Gran Tierra Energy (NYSEMKT:GTE) is an oil producer operating in Colombia and, to a lesser extent, Ecuador. The company has a strong balance sheet – $1.8 billion of assets, but only $600 million in liabilities (all figures from GTE’s 3/19 10-Q unless otherwise specified), strong operating cash flow – approximately $0.47 per share, and an active buyback program, allowing the repurchase of up to 5% of issued common stock over the period 3/11/19 to 3/12/20. GTE’s net income has been artificially depressed by some large but temporary (as I will detail in a forthcoming article) fluctuations in its effective tax rate. As of market close on 6/18/19, GTE was already cheap, trading at $1.93 – about 4 times operating cash flow and about twice EBITDA.
What happened on June 19?
On June 19, GTE’s price fell steeply, trading at one point as low as $1.60 and trading after hours, as I write, at $1.70. At 7.4 million shares, volume was heavy compared to the 10-day average, but low when compared to the 380 million shares outstanding – less than 2%. The reason was that the company issued an operational update. While the update contained primarily positive news, there were two negative issues.
The first issue is related to the Acordionero field.
This is one of GTE’s largest assets, producing approximately 20,000 barrels of oil per day (BOPD) as of December 2018 (production and asset data from GTE’s May 2019 AGM presentation, unless otherwise specified) and probably holding approximately 76 million barrels of oil or equivalent, about 50% of the company’s probable reserves. Technical issues relating to a) high levels of gas at two wells, and b) failure of electrical equipment at two other wells have caused a reduction in production of approximately 4,500 BOPD (company-wide production was running at approximately 37,700 BOPD prior to these issues). However, both of these issues are resolvable within “a few months” according to GTE (by water injection from an already completed facility) and 2020 Acordionero production is expected to run above Q1 2019 rates.
The second issue relates to a blockade of GTE’s Sur-Oriente and Putumayo-7 blocks by local farmers who are in an unrelated dispute with the Colombian government.
While these issues have reduced production by an additional 4,500 BOPD, the Colombian government, according to GTE, expects to resolve the issue within “a few days“.
So in aggregate, we have a temporary reduction of 9,500 BOPD, which had reduced GTE’s production (after adding back in production increases at other locations) from the pre-problems rate of approximately 37,700 BOPD to a current rate of approximately 29,000 BOPD – about a 23% drop. The market reaction implies about a 10% permanent drop in DCF. It doesn’t make sense.
An Eager Buyer with Lots of Dry Powder
Management seems to be strong a believer in GTE’ story. There have been no insider sales in the last year, and management has repurchased more than 10 million shares and canceled over the last 18 months.
On March 11, the company announced that a buyback of up to 19,353,951 shares had been authorized. From 3/31 to 5/01, 3,518,025 shares were repurchased and canceled. During that period, the stock fluctuated between $2.25 and $2.59. If management liked the stock enough to buy heavily in that range, then assuming that it believes its own statements that the problems are temporary, how happy will it be to buy at $1.70? Likely the company would have bought back more shares in the last six weeks, but a substantial portion of the 19.35 million authorization should still be left. And it has the funds to buy. Although 3/31 cash on hand was only $32.7 million, the company had a further $186 million available on its revolving credit facility. At these price levels, buying back the whole of the remaining authorization will be well below $30 million.
Investors should expect strong near-term upward pressure in this stock from two sources. First, there is likely to be a significant increase in the rate of buyback by the company (and possibly an additional authorization to take advantage of the situation). Second, there will be additional operational updates in the short-term as the temporary production slowdowns are reversed.
Disclosure: I am/we are long GTE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.