Pacific Rubiales (PRE.to): Ignore problems, that makes them go away

Everything I ever needed to know I learned in business school

Reader and friend H sends a couple of morning notes from South American investment banks regarding Pacific Rubiales (PRE.to/PREC.bo). It’s clear that the company wants to communicate very clearly that its miss on production and reserves in 2010 is over and done with, and everything is now under control.

But as you’ll see as you read these notes, they don’t really talk about most of the items that I mentioned in my post Sunday.

The company waited until March to say its 2010 oil output missed the projection of 225,000 barrels a day. This after putting a presentation on the web as late as Feb. 3 saying that output in 2010 was 220,000 barrels a day. Any oil company should know its production every day. The issue here is not that they failed to fulfill their goal. That happens! The problem is that they either didn’t know their real production until after Feb. 3, or that they knew and didn’t tell the public. Either way, not so great, and worthy of a “we won’t do it again.”

Second, there’s nothing here about the insider trading questions. It would be one thing to say something simple like “Mr. Iacono routinely sells PRE shares to increase diversity in his portfolio.” But instead, the issue isn’t mentioned, as if that makes the questions go away. I don’t know if that’s the fault of the company or of the analysts at the meeting. But the point is this: Many millions of PRE.to shares traded hands during a time when the insiders knew or should have known that the company had missed its output and reserves goals, while outsiders didn’t know. Millions of those shares were being sold by insiders. Someone at the company should really explain this.

By the way, still no word to this writer from Pacific Rubiales. Just in case, here’s an address you can use: settysoutham@gmail.com. The notes follow:

From Interbolsa:

…comments of our oil analyst of the meeting of Pacific Rubiales yesterday in Bogota:
“Ronald Pantin and Jose Francisco Arata, CEO and President of Pacific Rubiales presented and provide a clarification on the noise that was in the market regarding the company. Overall, there was no new information or news, but they were open to answer all the questions and discuss most of the matters that concern investors. Analysts’ interest was focused on three issues: 1) the non-achievement of the goal to produce 225 kbopd by exit 2010 (the production for Dec 31, 2010 was 193 kbopd) and the use of production capacity term; 2) the lower than expected resources conversion into probable reserves (delayed 2010 exploratory campaign wells results not included in certification) and the fact that the company is comparing reserves growth Dec 2009 vs. Feb 2010 (14 months); and 3) the “additional participation interest” clause in the Quifa contract, favoring Ecopetrol in detriment of Pacific Rubiales interest, that was disclosed back in 2007 but never mentioned thereafter.”

The management feels confident that the fundamentals are unchanged, something we agree on, but these issues could have left a sour taste for some investors. In conjunction with Ecopetrol, the company will publish a press release on March 31st or April 1st about a “pre-agreement” for the STAR project in Rubiales, conditioned on the pilot test results that will start soon and take 12 to 18 months to assess the additional recovery potential. According to the CEO, the cost to develop the STAR incremental production in terms of additional capex is not very large, and lifting cost could be affected by an increase of only US$1.5 per barrel.” I must only say they are trying to set the record straight!

Emphasis added. A couple questions: do I count as “noise that was in the market”? (Thanks to Otto, who is mandatory reading for those who want to learn about Latin American mining but can’t stand bullshit.)

I am awfully curious: what exactly did they say about “the use of the production capacity term”? For those late to the story, that refers to the Feb. 3 investor presentation, which incorrectly said that 2010 oil output was 220,000 barrels a day. In the company’s March presentation, they have a note saying that 220,000 barrels a day refers to “production capacity.” Truly one of the more absurd financial concepts. Like a baker claiming to have produced 10,000 loaves of bread when the real number was 8,000 — after all, the oven had the potential to produce 10,000, I just didn’t have the trucks available to take the bread to market! Whatever, dude. I wish Interbolsa had quoted the company response to that question. Anyway, good to hear that the questions are being asked.

