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Why Gran Tierra Stock Is Down 16% on Wednesday

By Jason Hall - Jun 19, 2019 at 1:09PM

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Equipment failures and political strife in Colombia are taking a bite out of its production. Investors are clearly worried about this, but today's fearful sell-off could be an opportunity to buy.

What happened

Shares of Gran Tierra Energy ( GTE -0.03% ) are down 16.2% as of 12:41 PM EDT on June 19, following a press release issued by the company before trading hours today. In the release the company gave investors an update on its operations results so far in the second quarter. 

In short, the update gave investors plenty of reason to be cautious, and based on today's sell-off, it was clearly enough of a reason for a lot of investors to move on. 

So what

Gran Tierra started the update with a few positive items, including news of expansions at its Acordionero projects, its largest oil-producing assets. It has completed the installation of mechanical upgrades and expansions there, which it expects will help boost production in the second half of 2019. The company also said it recently completed drilling two wells in Acordionero in 9.5 and 7.4 days respectively, record times in the field. 

Oil pumpjack at sunset.

Image source: Getty Images.

It also announced a handful of new contracts in Ecuador and Colombia, which it expects will lead to increased production by 2020. The increase will depend on the success of its exploration wells, which it will start drilling near the end of 2019. 

Now the bad news: Buried near the bottom of the press release, the company disclosed that it had to shut in oil production from multiple oil wells in the Acordionero due to equipment failures, and that local farmers had set up blockades in Colombia, causing it to halt production in two of its oil plays in the region. The shut-in production caused the company's oil output to fall: It was 37,700 barrels of oil equivalent per day (BOEPD) from April 1 to May 23, and 29,000 BOEPD the five days before the press release was issued. 

The combination of political unrest and downtime is clearly causing investors to flee Gran Tierra stock today, but there's a chance the sell-off is a bit overdone. On one hand, management is steadfast that it expects discussions between locals and the Colombian government to result in an end to the blockade, and that production will resume relatively quickly. Moreover, despite the downtime in Acordionero, the company has multiple initiatives underway there that are set to grow production in the play while also driving down operating costs and improving reliability.

One of the biggest steps will be bringing a 20-megawatt gas-to-power electricity generator online, which management says will both vastly improve power reliability and lower operating costs in the play. 

Now what

Gran Tierra has been a bit of a rarity in the independent oil and gas producer space in that it has a proven track record of generating solid positive operating cash flows. 

GTE CFO Per Share (TTM) Chart

GTE CFO Per Share (TTM) data by YCharts

But since it operates in South America, the market is clearly fearful of political risk for the company, along with falling oil prices. The company's stock has tracked Brent crude spot prices relatively closely over the past year.

GTE Chart

GTE data by YCharts

As a general rule, I'm not a fan of independent oil producers. It's a hard, capital-intensive business whose prospects are tied to an unpredictable commodity, and even the best producers often see their stock prices attached to crude prices, even when the results deserve better treatment. 

However, I think Gran Tierra looks like a unique opportunity right now; its results may be pretty ugly over the next quarter or two as it works through the production problems, but its management has a proven track record of cash flow generation, and I think investors willing to ride out some turbulence could end up making solid returns on this stock over the next several years. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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