Pacific Rubiales: A Tantalizing High-Risk Play on Oil

The risk/reward is intriguing on this one.

| More on:
The Motley Fool

Colombia’s largest independent oil explorer and producer is the Canadian domiciled mid cap Pacific Rubiales (TSX: PRE). Like its small- to mid-cap exploration and production peers, Pacific Rubiales has had a rough year.

Halfway through 2013, its share price had plunged by almost 20%; this sell-down was triggered by investors shying away from oil explorers and producers operating in what are perceived to be high-risk emerging markets along with a bearish outlook for crude oil prices.

Why the share price has collapsed

The primary drivers behind the falling stock price have been declining production and rising costs.

The company’s first-quarter 2013 net income fell by 52% (to $123 million), compared to the same period in 2012. There has been significant conjecture that Pacific Rubiales will lose its flagship Rubiales field in Colombia’s Llanos basin when the lease expires in 2016; this field provides 69% of the company’s production and holds 30% of its total proved oil reserves of barrels of oil.

Still, I believe the stock has plenty of catalysts. Even if Pacific Rubiales loses its rights to the Rubiales field the company will continue to perform strongly, with growth in its future.

Key growth catalysts

Already this month, Pacific Rubiales’ share price has spiked 4%, rebounding from a three-year low on the back of quarterly production being at the top end of its production forecasts for the second consecutive quarter. It’s expected that average daily production for the second quarter of 2013 will be around 128,000 barrels, a 38% year-over-year increase.

The company has also been able to broaden its reserve base through the acquisition and investment in other oil juniors operating in Colombia, the most significant being C&C Energia, which was finalized in December 2012. It also purchased a 49% interest in U.S.-based BPZ Energy’s Peruvian operations in 2012, further reducing this risk. Now 6% of its total proved reserves are located outside of Colombia.

A key indicator of profitability for oil explorers and producers is the netback per barrel they’re able to generate.  Netback measures the gross profit per barrel of oil after production and transportation costs have been deducted. Pacific Rubiales continues to generate a solid netback per barrel of $60 per barrel of oil, in an industry where an average of $40 to $50 per barrel is considered profitable.

Pacific Rubiales also has a strong exploration program in place with exploration operations in Colombia, Peru, and Brazil. During the second quarter, it completed drilling of four wells — two in Colombia, one in Peru, and one in Brazil. This resulted in an offshore oil discovery in Brazil and a natural gas and condensate discovery in Colombia. It is also waiting for the approval of an exploration and production permit in Colombia that will allow it to expand its operations into the Southern Llanos basis.

What’s it worth?
The company appears cheap on the basis of two key valuation multiples used in the oil exploration and production industry, enterprise value-to-EBITDA and enterprise value-to-proved reserves. These multiples allow investors to make apples-to-apples comparisons of industry participants as a means of determining value.

Despite the recent spike in its share price, Pacific Rubiales has an enterprise value-to-EBITDA of 3, which is less than the industry average of around 7. It also has an enterprise value-to-proved reserves of 19, which is less than the industry average of around 27. In my view, this stock is being unfairly valued by the market.

One other positive: Last month, Pacific Rubiales announced a 50% increase in its quarterly dividend to 17 cents per share, giving it an effective forward dividend yield of 3.5%. This is a particularly solid dividend yield for a mid-cap oil explorer and producer and one of the highest among Pacific Rubiales’ peer set.

Foolish bottom line

Despite Pacific Rubiales’ promising first-half 2013 results and the significant increase in the value of its dividend, speculation that the company will lose the Rubiales field has cast a pall over the company’s future.

But the ongoing focus on diversifying proved reserves through exploration and acquisition reduces this risk. Furthermore, with Pacific Rubiales focused on boosting production, cutting costs, and maintaining a solid netback per barrel, I see plenty of growth opportunities ahead. Paired with a cheap relative valuation, these initiatives make me think this is a tantalizing bet on an industry that has fallen into disfavor with investors.

More expert advice from the Motley Fool

Like small caps?  Then you’ll love the Motley Fool Canada’s small cap stock pick for 2013  – and beyond!  Simply click here now to learn all about it – FREE of charge!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

This post was created by Fool contributor Matt Smith.    

Fool contributor Matt Smith has no position in any stocks mentioned at this time.  The Motley Fool does not own any stocks mentioned at this time.        


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing


CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Boosting Your Monthly Income: TSX Stocks That Deliver

Dividend investing can boost regular or active incomes, especially select TSX stocks that pay monthly dividends.

Read more »

consider the options
Tech Stocks

Better Buy (2024 Edition): Shopify or Nvidia Stock?

Shopify (TSX:SHOP) isn't the only red-hot tech stock in town that could add to recent gains.

Read more »

Bad apple with good apples

5 Stocks You Can Confidently Invest $500 in Right Now

These stocks could significantly grow your investment over the next decade.

Read more »

Illustration of bull and bear
Tech Stocks

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

Given their high growth prospects and cheaper valuation, these three growth stocks would be an excellent buy as the market…

Read more »

Golden crown on a red velvet background
Energy Stocks

Enbridge Stock: This Dividend Aristocrat Could Gain in 2024

Enbridge (TSX:ENB) stock is looking like a great buy as management expects it to grow in 2024.

Read more »