Gran Tierra and the oil price

[Petroleum economist]

The Gran Tierra share price increased in 2024 by a staggering 53.2%. This is the most of all the oil and gas stocks that I track and warrants some investigation.

With WTI = $ 80-$ 85, I estimate the Gran Tierra 2024 eps to be $ 1.36-2.06 and the PE 4.6- 6.4.
The low PE, combined with shareholder returns of 8-10% seem to justify the current share price of $ 8.64.

Ranking model
In my oil and gas ranking model, Gran Tierra is the company which is the most sensitive to oil price variations. With WTI at $ 85/bbl Gran Tierra ranks a good 11th, at $ 80/bbl 26th, at $ 75/bbl 45th and at $ 70/bbl only 68th (out of 72).
This stunning difference is due to (1) oil price discounts due to quality/location, (2) high unit costs and (3) the tax/ royalty system under which Gran Tierra operates in Columbia. I will try to explain below with an example

Economic parameters
Quality/location oil price discount
In 2023 and 2024 Gran Tierra has sold its oil at a discount of typically $ 15.00/bbl versus Brent or $ 10.00 /bbl versus WTI.

Unit costs
Q1 2024 cost were a higher than I anticipated. I assume that the Gran Tierra 2024-unit costs (including depreciation, interest and administration) will be a high $ 45/bbl.
2023-unit costs were slightly lower at $ 43.50/bbl.

Tax/Royalty regime
As per the concession agreement, Gran Tierra pays to the government royalties of 20% from the revenues.
The tax rate varies from 35-50%, depending on the Brent oil price.

I am not a big fan of tax/royalty schemes, as interests of government and operator can diverge. I prefer Production Sharing Agreements (PSA’s) with a moderate taxation of the operator profits.

Effect on Profits
Using the economic parameters outlined above and varying the WTI oil price from $ 70/bbl -$ 85/bbI, I get the results as shown below per 1,000 bbl of oil:
WTI oil price: $ 70/bbl, $ 75/bbl, $ 80/bbl $ 85/bbl
Net revenues: $70,000, $75,000, $80,000, $85,000
Royalties (20%): $14,000, $15,000, $16,000, $17,000
Quality discount: $10,000, $10,000, $10,000, $10,000
Operating cost: $45,000, $45,000 $45,000, $ 45,000
Earnings before tax: $1,000, $5,000, $9,000, $13,000
Tax – 35/40/45%: $350, $2,000, $3,600, $5,850
Earning after tax: $650, $ 3,000, $6,400, $7,150


A $ 15/bbl reduction in the WTI price (from $ 85/bbl to $70/bbl), reduces the Gran Tierra profits by more than 90%!

As I said before, I do not like tax/royalty schemes. Gran Tierra is another example. At $ 70/bbl Gran Tierra will be reluctant to invest with returns of only $ 0.65/bbl. The government sees returns of 14.00 + 0.35 = $ 14.35/bbl and will push Gran Tierra to keep going. I can foresee some intense discussions if this would happen

Conclusion
Gran Tierra is a good investment for those who believe that oil prices will stay at $ 80-85/bbl or more.
However, if you believe oil prices can drop to $70-75/bbl or less, than better run for cover.