Beaten down intermediate oil producer Gran Tierra Energy (NYSE:GTE)(TSX:GTE:CA) noticed its share worth plunge within the wake of reporting its first quarter 2023 outcomes, which deeply disenchanted the market. As you possibly can see from the value chart under the sell-off now sees the driller down 37% for the yr thus far in comparison with 14% for the Brent worldwide oil worth.
Those current developments coupled with Gran Tierra finishing its 10-for-1 reverse split on May 4, 2023, make now an necessary time to find out whether or not the corporate stays deeply undervalued as I concluded in my April 17, 2023, article. In that analysis I discovered regardless of the appreciable geopolitical headwinds buffeting Gran Tierra that it has an after-tax 2P NAV of $4.14 per share or 6.6 instances its present share worth, after accommodating the 10-for-1 reverse cut up.
There is little doubt that Gran Tierra is being sharply impacted by the elevated geopolitical danger related to its operations in Colombia the place most of its oil reserves and manufacturing are positioned, however that danger is overblown. There are clear indicators that after the newest sell-off, sparked by Gran Tierra’s $10 million first quarter 2023 loss, that the market has severely overreacted creating a possibility for danger tolerant traders to accumulate a deeply undervalued intermediate oil producer.
Latest outcomes disappoint
Gran Tierra’s first quarter 2023 results, whereas on first appearances are extraordinarily disappointing, usually are not as dangerous because the market believes. The key quantity driving the savage drop within the driller’s market worth was its backside line $10 million loss for the quarter. The essential causes for that disappointingly poor bottom-line end result are myriad, key being a pointy decline in income from oil gross sales, which fell 17% yr over yr to $144 million.
The major driver was a 25% lower within the realized worth per barrel bought, which for the interval was $63.65 in comparison with $85.33 a yr earlier. That occurred as a result of the common Brent worth for the primary quarter 2023 was 16% decrease than for a similar interval a yr earlier. The worth differentials for Colombia’s two crude oil blends Castilla and Vasconia had been additionally considerably wider. Castilla bought for the interval at a mean low cost of $15.17 per barrel to Brent in comparison with $6.38 for the primary quarter 2022, whereas Vasconia’s low cost was $7.87 a barrel towards $3.60.
There was a pointy improve in first quarter 2023 working bills, which rose 18% yr over yr to $41 million. That occurred as a result of greater lifting prices, predominantly pushed by elevated oil manufacturing at Gran Tierra’s Ecuador properties being chargeable for 66% of the upper lifting prices, and dearer gear rental in Colombia for exploration actions. Depletion, depreciation and accretion additionally rose 26% yr over yr to $51.7 million, towards $40 million for the equal interval a yr earlier, as a result of as a result of elevated manufacturing and better prices within the depletable base. There was additionally a primary quarter 2023 $1.7 million international change loss in comparison with a $3.7 million achieve a yr earlier, which additional impacted earnings.
Taxes but once more are taking part in a distinguished position in Gran Tierra’s efficiency and outlook. During November 2022 Colombia’s Congress authorised a tax invoice launched by the nation’s first leftist president Gustavo Petro. As a part of the reforms aimed toward elevating $4 billion to comprise a widening price range deficit and bolster funding for social packages taxes for oil companies working in Colombia had been hiked. This included the elimination of petroleum royalties as an earnings tax deduction and making use of a scalable levy when the worldwide Brent worth exceeds a sure degree. An extra 5% tax is payable when the Brent worth ranges from $67.30 to $75 per barrel, which rises to 10% at $75 to $82.20 per barrel after which a further 15% is payable when costs exceed $82.20 a barrel.
That sparked appreciable hypothesis as to the way it will impression oil firms and their efficient tax charge. Economic thinktank Fedesarollo argued it’s going to carry the effective tax rate for energy companies from 36% to 70%, whereas the federal government calculated the efficient tax charge will rise to round 50% if the common Brent worth for the interval exceeded $82.20 per barrel. Total earnings tax expense fell 17% yr over yr to $32.9 million, primarily as a result of decrease taxable earnings from diminished oil sale income.
According to Gran Tierra’s first quarter 2023 report, its efficient tax charge for the interval was 142% in comparison with 50% for Colombia “primarily due to an increase in non-deductible foreign translation adjustments, the impact of foreign taxes, non-deductible royalty in Colombia and increase in the valuation allowance.” The appreciable improve within the efficient tax charge has not come from Colombia’s tax hikes however international taxes associated to operations in different jurisdictions and Gran Tierra taking the chance to cut back future tax liabilities at a time when taxable earnings is low.
