Smaller Canadian energy companies have made some bold moves, making considerable investments in countries once considered off limits by mainstream energy majors. This has seen them develop a particularly strong presence in what are perceived to be some of the highest-risk locations in Latin America, including Colombia, Peru, Ecuador, and Argentina.
Yet for the majority of those companies the risk has paid off, with rapidly growing oil reserves and production, coupled with those countries implementing policies making them more secure and foreign-investment-friendly. Of those companies, two that stand out because of their significant growth potential are Canacol Energy (TSX: CNE) and Gran Tierra Energy (TSX: GTE)(NYSE: GTE).
They were early entrants to Colombia’s oil boom, moving in after the success of that country’s largest independent oil producer, Canadian-domiciled and TSX-listed Pacific Rubiales (TSX: PRE). Over recent years, both companies have made a series of accretive acquisitions that have boosted both oil reserves and production, and have also had considerable exploration success in regions once considered high-risk and non-commercial.
However, despite growing signs of an emerging peace in Colombia and Peru implementing investor-friendly policies, the market continues to discount their true worth, creating an opportunity for risk-tolerant investors seeking to diversify their portfolios.
Canacol recently expanded its position in Colombia’s prolific Llano Basin
It was only last month when Canacol closed acquisitions that boosted its interest in the Llanos Basin located east of Bogota, Colombia’s capital. This region has been a key contributor to Colombia’s oil boom and is where the majority of Canacol’s oil assets are located.
Canacol boosted its holding in the Lla23 block by an additional 10%-90%, which saw it add additional daily light and medium oil production of 775 barrels with an operating netback of $60 to $65 per barrel. This outstanding netback, or margin per barrel of crude produced, is higher than the industry average for North American producers of around $42 per barrel, and will boost Canacol’s profitability.
The acquisition also added another 1.3 million barrels of crude to Canacol’s existing oil reserves of 40.6 million barrels, boosting the underlying value of the company’s core assets. These reserves have a pre-tax net present value after the application of a 10% discount factor of $842 million, or $9.42 per share, which is a 33% premium to the company’s current share price.
However, what makes Canacol stand out is the company’s ability to cherry-pick high-risk oil plays in Colombia and turn them into successful, commercially viable operations. It wasn’t long ago that the Putumayo basin in the south of the country was considered non-commercial, but now a range of players are operating in the basin after Canacol’s successes there over recent years.
More exciting for investors is Canacol’s position as the lead player in unconventional oil and gas exploration in Colombia, with it now holding the second-largest unconventional acreage. It has engaged a number of world-quality partners, including Exxon Mobil (NYSE: XOM), to develop those assets.
Earlier this year the company, in conjunction with partner Exxon, reported successful testing of the Mono Arana 1 well in the La Luna shale formation in Colombia’s Middle Magdalena, with it producing 590 barrels of medium oil daily. This bodes well for the success of Canacol and its partners in developing this extensive unconventional oil exploration acreage.
All of these things indicate that Canacol is well positioned to continue unlocking value for shareholders, and is significantly undervalued by the market at this time.
This company in Colombia is a hidden gem
For some time, Gran Tierra has been at the mercy of the civil conflict in Colombia, with its oil production in the Putumayo basin facing continual production outages due to guerilla attacks. However, with peace talks continuing to progress, as well as the company’s significant discovery in Peru, much of this risk has diminished.
This leaves it with solid daily oil production of 22,000 barrels and reserves of 109 million barrels — however, while its oil reserves have almost doubled, the company’s share price has remained flat.
More promising is Gran Tierra’s recent sale of its Argentinian operations to Madalena Energy (TSX: MVN) for a total of $69 million, the proceeds of which were composed of $49 million cash, $14 million in Madalena’s shares, and $6 million in working capital adjustments.
This leaves the company with a massive pile of cash totaling $440 million with essentially no debt, highlighting the strength of its balance sheet. The company is now well positioned to further develop existing assets and potentially consider making acquisitions in its core operational area of Colombia.
This would further boost revenue and cash flow, as well as the underlying value of its core assets, indicating at this time that Gran Tierra is significantly undervalued.