BMO and JP Morgan (JPM) the two big banks are the leading GTE analyst IMO, First Energy and Tristone do good research for the international oil and gas juniors. I like most of the companies from First Energy's recent Global Energy conference. Most of the 25 analyst that cover GTE are following the lead and price targets of BMO and JPM.
The investment brokerage house don't have a nickel of financial investment in Gran Tierra and the the big banks BMO, and JP Morgan are primarly banks that lend money, and secondarily investment house specializing in international oil stocks. Tristone and First Energy are good on the early development stage international oil stocks, like GTE.
BMO and JPM see the 14 exploration wells as a liability and not a potential for increase in NAV. BMO and JPM are not covering many small interantional small caps, so the valuation GTE compared to peers gets lost with BMO and JPM on GTE. Same thing with Goldman Sachs, who from time to time has a large position in GTE. BMO, GS, and JPM are not heavily invested in many small cap international oil stocks.
BMO and JP Morgan , perhpas by policy, add $0 NAV for GTE's 2009- 2010 drilling program, although they note upside potential from the 14 wells, just $0 in forward NAV (price target).
The smaller brokerage houses that cover more specualtive stocks, have a more bullish view of the forward value of the exploration phase for junior internationals, although these brokerages houses (IMO) won't stray too far from BMO's and JP Morgan's $4.50 price target. North American oil mid-cap producers are trading at much higher EV/CF
and debt adjusted DAEV/ CF multiples, than the internationals, like GTE and PMG, perhaps the big banks see country risk in South America. Certainly, you don't get PMG's 10k bopd per well flows or GTE's 5k bopd per well flows in Alberta and Texas.
A top notch, (non-boutique brokerage house) like Tristone or First Energy to depart too far from BMO and JP Morgan valuation, hasn't happened yet, and IMO for these reasons.
1) GTE provides conservative forward guidance on production,
2) The brokerage houses have not and probably won't brokerage any large PP financings for GTE like Pacific Rubiales's two - $500 million placements, and the smaller regular financing for BPZ. PRE's $1 billion in financing $500 credit and $500 million pipeline, is more likely to come from a big bank like BMO or JPM.
3) GTE hasn't until recently provided forward guidance to the press or the SEC on the "unriksed target size of the 2009- 2010 drilling program. In a conference call answer, Dana mentions seven Costayaco sized targets, and a few billion barrels from the Iquitos Arch then at the Global Energy presentation 20 mmbo Colombia and 160 mmbo Peru risked are noted whithout any detail.
4) Most of the analyst targets are 12 month targets based on 2P NAV on the 2008E reserves, and since the 2P reserves have not increased significantly, the analyst haven't increased their price targets. BMO and JP Morgan won't likely bump their price estimates until after 2P reserves increase from a new discovery.
5) Smaller brokerage houses understand the importance of not trying to trump the big banks, and BMO's recent action was a downgrade, as their $4.50 target was met (12k bopd at $50 WTI).
Investment brokerage house fell in love with BPZ, as BPZ was recently issued several private placements at share prices at a 30 -40% discount to the market price, so in return the brokerage houses return the favor. BPZ has a good 2P NAV, but going forward BPZ still needs PP financing for continued operations and CapEx. BPZ has been operating on a very tight budget, drilling on 2D seismic provided by others. BPZ is not self-funding financially, ie annual CapEx is higher than annual cash flow. PRE's 2010 CapEx is also much higher than 2010 cash flow, but they have the credit in place to fund 2010 CapEx.
On a 2P NAV BPZ is worth $8 /share , but on a cash flow basis, BZP current 2.7k bopd isn't paying BPZ's CapEx and BPZ needs about 10k bopd on an EV/CF valuation to justify $8 /share, IMO. Analyst have BPZ valued at 2009E production guidance at 10k bopd, last i looked BPZ was producing 2.7k bopd. Expect another PP financing from BPZ soon, as BPZ is continuing to with an agressive CapEx program that currently far exceeds their annual cash flow. BPZ is currently dependent on the PP financing system and the brokerage house love that! ~ millions more shares to the houses at a 30% discount to retail investors. IMO it very unlikely BPZ will ramp production from 2.7k bopd to 10k bopd for 2009E, anything under 7k bopd isn't paying BPZ's CapEx.
An acquistion by GTE, or funding of the Iquitos Arch play, (like the recent $1 billion for Rubialles/ Piriri/Quifa) could one day cause GTE to require $500 million in financing, even with a major JV partner for Blocks 122 and 128. Pacific Rubiales went for a long time without too many folks really understanding the finances of South American heavy oil projects. Valuation on Rubiales/ Piriri/Quifa is still not easy, in Q2 2009 PRE noted 21k bopd net for Rubiales and OpEx at $25 / bbl + $6 / bbl.
