TD Bank Top Pick: Gran Tierra Energy Inc.TD Bank Top Pick: Gran Tierra Energy Inc.
GTE-T: $4.06; ACTION LIST BUY 12-Month Target Price: $7.00
2016 was a productive and transformative year for Gran Tierra. The company completed four strategic acquisitions in Colombia that have positioned it to enter 2017 with multiple runways for productive capital deployment. Near-term production additions at Acordionero should help offset declines at the Chaza block and improve the company’s cash flows, allowing for further spending on the delineation and commercialization of the ‘N’-Sands and the ‘A’ limestone plays in the Putumayo Basin. We expect that management’s focus will remain on its Colombian work program to deliver production and reserves growth during 2017. We estimate the company will grow production by 27% to a daily average of about 36,000 BOE/d in 2017 with operating and cash netbacks of approximately US$27 and US$20 respectively, assuming an average oil price of US$58. Gran Tierra continues to trade at a significant discount to its closest Colombian peer company Parex Resources, on all valuation metrics including Base (0.83x vs. 1.64x) and Fully-Risked NAVPS (0.51x vs. 0.85x), 2017E EV/DACF (5.0x vs. 5.3x) and EV/2P reserves (US$14.01 vs. US$29.65). However, we are confident that Gran Tierra’s management has successfully re-focused the business on the core operations in Colombia and that the company is in a strong position to deliver on its growth targets. We expect that Gran Tierra will close the valuation gap with Parex, which we view as the current standard bearer for our LATAM sub-group, as it continues executing its work program.
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