This oil company looks like it could be a free bet for investors.
Any company whose valuation is largely underpinned by its ownership of a key asset, but which also has exciting potential in other areas is worthy of consideration.
Oil and gas exploration, development and production company PetroLatina Energy (LSE: PELE) is one such company. And let's face it, any company with the ticker PELE operating in South America deserves a second look. PELE is also what it's called by most private investors it seems.
The company's operations are focussed on Colombia where PELE also owns the Río Zulia-Ayacucho pipeline in the Catatumbo basin which transports crude oil. The final results for 2008 published last week, reported pre-tax losses of $3.4m, compared with a loss of $8.4m the year before, and revenues up by 10% to $7.8m.
Interestingly, though, the company also reported that 2,696 barrels of oil per day (bopd) were transported through the pipeline during the year and, though this was down on the previous year, the figure has risen significantly since the start of this year. Ecopetrol S.A., the Colombian state oil company using the pipeline, predicts an increased throughput from to 4,000 bopd from the middle of 2009. PetroLatina receives $1.60 per barrel transported from one field and $2.64 from another.
Cash in the pipeline
Of course, maintenance and security are ongoing issues for the pipeline, though it does have the capacity to transport 25,000 bopd. And the company expects to see greater volumes of crude oil transported, resulting in an increased cash flow due to the exploration activities in this area. If the pipeline reached half that capacity in the future, gross revenues could make today's valuation look extremely measly. PELE's price has been jumping around a bit recently, rallying from its low in February of 13p to a mid price of 37.75p as I write, valuing the company at a little over £16.5m.
The Río Zulia-Ayacucho pipeline alone seems to account for this valuation given its present and potential future revenue streams. When it was acquired in 2006 an external evaluation valued it at $10m. This looks like a shrewd purchase in hindsight and is exciting for investors as it effectively leaves all the other production assets and exploration possibilities in the share price for nothing.
Exploring excitement
For those of us who find it relatively difficult to understand oil exploration companies, this is a comfort -- some potential excitement with discoveries, with a great deal of downside protection.
The excitement comes from PetroLatina's six well minimum drilling programme which has met with initial success at its Los Angeles-11 development well (in which it has a 45% interest) which was drilled at a lower than expected cost. This has been brought into production at a rate of approximately 220 bopd. Oil was also tested at a deeper secondary target which should increase the field's reserves. PELE also holds a 20% interest in the Santa Lucía field on the same licence, and a 100% interest in the Doña María field. Its Colon-1 well is also poised to come onto production at a rate of approximately 1,200 bopd. Another well is expected to be spudded in the near future whilst another is under evaluation.
Additionally, PELE retains a 20% interest in the first three wells and a 20% working interest in future wells in Guatemala after the sale of its assets in that country.
Cash
PELE has enough cash to meet its requirements for the rest of this year, but expects to need additional funding to complete its extensive drilling programme. Since announcing its finals, the company has secured a large part of the required funding and is in negotiations with investment banks to secure the remainder. At the end of December, the company had cash of $2.7m and a net asset value of $39.65m.
Overall, I see PELE as an excellent way of gaining exposure to an exciting drilling programme for free due to the Río Zulia-Ayacucho pipeline. It's akin to getting your money back from a bet if your horse loses. I like those odds.
More from David Holding:
David owns shares in PELE.
