UK exploration groups turn attention to South America
While Africa remains the darling of many small UK exploration and production companies and investors, another far-flung region has seen growing interest — South America.
Factors ranging from an improved political environment to a better security outlook have made UK investors less hesitant to consider a continent that was previously largely ignored.
“There was a perception before that this isn’t really where UK E&Ps go,” said Charlie Sharp, an analyst at Canaccord Genuity. “The diminishing of terrorist activity in Colombia and the improved political regime in Argentina have been the real two hinges.”
Meanwhile, a collapse of international E&P investment in Canada has pushed some Toronto-listed companies to look for investments elsewhere.
Gran Tierra Energy
This month Gran Tierra, a Colombia-focused producer with an output of around 35,000 barrels of oil equivalent a day — which was already listed on Canada’s TSX and the NYSE — began trading in London, valued at about £1bn.
“Colombia is a good place for small and mid-cap E&P companies,” said Nathan Piper, an analyst at RBC, which acts as a broker to Gran Tierra. “It’s onshore so all the costs are low in terms of drilling and facilities; it’s generally oil they’re looking for, so straight forward to commercialise through the existing pipeline network.
“You don’t have to take on a lot of funding risk. It’s short cycle, which is pretty fashionable at the moment.”
The 2016 peace deal between Bogotá and the Farc guerrilla movement, coupled with the pro-business outlook of President Ivan Duque, has made Colombia increasingly attractive for E&P companies.
Gran Tierra is targeting a 15 per cent annual increase in production to reach an output of 50,000 barrels a day by 2020, funded by cash flow and driven by development of its Acordionero field.
“It really is what UK investors are beginning to look for in terms of E&P — well funded, with a bit of exploration exposure and a bit of production,” said Mr Piper.
The company’s shares were trading at around $3.03 on the NYSE on Friday, down from an October peak of $3.91, having started the year at $2.78.
President Energy, listed on London’s Aim exchange, is focusing its efforts on Argentina — a country long an anathema to investors with currency controls, export taxes and import restrictions making it a difficult place for foreign companies to operate.
But President has pointed investors to Argentina’s new-found pro-business outlook under Mauricio Macri. The president, elected in 2015, has removed some regulations and opened up the country for investment — particularly in energy.
The company produces around 2,700 boe/d at its sites in Argentina’s Neuquén and Noroeste basins.
However, a currency crisis in the country since April has caused turbulence and President’s shares have fallen from a January high of 12.5p to 8.1p.
“What’s going on in Argentina makes investors wary, but it doesn’t affect day to day business,” said Jonathan Wright, an analyst at FinnCap, adding that President had to be careful with its financial management.
The company has just completed improvement works in at its Puesto Flores and Estancia Vieja fields, which drove production up by 700 barrels of oil a day, and is looking for further growth. It has plans to acquire two further sites this year and launch new exploration programmes in Argentina and Paraguay next year.
Also in Argentina is Phoenix Global, the largest E&P player listed on Aim, which has pitched itself as an opportunity to invest directly in Vaca Muerta (or dead cow) — one of the few operational shale fields outside North America.
Argentina has the second-highest recoverable shale gas resources and fourth-largest recoverable shale oil deposits globally and extraction has attracted significant investment. Many of the energy majors, including Chevron, Shell, Total, Equinor and ExxonMobil, have invested in Vaca Muerta.
With a current output of around 11,000 boe/d in conventional production, Phoenix accounts for about 1 per cent of total Argentine output and owns 560,000 acres at Vaca Muerta, or 7.5 per cent of the overall acreage.
The company has a market capitalisation of around £520m but has seen its share price hit by currency volatility, falling 55 per cent from a high of 42p in January to 18.5p this month.
Richard Slape, an analyst at Stockdale Securities, said Phoenix’s share price has also been hampered by the large stake held by commodity trader Mercuria — which owns more than 80 per cent of the company, making it harder for other institutions to invest.
But he described Phoenix’s unconventional assets as “exciting” and said “the strategy is the right one”.
“I don’t see the shares doing an awful lot until they’ve drilled some wells on Vaca Muerta and demonstrated commercial flow. That is going to be the test.”