Tuesday, June 29, 2010

If Long On Colombian Oil, Forget HUSA and Consider GTE

It's days like today that I congratulate myself on my attempts to look for value and put emotions aside. Short positions are, obviously, doing quite well and my dividend payers are falling less precipitously than the average security. Still I review my thesis to confirm that logic still prevails.

While my HUSA short is doing very nicely, it is worthwhile to compare Houston American Energy to other Colombian exploration companies. If I wanted to own a piece of Colombia's growing oil business, I'd consider an investment in Gran Tierra Energy [ GTE ], not HUSA. GTE is an actual operating company that is proving itself nicely in South America while HUSA is a hope and a prayer speculation. HUSA could turn out to be a huge winner, but I strongly doubt it. A person could earn a good return with GTE and, maybe, get a huge winner. A comparison of the two companies is worthwhile.

Today, the market values GTE at $1.3B and HUSA at $315M. Per share, you can buy GTE at 1.5X book value, but must pay up to 10X for HUSA. On a sales basis you only have to pay 4X for GTE, but must fork over 29X sales for HUSA. Clearly, on a financial valuation basis, GTE is the better buy. How about on a production basis?

GTE is running at 15,000 BOPD net. HUSA's net is only 1000 BOPD and that production is for sale as it is controlled by Hupecol, the operating partner. Gran Tierra owns 100 percent of it's wells and leases. GTE produces 15X more oil, but is only valued at 4X more than HUSA. Not only are HUSA shareholders paying more per share for each sale, they are paying a huge amount more for cashflow as EV/EBITDA is only 4X while HUSA is valued at 94X cashflow giving GTE a cashflow yield of 25% and HUSA only about 1%. So, HUSA loses on the basis of financial valuation and production metrics. How about future big oil finds?

HUSA has an interest in about 1.1 M acres in Colombia, but only at approximately a 12% ownership interest. GTE owns 100% of over 6M acres of exploration in not only Colombia, but also Peru and Argentina. With GTE you get the potential excitement of Peru as well as Coumbia. I won't delve into who has better drilling prospects due to proximity to large, producing wells since they both say they do and I don't have the expertise. Both aren't burdened by debt, but face large exploration budgets. Both sets of investors hope that big oil finds are ahead.

If I want to own a lottery ticket on South American oil, GTE has much safer odds and more upside per share. Conversely, HUSA is priced too richly and I'll continue to say short.

No comments:

Add to Technorati Favorites