And then from Celfin Capital:

RUBIALES (Buy) : Held an analyst meeting last night in Bogota. We had the explanation on reserves, production and Quifa. We definitely are not worried about reserves as we will have an update by midyear on Quifa norte and we should be back on track, the company is working on the environmental license and should have the wells necessary to convert resources to reserves. Regarding production, yes they missed their target, and it’s the first time they disappointed the market with production numbers however the capacity to process the 220 mmbbld is there and they suffered like all the industry because of transportation issues. On Quifa…we continue to say that the correct information should be easier to find than the incorrect information. The type of contract is a combination between an association contract and the new ANH contract so it copied the same type of contract as the ANH but payable to Ecopetrol, yes it was in the reserve report in 2007 when it was Pacific Stratus, but if its one of the most important producing fields the disclosure should have been made in every presentation and report. The press release will be issued on March 31 or April 1 with info about the agreement with Ecopetrol regarding STAR. We are not so sure the information will have the final agreement but we could be hearing about the pilot on the field. 2011 will be a year with lots of news, as the exploration program is very aggressive with a capex that is equal to the sum of the last 5 years capex, with 20 rigs working between Quifa and Rubiales. This years capex should target ~400 mmboe. We can also expect the contract type of CPE6 from TEA to E&P. For this first quarter we should be seeing very good results as the company is selling heavy oil with a 3 usd premium vs wti, while they are buying light crude oil with a 20 usd discount in Llanos to blend. The cost efficiency they have achieved with the transportation infrastructure is leaving a netback of ~ 90 usd/ barrel, with current oil prices. We remain confident on the company, on its management, and the strong fundamentals. The markets price is only reflecting 2p reserves, all the exploration upside is not included in the price, which implies to us a good buying opportunity.

I love analysts. To paraphrase: Wow this company is really great, buy the stock. They misstated oil output but hey everyone was hit by transportation problems. They have a great management team when they aren’t trying to pull the wool over our eyes by assuming we saw a disclosure in 2007 rather than reiterating it constantly. Lots of upside as long as these reserves don’t just disappear on re-analysis as they did last year. They are going to multiply capital expenditures, and please ignore the blog commenter who said the company overpays for its exploration contracts to a Panama company related to an insider. Buy!

The thing here is that yes, PRE.to is producing oil, and by many accounts is one of the better junior oil companies out there. Which is exactly why they should have the cojones to confront criticism, take responsibility for any errors, promise to fix things, and move on.

Last night I took care of a 6-year-old who was “doing an experiment” with white glue on her mother’s bed. I mentioned that she should put down some newspaper to protect the quilt, and pointed to some spots of glue that were drying in the fabric. She denied that those spots were her fault, looked the other direction and kept pouring glue. This is normal for a 6-year-old. It should not be considered normal for grown-ups operating oil rigs.

14 thoughts on “Pacific Rubiales (PRE.to): Ignore problems, that makes them go away

  1. Augusto Rodriguez

    Dear Sir or Madam,
    Would you be so kind as to let us know your name, affiliation and interests. That may sound to you as inconvenient, but I think that we the investors of Pacific should be informed as to the real identity and purpose of somebody who has taken upon him/herself to be the judge and jury and other individuals and institutions. We the readers would be more than grateful if you let us into the reliability of your sources, for instance for inside trading, that you use in your writings. I am, for one, all for questioning public companies, but would like that to come from unimpeachable sources, since the livelihood and reputation of individuals, no to say the savings of investors, are at risk

    1. sapitosetty Post author

      Boy is that rich. You write from a Yahoo.es account and ask to know my real name, affiliation and interests. My name I will write you through e-mail, but you can find it on the Internet if you look. My affiliation: I am a freelance reporter. I write for a variety of publications, but have only covered PRE.to here on the blog and previously (a year or more ago) at Bloomberg News. My interests: getting at the truth, revealing interesting stories.

      But how about your real name, affiliation and interests? Nowhere in your note do you mention that you are writing from Pacific Rubiales Corp., but the IP address of your computer is “mail.pacificrubiales.com.co”. I have no way to know if you are a hacker who has managed to spoof that domain, but I know that doing so takes a fair bit of expertise — so I kind of doubt it.

      I am not the one putting anyone’s reputation or savings at risk, pal. I am just telling it as I see it. I called Pacific Rubiales last week for comment, which is a hell of a lot more than most bloggers would do. I was told to put my questions in writing and to send them to belinda@pacificrubiales.com. I did so, sending five detailed questions on March 23. I have yet to hear back.

      Your ill-anonymized comment is the first comment I have gotten from the company. I am happy to give the company’s side of the story. Just write me and tell me anything, anything at all. I promise to print it with no changes. You absolutely deserve to have your side heard, but this is one seriously pathetic way to go about it.

      1. Ron

        Ah, you must have really poked a few raw nerves. Keep it up. Too bad PRE is too cowardly to respond. Perhaps they are checking with their lawyers to see how culpable they are?

