Colombian based, Canadian mid-cap oil explorer and producer Pacific Rubiales (TSX:PRE) announced at the end of September that it would acquire beaten down fellow Canadian oil producer Petrominerales (TSX:PMG) for $160 billion. This was welcome news for Petrominerales shareholders who had taken a bath, with more than 20% wiped off the value of the company for the year-to-date prior to the announcement.
Since the deal was announced Petrominerales shares have spiked and are now up by 43% year-to-date. Pacific Rubiales has offered each share holder $11 in cash per ordinary share and one common share in the recently formed ExploreCo.
But this is also positive news for Pacific Rubiales and its investors, with the company’s future proved reserves and production in doubt. It also represents solid value for Pacific Rubiales, with the acquisition priced at around three times forecast EBITDA. This, according to Bloomberg, is well below the median ratio of around five times.
Just how important is the acquisition for Pacific Rubiales?
It has been speculated by a number of analysts and industry insiders that Pacific Rubiales would be unable to renew the lease on its flagship Rubiales field, which expires in 2016. The Rubiales field – located in Colombia’s prolific Llanos basin – is operated by Pacific Rubiales in partnership with Colombian state controlled Ecopetrol. The importance of the field to Pacific Rubiales is underscored by the fact that it holds 30% of its proved oil reserves and provides 69% of its oil production.
The acquisition of Petrominerales increases Pacific Rubiales presence in the Llanos basin and significantly boosts its Colombian light oil reserves. This is an important acquisition for Pacific Rubiales boosting both its oil reserves and daily production by almost 10%. It also gives Pacific Rubiales access to greater quantities of Colombian light crude, which is an important diluent for its Colombian heavy oil production.
With Colombian light crude trading at a premium to Colombian heavy crude, this will boost Pacific Rubiales’ margins. It will also reduce costs with Pacific Rubiales able to blend this light crude with its Colombian heavy crude.
The deal also gives Pacific Rubiales increased ownership in the all important Colombian oil transportation infrastructure. This will see Pacific Rubiales acquire Petrominerales five percent stake in the OCENSA pipeline and ten percent interest in the Bicentario pipeline.
These pipeline assets are especially important to oil producers operating in Colombia because of its rugged terrain and lack of infrastructure. This essentially makes them the only cost effective method of transporting crude in a country that is now Latin America’s fourth largest oil producer. The acquisition of these pipeline assets will also contribute to lower transportation costs further boosting Pacific Rubiales margin per barrel of oil produced.
Pacific Rubiales then plans to spin-off those pipeline assets along with its existing pipeline assets into a new company, which will unlock additional capital allowing it to pay-down some of Petrominerales debt’. It will also give it additional funds for to invest in its exploration and development plans.
Still appears undervalued
Even though Pacific Rubiales’ share price spiked on the back of this news, I believe that it is still undervalued. It’s currently trading with an enterprise value of less than four times its EBITDA and 15 times its oil reserves. Both of these ratios are significantly lower than the majority of its competitors and I believe make it an appealing investment.
What next?
The deal is expected to be completed during the fourth quarter and will cement Pacific Rubiales’ position as the largest independent oil explorer and producer in Colombia. But the deal still requires regulatory approval from Colombia’s oil industry regulator, the National Hydrocarbons Agency or Agencia Nacional de Hidrocarburos in Spanish. While it is difficult to predict the future with any certainty at this time it would appear that the acquisition will be approved.
Foolish bottom line
The acquisition will allow Pacific Rubiales to maintain its growth trajectory as the fastest growing mid-cap oil explorer and producer. Over the last five years Pacific Rubiales has grown its oil production by over 45% and its oil reserves have almost tripled.
I believe it will leave Pacific Rubiales well positioned to continue delivering value for share holders and create further growth. When paired with its relatively cheap valuation this makes Pacific Rubiales an intriguing risk reward play in South America.
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Fool contributor Matt Smith does not own shares of any companies mentioned. The Motley Fool has no positions in the stocks mentioned above at this time.
