GTE Update

[dan_s]

Gran Tierra Energy, Inc. (AMEX: GTE) was added to the Sweet 16 on April 6.

The company is based in Calgary, Canada. It currently holds interests in producing and prospective properties in Colombia, Brazil, Peru and Argentina. Most of the production today is coming from Columbia.

A detailed company profile and forecast for GTE is available under the Sweet 16 tab.

For the year 2010, GTE had record average annual production of 14,325 barrels of oil per day, which is a 13% increase from 2009. Their proved reserves at year end were 23.6 MMBO. GTE grew revenues for the year to $374.5 million, which is a 42% increase from 2009. 2010 net income was $37.2 million or $0.15 per share. Cash and cash equivalents as of December 31, 2010 were $355.4 million.

First quarter results were in-line with my forecast:
• Production of 14,547 boepd (98.8% oil & NGLs)
• Cash flow per share of $0.24

Gran Tierra recently announced that they have closed on the acquisition of Petrolifera Petroleum Limited (“Petrolifera”). The deal closed several months earlier than I thought it would. This is the primary reason I decided to promote GTE to our Sweet 16 Growth Portfolio. Petrolifera will add 3,000 boepd to GTE's net production in the 2nd quarter.

Moqueta Oil Discovery in Columbia will be a major driver of production and reserve growth over the next two years. Progress made during the first quarter.
• GTE successfully drilled and tested Moqueta-4 delineation well.
• Subsequent to the end of the quarter, successfully drilled the Moqueta-5 delineation well, which further increases the reserve potential of the field.
• Continued construction of the Moqueta to Costayaco flow-line with first long-term test production expected in late May 2011.
• During the quarterly conference call the company stated that long-term testing will be done on each zone so this year production will be limited to about 500 bopd. They believe the field will be capable of production at the pipeline capacity of 20,000 bopd in 2012.

I believe that the combination of Gran Tierra’s successful drilling program in 2010 and their very strong debt-free balance sheet positions the company for significant growth in 2011 and beyond. The recent pullback in the share price, primarily a result of an announced dry hole on an exploration well in Peru, offers investors a very attractive entry point.

Based in my forecast, estimated current Fair Value for GTE is $11.40 per share. GTE has significant exploration upside beyond this price.

GTE is a “Pure Play” on South American oil exploration and development opportunities; a region that I believe offers investors exceptional growth potential.

A word of caution: GTE will be drilling several High Risk / High Potential exploration wells during 2011. Therefore it carries more Dry Hole Risk than the other E&P companies in our Sweet 16 Growth Portfolio.

Strong production growth is forecast in 2011. GTE’s capital program will fund an accelerated drilling program in 2011; a total of 21 wells, including their first exploration wells in Peru and Brazil. The company will be testing net risked resource potential over 250 million bbls of oil in 2011.

GTE has a $357 million capital program planned for 2011 that will be fully funded by operating cash flows.

GTE has a solid management team with international experience. They come from EnCana, ARCO, BP and Nexen; all world class organizations.

[dan_s]

Moqueta Field will be the major driver of production and reserve growth over next 18 months.
Taken from the 1st quarter CC:

We continue to have excellent success growing the reserve potential of our Moqueta oil discovery. Moqueta-4 and subsequently Moqueta-5 have both extended the depths of the known oil columns in all 5 reservoirs. No oil-water contact has been found in any of the reservoirs, indicating additional reserve potential exists further down the flanks of the structure.

Up to the end of the first quarter 2012, we anticipate drilling 2 more delineation wells at the Moqueta field. Moqueta-6, expected to spud in June of 2011, will be drilled as a deviated well from the Moqueta-4 surface location in order to further investigate the down dip limits of the oil columns encountered in reservoirs.

Planning is underway for Moqueta-7, expected to be drilled in the first quarter of 2012 at a new surface location approximately 1,750 meters west of Moqueta-4. This location will allow appraisal of the down dip extent of the field. Moqueta-7 could be used as an oil producer or water injector depending on the well results.

First long-term test production from a new 6-inch, 8-kilometer pipeline linking Moqueta to Costayaco is expected to take place in late May 2011. Construction of the line is approximately 85% complete. Once initiated, average production from the Moqueta field is expected to be modest at approximately 500 barrels per day. Production is expected to begin ramping up in 2012 to levels that will be determined once reservoir performance data has been acquired, the full aerial extent of the field has been determined and the final development plan concept decided.

Finally, new 3D seismic acquisition is expected to start in the second quarter to assist in refining the mapping of the Moqueta field and planning further delineation and development drilling.

[dan_s]

Tuder Pickering report for May 19 raised GTE target price to $10.50.

E&P 2012 EV/EBITDA multiples (E&P $635) – Small-caps look cheapest on
2012 EV/EBITDA with ~50% of our small-cap coverage at 5.0x or less, compared to
only ~30% and 25% for large-caps and mid-caps, respectively.

By group,
> cheapest large-caps are YPF (3.4x), APA (4.0x), and OXY (4.4x).
> Cheapest mid-caps are PRE (2.5x), QEP (4.4x) and WLL (4.5x).
> Cheapest small-caps are PMG and GTE (both 2.2x), SGY (3.5x), and CRZO (4.3x)

[davidc257]

What risks for GTE do you perceive from the results of the Peruvian election yesterday?

[dan_s]

GTE has a lot of acreage in Peru but no production. As I recall, only three exploration wells are planned for Peru this year vs. 30+ well in Columbia. Near-term upside is all in Columbia, Argentina and Brazil.

GTE is going to report about a 3,000 boepd increase in production for Q2.

Whatever happen in Peru will not effect this year's earnings and cash flows.

[davidc257]

As always thank you for your insight.

Cheers

[wilmawatts]

Thanks Dan, the Peru stock market plunged 12% when news of the election results became official.

My take also, Peru is a minor part of GTE's assets. Right now GTE selling at fire sale prices.

[dan_s]

I just took a hard look at my forecast model for GTE.

My forecast for 2011:
$0.47 EPG (compares to First Call estimate of $0.48)
$1.40 Cash flow per share

My forecast for 2012 (assumes $100/bbl oil):
$0.68 EPG (compares to First Call estimate of $0.62)
$1.86 CFPS

My forecast for 2012 if we assume $130/bbl for oil (the current forecast by Morgan Stanley and Goldman Sachs):
$1.16 EPG
$2.39 CFPS

Near-term catalyst is how fast they can test and develop the Moqueta Field in Columbia and the results of this year's exploration program. I do not have any production in my forecasts from the exploration program. Moqueta Field should be around 500 bopd during 2nd half of this year. Once they are done with testing, it should ramp up to 15,000 bopd by the end of 2012.

My current Fair Value estimate is $11.40 per share with a lot of exploration upside beyond that. Hang tough with this one. 2nd quarter results are going to be very good.

[wilmawatts]

Thanks Dan for your insight. Oil seems to be on an uptrend here, OPEC not raising production.

I don't think they have production capacity to raise, except for a country or two, and internal demand is skyrocketing.

[dan_s]

You raise a very good point. The demand for fuels in the OPEC countries is going up. Iran is importing refined products.