Petrominerales from Canadian Value
Posted: Fri Feb 18, 2011 5:13 pm
What has caused the increase of 60% in the Petrominerales share price ? Certainly a strong stock market and oil price is a part of it. The bigger part is Petrominerales continuing doing what they have been doing since inception. And that is drill successful and significant exploration oil wells on a regular basis.
Consider the exit rate production figures for Petrominerales over the past few years:
2006 – 2,500 bopd
2007 – 10,000 bopd
2008 – 15,000 bopd
2009 – 24,000 bopd
2010 – 40,000 bopd
Small wonder the Petrominerales share price has gone from $3 to $40 over this time period.
Relentless Positive News Flow
Then consider the news flow that has helped drive the share price from $25 to $40 in just the last 4 months:
November 29, 2010 – Big hit at Caruto
"Bogotá, Colombia – November 29, 2010 – Petrominerales Ltd. ("Petrominerales") (TSX:PMG), a 65% owned subsidiary of Petrobank Energy and Resources Ltd. (TSX:PBG), is pleased to provide an operational update highlighted by the successful test of our Caruto-1 well at over 10,000 barrels of light oil per day ("bopd")."
http://www.petrominerales.com/wp-conten ... -29-PR.pdf
December 7, 2010 – More success at Yenac
Bogotá, Colombia – December 7, 2010 – Petrominerales Ltd. ("Petrominerales") (TSX:PMG), a 65% owned subsidiary of Petrobank Energy and Resources Ltd. (TSX:PBG), is pleased to announce the successful test of our Yenac-2 well at a rate of 2,936 barrels of oil per day ("bopd").
http://www.petrominerales.com/wp-conten ... -07-PR.pdf
December 8, 2010 – Signs that they may have uncovered a large heavy oil field
In the first test of a Mirador sand, we production tested over 600 bopd of heavy 10 degree API oil at watercuts between 80 and 90% over a seven‐hour test period. This level of productivity from a vertical heavy oil well is extremely encouraging and has the potential to significantly expand the prospectivity of our Llanos Basin heavy oil assets.
[www.petrominerales.com]
January 5, 2011 – Exciting well at Yatay with potential follow up drilling
Bogotá, Colombia – January 5, 2011 – Petrominerales Ltd. ("Petrominerales" or the "Company") (TSX:PMG), is pleased to provide an operational update highlighted by our Yatay-1 exploration well producing 10,440 barrels of 43 degree API light oil per day ("bopd") under natural flow.
[www.petrominerales.com]
January 19, 2011 – Oil production from Mantis as well
[www.petrominerales.com]
Bogotá, Colombia – January 19, 2011 – Petrominerales Ltd. ("Petrominerales" or the "Company") (TSX:PMG), is pleased to provide an exploration update highlighted by our Mantis-1 exploration well testing 1,800 barrels of 17 degree API oil per day ("bopd").
The flow of news and positive exploration results is enough to make your head spin isn't it. For Petrominerales the rate of positive results have been accelerating over time as each new well provides more cash flow which allows them to drill more exploration wells each successive year.
Short of high impact, high quality drilling targets they are not.
Right Place at The Right Time
So how can it be that this company can grow production by 50% to 100% year after year ? It is a case of having been in the right place at the right time.
Prior to 2004 in Colombia the state oil company Ecopetrol was allowed to back in for a 50% interest on any property owned by a foreign oil company where a discovery was made. Obviously this did not create an attractive situation for foreign oil companies who would take the risk of drilling the exploration well and then lose 50% of the property if successful.
In 2004 the Colombian government saw that the country was about to become a net oil importer despite having hugely prospective oil property that was sitting undeveloped. In an effort to encourage foreign investment the old arrangement with Ecopetrol was eliminated.
At the time of this enormous change in 2004 Petrominerales (through its former parent company) was one of the few foreign companies already on the ground in Colombia. This gave them a huge advantage as they already knew the country and which areas were most prospective.
In other words Petrominerales was given basically first shot at very attractive property. And they swung big capturing 1.5 million acres of the most prospective exploration property in the Colombia.
As you can see, once Petrominerales had acquired some 3D seismic and indentified some targets the production growth has been strong:
2006 – 2,500 bopd
2007 – 10,000 bopd
2008 – 15,000 bopd
2009 – 24,000 bopd
2010 – 40,000 bopd
I've listened to every presentation the company has made and all of the conference calls for quarterly earnings. It is quite apparent that management thinks they have just started exploring their exploration acreage. Each year as cash flow ramps up they expand their 3D seismic data on more and more of their property and identify more and more drilling locations.
