All values are given in US Dollars
PetroTal is a compelling risk-reward in the oil space. The reason is probably because it is a small cap
spin-off into a reverse merger of a failed oil and gas company. The rationale behind the spin-off was that the
asset was non-core (other country of operations) and wouldn't move the needle for the parent, Gran Tierra Energy,
to develop it by itself. Petrotal has just one quarter of reporting revenues, which again doesn’t help it getting out of obscurity.
Normally I don’t like development assets since all sort of things can go wrong and it is hard having a
definitive image of the underlying profitability of the field/company. With PetroTal, there are some
mitigating factors. A conventional field with many comparable fields with long operating histories, a
decent balance sheet and a big discount to what I think is a fair value makes me more comfortable.
This write-up won’t be very long since all risks are pretty obvious but hard to quantify. The company
only has a single real asset, the Bretana field in Peru, which is still in development.
PetroTal is valued in the market at around 100 Million (fully diluted around 107 Million). The latest
quarterly report mentions net cash of nearly 28 Million, but this amount has come down to 22
million due to ongoing capex to expand output at the field according to a recent press release. This
equates to an EV of 78 Million.
For this EV you get understated 2P reserves just shy of 40 Million barrels or less than 2 dollars a
barrel. If they can get the reserves closer to 3P over time, which I think is likely, you are paying
around 1 dollar a barrel.
The Bretana field
The field was discovered in 1974 by Amoco. There were some delineation wells drilled afterwards to
determine the size of the field, but these came up dry. The license was abandoned until it was taken
up by Gran Tierra Energy from which the company was spun out.
Bretana is a large OOIP, sandstone, unfaulted field but with a heavy crude (18-20 API). The OOIP is at
least 330 Million, with upside possible. As of now, the recovery factor mentioned by Netherland
Sewell & Associates inc (NSAI) is 12% percent to get to the 2P reserves of 40 million barrels. This
recovery factor is very conservative, and I think the real recovery factor should probably be a
multiple (2-3 times) of the current recovery factor.
Not only management mentions this and makes a pretty compelling case in their August 18
presentation, but the reserve auditor makes a similar claim in their reserve report. NSAI states:
“Bretana field is analogous to 16 oil fields that were discovered and developed by Occidental
Petroleum and PetroPeru in Blocks 8 and 192 in the 1970’s. These fields are on the same geological
trend to the northwest of Block 95. Vivian formation sandstones from the primary reservoir in these
fields with similar oil characteristics, reservoir characteristics, and structural trapping styles as
Bretana Field. These analogous fields provide a guide for production profile modeling, and recovery
factors (RF) are predicted to be over 20 percent.”