Pacific Rubiales:Yield And Buybacks Could Hold The Key

Pacific Rubiales (PRE.CN) is currently trading 8x FY13e earnings, the share price does not seem over stretched, especially given the company’s continued double-digit production growth, cost cutting efforts and above-average access to growth opportunities. We are expecting a strong set of Q113 results early in May to highlight the company’s free cash generation, and with this, the likelihood of increased dividends, which we expect could bring a new set of investors to the table.

Strong operational numbers – a good start to the year
Pacific Rubiales kicked off 2013 with a good set of operational numbers, which came in at the upper-end of company guidance for the year. Average production in Q113 was reported as c 127kboe/d, at the top of the 115-130kboe/d range published for 2013e. Cost reduction targets of US$8/bbl continue on track and will benefit from the investments in light oil production, power lines, and the new Bicentenario pipeline, all of which should be in place by Q313. We point to a planned capex budget of US$1.6bn, which looks well funded by company cash flow guidance of US$1.8-2.0bn for the year, leading us to conclude that year-end 2013E cash position could increase well above the US$243m reported at year-end 2012.

Exploration on track – potential catalyst in Peru
Exploration efforts so far in 2013 have included 10 wells in Colombia and Brazil, realising four oil and two natural gas discoveries. In Colombia’s Llanos basin, three wells have been completed in the Cubiro and Arrendajo blocks, with these resulting in light oil discoveries. Similarly, in the Lower Magdalena basin, two wells have made gas discoveries. In Brazil’s offshore Santos basin, Kangoroo-1 discovered 25m column, while Emu well has been plugged and abandoned. Finally in Peru, a drilling rig is being mobilised to Yahuish and expected to spud this month, with management estimates of this large “Elephant” sized target being 573mm bbls.

Valuation: Yield and buybacks could hold the key
Currently trading at 8x consensus P/E, the company valuation does not seem stretched, especially given the continued production growth, cost-cutting efforts and sizeable exploration portfolio, which is expected to grant the company access to new growth opportunities beyond Piriri/Rubiales. We expect a solid set of Q1 results to confirm free cash generation, while the company’s exploration programme could also provide new catalysts in 2013.

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