Exploration Inventory
Here's the detail of their prospect inventory, and how large the potential prize will be at each location:
Acres (mil)
Prospects
Target Size
MMbbl
Deep Llanos – Corcel Type Propects
634
55
2 -25
Deep Llanos – Foothills Type Prospects
634
8
25+
Central Llanos
403
12
1 – 15
Heavy Oil
906
17
50+
Putumayo
32
2
3 – 10
Peru
9,482
24
25+
12,091
118
2011 Exploration Plan
In 2011 they will be drilling approximately 45 exploration wells. I went back and recorded their success rate since they started exploration drilling in 2006.
The results by region are:
Corcel – 15 out of 18 exploration wells have been successful (83%)
Guatiquia – 5 out of 6 exploration wells have been successful (83%)
Cental Llanos – 5 of 10 exploration wells have been successful (50%)
Entire company has hit on 71% of the exploration wells drilled since commencing exploration of their large land base. That is ridiculous and can't continue, but does show just how prospective this area is for oil.
With 45 exploration wells to be drilled, a 71% track record of success and wells that have averaged between 6,000 and 8,000 barrels of oil per day initially you can do the math and see that 2011 could be a big year for Petrominerales.
Valuation
This is the hard part with Petrominerales. What should you be willing to pay for this company ?
You know that what it is producing today is likely to be much less than what it will be producing three years from now. They have doubled production almost every year and have a deeper drilling inventory now than ever before as they continue add 3D seismic information for more and more of their land which allows them to identify new prospects.
Two comments from the company stay in my head
1) They believe that they have explored about 5% of what is prospective in their acreage
2) 2011 will be the first year that they go elephant hunting by targeting the big prospects in the Llanos foothills, their heavy oil acreage and their Peru property. A single success on any of these could double the reserve base of the company
At $40 per share investors are paying about 6x 2011 EBITA based on current expected production. If some of those 45 exploration wells turn into success like the recent Caruto and Yatay wells that multiple will shrink in a hurry.
I think $40 will likely turn out to be a steal as rapid production growth is inevitable here over the next couple of years simply due to the number of exploration wells being drilled and the quality of the prospects they are being drilled on.
At the very least I'm holding the shares I currently own very tightly and am excited to see what all of this exploration drilling brings in 2011.
Author: Canadian Value
Consider the exit rate production figures for Petrominerales over the past few years:
2006 – 2,500 bopd
2007 – 10,000 bopd
2008 – 15,000 bopd
2009 – 24,000 bopd
2010 – 40,000 bopd
Small wonder the Petrominerales share price has gone from $3 to $40 over this time period.
Relentless Positive News Flow
Then consider the news flow that has helped drive the share price from $25 to $40 in just the last 4 months:
November 29, 2010 – Big hit at Caruto
"Bogotá, Colombia – November 29, 2010 – Petrominerales Ltd. ("Petrominerales") (TSX:PMG), a 65% owned subsidiary of Petrobank Energy and Resources Ltd. (TSX:PBG), is pleased to provide an operational update highlighted by the successful test of our Caruto-1 well at over 10,000 barrels of light oil per day ("bopd")."
http://www.petrominerales.com/wp-conten ... -29-PR.pdf
December 7, 2010 – More success at Yenac
Bogotá, Colombia – December 7, 2010 – Petrominerales Ltd. ("Petrominerales") (TSX:PMG), a 65% owned subsidiary of Petrobank Energy and Resources Ltd. (TSX:PBG), is pleased to announce the successful test of our Yenac-2 well at a rate of 2,936 barrels of oil per day ("bopd").
http://www.petrominerales.com/wp-conten ... -07-PR.pdf
December 8, 2010 – Signs that they may have uncovered a large heavy oil field
In the first test of a Mirador sand, we production tested over 600 bopd of heavy 10 degree API oil at watercuts between 80 and 90% over a seven‐hour test period. This level of productivity from a vertical heavy oil well is extremely encouraging and has the potential to significantly expand the prospectivity of our Llanos Basin heavy oil assets.
[www.petrominerales.com]
January 5, 2011 – Exciting well at Yatay with potential follow up drilling
Bogotá, Colombia – January 5, 2011 – Petrominerales Ltd. ("Petrominerales" or the "Company") (TSX:PMG), is pleased to provide an operational update highlighted by our Yatay-1 exploration well producing 10,440 barrels of 43 degree API light oil per day ("bopd") under natural flow.
