No Oil Trade Is Dicier Than This Colombian Driller StockChristine Jenkins
The world’s wildest oil stock is a Colombian driller that’s either on the cusp of a gusher or about to go bust, depending on whom you ask.
The company is Pacific Rubiales Energy Corp., a seven-year-old Bogota-based producer headed by a group of Venezuelans who took on more than $3 billion of debt to plow into acquisitions and exploration projects when oil prices were around $100 a barrel. Now, New York crude futures are closer to $50, near the level that Fitch Ratings estimates would put the company at risk of violating terms on its debt.
The stock has swung an average of 13 percent a day in 2015, and its volatility over the past month is the highest among all oil companies with a market capitalization of at least $1 billion, according to data compiled by Bloomberg. The company’s Canadian shares have fallen 74 percent in the past year to C$4.20, and Credit Suisse Group AG says they’re headed to C$1. Another bank, Grupo BTG Pactual, predicts they’ll quadruple.
“Some people think it frankly might go to zero,” said Nathan Piper, an analyst at RBC Capital Markets, who raised his target price today by 67 percent to $C5. “On the flipside, if the oil price starts going up, clearly it has a chance of recovery.” Anything that triggers a surge in the stock price would probably send short-sellers scurrying to cover their bets, in turn intensifying the rally, Piper said.
It isn’t just the crude market causing the whiplash. The stock also is the object of takeover speculation. Alfa SAB, a Mexican conglomerate, has bought up 19 percent of the stock. The threshold at which, under Canadian law, a suitor usually has to bid for the rest of the shares is 20 percent.
Pacific Rubiales says the fluctuations aren’t justified.
“We are well-placed to survive this period of oil-market volatility and certainly do not agree with the bear case,” Peter Volk, the company’s general counsel, wrote in an e-mail. “We have and will continue to operate a very strong business.”
For a glimpse of what it’s like to trade Pacific Rubiales, take the first week of February. On Monday, the shares jumped 19 percent, then surged 29 percent the following day. Wednesday, the stock tumbled 11 percent, and Thursday the shares gained 20 percent. Pacific Rubiales ended the week up 64 percent. The prior week, it had tumbled 22 percent.
The stock has rebounded from C$2.90 in late January as oil rallied from an almost six-year low of $44.45 a barrel. David Neuhauser, a fund manager at Livermore Partners in Northbrook, Illinois, says he’s been buying Pacific Rubiales on speculation that the producer will be able to cut costs and raise cash.
“Even with what we’ve seen, I still wouldn’t bet against them,” he said in a telephone interview. “The next year is going to be an interesting ride.”
According to Fitch, a prolonged period of oil prices around $50 a barrel would put the company at risk of violating terms of its bonds that specify debt can’t be more than 3.5 times earnings before interest, taxes, depreciation and amortization. Breaching the rules would restrict the company from additional borrowing, while depressed oil prices will put pressure on its cash, Fitch says.
The company’s license to drill in Colombia’s largest oil field, which provides about 40 percent of its output, is due to expire in mid-2016.
The company has at least two “very large” projects that can be “ramped up relatively rapidly” as oil prices recover, Volk said.
“Either this is going to be a phenomenal opportunity for someone to be buying the equity, or it’s going to be a more difficult path,” Livermore’s Neuhauser said.