Gran Tierra Energy: At 2x FCF, there’s a lot to like (GTE)

Oil pumps working under the sky


investment thesis

Gran Tierra Energy (New York Stock Exchange: GTE) is a cheap value oil and gas company based mostly in Colombia. In fact, the stock is pretty cheap, priced at 2x free cash flow.

But the main problem is that Colombia’s new president does not seem inclined to entertain a new exploration of the country. And therein lies the problem with GTE. Its proven reserves plus its 11-year probable reserves.

This means that for up-and-coming oil fanatics, the GTE is cheap stock with hair.

To sum up my position, I simply cannot stop myself from being attracted to cheap oil stocks. Even those with unclear paths to shareholder returns.

what is happening now?

Oil market fluctuations. Consider this, down 5%. Then he arrives. And now positive. What I described here is the 24 hour oil market. With this much volatility, how can anyone plan for future production?

When Oil was at +95 WTI just a few months ago, everyone was bullish. The board members, the CEOs, the investors and myself, we were all very optimistic that we would see oil and gas companies enjoying their day in the sun.

It’s clear that investors have become saturated with paying high multiples to technology companies where the bulk of their expenses are equity-based compensation. And then, you’re told, those options aren’t a drag on profitability.

GTE Q3 2022

GTE Q3 2022

On the other hand, investors can be given the option to invest in Gran Tierra Energy. A company with mostly oil holdings in Colombia. And obviously, for investors, that presents an important major risk, the fact that Colombia has just elected its first-ever left-wing party.

Another consideration that might be worth discussing is that the GTE only has 8 years of 1P reserve. Well, maybe less than a year because this table is 1 year old.

GTE Q3 2022

GTE Q3 2022

As you can see above, GTE’s proven and probable reserves are around 12 years. Not a big deal. But at some point in the next two or three years, GTE will have to work on expanding its 1P reserves.

When asked on the call about GTE stock, GTE CEO Gary Guidry said,

Chairman, Petro said clearly there are no new exploration contracts.

[…] We’ve also had a couple of years here where we’ve refocused our exploration efforts. We went through the process of organizing. So we have a land inventory — on land that we currently have to dig for the next couple of years.

President Petro didn’t say anything about the current territory, and we found the regulators and governments — business as usual cooperating in what we’re doing.

How does a company with a hand full of years of proven inventory figure out how to get around this problem? Or maybe there are other options available? Could the GTE simply move more in Ecuador?

Financial position discussed, buy back 2.9%

GTE 10-Q Q3 2022

GTE 10-Q Q3 2022

What the table above shows is that GTE has no debt due in 2023 or 2024. This means that its next batch of debt will be reduced at the beginning of 2025.

So in all, including the recent debt buybacks, GTE’s net debt comes to nearly $460 million.

Simply put, even though GTE repurchased over 10 million in the quarter, and reduced its total share count by 2.9%, I have to wonder if this is the best use of capital at this point.

GTE stock value – approximately 2x free cash flow

GTE stock valuation

GTE stock valuation

As the chart above shows, GTE expects to bring in approximately $190 in free cash flow this year. That would put the stock at about twice its free cash flow for the year.

But as you’ve already indicated, given GTE’s debt profile, that means it’ll need to keep oil prices in good shape for a few more years, so GTE could dump some of its 2025 bonds.

bottom line

GTE has two problems. The first is that it operates in a country that is not well prepared for new exploration projects.

The second problem is that GTE still carries a fair amount of debt. This second consideration isn’t a deal breaker. In fact, I think the stock is incredibly cheap with 2x free cash flow.

What that means is that GTE is going to have to work to reduce that debt even more, before returning that significant capital to shareholders.