The rout in crude prices and uncertainty over when they will rebound has triggered a savage sell-off of oil stocks. Hardest hit have been the smaller oil explorers and producers operating in exotic offshore locations as well as those with weak balance sheets and operational issues. However, this has created buying opportunities, with many oil companies remaining profitable despite oil prices being at their lowest level in five years. One company that stands out for all of the right reasons is Calgary-based Gran Tierra Energy Inc. (TSX:GTE)(NYSE:GTE), which operates in Colombia, Peru, and Brazil. The company has seen its share price plunge a massive 68% over the last six months as the rout in crude prices has gained momentum.
So what?
Despite the rout in crude prices, Gran Tierra remains profitable with its particularly low operating costs, a result of cheap production inputs in South America. For the third quarter 2014, Gran Tierra’s operating costs were US$17.88 per barrel, far lower than many of its Canadian peers. This allows Gran Tierra to generate a solid margin per barrel of crude produced, reporting a netback of US$67.17 per barrel for the same period. Such a high netback gives it significant fat to absorb lower crude prices before cash flow and profitability are negatively affected.
Even more promising is that operating costs should continue to fall. Third-quarter costs were higher because Gran Tierra had to use higher-cost road transportation to ship its oil to market because of pipeline outages in Colombia. The key cause of these pipeline outages was attacks on Colombia’s oil infrastructure by the largest belligerent group the FARC. But the volume of attacks should diminish significantly following a ceasefire late last year.
Gran Tierra also has a distinct advantage over many of its peers that operate solely in Canada and North America, because it is able to access to premium Brent pricing. Brent is the international benchmark oil price and trades at a premium of 7% to West Texas intermediate or WTI, the North American benchmark oil price.
Even more positive is that despite slashing its 2015 capital budget to US$310 million, a 29% reduction compared to 2014, its forecast 2015 oil production will grow by 7%. This bodes well for cash flow to remain stable despite markedly softer crude prices. It also leaves Gran Tierra well positioned to fund its 2015 operations from a combination of cash flow and existing cash on hand, allowing it to maintain its pristine balance sheet that has no debt and a high degree of liquidity.
I also believe Gran Tierra will also perform quite strongly when oil prices rebound and many analysts expect this to occur in early 2016 as the global supply glut dwindles on the back of lower production and greater energy demand.
Now what?
With Gran Tierra’s attractive valuation metrics, including an EV of two times forecast 2015 EBITDA and three times its oil reserves, it is a promising speculative play on a rebound in crude prices.
