It has been a tough time for investors in Gran Tierra Energy Inc. (TSX: GTE)(NYSE:GTE), as it has consistently failed to unlock value for shareholders, despite its promising assets and operations. This is now set to change with activist investor West Face. West Face holds almost 10% of the company, thereby winning a victory in its battle with existing management. As a result, West Face has been able to select a new CEO and will nominate four directors to the board.
I believe this could be one of the catalysts required to have a marked improvement in Gran Tierra’s performance, which will unlock value for investors.
Now what?
Gran Tierra holds a diverse portfolio of oil assets spanning Brazil, Colombia, and Peru, with the majority of its oil reserves and producing assets located in Colombia.
For the first quarter 2015 it reported a net loss of US$0.16 per share. This can be attributed to sharply weak crude prices and impairment charges resulting from its decision to cease development of its assets in Peru.
However, with the changes in management and the renewed focus on its Colombian assets, Gran Tierra’s financial performance should improve throughout the remainder of 2015.
This is because it derives 96% of its oil production from Colombia and has also made a number of changes to its operations that should boost profitability. These include a focus on reducing operating costs in Colombia and the ongoing development of its oil assets in southern Colombia. The weaker Colombian peso against the U.S. dollar also further helps to reduce costs, as crude sales are being made in U.S. dollars and operational expenses are incurred in Colombian pesos.
The impact these initiatives are having on Gran Tierra’s performance can already been seen in its first-quarter results, with crude production exceeding company projections and growing by 7% year over year. More importantly, Gran Tierra was able to achieve this growth after slashing its 2015 capital budget by more than two-thirds compared with 2014.
Another aspect investors tend to overlook that is of particular importance in the current harsh operating environment is Gran Tierra’s solid, virtually debt-free balance sheet. It is also highly liquid with US$204 million in cash and cash equivalents, and Gran Tierra expects to fund its 2015 capital program from cash flow and cash on hand.
Furthermore, unlike the majority of its counterparts operating in North America, it is able to access premium Brent pricing. At this time Brent trades at an 11% premium to West Texas Intermediate (WTI) and this should remain the case for the foreseeable future as U.S. oil production and inventories are applying considerable pressure to WTI prices.
So what?
There is much to like about Gran Tierra. The change in management, as well as a renewed focus on its Colombian operations, appears to be the catalysts required for the company to unlock value for investors. This makes it a solid bet on the long-awaited rebound in crude prices, although it is not an investment without risk. Not only is Gran Tierra exposed to weak industry fundamentals, including sharply lower crude prices, but it operates in an environment with higher risk than those peers located in North America.
