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Latest Political Developments in Colombia a Positive for its Oil industry

In an expected outcome, conservative Colombian presidential candidate Ian Duque won the presidency against former guerrilla, Bogota mayor, and leftist Gustavo Petro. While many Canadian investors could be forgiven for pondering why this is important, it is easy to explain.

You see, many Canadian energy companies have held pioneering roles in developing Colombia’s oil industry in recent years. The election of Duque has removed much of the political risk that was being priced in by markets for companies such as Gran Tierra Energy Inc. (TSX:GTE)(NYSE:GTE) and Parex Resources Inc. (TSX:PXT). That victory, along with firmer crude, has seen both companies soar over the past month, gaining 26% and 35%, respectively.

In Colombia, investors seeking exposure to oil will find some intriguing, attractively priced upstream oil producers that are experiencing considerable success in an operating environment where the degree of geopolitical risk is lower than many believe. 

Now what?

An exceptionally appealing play on higher crude is Gran Tierra. In recent years, it has pivoted its operations to focus on Colombia and to become the leading independent upstream oil producer in the Andean nation. Latest developments indicate that it is on track to achieve that goal. Gran Tierra reported solid first-quarter 2018 results, including record quarterly oil production of 35,075 barrels daily, which was 23% higher than the same period in 2017.

Notably, oil made up 100% of total production for the quarter, bolstering Gran Tierra’s exposure to the positive outlook for crude.

The profitability of Gran Tierra’s Colombian acreage can’t be emphasized enough. Operating netback for the first quarter surged by 45% year over year, leading to a 66% spike in funds flow and net income of US$18 million, which was a remarkable 40% increase compared to a year earlier. Gran Tierra can also access international Brent pricing, which — even after the sharp convergence of Brent and West Texas Intermediate — still trades at a premium to WTI, giving the driller a financial advantage over its North American peers.

Parex has a long growth runway ahead of it in Colombia and a solid history of growth. Second-quarter 2018 oil production is estimated to be 5% greater than the previous quarter and a remarkable 24% higher year over year. That is an important attribute in an environment where oil has risen sharply to see Brent up by 71% over the last year. It means that Parex’s earnings can only continue to grow at a decent clip, which, ultimately, will boost its market value.

The driller is also in the process of restructuring it Colombian operations to make them more tax efficient. While this will incur a one-off US$140 million tax expense, which will impact 2018 earnings, overall, it will make Parex’s business more efficient for tax purposes, delivering sustained tax savings over future years. It will do this by reducing the company’s long-term effective tax rate from around 20-25% to between 16% and 19%, which will give Parex’s bottom line a solid lift.

One of Parex’s most attractive attributes is its considerable exploration success. That will continue because of the quality of its oil acreage and recent positive outlook for its exploration as well as well development efforts. Parex is in the process of drilling 10 wells, including exploration, appraisal, and development wells, which will ultimately bolster oil reserves, enhance reserve recovery, and boost production. 

So what?

During the sustained slump in crude, Colombia’s government introduced a series of reforms aimed at reducing the tax burden for foreign oil companies. Those developments — along with reduced political risk, an improving security situation, and lower operating costs — make it an attractive destination for foreign oil companies. It is these qualities coupled with high-quality assets, reserves majority weighted to oil, growing production, and an ability to access Brent pricing that make Gran Tierra and Parex attractive plays on the improving outlook for oil.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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