Cheapest Oil Exploration Target Is in Colombia: Real M&A

Petrominerales Ltd. (PMG)’s debt load and 50 percent stock drop has created a bargain for energy companies looking to acquire assets in South America’s third-biggest oil producing country.

The oil explorer, based in Calgary with most of its operations in Colombia, has lost more than half its market value in a year as it sought to tap new finds amid declining output. That’s left Petrominerales’s equity and net debt valued at the cheapest multiple to profit among any oil and gas explorer in the world with a market value higher than $250 million, according to data compiled by Bloomberg.

Petrominerales’s reserves, estimated at more than 40 million barrels of mostly high-quality light oil, could attract its Colombian rival Pacific Rubiales Energy Corp. (PRE), according to Macquarie Group Ltd. While the explorer’s debt exceeds its $505 million market value, Petrominerales also has stakes in Colombian pipelines that may appeal to TransCanada Corp. (TRP), Enbridge Inc. (ENB) or even private equity, said FirstEnergy Capital Corp., which values the company at about $1 billion.

The energy producer “could be attractive to a whole lot of people,” Darren Engels, an analyst at FirstEnergy in Calgary, said in a telephone interview. “An oil and gas company could buy the reserves and production and a completely new player could buy the pipeline assets. There could be multiple buyers.”

A representative for Petrominerales had no immediate comment on whether the company has been approached by suitors.

Oil Assets

Petrominerales, originally incorporated in 1996 to explore and develop oil assets in Colombia, has since expanded into Peru as well as Brazil, where it is seeking to develop unconventional tight-oil assets. The company, with about 41 million barrels of proven oil reserves, also has stakes in Colombian pipelines.

After peaking at C$4.26 billion ($4.2 billion) on the Toronto Stock Exchange in February 2011, the explorer’s market value has plummeted 88 percent to C$514 million as new discoveries failed to stem eight consecutive quarters of falling oil output. Discoveries typically take several years to become productive.

The company also faces as much as about $200 million of bond redemptions in August, when holders of some of the company’s convertible debt can exercise a put option to tender their securities early for full repayment.

‘Bad Run’

In May, Petrominerales hired Toronto-Dominion Bank’s TD Securities Inc. to help raise cash from assets including its stake in the Ocensa pipeline linking Colombia’s oil-rich eastern plains with the Caribbean coast.

“It’s had a bad run of headlines and the stock’s obviously had a bad run, to say the least,” Rupert Stebbings, equity markets vice president at Bancolombia SA in Medellin, Colombia, said in a phone interview. “That’s the combination that gets people thinking it must be for sale.”

Today, Petrominerales fell 0.5 percent to C$6.04 at 10:09 a.m. in Toronto.

Petrominerales had an enterprise value of $1.1 billion, equal to 1.85 times its earnings before interest, taxes, depreciation and amortization in the last 12 months. That’s the lowest among oil and gas explorers with a market value of more than $250 million, and compares with the median 8.2 multiple for the group, according to data compiled by Bloomberg.

Even with profit declining this year, Petrominerales is still trading at a cheaper multiple than 95 percent of peers based on this year’s projected Ebitda.

“It does look cheap,” David Popowich, an analyst at Macquarie, said in a phone interview from Calgary. The company’s reserves of light oil, which are easier to refine than the heavier types that are more commonly produced at Colombia’s largest fields, are “definitely in demand,” he said.

Potential Suitors

Petrominerales’s upcoming commercial development of heavier oil in Colombia will add value by increasing the company’s scale and offering more predictable production growth, Matthew Portillo, an analyst at Tudor, Pickering, Holt & Co., said in a phone interview from Houston.

Suitors for Petrominerales could include Pacific Rubiales, its larger rival in Colombia with a market value of $6.8 billion, Popowich and Portillo both said. The Bogota-based company has already spent money in recent months to buy companies and oil-and-gas blocks in Brazil, Colombia, Guatemala, Guyana, Papua New Guinea and Peru.

Ecopetrol SA (ECOPETL), Colombia’s state-controlled oil company with a market value of $87 billion, also could be interested, according to Portillo, while FirstEnergy’s Engels said pipeline operators such as TransCanada and Enbridge could be lured by Petrominerales’s pipeline stakes.

Representatives for Pacific Rubiales and Bogota-based Ecopetrol declined to comment.

In Pieces

Grady Semmens, a spokesman for Calgary-based TransCanada, which has a market value of $32 billion, said the company “is not currently interested” in Petrominerales. Graham White, a spokesman for Calgary-based Enbridge, said the $36 billion pipeline operator is “actively looking at growth opportunities internationally,” declining to be more specific.

Another option would be for Petrominerales to be broken up and sold in pieces, with the oil operations going to one acquirer and the pipeline stakes to another, such as a private-equity firm, Engels at FirstEnergy said.

While Petrominerales has assets that might appeal to a buyer, Mason Granger, a portfolio manager at Sentry Investments Inc., said the recent performance and debt woes may damp interest in the company as a takeover target. The explorer, with total debt of about $560 million as of the first quarter, is projected to have negative free cash flow this year on declining Ebitda, according to data compiled by Bloomberg.

Many Issues

“They’ve had eight consecutive quarters of shrinking production, they’re running on a bit of a treadmill trying to replace core production, their exploration program has had very mixed to negative success,” Granger said in a phone interview from Toronto. “And they have this host of other issues, including this put option on the convertible debenture. I just don’t know who the obvious buyer is.”

Still, Petrominerales should be valued at about $1 billion, based on its reserves and pipeline assets, double where it’s trading now, FirstEnergy’s Engels says. The interest in the Ocensa pipeline alone is worth about $300 million, he said.

Given the depressed valuation, buyers attracted to the Ocensa pipeline stake might opt to just buy all of Petrominerales instead, said Tudor Pickering’s Portillo.

“If you were looking at acquiring the pipeline, you may ultimately look at acquiring the whole company,” Portillo said.

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Andrew Willis in Bogota at awillis21@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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