Investors seeking an attractively valued energy stock that is trading at deep discount to its intrinsic value and is positioned to soar should look no further than Gran Tierra Energy (TSX:GTE)(NYSE:GTE). The upstream oil producer has gained only 2% for the year to date, despite the international benchmark oil price Brent gaining around 27%. This has created an opportunity for investors seeking an oil stock that is trading at a deep discount to its intrinsic value and offers considerable potential upside.
Quality assets Gran Tierra is focused on oil exploration and production in the Latin American nation of Colombia, where it has become one of the leading privately owned oil producers. It has amassed considerable acreage in the Andean nation’s three main oil-producing areas: the Llanos, Magdalena, and Putumayo basins.
That acreage holds proven and probable oil reserves of 142 million barrels of crude, which have a before-tax net asset value of $8 per share, which is over 2.5 times greater than its current market value. This highlights the considerable potential upside available to investors, particularly with that value being determined using a forecast Brent price of US$64.50 per barrel for 2019 and US$67.90 for 2020. There is every indication that value will expand because Brent is poised to average higher than those prices during those years.
There are signs that the driller’s reserves will continue to grow. Gran Tierra has mean unrisked prospective resources of 1.4 billion barrels of crude, highlighting the considerable exploration upside held by its existing acreage. The driller also recently acquired three blocks in Ecuador’s Oriente Basin, which is the same geological oil basin as the Putumayo basin in Colombia, where Gran Tierra is a leading landholder. The company expects to commence its drilling program in Ecuador in 2020.
Gran Tierra also has a long history of growing its reserves through a combination of exploration as well as development drilling and acquisitions. For 2018, it reported a notable reserve-replacement ratio of 140% and that reserves had grown by 4% year over year. Between 2015 and the end of 2018, Gran Tierra’s proven and probable reserves expanded by 149%.
Another important aspect of Gran Tierra’s operations is its proven ability to grow oil production at a solid clip. For 2018, it announced that its oil production had grown by 15% to an annual record of 36,209 barrels daily with a notable operating netback of US$41.85 per barrel pumped, which was 42% greater than 2017 and one of the best among its peers. This underscores that not only can Gran Tierra expand its production, allowing it to fully benefit from higher crude, but also that its operations are highly profitable.
That can be attributed to its ability to access international Brent pricing, which at this time trades at a US$7 per barrel premium to the North American benchmark West Texas Intermediate (WTI), giving Gran Tierra a financial advantage over its peers operating solely in North America.
For 2019, Gran Tierra has forecast average daily production of 41,000-43,000 barrels, which, at its midpoint, represents a 16% increase over 2018. This will allow it to take full advantage of higher crude and the improving outlook for petroleum.
A combination of supply constraints, growing geopolitical risks, and firmer-than-expected demand growth, according to some analysts, will lift Brent to as high as US$75 a barrel before the end of the year. At an assumed price for Brent of US$65 per barrel, Gran Tierra predicts that its production will generate a netback of up to US$34.50 per barrel, which, while lower than 2018, is in the top percentile for the industry. That — along with increased production — will bolster Gran Tierra’s earnings, which in turn should lift its stock.
Now is the time to buy Gran Tierra When the quality of the driller’s operations, impressive netback, growing production, and rock-solid balance sheet, where long-term debt is a manageable one times annul, EBITDA it is a very attractive play on higher oil. This appeal is enhanced by the fact that Gran Tierra is trading at a considerable discount to the value of its proven and probable oil reserves.
Fool contributor Matt Smith has no position in any of the stocks mentioned.
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