Oil and Gas investment, 10 easy steps.
GTE answers to the top ten questions to ask youself or broker prior to investing in junior international oil and gas companies lioke Gran Tierra.
1. How many barrels of oil per day (bopd, or “boe” for natural gas – barrels of oil equivalent) is the company producing, 19k bopd gross and 13k bopd net and how quickly have they grown production in each of the last 3 quarters. (quarterly growth rate - QGR)
Q2 2008 3.1k bopd,
Q3 2008 4.2 k bopd 33% QGR,
Q4 2008 7 k bopd 66% QGR,
Q1 2009 10k bopd 42% QGR
Q2 2009 12.6K bopd 26% QGR
Q3 2009 15k bopd 19% QGR
Q3 2008 to Q3 2009 4.2k bopd - 15k bopd - 257% annual production growth
How much of their production is oil 100% oil, and how much is natural gas 0% (gas prices are very low right now and doesn’t produce much if any cash flow for companies)
How much net cash or net debt do they have? 140 million in cash This industry uses a lot of debt, so if a company actually has net cash, they could grow more quickly because they have an entire untapped line of credit waiting to go drilling, and grow the business. And of course no debt means no debt payments and flexibility in doing business. GTE has no debt, and in 2010 cash flow is 200% higher than budgeted CapEx. Where are the properties? South (of North) American Investors give North American assets a slight premium, unless the company is either growing very fast or has a management team that has built and sold an oil & gas company. Political risk shows up in the stock price.
How many wells will the company be drilling in the coming nine months? 14 exploration in the next 12 moths This will give you an idea of how fast they may grow. Companies usually say in their presentation how many wells they will drill property by property, but don’t often give an overall number in one slide. Odd, but true.
How much will all this drilling cost, $100 million and do they have the money or cash flow to do it? Yes, the 14 well drilling program is fully funded from their existing cash balance. Most companies have a slide in their corporate presentation that shows their estimated cash flow for this year or next along with their estimated capex, or capital expenditure, which is their drilling budget. Or do they have to raise money in the market to do the drilling they want? (This is not good—when the market smells a financing coming, it drives the stock lower.)
Are these wells higher risk exploration wells or lower risk development stage wells? High risk exploration, Gran Tierra risks the drilling at 180 mmbo, 650% more than current 2P reserves. Development wells are just filling in an already discovered oil field. No development drilling is planned during the next year. Development drilling ends in early November on Costayaco. It means these wells will almost certainly repeat the success of the discovery well; the oil or gas formation is large and drilling success is “repeatable”. The market loves certainty, and most companies go out of their way to crow about their “undeveloped land acreage” GTE has 7.2 million undeveloped acres and “X year drilling inventory”; 69 well drilling inventory the number of wells they could drill on this development stage land. GTE can drill 28 exploration wells a year for the next six years with the cash flow Costayaco generates at peak production. 14 exploration is a good number utilizing 40% of the annual cash flow for drilling.
7. As an example, the new, big shale formations in North America are very “repeatable”. The Bakken oil field in Saskatchewan is “repeatable” in large scale, i.e. it could support many wells. Seven of the exploration targets are repeats of Costayaco geology, development and production in the Foothills Trend. Oil migrating from the mountains is trapped in the foreplains at structural faults. Seven targets similar in size to Costayaco.
If the company is doing exploration drilling, what has been the company’s success rate in each of the last two years? In the Putumayo basin the wildcat exploration wells have a 100% success rate, Costayaco discovery, Juanambu discovery, Popa discovery. 7 wells in the Putumayo, and limited record of success rate on the Catguas block or Iquitos Arch in Peru. Solana PNA a well or two in the Catutumbo basin. The risk of the oil basins is an important consideration for me. I feel more comfortable with the finances and business plan in the Putumayo basin, ie low cost opex and high netbacks as compared to say deep water exploration in the North Sea, which I personally, know very little about. HINT: if it’s not on the powerpoint, guess what… There is new technology called 3D seismic that allows companies to see the producing oil/gas formations much better – and now means a much higher success rate for exploration. Anything under 70% success in raw exploration I get nervous. (I don’t buy the longshots.) Gran Tierra has made these light oil discoveries in the Putumayo basin - Costayaco, Juanambu, Guayayaco, Linda, Mary, Toroyaco, Miraflor. I can't recall GTE, or Arogsy drilling a PNA wildcat exploration well. What has management done in the past – have they ever built and sold a producing energy company? With Encana prior to GTE, Dana Coffield was responsible for the discovery of 130 million barrels of oil. With GTE, he has acquired two companies, emerged with Solana Resources, and made land deals with the governments of Colombia, Peru, Argentina, and a new office in Brazil.
How many research analysts follow the story? 24 analyst cover GTE including two major banks BMO and JPM, also Goldman Sachs follows and invests in GTE. George Soros has a large position in GTE. If the answer is 3 or less, why hasn’t management been able to secure more coverage–there is a reason. It might be because your target investment is small. It might be it is just not a compelling growth story as you think. Or it might be just because management doesn’t raise money much, i.e. rarely if ever issues equity. Analysts get partly compensated on the business they can bring into the firm. If they cover a producer who will never raise money, they’ll never get paid, so who cares? GTE has no plans to raise money from the analyst. Without analyst coverage there is no institutional money flow in the stock. And without institutional support, your stock will need A LOT of drilling success to move up, and will likely always trade at a big discount to its peer group.
There are LOTS of other questions to ask. This is just Round 1. In my next column, Keith Schaefers will outline his Round 2 of questions to pose to management. If these ten questions on the companies financials and fundmental operations check out then, on to round 2 to review managment and country risk issues. If your a short term investor, who cares about managment, its all about what the drill bit can do for me. But if your investing a half a million dollars, or so, in a company as a long term , investment without considering the qualifications of the mangerment team, then that seems to be a bit naive. GTE has very conservative management, that is very concerned about the bottom line, with a grand long term plan, you may like that style, you may not. |
