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Pacific Rubiales: A Hidden Gem


Small oil company making big noise.

I spent that past week in Colombia touring the operations of several energy companies. I want to highlight one that stood out above the rest, Pacific Rubiales Energy (Symbol PEG on the Toronto Stock Exchange).

Pacific Rubiales' primary asset lies in the Llanos basin in the Rubiales heavy oil field. Current net oil production is about 12,000 barrels per day (bbls/d) which should ramp up to over 60,000 bbls/d by 2010. At $100 oil, this translates into about 2.5x 2010 EBITDA base on the current stock price. I was incredibly impressed with the operations at Rubiales after my site visit on Saturday. Even more impressive was the human capital at Pacific Rubiales. After spending several days with the senior management team, I'd say this is one of the smartest and most capable groups I've ever seen for a company this size.

Many of the key employees came over from Petrovesa, the Venezuelan state-owned energy company that Hugo Chavez has just about destroyed. Venezuela has been producing heavy oil since 1914 and Petrovesa had the most experienced knowledge base on heavy oil until Chavez took over. It appears that much of the heavy oil found in Venezuela extends into Colombia. Because the geology is similar, the folks at Pacific Rubiales are in the perfect position to capitalize on the heavy oil opportunity in Colombia.

Pacific Rubiales also has a natural gas field in lower Magdalena basin in its La Creciente block where it has about 500 Billion cubic feet (Bcf) of 3P reserves. Current production is at about 30 million cubic feet a day (mmcf/d) and should climb to 60mmcf/d by the end of the year. Pacific Rubiales is currently evaluating a compressed natural gas project that would allow them to ship to Panama and Jamaica.

Key upcoming catalysts for Pacific Rubiales include:

1. Additional blocks with heavy oil potential to be awarded by the Colombian government in mid-July. Pacific Rubiales was the only "non-major" invited to bid as an operator because of its success and the experience of its management team. I wouldn't be surprised to see Pacific Rubiales try and partner with a major here.

2. Drilling success in the Quifa heavy oil prospect (adjacent to the Rubiales field). I'm looking for results later in the year.

3. Announcement of a compressed natural gas contract for its La Creciente natural gas field. I expect to see something here soon.

4. Drilling success / additional oil/natural gas discoveries from one of the company's Guama, Moriche, or Arauca blocks.

5. Additional research from the sell-side as more analysts discover Pacific Rubiales.

Bottom line: I believe this stock is too cheap and will go much higher in the next 12-24 months. Rapidly increasing oil production, top-notch management, and a relatively unknown stock combine to make this one of my favorite energy investments for 2008.
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Position in PEG

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