Alfa to Inherit Rubiales Oil Output Battle If Bid Prevails

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If Alfa SAB and Harbour Energy Ltd. succeed in buying Pacific Rubiales Energy Corp. they’ll also acquire the oil driller’s battle to avert a steep production decline.

With the expiration next year of an agreement to produce crude from its namesake Rubiales field in central Colombia, the company will try to ramp up production at a nearby block known as CPE-6. That effort has met with slumping prices and community opposition, with some landowners threatening to try to halt the project on concern it’s harming the environment.

“They don’t have anything of any significance that could fill the gap besides those projects in the near term,” Gregory Lesko, a money manager at Deltec Asset Management LLC, said by phone from New York. “I don’t think there’s any way around a production decline. The question is how steep it’s going to be.”

Alfa and Harbour offered to buy Pacific Rubiales, which trades in both Toronto and Bogota, this week for about C$2.1 billion ($1.7 billion) after the collapse in crude prices spurred record losses and pushed up debt, making the stock among the world’s worst performers among oil producers. Pacific Rubiales is now in exclusive talks with Alfa and energy investor Harbour. Alfa, a San Pedro Garza Garcia, Mexico-based conglomerate, is seeking an expanded oil business as its home nation opens production to foreign investment.

Colombia’s state-controlled producer, Ecopetrol SA, said in March that Pacific Rubiales’ contract for its namesake field won’t be extended beyond June 2016. The nation’s largest oilfield accounts for roughly a third of Pacific’s production and 11 percent of total reserves.

‘Critical’ Development

Without the Rubiales field, CPE-6 is “critical” for the company, said Lesko, who manages about $300 million in emerging-market equities, with output from potential projects in Mexico still years away.

The government granted an environmental license in November 2013 for the project, which is currently producing about 1,500 barrels a day, according to an April presentation. Canadian energy producer Talisman Energy Inc. has a 50 percent non-operating stake in the block.

While Pacific Rubiales suspended drilling and development work in the block because of low prices, it remains confident of the long-term viability, it said in response to questions.

Owners of several large properties in the area say seismic surveying in recent years has caused soil erosion and damaged springs.

‘Open Dialogue’

“It never used to stop flowing, even in summer. Now it’s drying up,” said Eliceo Enciso, gesturing to the Tillava river that flows through his 7,500-hectare (18,500-acre) farm. “These tentacled monsters never bring anything worthwhile for farmers. They’re not entering.”

Dagoberto Pastran, co-owner of a 7,000-hectare farm inside the block, says contractors carrying out seismic studies failed to keep an agreement to repair damaged fields. He now opposes all further oil activity until soil erosion issues are resolved.

Pacific Rubiales has established an open dialogue with the communities and built relationships of trust, it said in an e-mailed response to questions. Asked about the environmental allegations, the company referred to public studies that prove seismic acquisition does not cause erosion.

Founded by former Petroleos de Venezuela SA executives in 2003, Pacific Rubiales increased net production from the equivalent of 8,000 barrels of oil a day in 2007 to 147,000 barrels in 2014. The company used skills honed in Venezuela’s heavy oil fields to extract similar crude in Colombia where others had failed.

Debt Surge

Then oil prices collapsed. That shifted investors’ attention to a more than tripling of debt since 2012 to about $4.7 billion following acquisitions of smaller oil companies and leverage ratios that are more than double the average of global peers at 5.5 times, data compiled by Bloomberg show.

Even after a 33 percent surge fueled by the Alfa-Harbour takeover offer, Pacific Rubiales shares are still down 65 percent in dollar terms from a year ago, the steepest drop among 15 global peers tracked by Bloomberg.

“We think shareholders should accept the offer,” Jared Dziuba, a BMO Capital Markets analyst, wrote in a report Wednesday. “Pacific Rubiales’ growth portfolio outside of Mexico is troubling in our view.”

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