Colombia oil: Big year coming

Yes, I know I have a reputation to uphold as the guy with a skeptical eye on the Colombian oil miracle. But credit where it’s due: They said they’d double output to a million barrels a day, and here we are: Here is Colombian President Manuel Santos saying that his country may pass that milestone sometime around today.

There’s also a trading opportunity. Now, I’m no equities analyst, nor a CFA, so take everything here with a big grain of salt, ok? But: Otto has a post up about how Venezuela-exposed companies, and more importantly that country’s bonds, will offer opportunities for fun and profit this year. However, the stocks he mentioned are illiquid. I.e., the three companies mentioned had less than 80,000 shares of volume yesterday — combined. And for regular retail people, it’s a trick to get into the sovereign bond market (trust me, I’ve tried).

But all isn’t lost. Where Venezuela stands out isn’t gold, but oil. This is where the Colombian companies may come in.

I expect some people will speculate on Ecopetrol (EC) and Pacific Rubiales Corp. (PRE.to), the biggest oil producers in Colombia. I don’t know if these companies are planning a triumphant march into the Venezuelan oilfields in the next apertura. But in terms of supplier relationships, language, training, and even personal knowledge of Venezuelan fields, these two companies — especially Pacific Rubiales, with its many ex-PDVSA executives — are obvious candidates to help get Venezuelan oilfields fixed up in a post-Chavez scenario.

That said, my advice is to play these games at your own risk. I don’t think any new president in Venezuela will rush to change the rules for oil companies operating in the country. “Entreguismo,” or a policy of handing natural resources to foreigners, is hated in Venezuela. Yes, a non-Chavez leader can promise to halt expropriations of oil rigs, making it cheaper to drill. But that same person will have a hard time starting a new “apertura” of inviting in foreign companies to work the oilfields, especially if the Chavez’s PSUV party survives his departure and serves as an aggressive opposition.

And there is the question of how cleanly power gets transferred in the unlikely event of a Chavez loss. You might get a win by betting on PRE in the next dip and seeing the shares surge on Oct. 7, election day. But if Venezuela collapses into chaos Oct. 8, so will that bet.

I expect people in New York and Toronto to tout this as a “play” in hopes of playing on public ignorance about Venezuela oil. They are most likely to pitch Pacific Rubiales, because it seems to be taboo in North America to write a skeptical word about that company. So yes, you can probably make some money playing that stock. But just know what you’re getting into: You’re not betting that the Colombians will drill any Venezuelan oilfields within the next couple years. You’re betting that someone else hears the pitch later than you and is willing to bid up the shares.

 

5 thoughts on “Colombia oil: Big year coming

  1. ottorock

    I agree with Setty. In other news, Setty and others have pointed out Harvest (HNR) as another potential Chávez’12 leverage play. I agree with that one’s potential as well.

  2. sapitosetty Post author

    Here’s what I had written, but since it had nothing to do with Colombia, it got cut. Here you go, yours at no extra charge for bothering to read these comments.

    The company I see that looks ready to roll on Chavez news is Harvest Natural Resources (HNR). It used to be a Venezuela pure play. While it has been exploring elsewhere, its operating income still comes from Venezuela, and its joint venture fields will make more money if there are any serious changes in oil policy in Venezuela. For example, its 32%-owned joint venture paid over US$160 million in windfall profits tax in Venezuela in the first three quarters of last year. All the oil companies want this tax to be lowered, and say that it’s a big part of why they’ve been boycotting Venezuelan oil and gas auctions. Let’s say a new president eliminates it: That would mean that operations just like those of q1 to q3 of 2011 would give HNR an extra 50 cents a share of EBIT every quarter. Not bad for what is now a sub-$7 stock. Meanwhile, the company could get back to growth with a government that respects property rights, as drillers will be able to go back to Venezuela without charging a premium for the potential loss of their equipment. Unlike the Colombia “plays,” this is a company that will immediately do better under any president less nationalistic and expropriation-oriented than Chavez.

    1. Ron

      The “problem” with HNR is that the divvies being earned from their Ven operations aren’t be distributed outside the country. The parent company is still awaiting receipt for half of the divvies from 2009 (let alone 2010, and 2011). As such, their big cash balance is being eaten up in their attempts to diversify (Oman, Indonesia, Gabon). So far, Indo and Oman have been a bust. Gabon has been a modest success, but is years away from development. As such, despite very big reserves, fast growing production/cashflow in Ven, investors aren’t seeing the benefits and the share price has collapsed since HNR failed to sell itself as was being touted in 2010.

      If you want to invest in Colombian companies, there are significantly better values to be had in CZE, PXT, GTE, PMG, CNE etc than PRE or Ecopetrol.

      1. sapitosetty Post author

        Thanks – I knew the dividends were behind, but didn’t want to embarrass myself by giving an inaccurate time frame. Now, under new administration, it seems quite obvious that any of the non-Chavez options will probably eliminate the windfall tax, which hits PDVSA hardest. That will give the company billions of dollars a year to play with as it will — and paying JV dividends will certainly be on the list. Maybe not at the top, but on the list.

        There probably are stocks that make better Colombia investment opportunities than PRE and EC. My point was that those two are the best set-up to go to Venezuela, and will get media hype at some point.

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