In the long term acquiring Solana shares at $4.50 / share is a good deal. Similar to Shell's farm-in with BZP, a GTE and SOR merger is favorable as it creates a combined entity that is less likely to be bought out by a major oil company, and has more cash to fund near term exploration drilling and development drilling, and production infrastructure. IMO the combined company is more likely to reach a full mid tier valuation 5 years from now. Future operations will be funded from both the $100 million cash balance and the huge cash flow from the existing Costayaco production. The merger will result in lower operations cost.
The analyst on the conference call were all very upbeat. I recommend listening to Dana Coffield's recent conference call. The merger creates a combined company with $100 million in cash and self-supporting future operations with 3-4 rigs operating full time. With continued drilling success Grant Tierra may be able to reach a production profile of 30,000-35,000 exiting 2009. the Costayaco oil field could easily be producing 25,000 - 30,000 bopd exiting 2009. The combined company has an excellent "light oil" land portfolio in Argentina, Colombia, and Peru with huge land blocks in light oil basins of the Catguas, Putumayo, Llanos, and Amazon basins (Arco de Iquitos in Peru) to support many years of oil exploration and production. Gran Tierra is listed on the main boards in New York, Toronto, and I'd expect a London listing GTE projects 15,000 bopd (gross) in production exiting 2008. And is profitable with approximately $65 oil prices. IMO Solana had better intermediate term drilling prospects in the Llanos and Catatumbo basins and Gran Tierra better long term drilling prospects in Peru and the Putumayo A & B blocks.
The market values SOR and GTE on the current valuation of the production and proven reserves of Costayaco 1-3, while the arbitrage valuation currently favors Solana shareholders, the merger is in my opinion a good deal.
Cheers!
Link to some notes I posted at the end of June, on the potential value of a proposed merger.
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