2023-06-22 20:26:22 ET
Summary
- PetroTal faced a river blockade in June supposedly due to dissatisfaction from AIDECOBAP over the company's control of the 2.5% social fund.
- Despite the blockade, production numbers remain strong, and the company expects to surpass its previous output guidance.
- With an annualized dividend yield of over 11.5%, growing production and discount to other LATAM peers, PetroTal remains a very attractive option.
In my latest article about PetroTal (OTCQX:PTALF) (TSX:TAL:CA), in the beginning of April highlighting the significant discount of the share price to the value of the reserves and the beginning of a capital return program with the potential to attract a wider shareholder base. Since then, the share price has actually fallen alongside oil prices and some important company-related events have happened. So it's worth taking a look at PetroTal again. In June the company had to deal yet again with a river blockade. Despite this, production numbers look very good and management expects to surpass its previous production guidance. Overall, I remain bullish on the company, especially in light of the 11.5% annualized dividend yield, which appears sustainable and is amongst the highest in the oil and gas space.
The river blockade
In the beginning of June, news broke out that two oil barges have been taken over by individuals related to The Indigenous Association for Development and Conservation of Bajo Puinahua (AIDECOBAP), essentially blocking river access. As this river route is the main export route of PetroTal, the company had to halt production. Fortunately, the situation coincided with a previously planned production reduction, related to some maintenance/upgrades in operational infrastructure, so the actual effect on guided production was softened.
The reason behind the blockade was supposedly because AIDECOBAP was unhappy with PetroTal having control over the notorious 2.5% social fund, which aims to redirect 2.5% of the company's net profit towards social projects for the benefit of the locals. Apparently, following the involvement of the Regional Governor of Loreto, the blockade was removed, but PetroTal's representative on the 2.5% social trust board was removed. The company didn't sign the agreement and is raising the issue with the federal government. So while the blockade was removed, the issue is not completely solved. I think it's logical for PetroTal to have a say on what the funds will be used for as it's an interested party in the best possible allocation of the funds in order to have good relations with the locals. If the funds are being embezzled, the locals would see no benefit from the fund and could turn their anger against PetroTal yet again.
Production back on track
Following the removal of the blockade and the completion of the upgrade/maintenance work, PetroTal is back on track, maintaining average production rate well above 20kboe/day. Data from Petroperu indicates that the company has reported 23.6kboe/day average output for the period of 12-19 June.
This brings the average Q2'23 production to 19 June to over 18.3kboe/day. So despite the river blockade and the subsequent production halt, PetroTal is on track to beat the initial guidance of 17kboe of daily production. Management anticipates the beat to be about 5%, which will be approximately 17,850boe/day, but the data from Petroperu suggest an even larger beat, unless production is substantially reduced in the last ten days of June.
Logistical constraints and options
The data clearly shows that PetroTal has the ability to maintain production rate of well above 20kboe/day. However, logistics are a constraint. The main exporting route is dependent on the water level of the Amazon River. However, it's known that water levels peak of the Amazon are seasonal and generally peak in May and decline until September, when a rise begins. This naturally makes Q3 the weakest quarter in terms of exporting capacity, hence management guides of only 13.5kboe/day production rate in the July-September 2023 period.
In order to solve its logistical constrains, the company is actively exploring other potential exporting routes, which could flatten the seasonality of the main river route and expand the overall actual sustainable production capacity. The previous main exporting route of PetroTal - the Northern Peruvian Pipeline (ONP) has been subject to vandalism and intentional cuts, making it non-functional. However, in April, Petroperu has completed the repair works and the ONP is believed to be operational again. However, security risks remain and PetroTal is not keen to jump on the restart of exports through that route yet. In the Q1'23 earnings call , the CEO - Manolo Zúñiga stated that one of the options actively explored is the bypass of the initial ONP section, which has been the most frequent target of attacks and shipping oil to a further section of the pipeline.
Slide 5 also shows some of the other routes, the company's examining, which includes the OCP in Ecuador, delivering oil by barge at [indiscernible] and/or at the port of Yurimaguas, hence bypassing the initial section of the O&P and even taking our auto directly to Lima as we did in 2019. Should these other routes be confirmed to be commercial and sustainable, the company anticipates another 20,000 barrels of oil per day of offtake availability.
- Manolo Zúñiga, CEO of PetroTal
Shareholder return program update
Meanwhile, the long-anticipated shareholder return program finally began with an initial quarterly dividend of US$0.015, which amounts to a total distribution of a bit below US$14M per quarter. In conjunction with that, a share buyback of up to approximately US$3M per quarter was also launched. Note, that at the current share price of US$0.52, the annualized dividend yield comes at more than 11.5% - significantly better than average. PetroTal's projections indicate that the dividend is well covered in the current oil price environment.
At the same time, in the Q1'23 earnings call, management expressed preference for dividends over buyback increases and hinted the possibility of special dividends, in the appropriate oil price environment.
For the time being, we've approved approximately $3 million for buybacks, which is essentially what we believe is the maximum available at this point in time, considering our liquidity. If we have more free cash flow, we will consider amending the program. But for now and for the short term, we would increase dividends along the way.
- Doug Urch, CFO of PetroTal
Valuation
PetroTal continues to trade amongst the cheapest oil and gas stocks in the LATAM region in terms of Forward EV/EBITDA ratio. This is despite the historic track record and great prospects for increase in the production capacity. The only other company with such characteristics amongst the presented peer group is the Argentinian Vista Energy (VIST), which has nearly 60% higher Forward EV/EBITDA ratio. For valuation of PetroTal through its 2P reserves, you can check out my previous article , which indicated a fair price of US$1.69/share - more than 3x the current levels.
Now that PetroTal is a dividend payer, a wider group of investors may become interested in the stock. A major catalyst for a upswing could be a breakthrough on the logistical front - activating another exporting route, which would allow to maintain production over 20kboe/day consistently.
Risks
The biggest risks for PetroTal are related to its main exporting route. They could be two-fold - low river levels, due to dry weather and another river blockades by the locals. Both core sources of the problem are more or less outside the company's control, although the relations with the locals could be improved through the 2.5% social fund and/or the company may strengthen security on the barges. So the best way to mitigate this risk will be to have another alternative(s) for exporting large quantities of production (approximately 20kboe/day), hence this is the potential big catalyst for the stock.
Conclusion
After the production disruption in the beginning of June, due to river blockade has ended, PetroTal is back on track, producing well above 20kboe/day, partially offsetting the effects of the stoppage. Despite this challenge, the company is on track to beat production guidance and deliver a record quarter in terms of output. The oil producer also paid its first quarterly dividend with more expected to come later this year. With an annualized dividend yield of over 11.5%, growing production and discount to other LATAM peers, PetroTal remains a very attractive option, and I'm using the current weakness to add to my position.
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PetroTal: Despite Blockade, Production Remains Strong