Pacific Rubiales Stock down 90%—Is It a Possible Takeover Target?

The depressed global oil prices have not been kind to Pacific Rubiales, Colombia’s largest independent oil producer. Heavily staffed with refugees from Venezuela’s PDVSA, the company is finding it even more challenging to create shareholder value than its other petroleum sector peers. The company’s stock price is a small fraction of its 2011 high, as it is suffering from a $4.5 billion (US) debt load.

CEO Ronald Pantin defended the company in a statement: “Contrary to market rumours, the Company is not in default under any of its debt obligations and does not expect to be at risk of payment default. The leverage covenants in our senior  notes are ‘incurrence based covenants’ which simply means the Company’s ability to take on additional debt may be restricted by such ratios, subject to various exemptions. All of our senior notes have maturities that extend out from 2019 to 2025.”

Pantin went on to describe aggressive cost cutting that the company is undertaking immediately in order to weather the current market conditions. “The uncertainty in oil prices continues and although we believe that oil prices will recover, we are taking a cautious view on the timing, reducing both our costs and our 2015 capital budget to match expected cash flow. The Company has the operational and financial flexibility to adapt to the changing environment while continuing to grow production. Our reduced capital budget only has a marginal impact on production targets as we focus expenditures on our highest return and most material near-term projects.”

“Pacific Rubiales remains fully focused on maintaining liquidity in this environment, by significantly reducing costs and also reducing capital expenditures by $200 to $400 million, to match expected cash flow. Furthermore, we have additional flexibility from our $1.0 billion revolving credit facility, which is currently undrawn,” said Pantin. “Reducing costs remains a priority. Our cash operating costs are now expected to be approximately $28/boe (barrel of oil equivalent), benefiting from the lower Colombian Peso, a number of cost reduction initiatives put in place before year-end 2014, and lower supplier service costs. We expect significantly lower G&A costs to be driven by the lower local currency exchange rate and a reduction in staff and other costs. Average royalty rates and cash taxes are also expected to be reduced in the lower oil price environment.”

The debts were incurred partly through a string of acquisitions in the recent past, when oil production was more lucrative. The Canadian based but South America focused producer of natural gas and crude oil, owns 100% of Meta Petroleum Corp. , which operates the Rubiales, Piriri and Quifa heavy oil fields in the Llanos Basin, and 100% of Pacific Stratus Energy Colombia Corp., which operates the La Creciente natural gas field in the northwestern area of Colombia.  Pacific Rubiales has also previously acquired 100% of Petrominerales Ltd, which owns light and heavy oil assets in Colombia and oil and gas assets in Peru, 100% of PetroMagdalena Energy Corp., which owns light oil assets in Colombia, and 100% of C&C Energia Ltd., which owns light oil assets in the Llanos Basin.  In addition, the Company has a diversified portfolio of assets beyond Colombia, which includes producing and exploration assets in Peru, Guatemala, Brazil, Guyana and Papua New Guinea.

2015 Revised Guidance – Key Highlights released by Pacific Rubiales:

• Net production of 150 to 160 Mboe/d, a slight decrease from the previous guidance, representing approximately 1 to 8% growth over expected 2014 production levels.

• Average WTI oil price assumption of $55 to $60/bbl during the year.

• Oil price realization is expected to be $1 to $2 above the WTI benchmark price assumption.

• A significant reduction in 2015 cash costs: with operating costs estimated at $28/boe, G&A costs of $200 million, financing costs of $250 million and cash taxes of $200 million expected.

• Generating Adjusted EBITDA of $1.5 to $1.7 billion (including funds from hedging programs and dividends from affiliates), and Funds Flow (Cash Flow) of $1.1 to $1.3 billion.

• Exploration and development (“E&D“) capital expenditures of $1.1 to $1.3 billion, the majority directed to development drilling and facilities, and a small amount to exploration.

The company’s common shares trade on the Toronto Stock Exchange and La Bolsa de Valores de Colombia and as Brazilian Depositary Receipts on Brazil’s Bolsa de Valores Mercadorias e Futuros under the ticker symbols PRE, PREC, and PREB, respectively.