BMO and JPM as banks probably have the possibility for $1 billion in iquitos financing, in the back of their mind, not the short term share price.
Right, after Pacific Rubiales $500 million financing for the pipeline and the $500 million line of credit, BMO started raising their targets on PRE on a weekly basis. The smaller brokerage houses followed BMO's lead as the $1 billion in capital plus + $65 /bbl WTI, took financial risk out of PRE's business plan . ie the big banks bought into PRE's long range business plan. The big bankers are still watching GTE for financial requirements BMO and JPM didn't produce their 90 page reports on Gran Tierra, just for fun. GTE has upside exploration risk, but very low financial risk, which is tha main reason, I am heavy invested in GTE. Cash flow and reserves from Costayaco underpin the current market valuation allowing GTE to execute a very high impact exploration drilling program.
In Q2 2009 PRE and GTE had similar net of royalty quarterly revenue. PRE was selling more bitumen and gas at a lower price, and GTE, in Q2 was selling less bopd at a higher price. In Q2 2009, PRE had operating costs of $25 + $6 /bbl and GTE had operating costs of $8 /bbl. PRE has promised to lower OpEx costs. As production goes up GTE's OpEx costs come down, but GTE's OpEx by comparison to PRE's have stablized.
Both GTE and PRE basicaly broke even in Q2 2009 due to low oil prices and the " Colombian Peso increasing in vlaue relative to the USD) GTE remains debt-free and has no debt obligations to the banks or brokers in the forseeable future. The risk on GTE is the DD&A costs / bbl of 2P reserves will be increasing due to the 14 well exploration drilling program, and for PRE they need to reduce their OpEx costs/ bbl. There are a lot of financial unknowns as PRE increases their net 21k bopd from Rubiales to 75k bopd. PRE has to drill quite a few 100 bopd wells to triple their production revenue, the Rubiales pipeline, and increased processsing capacity make it possible.
For GTE to triple current production they'd need a big discovery in the Catguas, with 25k bopd spare infrastructure capacity, and another big discovery in the Piedemonte blocks, that are closer to the Orito sales station, than Costayaco. A pipeline from Peidemonte to the Orito sales station would csot much, much less than one from Verdeyaco to Orito.
GTE exited the H1 2009 with $140 million in cash, and a remaining $10 million in Capex planned Q4 2009 to pay for Costyaco 10 and Rio Mocoa. GTE has $100 million in CapEx planned for 2010, some seismic and rig costs on 13 more wells at about $4 - $6 million per well. 2010 gross revenue should be about $300 million , and OpEx cash flow of about $250 million on 5.4 mmbo in production and WTI averaging $68/bbl in 2010. GTE should exit 2010 with a cash balance of about $230 million ($200M CF - $100 M CapEx 2010 + $130 million 2009E cash balance).
Tristone is good on "unrisked exploration value", but they haven't updated their unrisked valution, Tristone carried the Catguas drills risked at $.03 per share, and used $7 /bbl for 2P "unrisked reserves" on the new Putuamyao and Catguas targets, IMO Tristone reduces the Putumayo target sizes to about 30- 50% of what Arogsy/Solana published in 2005-2006, and discounts the forward 2P value as much as 70%. The 20 mmbo / 160 mmbo from GTE also include some big deductions from Arogys's oringal 230 mmbo for the Moqueta blocks A & B and GTE's note of a couple billion recoverable from blocks 122 and 128. GTE hasn't released to the press or SEC their target size for the Catguas or Verdeyaco, analyst don't have the same liberty as I do to swag these targets at 100 mmbo each based on 2005 - 2006 information from Solana Resources, Arogsy Energy, and Ecopetrol.
Tristone, has a handle on the potential impact of the 14 well exploration program 2009 - 2010, but since some of it is more than 12 months out it Tristone's past and current reports don't add much value. I would not expect too much valuation for Peru as production is very far out, but on a 2P NAV it not unrealistic to assume the entire 2009-2010 drilling program could book 2P reserves in 2010E, and analyst doing 2PNAV valuation next year from 2010E to 2011E will need to consider the impact of results from the next 14 exploration wells.
Tristone carried Peru "unriksed" at $.29 / share based on a Joint venture / farm-in value, knowing full well a farm-in and some success could be worth $1.50 / share un risked". Algane recent offer on Delavaco has the Popa oil field valued in the open market at $80 - $100 million net to Delavaco.
You can chase exploration potental on a billion barrels here or there, but It pretty much always comes down long term to management . After all is said and done, managment is what we're all buying, not some analysts price target! |
