February 20th, 2009

I used to hold this stock back in 06-07, when great results started coming in and the share did some great appreciation; however I kind of forgot about this company after I sold and now that the oil-price has all but crashed it might be interesting to do a little follow-up.

PMG is an out-growth from Petrobank (TSX PBG). The mcap is about CAD$800M. They are currently active in Colombia, and since recently, Peru; where the main-focus is on conventional oil, but also heavier types of oil (just like PBG). They hold vast areas of land with great potential in all oil-categories. At this time the heavy oil findings are not too relevant as they require a higher oil-price to be interesting, so I'll focus on their light oil production, but of course the heavy oil will hold a great leverage when oil starts moving up again.
The expansion of PMG has been a very quick one, from having produced practically nothing only recently, they're now producing about 25000 bopd (end of january 2009). The oil-bearing rock of the PMG lands is one with a very large amount of smaller oil-reservoirs. In the latest estimate the 3P reserves of PMG stand at about 52 mmbbls, which is worth almost $2B at an oil-price of $35. The trend is fairly clear here, PMG keeps drilling new wells all over the place and production keeps increasing strongly with reserves. The strategy of going after many smaller reservoirs in these areas of the world has proven very lucrative. Considering the large land-holdings that they have and the recently increased holdings in the region, it's hard to see a soon ending in the growth - the only thing that would slow it down is lower oil-prices.
It is far from unlikely that oil wouldn't be able to drop further, but either way the world will need oil and if prices drop then PMG will simply have to slow down production and exploration, I strongly doubt that they would go bankrupt or that they would be forced to sell holdings; but profitability might very well be depressed severely - although I guess that would only last for shorter periods of time, the world will pick up again in a couple of years and the demand for oil will be as good as ever. The profitability of the operations in PMG looks pretty good; for Q3 of 2008 the production cost was only $8.02 per barrel, which would leave a pretty good margin even if the oil-price would dive further.

So, is it a good idea to buy PMG today? I would say both yes and no. Oil might drop further and in the shorter term the SP could take a strong dive; in the future oil will move higher (we're probably talking years here) and in this time PMG might still keep growing in reserves and production so that the SP might stay somewhat stable and then kind of shoot of when oil begins to climb higher again. The appreciation of SP I guess would be strong and swift when oil turns up, so to be sure to be part of it you might want to buy in advance. Let's not forget that oil is a great protection against inflation and in comparison with gold, oil simply looks cheaper.

Remember peak-oil?