PetroTal Stock: Where Value Meets Growth (OTCMKTS:PTALF)

Atlas Equity Research profile picture

mattjeacock

Although value and growth are two distinctly different investment styles, they are not mutually exclusive. Conversely, some stocks may have characteristics of both, increasing the potential for substantial returns. This is exactly what I see in the case of PetroTal (OTCQX:PTALF)(TSXV:TAL:CA). The company, which is registered in Canada and operates in Peru, has achieved impressive production growth, although it faces some logistical problems of late. With Block 95 currently in operation still having room to grow, PetroTal could more than double its production by the end of the decade through Block 107.

While logistical issues and other potential risks must be taken into account, current enterprise value implies that an investor is realizing the after-tax NPV of Block 95’s Bretana field 2P reserves at a 60% discount and full potential. of Block 107. is free Management intends to do an uplisting on TSX by year-end 2022, while a shareholder return may be announced in the first quarter of 2023, which should make the company more visible to investors and act as a short-term catalyst.

company summary

PetroTal is a Canadian oil and gas company with assets in Peru. It was formed in 2017 as a result of a merger between Sterling Resources and the Peruvian assets of Gran Tierra Energy (GTE). PetroTal’s two main assets are Block 95, which includes the Bretana field, where it is currently producing, and Block 107, which is not yet in production but has great potential.

active

company summary (Petroleum)

from 24the August, there are 852.2 million shares outstanding, 27.9 million performance share units (PSUs), and 62.7 million performance warrants. The ownership structure is dominated by entities whose largest shareholder is Meridian Capital International with an 18.5% stake, followed by Kite Lake Capital Management (10.5%) and Burggraben Holding (8.1%).

recent performance

PetroTal has been steadily increasing production ahead of lockdowns in response to the pandemic, causing oil prices to plunge sharply. After that, production trended upward again as a daily rate of 14.5 kboe was reached in the second quarter of 2022.

In terms of financial results, increased production coupled with higher oil prices have led to a cash flow bonanza. Since the beginning of the year, PetroTal has generated around US$100M of free cash flow and according to recent Q3’22 guidance operational updateit is expected to achieve US$211 million of free cash flow by 2022. In turn, the company’s financial position has improved considerably and management intends to pay off the remaining US$80 million of bonuses in full and may initiate a program. return of shareholders at the beginning. of the next year

Also READ  The Stock Market: Still Looking For The Fed To Break
performance

Recent performance of Petrotal (Petroleum)

It should be noted that there are some challenges with accounts receivable this year as they reached US$123.7 million at the end of 3Q’22. Most of them are owned by the state-owned Petroperú, which as operator of the Norperuano Pipeline (ONP) is PetroTal’s main business partner, which uses the pipeline to bring its production to market. Petroperú has been rocked by scandals and its financial situation has recently deteriorated. However, a few weeks ago it was announced that the state entity will receive capital injection from the government, which should enable it to pay its obligations to trading partners.

logistical problems

The shortest route for PetroTal’s production to reach international markets is through the aforementioned ONP pipeline. However, the pipeline is very old, having been built in 1977, and corrosion problems are causing constant leaks, not only disrupting operations, but also contaminating areas restricted by indigenous people. In response to oil spills, there are civil unrest and infrastructure blockades. PetroTal had to to close operations this year for a period of time, due to such civil unrest. The operational challenges of the pipeline continued in the third quarter of 2022 and the company was forced to limit its production, which amounted to 12.2 kboe/day, breaking the quarterly growth trajectory.

storage

Petroleum storage capacity (Petroleum)

To mitigate part of the risk of constant operational interruptions for the maintenance of the ONP pipeline, PetroTal has developed important storage facilities and is expanding the capacity of its river route to Brazil. However, this is not a complete solution, as most of the storage capacity is located outside the Bretana field, so production has yet to leave the company’s premises, which could be impeded by civil unrest. in the zone. In addition, the export through barges can be affected by low river levels, as has happened recently. I hope that the ONP problems persist and that repair and maintenance in isolated areas of the pipeline is only a temporary solution. For the problem to be resolved in general, the entire pipeline must be renewed, but that would be a costly endeavor for the poor state of Peru. As long as the river levels are normal, PetroTal could export its production through the Brazilian route and, in cases where the drought persists in the area, the barges would have to be loaded at reduced capacity.

