Better Know A Stock - Part 7
The inspiration here is all Stephen Colbert's.... he has his series of "Better know a district" so I figured why the heck not... Better Know a Stock, companies that are never followed or too small to be heard of. So here goes that 9000 part series.... =)
Gran Tierra Energy (AMEX: GTE)
Gran Tierra Energy is a relatively new oil and natural gas exploration and drilling company specializing in Colombia, Argentina and Peru. They have just over four years under their belt now and we are beginning to see those sweet, sweet benefits of a successful management team.
Gran Tierra absolutely benefited from rising oil prices in 2008, but let’s face it, Rome wasn’t built in a day and it took a good 12-18 months to get their operations off the ground. In 2006 revenues totaled just over 6 million dollars. These revenues jumped dramatically in 2007 to 31.9M dollars and to 112.8M in 2008. Expected revenues are still growing, according to analysts, at an amazing clip. If these numbers hold true, we’ll see GTE tack on a 91% revenue gain in 2009 and another 62% on top of that in 2010! That is phenomenal growth!
How about those profits? Oil by nature tends to be a very high margin product and GTE is working rather efficiently despite having to spend a fortune right now on research and development costs. GTE went from net losses in 2006 and 2007 to a massive 110 million dollar profit in 2008! By 2010, Gran Tierra should be bringing in over 250 million dollars in yearly profit! Although most consensus estimates can be all over the board with such a new company, the majority of GTE’s history shows a consistent pattern of performing better than analyst expectations.
You know I’m somewhat of a stickler for a solid balance sheet and all too often these oil and gas exploration companies allow for their profits to drive massive debt loads. GTE currently has 176.8M dollars in cash with zero outstanding debt and a 150M dollar available credit facility if needed. Those are some pretty sweet figures for a four year old company that burned cash like mad in its first 24-30 months of existence.
With these figures, it got me thinking about just what can possibly be out there to keep a company like this down and there are a few key factors that have to be considered.
First you have absolutely, positively, no doubt about it, way WAY too many shares outstanding. Whoever thought it would be a smart idea to bring 241 million plus shares to market needs to be poked with a stick repeatedly (second offerings included). I know the market sentiment toward reverse splits, but I think it would be in this company’s best interest to either consider a reverse split or begin buying back shares with some of that extra cash. There are far too many outstanding shares to cause this company to make a major move.
Next up we have that pesky US dollar which has been falling like a rock. We already know that Gran Tierra is going to be inextricably tied to the rising and falling price of oil to some extent, but factor in that this company is often paid in foreign currency and you can place a big question mark next to GTE’s profits. I’m not saying GTE will turn over a loss when a profit is expected, but you could see up to 10% profit swings just due to currency exchange rates alone.
Finally, but not lastly, international relations and sanctions could play a big part in determining just how much GTE can drill and where in can drill. The US could apply certain sanctions against GTE and local governments in Colombia, Peru or Argentina could practically pull the plug on GTE if they chose to. Neither of these seems very likely with a Democrat in office in the US and the local governments reaping the benefits of oil production, but they are risks that should be addressed.
All in all, I’d have to say that Gran Tierra looks good and appears to be in its ripe years of growth. Most of these newer oil companies really rocket in their young years then mellow out to become 10% per annum ho-hummers. I think GTE has 2-3 nice years left and they could easily be a triple from current levels as long as they can keep their outstanding share amount under control (no secondaries) and avoid getting screwed by currency exchange rates.
On a side note, I’d like to point out that Gran Tierra’s 2008 Annual Report is FAN-TAS-TIC! This is a very easy to read and entertaining report, so I had to give them props for a very thorough report.
Those numbers don’t like, and that ain’t no bull!