        I’d love you to send your information to the TSX enforcement. There are way too many shenanigans that go on with nary a slap on the wrist. These guys need more than a slap on the wrist – a lot of investors money evaporated after PRE “forgot” to mention they’d miss guidance…

    2. sapitosetty Post author

      One more item about “interests” — I am long an emerging markets ETF in my retirement fund. It’s entirely possible that, through that holding, I am actually long PRE.to. I haven’t checked and I’m not going to check, because I’d rather not know if I have any financial stake in this story.

    3. otto

      Seems to me that far more is at risk if dubious oil companies with personnel who dabble dubious internet trolling tactics are left uninvestigated. Waddya say “August”?

  2. Augusto Rodriguez

    Dear Sir/Madam,
    I am so sorry that you did not like my real name or the fact that I am investor in Pacific Rubiales. You have chosen not to disclose yours again, and have instead chosen to diminish my attempt to extract from you information. Hope you keep well.

    1. sapitosetty Post author

      Don’t tell me what I like or don’t like. You have a lovely name and many of my friends are long PRE.to.

      I had comments about the IP address of your computer. Allow me to phrase it as a question: Do you work at Pacific Rubiales?

      I also hope you remain well. Regardless of any Internet discussion or temporary stock market movement, it’s important to remember we’re all people and we’re all in it together.

  3. otto

    Augusto, you need some advice about the internet. Here it is: Never, ever think you’re anonymous and never ever thnk that simple lies are undetectable. You have just had a nasty lesson in web 2.0 reality, now come clean and admit your affiliation with PRE.to.

    And to make it up to us all, would you do the blog a favor and tell us about the alleged overcharging for supplies from that private Panama company owned by the PRE brass while you’re at it? Just another reason why PRE.to will never go under SarbOx rules and make it to the NYSE, I reckon.

  4. westslope

    “They misstated oil output but hey everyone was hit by transportation problems. ” -setty

    Un momentito por favor. Ya basta. Let’s not get carried away here.
    The company missed year-end production guidance by 8% and said so explicitly. The company never misstated past, or current oil output.

    The company did try to clumsily spin its way out of disappointments with respect to company-fashioned expectations on production, reserves, and cash flow. How much of the recent $2 B market capitalization hair-cut is due to the spin and how much due to the disappointment is hard to say.

    Prior to year-end, Pacific Rubiales had been outperforming virtually all independent peers in the Colombian upstream oil sector. While disappointments were common among peers, Pacific Rubiales consistently announced production increases and new finds. I have rarely owned an oil exploration and production company that has been this successful.

    So one round of guidance disappointment may not have been that critical. Unlike Alange Energy, Pacific Rubiales did not misdirect investors and the public with regards to actual production. But in the wake of the Alange Energy affair, senior management should have known that timely, forthcoming news would be the best strategy.

    Hopefully, senior management understands some of the tough love coming out of these blog posts.

    Frankly, I’m a little suspicious of you setty. If you are at all familiar with different business cultures, ex-pat communities, the overseas oil biz, what can I say? The above blog reads like an info-mercial! Are you sure that you are not paid to promote Pacific Rubiales? ;-)

  5. westslope

    Oh boy. What I would do for an edit function. I was wrong again. Most people get up in the morning, wash their faces and maybe apply cream or make-up. I apply egg.

    The February 2011 corporate presentation dated 03 February 2011 presents 2010-exit production capacity of 220,000 gross operated boe/d on slides 3 and 4.

    Then on slide 5, the company gets sloppy and slides in the production capacity number into a slide of actual daily production growth (slide 5). According to the recent MD&A document, the year-end production was actually 192,997 boe/d.

  6. westslope

    “Everything I ever needed to know I learned in business school”

    I love the monkeys but the caption bothers me because I believe it misrepresents what gets actually taught in biz school these days. They teach you to keep your head down in biz school maybe. But not like this. Most North American biz profs would disagree strongly with Pacific Rubiales’ communication tactics over the last four months. Strikes me that this is a case study in what to avoid.

    For more on monkey economics (read behavourial economics and finance), see Laurie Santos: A monkey economy as irrational as ours at: http://www.ted.com/talks/laurie_santos.html

    Loss-of-face media relations-type errors can be explained by sunk cost effects, loss aversion, etc. FWIW, everybody and I mean everybody, makes these kinds of errors.

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