When it gets really cold at home we like to dream of far-off and warmer places we can go to look for oil and gas.
In that regard, Peru is emerging as a real hot spot for Canadian junior exploration companies.
In fact, almost all of South America is hot (literally and figuratively) right now. The International Energy Agency pegs Brazil to be the fastest growing non-OPEC producer after Canada, and Colombia has become a household name after the government there took steps a decade ago to attract foreign investment and reverse production declines at its major fields. In fact, Ecopetrol, the Colombian state oil company has undergone a complete transformation and now trades in both Toronto (ECP-TSX) and New York (EC-NYSE).
In that sense Peru is where Colombia was a decade ago. It has been an oil-producing country since the late 1800s and has seen its oil industry suffer from a lack of investment.
According to the U.S. government’s Energy Information Agency, the country’s oil production fell by half in the two decades from 1984 to 2004 — to a little less than 100,000 barrels a day — and has since recovered to about 150,000 bpd according to the most recent statistics.
In the same period the country’s consumption has skyrocketed as it strives to improve the standard of living of its people. It became a net oil importer in 1992, but it’s not for lack of oil.
According to the 2008 BP Statistical Energy Survey, Peru had proved oil reserves of 1.097 billion barrels at the end of 2007 or a little less than one per cent of the world’s reserves.
It’s also relatively unexplored and offers excellent wildcat potential. American majors like Hunt Oil have had good exploration success and the government is courting Asian investors like South Korea to build roads and infrastructure in exchange for attractive oil concessions.
Many South American countries have governments that make it difficult to operate or actively discourage business, but Peru has made efforts to improve transparency. Everyone knows how volatile Venezuela’s Hugo Chavez can be, and Ecuador and Bolivia have left wing governments modeled on Chavez’s Bolivar socialism.
Following its sovereign debt crisis a few years back, Argentina has a cap on oil prices, though the geologic potential is attracting a lot of attention. Canadian brokerage firm Wellington West Capital Markets just hosted an energy conference the highlighting the opportunities and some of the Canadian juniors doing business there and Peru is definitely in the same league.
According to Business Monitor International, which ranks country risk, Peru holds third place behind Colombia in its composite Business Environment (BE) ratings, which combine upstream and downstream scores.
While Peru’s absolute resource base may be small, BMI says its output growth outlook is excellent, reserves-to-production ratios (RPR) are above the regional average, and licensing terms are “particularly attractive.”
Peru also has a strong position in BMI’s downstream Business Environment ratings, ranking fourth, above Mexico and is on par with peers like Trinidad.
Most financial advisors will tell you that emerging markets offer more exposure to the global economic recovery (if and when it ever arrives) and with international oil prices nearing $120 a barrel, high risk-high reward exploration is an attractive proposition.
Compared to the Middle East and North Africa, South America is a relative haven of tranquility and countries like Colombia have been extremely successful in attracting the attention and investment capital of Canadian juniors like Petrominerales (TSX-PMG) and Petrolifera (TSX-PDP). Peru seems to be the next logical extension for these companies looking to expand beyond their regional base.
International majors have also taken note. Spain’s Repsol is a newcomer and Calgary-based Talisman Energy (TSX-TLM), which is also a major player in Colombia, has spent more than $70 million in Peru in preparation for drilling a series of exploration wells over the next few years.
Even Ecopetrol has announced $2.5-billion joint venture in Peru with the aim of quadrupling production over the next seven years to 50,000 bpd. If successful, it would amount to a third of the country’s overall output.
But several smaller Canadian players have been active too, with a mix of both dazzling and disappointing results.
Calgary-based Gran Tierra Energy (GTE-TSX) last week announced that its latest Kanatari-1 effort came up dry, sending its shares about 10 per cent lower.
Despite the discouraging outcome Gran Tierra still has three more high-impact wells in the queue that could move the needle in terms of its share price. Despite the setback, the shares have still managed to double since last summer and many analysts still consider it a buying opportunity.
Other Canadian firms active in the region include Canacol (CNE-TSX), Orion Energy (OIP-TSX) and Veraz Petroleum (VRZ-TSX) which Calgary-based FirstEnergy rates a “strong buy.”
Veraz has non-operated interests in three onshore blocks in Peru along with a substantial amount of two-dimensional and three dimensional seismic data to bring to the table.
Following a farm-out deal with Petrominerales, the company has had to double its outstanding float to to come up with its share of development costs via an equity issue, but analysts including FirstEnergy said it wasn’t as dilutive as first feared.
The companies plan to drill three exploration wells in the second half of the year, any one of which could have a meaningful impact on its share price.
Veraz is currently trading in the middle of a 52-week range of 50 cents and $1, so its speculative rating is probably apropos.
There you have it: Peru, an oily basin with more than a century of production, some world-class exploration prospects and a diversity of large and small companies staking out prospects. Not to mention wonderful beaches and some tropical weather we can only dream of back home.
- OGIB Research Team