Pacific Rubiales: Quifa Block Clause Was Disclosed

BOGOTA (Dow Jones Newswires), March 17, 2011

Pacific Rubiales released a statement Thursday to "reiterate" a controversial clause in one of its contracts that many investors didn't know existed until a week ago and caused a sharp selloff in its shares.

Some analysts say the clause is significant enough to turn Pacific Rubiales into a minority rather than majority shareholder in its important Quifa oil block. The company's shares, which trade in both Toronto and Bogota, have plunged about 22% over the past week.

The plunge in the Toronto-based company's shares has created a stir in Colombia, as the company had become a shining star for the Colombian Stock Exchange. Pacific Rubiales shares more than doubled in price last year and the company is seen as the poster child of the recent boom in oil production in Colombia.

The clause in question is related to the Quifa oil block in eastern Colombia, a key source of Pacific Rubiales' average gross production of 225,000 barrels a day of oil. The Quifa block could hold at least 250 million barrels of reserves, and Pacific Rubiales has a 60% stake in it while Colombian state-owned oil company Ecopetrol owns the other 40%.

But the clause, which is mentioned in a reserves certification report released March 10, indicates Pacific Rubiales' interest would decline depending on changes in the price of oil and the amount of royalties it must pay to Colombia's government.

Analysts from several brokerages in Colombia who follow Pacific Rubiales expressed surprise when the clause was mentioned in the report and suggested the company may have been misleading investors. Analysts noted the clause wasn't mentioned in any of the company's annual reports or recent presentations to investors. The company's share price began to plunge as soon as the clause came to light.

Thursday's statement from Pacific Rubiales, however, says the clause was already disclosed in a pair of reserves reports four years ago. It said those reports explained that the company's interest in Quifa "contains a variable volume participation clause that is a function of the variability of the price of oil."

Exactly how much Pacific Rubiales' 60% interest in the Quifa block could be reduced based on the now-very-public clause remains uncertain. Some analysts initially said it could reduce the company's stake to as little as 45%.

In recent days, Colombia brokerage InterBolsa as well as Chile-based Celfin Capital reduced their target price for Pacific Rubiales shares based on the clause, although both maintained a buy recommendation for the company's shares, saying the company's fundamentals remain strong.

When officials from Pacific Rubiales were asked by reporters earlier in the week why the company's shares were falling so sharply, they said they didn't know, and added that the company remains solid and will continue to grow.

InterBolsa said in a report Thursday that based on the company's most recent statement on the controversy, it could be interpreted that the clause may not be triggered as soon as some previously suspected.

That may be helping the shares begin to recover. Pacific Rubiale's shares, which fell 22% since March 9 to close Wednesday at COP50,000 on the Colombian Stock Exchange, were up 4% to COP52,180 in morning trading Thursday.

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