is based on a risked net asset value (NAV) assessment
of the company’s asset base on recent strip pricing, and is in line with a 2015E
EV/DACF multiple of 4.0x (also on recent strip pricing).
Background
Petroamerica is an international E&P company with operations in Colombia’s
Llanos and Putumayo Basins. It was founded in October 2009, when the current
Lead Executive Chairman Jeffrey Boyce engineered a series of oil & gas asset
acquisitions in Colombia. Dr. Ralph Gillcrist, who previously served as
Petroamerica’s Chief Operating Office r, was recently appointed Chief Executive
Officer.
A substantial oil discovery at Las Maracas, where Petroamerica is partnered with
Parex Resources (PXT-SO), represented a major turning point for the company
in mid-2012. Now fully developed, this mature field remains Petroamerica’s
largest producing asset, accounting for 94% of corporate production in Q2/2014.
Petroamerica completed the acquisition of Suroco Energy in Q3/2014, increasing
its production capacity by approximately 2,200 Boe/d.
Investment Thesis
Petroamerica is a good example of how one discovery can dramatically reshape
a company in Colombia’s Llanos Basin. In the relatively short span of two years,
Petroamerica’s net production increased from just ~200 Bbl/d to more than
6,000 Bbl/d, almost entirely due to growth from Las Maracas. However, in a
basin where field-level production declines routinely top 60% per annum, oil &
gas producers are under intense pressure to add new production and reserves
before existing barrels deplete.
To that end, Petroamerica has staked its future growth on the assets of Suroco,
which are located in southern Colombia’s Putumayo Basin. We believe the midterm
performance of this stock will be determined by the degree to which
Petroamerica is able to offset production declines at Las Maracas with
exploration and development success elsewhere in its portfolio. However, the
recent decline in commodity prices should limit the company’s ability to ramp up
spending, particularly given a material (~$30 million) debt repayment obligation
that is due in April 2015.
Why Are We Cautious On Petroamerica?
In our experience covering international E&Ps, declining production is one of the
most difficult headwinds for a stock to overcome. Official production data from
Colombia’s regulator suggests Petroamerica’s largest asset has gone into decline
in H2/2014, a trend we believe is likely to continue into H1/2015.
Concentration risk. Even with the Suroco assets fully incorporated and
on-stream, Petroamerica remains highly leveraged to the Las Maracas field,
where production has declined ~40% in the past six months. If Las Maracas
were to continue declining at this pace, we estimate Petroamerica could
lose ~2,000 Bbl/d of net production between Q3/2014 and Q2/2015
reporting.
Non-operated asset base. Petroamerica does not currently operate any
of its assets. We see this as a major strategic obstacle to the story,
particularly when the company faces some urgency in replacing production
declines. Additionally, Vetra Energy (private), which was Petroamerica’s
opponent in the highly contentious takeover battle for Suroco, is now an
operating partner on several blocks. It will be interesting to see if these two
parties can maintain a constructive working relationship going forward.
Exposure to Putumayo Basin. The Putumayo Basin in southern Colombia
has been recently plagued by social and security issues, which have forced
several operators to shut-in production for significant periods of time.
Resolution of peace talks between the Colombian government and the FARC
may see a measure of calm return to the area, although sentiment has
arguably deteriorated in Q4/2014. The difficult operating environment likely
contributed to the discounted valuation at which Petroamerica was able to
consummate the Suroco transaction, but we remain skeptical that this part
of the Colombia represents a reliable growth platform in the near to
medium term.
What Would Make Us More Constructive?
Petroamerica grew very quickly on the back of the Las Maracas discovery in
2012/13, and we believe there is no reason it couldn’t replicate this success
again in the future. However, given the prevailing negative sentiment towards
small-cap oil producers, we would prefer to see concrete evidence of near-term
growth before becoming more positive on the name.
Exploration success. Petroamerica is expected to maintain a relatively
active exploration drilling program in H1/15, with a number of key wells
already underway. We are particularly interested in the results of Llanos
exploration drilling, where discoveries can be quickly monetized.
Resumption of production in Suroriente. At the time of Q3/2014 results
in late November, Petroamerica indicated it still had a material amount of
shut-in production on the Suroriente Block. Resumption of steady
production (supplemented by a successful development drilling program)
would certainly be viewed positively, but we believe Petroamerica will still
require some exploration success to maintain production at current levels
through mid-2015.
Oil prices. Petroamerica markets its crude through a variety of contracts
that are benchmarked against both Brent and WTI. Due to infrastructure
downtime, Petroamerica’s Putumayo Basin assets are also subject to some
of the poorest netbacks in our Colombian coverage universe.
Conclusion
With little development work anticipated for its largest asset in the coming year,
we believe Petroamerica will be fighting declines for the better part of H1/2015.
We acknowledge that production declines are probably priced-in to some degree,
but until the company can demonstrate a clear ability to grow elsewhere, we
believe the stock is likely to underperform its peers over the medium term. We
will remain attentive to exploration success, along with improving market
sentiment, as potentially driving outsize returns in this name later in 2015.