Latin American Oil: More Than Just Petrobras
When conversation turns to Latin American oil stocks, it's apt to begin and end with Petrobras (ticker: PBR), Brazil's booming energy giant.
But increasingly, Colombian-focused oil companies like state-controlled Ecopetrol (EC) and upstart Canadian outfit Pacific Rubiales Energy, (PRE.Canada), deserve to be part of the discussion. The shares of Ecopetrol have risen about 64% in the past year and Pacific Rubiales' have doubled, though an analyst says there's roughly 20% upside still left. Both companies have made dramatic production gains, enjoy good prospects for continued growth in reserves, and have thrived under the improved security climate in Colombia. Backed by billions in U.S. military aid, the country's military has gained the upper hand against leftist guerrillas who a few years ago were lording it over the same eastern provinces where wildcatters now are drilling for crude.
Bank of America Merrill Lynch analyst Frank McGann recently reiterated a Buy on Ecopetrol, in part because of management strength. "After years of undermanaged assets, they've become more aggressive," says McGann, who has a price target of 50 for the shares, up from last week's 42.38. An exploration and development company with a market cap one-tenth that of Ecopetrol's, Pacific Rubiales also is growing quickly under a unique management group. They are mostly former Petroleos de Venezuela executives banished by President Hugo Chavez after the 2002-2003 general strike.
Using knowledge gained in heavy oil fields in Venezuela's Orinoco Belt, Pacific Rubiales has been the main player in boosting output at Colombia's eastern plains, or Llanos, region, where oil has the consistency of tar. As operator, it's developing the Rubiales and Quifa fields there in partnership with Ecopetrol. Combined, the two fields will double their production in 2010 over last year to 200,000 barrels per day and thus account for nearly one-quarter of Colombia's crude output. Pacific Rubiales is McGann's top Latin oil stock pick with a target price of 40, versus 32.02 last week.
It's all quite a turnabout from 2003, when Colombia's production was plummeting, mainly because the terror sown by the rebels made drilling too risky. Fearing the nation would lose oil self-sufficiency, then-president Alvaro Uribe ordered the privatization of Ecopetrol and began to offer extremely attractive terms to foreign oil explorers.
Seven years later, Colombia's total annual output is expected to average 800,000 barrels of crude and 1.1 billion cubic feet of gas daily, up 48% and 90%, respectively, from 2003. It ranks 25th among the world's oil producers, up from 29th in 2005. About 100 exploratory wells will be drilled in Colombia this year, up from only 10 in 2002.
For most of its history, Ecopetrol was a passive partner in foreign companies' big Colombian ventures. In 2007, the government sold a 10.1% chunk of shares to the public, and today Ecopetrol boasts a market cap of $82 billion. It's been trying since to remake itself as a more entrepreneurial entity.
Ecopetrol President Javier Gutierrez told Barron's that the company next year will invest $1.3 billion in exploration, including 40 exploratory wells, mostly to be drilled in Colombia but also in Brazil, Peru and the U.S. Gulf Coast. That's up from 23 exploratory wells this year. Ecopetrol has trumpeted plans to raise output of crude and equivalents to an average of 750,000 barrels a day in 2011, up 22% from this year. The company, which is among the world's 40 largest oil concerns, has set its sights on one million barrels a day by 2015.
The integrated company is also shoring up its downstream operations, and its $10.6 billion investment plan for 2011 includes continued work on an ultramodern refinery. Ecopetrol is also the lead investor in a $4.2 billion pipeline project, the biggest since the mid-1990s, to connect heavy-oil fields to the Caribbean depot at Covenas.
Jose Arata, president of Pacific Rubiales, says the company's net production could average 150,000 barrels a day next year, up 50% from the 100,000 net barrels a day production it will average in 2010. The company has primed analysts to expect reserves to hit a total of 400 million barrels by year end, or 43% more than last year. The oil producer is expected to earn $1.17 per share this year and $1.99 next year. Revenue, at $1.15 billion through the first three quarters of 2010, is running 168% over last year's similar period.
There are some nubarrones, or clouds, on the horizon, Skeptics wonder if Ecopetrol can change its culture, noting the company has yet to make a major oil discovery. The bulk of the 300 million barrels added to Ecopetrol's reserves last December came from a "revaluation" of existing reserves and improved crude recovery techniques. It's also been an active acquirer.
There also are worries that the government will offer more shares to spend for its own purposes, a fear that recently cut the stock price, or lift Ecopetrol's royalties and taxes, currently among the lowest in Latin America.
Finance Minister Juan Carlos Echeverry insisted to Barron's that the new president, Juan Manuel Santos, isn't about to mess with a good thing.
"We know that attractive terms now offered to oil companies to come here to invest have been responsible for Colombia strengthening its energy self-sufficiency," Echeverry says. "We aren't going to change that."
(Chris Kraul, a Bogota-based freelance writer, covers Latin America for the Los Angeles Times and other publications.)
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