[www.petrominerales.com]
January 19, 2011 – Oil production from Mantis as well
[www.petrominerales.com]
Bogotá, Colombia – January 19, 2011 – Petrominerales Ltd. ("Petrominerales" or the "Company") (TSX:PMG), is pleased to provide an exploration update highlighted by our Mantis-1 exploration well testing 1,800 barrels of 17 degree API oil per day ("bopd").
The flow of news and positive exploration results is enough to make your head spin isn't it. For Petrominerales the rate of positive results have been accelerating over time as each new well provides more cash flow which allows them to drill more exploration wells each successive year.
Short of high impact, high quality drilling targets they are not.
Right Place at The Right Time
So how can it be that this company can grow production by 50% to 100% year after year ? It is a case of having been in the right place at the right time.
Prior to 2004 in Colombia the state oil company Ecopetrol was allowed to back in for a 50% interest on any property owned by a foreign oil company where a discovery was made. Obviously this did not create an attractive situation for foreign oil companies who would take the risk of drilling the exploration well and then lose 50% of the property if successful.
In 2004 the Colombian government saw that the country was about to become a net oil importer despite having hugely prospective oil property that was sitting undeveloped. In an effort to encourage foreign investment the old arrangement with Ecopetrol was eliminated.
At the time of this enormous change in 2004 Petrominerales (through its former parent company) was one of the few foreign companies already on the ground in Colombia. This gave them a huge advantage as they already knew the country and which areas were most prospective.
In other words Petrominerales was given basically first shot at very attractive property. And they swung big capturing 1.5 million acres of the most prospective exploration property in the Colombia.
As you can see, once Petrominerales had acquired some 3D seismic and indentified some targets the production growth has been strong:
2006 – 2,500 bopd
2007 – 10,000 bopd
2008 – 15,000 bopd
2009 – 24,000 bopd
2010 – 40,000 bopd
I've listened to every presentation the company has made and all of the conference calls for quarterly earnings. It is quite apparent that management thinks they have just started exploring their exploration acreage. Each year as cash flow ramps up they expand their 3D seismic data on more and more of their property and identify more and more drilling locations.
Exploration Inventory
Here's the detail of their prospect inventory, and how large the potential prize will be at each location:
Acres (mil)
Prospects
Target Size
MMbbl
Deep Llanos – Corcel Type Propects
634
55
2 -25
Deep Llanos – Foothills Type Prospects
634
8
25+
Central Llanos
403
12
1 – 15
Heavy Oil
906
17
50+
Putumayo
32
2
3 – 10
Peru
9,482
24
25+
12,091
118
2011 Exploration Plan
In 2011 they will be drilling approximately 45 exploration wells. I went back and recorded their success rate since they started exploration drilling in 2006.
The results by region are:
Corcel – 15 out of 18 exploration wells have been successful (83%)
Guatiquia – 5 out of 6 exploration wells have been successful (83%)
Cental Llanos – 5 of 10 exploration wells have been successful (50%)
Entire company has hit on 71% of the exploration wells drilled since commencing exploration of their large land base. That is ridiculous and can't continue, but does show just how prospective this area is for oil.
With 45 exploration wells to be drilled, a 71% track record of success and wells that have averaged between 6,000 and 8,000 barrels of oil per day initially you can do the math and see that 2011 could be a big year for Petrominerales.
Valuation
This is the hard part with Petrominerales. What should you be willing to pay for this company ?
You know that what it is producing today is likely to be much less than what it will be producing three years from now. They have doubled production almost every year and have a deeper drilling inventory now than ever before as they continue add 3D seismic information for more and more of their land which allows them to identify new prospects.
Two comments from the company stay in my head
1) They believe that they have explored about 5% of what is prospective in their acreage
2) 2011 will be the first year that they go elephant hunting by targeting the big prospects in the Llanos foothills, their heavy oil acreage and their Peru property. A single success on any of these could double the reserve base of the company
At $40 per share investors are paying about 6x 2011 EBITA based on current expected production. If some of those 45 exploration wells turn into success like the recent Caruto and Yatay wells that multiple will shrink in a hurry.
I think $40 will likely turn out to be a steal as rapid production growth is inevitable here over the next couple of years simply due to the number of exploration wells being drilled and the quality of the prospects they are being drilled on.
At the very least I'm holding the shares I currently own very tightly and am excited to see what all of this exploration drilling brings in 2011.
Author: Canadian Value