Sharply decrease oil income and better bills coupled with Gran Tierra spending a considerable portion of its 2023 capital price range of $210 million to $250 million on drilling 14 improvement wells in the course of the quarter noticed destructive free money move of $10 million. Those 14 wells, plus an additional 4 accomplished in the course of the first 5 weeks of the second quarter 2023 to provide a complete of 18 wells already drilled make-up a large portion of the 18 to 23 improvement wells deliberate for completion throughout 2023. The completion of these wells early in 2023 will give oil manufacturing a major enhance.
While these numbers are significantly disappointing for Gran Tierra’s hard-hit shareholders there was additionally excellent news contained within the outcomes. Key being an 8% yr over yr improve in oil manufacturing to a mean of 31,611 barrels per day in the course of the first quarter 2023. That quantity, nonetheless, remains to be decrease than the 32,000 to 34,000 barrels per day budgeted for 2023, though the completion of 18 improvement wells from a deliberate most of 23, will assist to carry oil output and canopy that shortfall.
The outlook for the rest of 2023
The current sharp decline in oil costs which sees Brent down by practically 15% during the last month is weighing Gran Tierra’s outlook. That will be blamed on weak financial information and rising fears of a recession. Those current losses have virtually worn out the entire positive aspects that got here with OPEC’s shock early April 2023 manufacturing lower, which noticed Saudi Arabia alone slash output by 500,000 barrels per day. There is, nonetheless, rising bullish sentiment over the outlook for oil over the rest of 2023 with OPEC members beneath stress to spice up costs to stability their budgets and the onset of the summer time driving season.
The U.S. EIA has forecast a mean Brent worth for 2023 of $85 per barrel, which is consistent with Gran Tierra’s base case 2023 price range, which is reliant upon Brent averaging $85 per barrel over the course of the yr. That worth is barely greater than the worldwide benchmark’s common of $82.10 per barrel for the primary quarter. There are indicators Brent could not common $85 per barrel over the course of 2023 with recession fears, poor financial information from China and a provide surplus weighing on its outlook.
This implies that Gran Tierra might fail to attain its base case annual price range.
That means the driller will fail to ship the deliberate monetary numbers together with free Cash move of $65 million for 2023. Gran Tierra’s low case plan requires Brent to common $75 for 2023, which does seem doubtless, and if achieved will ship $25 million in free money move. If that happens, it has the potential to set off a worrying downside for the corporate regarding its excellent 2025 notes that are a lability totaling $272 million and fall due throughout February 2025.
By the tip of the primary quarter 2023, Gran Tierra solely had money of $105.7 million, accounts receivable of $13.6 million and $20 million of stock, leaving a considerable shortfall if the corporate pays the legal responsibility due for the notes. The driller does have an undrawn $150 million money facility which matures in 2024, and can doubtless be refinanced, however that can handle the shortfall for the 2025 notes. For these causes, Gran Tierra might want to get hold of some type of financing for the notes which can doubtless be supplied on onerous phrases, thereby inflicting the corporate’s financing bills to rise.
Finding the indicative truthful worth
While Gran Tierra’s first quarter 2023 outcomes are actually disappointing and underscore the appreciable headwinds confronted by the corporate and its draw back publicity to weaker oil costs the valuation from my final article stands. In that analysis I calculated Gran Tierra’s after-tax 1P NAV per share was $2.62 and $4.14 for 2P. Using the identical methodology utilized in my April 17, 2023, replace on Gran Tierra adjusted to mirror present numbers, together with:
- a decrease depend of 333,069,000 excellent widespread shares, which after the 10-for 1-reverse cut up adjustments to 33,306,900 widespread shares;
- diminished long-term debt of $581,391,000; and
- money and money equivalents of $105.7 million as per Gran Tierra’s first quarter 2023 outcomes.
For the sake of offering a direct pre-reverse cut up comparability I’ve used the excellent variety of shares as per the March 2023 monetary outcomes. This, as per the chart under, provides an after-tax 1P NAV per share of $2.56, which is barely decrease, 2.3%, than the earlier calculation of $2.62.
*Note: After the 10-for-1 reverse cut up Gran Tierra has an after-tax 1P NAV of $25.60 per share.
That worth after accounting for the reverse cut up is equal to $25.60 per share, which is four-times greater than Gran Tierra’s worth of $6.33 on the time of writing.
