My Favorite Emerging-Market ‘Power’ Player Is …

Rudy Martin | March 16, 2012

This week, thousands of energy industry executives from the Americas met in Colombia for its Oil and Gas Summit to discuss the state of the industry there and the unusual investment opportunity the country represents.

Many of these global players have been eyeing this country’s energy sector long before this week … and for good reason.

Colombia has attracted the attention of small-and medium-sized energy companies as well as the industry’s major international players like Brazil’s state-run energy giant Petrobras (PBR), Spain’s Repsol (REPYY.PK) — which has significant Latin American presence, particularly in Argentina — and many others.

With so many key emerging-market companies attracted to this area, as an investor you may want to follow suit. So today we’ll zero in on several of those companies as they start to gain a foothold, and you’ll discover which ones might be the potential investment winners of tomorrow.

First, let’s take a look at what makes Colombia so attractive to energy companies from all over the world.

1. The economic environment in Colombia is positive.

Colombia is a free-market economy with major commercial and investment ties to the United States. Its transition from a highly regulated economy has been under way for more than 15 years.

The country’s average annual economic growth rate was more than 5% from 2002 to 2007. And it is clearly on an upward path for 2012, with the International Monetary Fund forecasting an annual growth rate of 4%-5%.

This figure is down from the most recently reported 7.7% for the third quarter of 2011. But just last week, U.S. Under Secretary of State for Political Affairs Wendy Sherman reportedly said that Colombia has the potential to become South America’s second-largest economy (after Brazil). So annual growth may be down by a couple of percentage points, but it’s still strong … and getting stronger.

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2. The oil opportunities are significant.

Columbia will be a larger producer soon, with an increase of 266,000 barrels per day (bpd) targeted by 2015.

Its proven reserves hit 2 billion-plus barrels last year. Proven reserves refer to the oil that is very likely (around 90%) to be recoverable under existing conditions within a country.

With this increased production, Colombia can now rely on domestically produced oil until at least 2020, by which time it is predicting that new reserves will have been found.

However, even given these new figures, Colombia has a long way to go to live up to recent predictions that it could overtake neighboring Venezuela’s 3.1 million bpd production within 10 years.

This is not like the huge oil finds in Brazil — but the point is clear that Colombia has real oil fields and is looking for companies that will produce these resources …

3. And the government wants more production.

Colombia’s national hydrocarbons agency plans to offer 113 blocks in the tender for new exploration-and-production licenses. At least 33 of them will contain some form of unconventional resource potential.

The closing date for all financial offers is set for October 16, with winners set to be announced in November. That means we probably won’t start to see any huge growth action in related stocks here till later this year at the earliest, but that means opportunities are on the way!

4. The country’s location and geology also help.

In addition to a well-established oil services industry, which is dominated by Colombia’s largest oil company Ecopetrol (EC), the country’s landscape naturally lends itself to be ideal for exploration and development with diverse geology and opportunities that include:

• Small to giant field discovery potential
• Light to heavy oil, and natural gas
• Onshore and offshore opportunities

It has an ideal location with access to both the Pacific and Atlantic export markets.

So with all that action, it is natural to think that now is an attractive time to invest in Colombia.

But it’s not without risks. Consider the upbeat statements from one oil investor.

According to Petrominerales (PMGLF.PK) management, “Colombia is really a core country for us, and we look at all the bid rounds. There is a lot of lower-hanging fruit — highly unexplored areas there.”

This smaller North American company is in the process of drilling three wells in Colombia, and cementing or testing another five across the country’s Llanos Basin.

Yet, just last week, Raymond James cut that stock to “Underperform,” citing concerns about a production decline and disappointing exploration results. It was the rare company delivering year-over-year reserve declines, despite $396 million (Canadian) spent on exploration drilling 26 wells.

This is not the only smaller oil company with a focus on these fields. Pacific Rubiales (PEGFF.PK) and Gran Tierra Energy (GTE) are also active in Colombia.

For now, I’m still waiting for larger production out of Colombia, and my favorite way to play that would be Ecopetrol, the $122 billion market value mega-play. That stock’s up 50% over the last 12 months (with dividend reinvestment), so I’m waiting for a pullback in the markets to jump into that one.

Best wishes,

Rudy

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