Pacific Rubiales Energy Corp. has finally erased one of the question marks hanging over its immediate future, an encouraging sign for investors interested in betting on the Toronto firm’s foray into Colombia’s oil fields.
Shares in the oil and gas producer rose nearly 4 per cent on Monday after it said Colombia’s environmental agency had approved two oil licences after years of delays.
Pacific Rubiales is Colombia’s largest independent crude producer and the approvals will allow it to expand its exploration and development program in the country.
Analysts say the company’s renewed focus on boosting its own production, rather than simply buying other producers, is a positive development. Pacific Rubiales has been a serial acquirer of other producers over the past two years, and recently made a $935-million offer to buy Petrominerales Ltd., another Canadian company focused on Latin American oil production.
“This news is a sign they can grow organically and I think that is being viewed positively,” said Macquarie Equities Research analyst David Popowich.
While there are some unavoidable risks with operating in Colombia – including rebel groups that are attacking the country’s oil and gas infrastructure – the licence approvals announced Monday will help the company diversify away from its Rubiales field, which accounts for about two-thirds of its production and has licences set to expire in 2016. Analysts say the company is expected to lose the licences or be forced to negotiate less favourable terms.
Before Monday’s news, Pacific Rubiales shares were down 9 per cent over the past year as investors worried about whether the company would be awarded licence approvals for new exploration and development areas, including one for the CPE-6 field, which it co-owns with Talisman Energy Inc.
“Without clear growth, people had priced in the worst-case scenario,” said Mr. Popowich.
Pacific Rubiales stock closed up 77 cents to $22.22 on the Toronto Stock Exchange on Monday, nearing its 52-week high of $25.94 reached in March.
“If [CPE-6] is as good as Pacific Rubiales says it is, then the stock is probably headed to at least $25,” said Mr. Popowich, who has a $26 price target on the stock and a “buy” recommendation.
Of the analysts covering Pacific Rubiales, 20 call it a “buy” while four label it a “hold,” according to Thomson Reuters I/B/E/S.
Pacific Rubiales hiked its dividend by 50 per cent in the summer to try to reassure investors of its growth plans. Today, it pays a 3.2-per-cent yield and is one of just 39 companies out of 310 in the oil and gas industry group with a dividend, according to Thomson Reuters.
Still, analysts say Pacific Rubiales’s main attraction is the potential of the Colombia oil and gas play.
“People would rather see them spending money on drilling and growth than paying dividends,” said Mr. Popowich.
Some investors are also attracted to the company’s proprietary Synchronized Thermal Additional Recovery (STAR), said Salman Partners Inc. analyst Justin Anderson. The technology heats the reservoir, which helps to release more oil.
“It may have the potential to double or more their recovery growth,” said Mr. Anderson, who has a “buy” on the stock and $24 price target. “I think that’s a main reason an investor would want to own the stock – basically speculating on STAR technology.”
That said, Mr. Anderson prefers other Latin American-based energy stocks such as Gran Tierra Energy Inc., which he believes has better growth potential, and Parex Resources Inc., which is cheaper.
For Laura Lau, senior portfolio manager at Brompton Funds, the licence approvals aren’t enough to compel her to buy Pacific Rubiales stock for her clients.
Ms. Lau said she’d wait for evidence that the oil can flow and that proper infrastructure will be in place to transport it.
She’s also concerned about the risk of investing in companies with operations in Colombia because of increased attacks on oil and gas operations by the country’s main rebel group, the FARC, which is the Spanish acronym for the Revolutionary Armed Forces of Colombia.
“It’s just not as good a place to invest as it used to be,” said Ms. Lau.