The last year has been difficult for Pacific Rubiales (TSX:PRE) investors. The Colombian-based oil explorer and producer’s stock price has tanked by 38% over that time. The market continues to price in the worst-case scenario as a range of headwinds impact the company’s performance and future outlook.
What went wrong?
A key driver of this decline in Pacific Rubiales share price is the company’s earnings have consistently missed the consensus analyst estimates for the last five quarters. For the third quarter 2013 it missed the consensus revenue forecast by 7% and the consensus earnings estimate by a whopping 44%, reporting earnings of U.S.$0.33 per share.
Softer oil prices coupled with a rapidly depreciating Colombian peso have played havoc with Pacific Rubiales’ performance. Crude prices have dropped 9% since spiking to a two-year high in late August 2013 and the Colombian peso has plunged 14% against the U.S. dollar over the last year. With the majority of Pacific Rubiales’ crude production coming from Colombia this has had a significant impact on revenue, cash flow and ultimately the bottom line.
The final nail in the coffin was the emerging markets rout triggered by the collapse of the Argentine peso. This triggered a ‘flight safety’ among investors and saw many reduce their exposure to higher risk emerging markets in Latin America.
There are a number of question marks hanging over Pacific Rubiales’ future
There are a number of question marks hanging over the company’s future, concerning analysts and causing negative sentiment about the company’s future to grow. Chief among these is the June 2016 expiry of the concession for its 42% share in the Piri Rubiales field in Colombia’s Llanos basin.
Pacific Rubiales obtains the majority of its crude production from this concession and in the third quarter 2013 this amounted to 56% or 65,000 barrels of oil daily of its total production. As a result, the loss of the concession will have a significant impact on the company’s revenue, cash flow and ultimately, its bottom line. This has obviously concerned the market and its loss will have a significant impact Pacific Rubiales’ growth plans.
Despite a strong operational performance, fourth-quarter earnings will disappoint
Pacific Rubiales is set to report its fourth-quarter and full-year 2013 results on March 13, 2014 and I expect it to deliver some strong operational results for the quarter. Management has already estimated oil production to have grown by 3% to 5% in comparison to the previous quarter and sales volumes to have increased by around 16% in comparison to the previous quarter.
But I don’t expect these solid operational results to translate into to a solid financial performance. I doubt that Pacific Rubiales will report earnings in line with the analyst consensus of U.S. $0.62 per share. A depreciating Colombian peso coupled with significantly lower oil and natural gas prices will have negatively impacted revenue and ultimately the bottom line.
Future outlook is growing increasingly positive
Despite the question marks hanging over Pacific Rubiales’ future and the growing headwinds impacting its performance, the company’s future outlook is far brighter than the market would have investors believe.
Management has established a clear path to replacing the oil reserves and production that will be lost when the Piri Rubiales concession expires. Development of the CPE-6 and Rio Ariari blocks in the Llanos basin, which were acquired through the purchase of Petrominerales, remains on track. When complete, both blocks should deliver average daily production of around 70,000 barrels of oil net to Pacific Rubiales.
I also don’t believe that the market has fully factored in the accretive value of Pacific Rubiales’ acquisition of Petrominerales. This boosted the company’s higher margin light oil reserves and gave it a lower cost source of diluents for its heavy oil production. It also boosted Pacific Rubiales exploration acreage and gave it a 5% equity interest in the OCENSA pipeline, which was recently sold for U.S. $385 million.
Pacific Rubiales has a high quality, geographically diverse exploration base, with acreage spread over Guatemala, Colombia, Peru, Brazil and Papua New Guinea. Much of the South American acreage falls over the sub-Andean basins, which are believed to form one of the richest hydrocarbon chains in the world. The quality of these assets is highlighted by the recent discovery of oil in Block 131 that forms part of Pacific Rubiales exploration properties in the Ucayali Basin in Peru.
Finally, the impending commercial implementation of Pacific Rubiales’ proprietary STAR technology will be a game changer for the company. It is claimed that it will potentially double its reserves and boost oil production by increasing oil reservoir recovery rates.
Foolish bottom line
It is undeniable that it has been a horrific year for Pacific Rubiales investors. While the tough times aren’t over yet, it is clear the market has priced in the worst-case scenario while ignoring the immense potential the company possesses.