Also READ  Jump on the Electric Vehicle Trend with Albemarle Corporation (NYSE:ALB)

expansion plans

plan

Bretana field production plan (Petroleum)

Through exploration, PetroTal has been consistently expanding reserves in the Bretana operating field and envisions a path to flatten production to levels of around 25kboe/day for several years from this field alone. The last news from the field are also encouraging. 13H has been successfully tested for 8kbep/day production in early November.

prospects

Other Block 95 prospects (Petroleum)

In addition to Brittany, Block 95 has many very promising extensions, which could come online in the second half of the decade and further support production growth. The financing of the expansion could be done with own funds, if current oil prices remain persistent and the company continues to generate significant cash flows.

expansion

The Osheki Kametza field of Block 107 (Petroleum)

The company’s other property, Block 107, has impressive prospects. The main area of ​​interest is the Osheki Kametza field, which the company says has the potential to double the production of Block 95 that it currently operates. However, as it is likely to be capital intensive, PetroTal is looking for a joint venture partner. for the development of this perspective. For that reason, the company’s production scenario is based on a 50% stake, even though it is currently the sole owner of the asset.

Stock price and valuation

Frame
Data by YGraphics

PetroTal has given investors a share price increase of more than 83% YtD, more than double that of the United States Oil ETF (USO). However, looking at the company’s production and reserves growth trajectory, I think there is more room to the upside. The current market capitalization of around US$510 million implied an FCF return of more than 40%, using the company’s recent guidance for 2022 FCF. In addition, the current EV of approximately US$400M is 2.5 times lower than the estimated NPV of the 2P reserves, discounted at 10%, from the Bretana field alone, without taking into account all the remaining potential of Block 95 and Block 107. .

In addition to the risks associated with operating in Peru, including logistical issues, there are a few other factors that I believe are causing what appears to be a wide valuation gap. First, unlike many energy companies, PetroTal is not yet returning any value to its shareholders in terms of dividends and/or buybacks. However, this could change soon. management has indicated intentions to fully withdraw the outstanding bond issue and begin a capital return program. In turn, this could put the company on the radar of investors, who want some of the profits shared with them on a regular basis. Likewise, the CEO of PetroTal has said that an uplisting process on the TSX is underway and could be completed by the end of the year. As a result, the company can become more visible to investors.

Also READ  Charles & Colvard: Lab-grown diamonds can survive a recession (NASDAQ:CTHR)

risks

political risk

Peru has been in political turmoil lately, as the current leftist president survived two impeachments and another legal battle seems to be forming. There too big protests in the capital city of Lima. In such an environment, politicians may see PetroTal profits as an opportunity to buy themselves by promising more social spending. However, the CEO of PetroTal has discarded the possibility of extraordinary taxes, explaining that it would require constitutional changes.

background

petrotal social fund (Petroleum)

While the company was unable to change the overall landscape of the country, it is taking steps to strengthen the relationship with the local communities in its area, in order to reduce the risk of unrest disrupting its operations. One such initiative is the 2.5% social fund, which should invest in social infrastructure for the benefit of the local community.

Logistics risk

The company’s impressive production growth trajectory was interrupted in the third quarter of 2022 by logistical issues and further growth may also be limited. The ONP pipeline appears highly unreliable, so PetroTal’s efforts to further develop and increase the capacity of the Brazilian route across the river appears to be the best option available. However, in persistently dry weather, water levels can drop, limiting the carrying capacity of the barges.

conclusion

With PetroTal, investors should not choose between value and growth, as the stock offers both. Current market pricing implies a 40% FCF return by 2022 and a 60% discount from EV to the estimated NPV of the Bretana field. On top of that, there is significant potential for growth from the rest of Block 95, as well as Block 107. The possible introduction of a shareholder return program and listing on the TSX could act as bullish triggers. However, the company has to deal with logistical problems, which could hamper production growth, and Peru is not very stable politically. For that reason, I believe the stock should be considered only by investors with a high tolerance for risk.

Leave a Reply

Your email address will not be published. Required fields are marked *