Gran Tierra’s indicative truthful worth rises to $4.08 per share pre-reverse cut up or $40.80 put up reserve cut up, because the chart under reveals, for its after-tax 2P NAV per share. That worth is 1.4% decrease than the earlier replace the place it was $4.56 per share.
*Note: After the 10-for-1 reverse cut up Gran Tierra has an after-tax 2P NAV of $40.80 per share.
As mentioned in earlier articles the 2P after-tax NAV per share is actually the trade accepted commonplace for figuring out an intermediate oil producer’s indicative truthful worth. For that purpose, Gran Tierra actually seems closely undervalued, particularly after its newest sell-off, contemplating the after-tax 2P NAV per share of $40.80, after the ten for 1 reserve cut up, is six instances better than its market worth of $6.33 on the time of writing. That demonstrates there may be additionally a substantial margin of security for traders.
Headwinds and dangers create uncertainty
The market’s substantial undervaluation of Gran Tierra will be attributed to a closely overblown notion of danger related to working in Colombia coupled with the corporate’s sharp sell-off after it launched these poor first quarter 2023 outcomes. I’ve mentioned the geopolitical dangers related to working in Colombia at size in prior articles right here:
Aside from commodity worth danger the principle dangers going through Gran Tierra come up from its operations in Colombia. Colombia’s first leftist President Gustavo Petro who was inaugurated on August 7, 2022, hike taxes which had been accepted by Congress throughout November 2022. That reform noticed royalties eliminated as an earnings tax deduction and the imposition of a scalable levy on oil gross sales based mostly on the Brent worth. An extra 5% tax is payable when the Brent worth ranges from $67.30 to $75 per barrel, which rises to 10% at $75 to $82.20 per barrel after which a further 15% is payable when costs exceed $82.20 a barrel. This has lifted the efficient tax charge for upstream producers working in Colombia to 50% from 36% previous to the reforms being written into regulation.
There are additionally appreciable dangers associated to Petro’s plans to finish awarding contracts for hydrocarbon exploration, which regardless of some indicators that it could not go forward, seems on observe to be applied. Petro can be within the technique of banning hydraulic fracturing with a invoice to enact this proposal being handed by Colombia’s Senate and despatched to the decrease home for overview. While Colombia’s nationwide authorities has dedicated to respecting present hydrocarbon exploration and manufacturing contracts the proposals talked about above to level to better regulatory stress being positioned on the sector.
Civil unrest and safety dangers stay a continuing hazard in Colombia. The South American nation’s vitality infrastructure is seen as a respectable goal by the final leftist guerilla teams working within the nation the National Liberation Army (ELN – Spanish initials) which usually bombs pipelines. Oil theft from Colombia’s pipeline community utilizing illicit faucets is rising. These occasions, after they happen, drive the shuttering of pipeline by the operator CENIT, a subsidiary of nationwide oil firm Ecopetrol (EC). This means drillers like Gran Tierra should use greater value highway transport to ship the oil produced to ports for cargo to worldwide vitality markets or retailer the petroleum produced on website till the pipelines reopen. That impacts earnings by inflicting transport prices to spike in addition to decreasing the amount of oil accessible on the market.
Rising civil unrest due to the petroleum trade’s disintegrating social license stays a continuing hazard. Many communities, as a result of damaged guarantees, oil spills and frequent polluting emissions are against trade operations. That has led to neighborhood blockades and oilfield invasions forcing drillers to shutter operations, once more impacting manufacturing volumes and subsequently income.
Gran Tierra’s first quarter 2023 outcomes actually shook traders with the corporate’s $10 million particularly disappointing. There are additionally a variety of dangers weighing on the driller’s outlook, notably the prospect of softer oil costs and the looming long-term debt legal responsibility associated to the $272 million February 2025 notes. When these causes are contemplated together with the heightened geopolitical dangers in Colombia, it’s comprehensible why Gran Tierra was closely sold-off by the market after it launched its first quarter 2023 outcomes. What is obvious is that Gran Tierra is buying and selling at a deep low cost to the after-tax 2P NAV per share of $40.80 which is six instances greater than its share worth on the time of writing, highlighting that there’s appreciable upside with a stable margin of security on provide.
It is necessary to notice that Gran Tierra is a high-risk funding going through appreciable geopolitical danger working in a strife-torn South American, which regardless of being the continents longest working democracy, is experiencing substantial political upheaval. There can be the chance posed by Gran Tierra’s dependence on oil costs, which have turn into significantly risky in current weeks as a result of blended financial information and fears of an financial laborious touchdown.
Editor’s Note: This article covers a number of microcap shares. Please concentrate on the dangers related to these shares.