Pacific Rubiales Energy (PRE)

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Pacific Rubiales Energy (TSE:PRE, FRA:3PY1) is a Toronto-based, Colombia focused petroleum company engaged in exploration and production. At the end of 2010 it oversaw activity at 35 oil field blocks in Colombia (7 mature, 28 still in exploration stage) 3 in Peru and 2 in the Petin Basin of northern Guatemala (projects acquired in October for a cost of over US $10 million (could be as high as US $25.575 million, three other oil exploration companies have an interest there). Its largest block, the rubiales field comprises at least 80 oil wells that are already producing.^[1] Many of the assets it currently oversees were taken over in 2007 (Rubiales Field) and 2008 (Pacific Stratus Energy and then Kappa Energy (Magdalena, Llanos and Catatumbo basins). Ecopetrol owns half of Pacific Rubiales largest assets. Though there are only a handful of natural gas sources among its assets, natural gas production has risen steadily since the company began production (2007) (the main asset La Crecinte experienced a rise in production, up from 5,800 boe/d in 2008 to 7,382 boe/d in 2009 then to 9,920 boe/d (net) in 2010). During 2009 22 new wells were drilled (19 at the Rubiales and Quifa blocks. the Rubiales block is where the company is experiencing most of its production growth). In the 3Q2011 76.36% of gross production (167,343 of 219,136), 63.3% net royalties (55,166 bpd) came from Rubiales, down from 85.6% in 2010. Quifa produced 10X more oil up to 35,222 bpd of which 19,241 bpd was Pacific Rubiales share after royalties. Rubiales 3Q total field output was up 32.9%, Quifa up 1032.9%, Dindal/Rio Seca up 109.7%, La Creciente up 18.2%, Abanico down 21.4% (though Pacific Rubiales net royalty share in Abanico down only 1.4%). In 2010 85.6% of gross production (123,581 bbls/d) before royalties (74.5% or 42,452 boe/d net after royalties) came from the Rubiales/Piriri oil field (up 80% on the year gross, up 74% on the year net). La Creciente was second at about 10,000 boe/d up 34%. The Quifa field experienced the largest increase in production between 2009 and 2010 going from 308 bbls/d (gross before royalties) to 4,819 bbls/d (2,630 bbls/d net, most of the reduction is due to smaller share held by the company (2,812 share before royalties) in 2010.^[2]

Contents 1 Company Overview 1.1 Production by oil field 1.1.1 2011 third quarter 1.1.2 2011 first quarter 1.1.3 2010 2 Business and Financials 2.1 2011 third quarter 2.2 2010 year end 3 Trends and Forces 3.1 Stability in Colombia contributing to an increase in investment 4 References

Since the end of 2009 the company made a number of key moves. The first was the acquisition of six oil exploration blocks in Colombia (in the Ronda 2010 bidding process) and the other the divesture of two blocks in Colombia (within the Buganviles area) to Petrodorado, a company with which Pacific Rubiales is partnered with in Peru.^[3] The six acquired blocks include a controlling interest in two blocks as well as an interest in four others through a consortium, in which it will be the primary operator. Five of the blocks were in areas the company already had interests in (Putumayo and Llanos basins) and the other in the Cordillera Basin.^[4] The sale of assets involved about a quarter of its control at two blocks in Colombia to its Peruvian partner Petrodorado (the reasoning behind that decision was to "permit the company to focus on its producing assets and low-risk exploration" according to company chief Ronald Pantin).^[5][6] Talisman Energy is the company's main partner in the Putumayo Basin (Talisman has a 40% interest in all three blocks with the rest held by Pacific Rubiales subsidiary Meta Petroleum).

Doing business in Colombia can be considered high risk/high reward. Traditionally the country has had problems associated with political corruption, out of control inflation, rebels and counterfeit money, however since the turn of the century the situation has improved. Greater economic and political stability can be credited in part to new anti corruption policies, improved relations with the USA and greater isolation of guerella rebels. The biggest reward for doing business there today comes from capitalist friendly economic policies aimed at attracting foreign investment.^[7]

The most important customers of the company are the USA, Canada and the Caribbean. In 2009 8,625,955 barrels (crude oil) were exported abroad (mostly to the U.S. Gulf Coast) while 1,603,363 barrels were used domestically in Colombia mostly by the industrial economic sector (at an average price of $53.90 per barrel).^[8]

Average total net production in the three months ended September 2011 was 87,159 boe/d a 52=4.50% increase when compared to the corresponding period in 2010 (56,404 boe/d); production sold per day amounted to 101,553 boe/d 22.73% greater than in the first quarter of 2011.^[9] Total gross field production in the third quarter was 219,136 bpd up from just over 144,000 bpd in the third quarter of 2010. Average net production in the first three months of 2011 was 79,648 boe/d a 52.50%% increase when compared to the first three months of 2010 (52,227 boe/d); production sold per day amounted to 82,747 boe/d 25.94% greater than the year before (65,702 boe/d).^[9] The company has an ambitious goal of raising gross production to 500,000 barrels a day by 2013-2014)^[10] New pipeline expansion which began in 2008 paved the way for gross production to reach 170,000 bbl/d which (the company was on track for according to reports released at the half in 2010). Phase 1 one of that expansion cost the company $370 million US and was 45% complete by the end of 2008; Phase 2 was estimated to cost $160 million US.

Net Proved Reserves are up by 40 million barrels of oil equivalent or 15.2% to 350 million barrels in September 2011, as compared to March 31, 2011 (310 million boe).^[11]

Company Overview

reserves mil boe	2008	2009	1Q10	2Q10	3Q10	(2009,3Q10)	2011 Feb.28[9]	2011 June	2011 Sept
Total Oil	381.55	559.6	550	538.5	526.19	(6.0)%	619.81	667.05	648.01
Total Gas	70.86	78.7	77.7	77	75.74	(3.8)%	95.53	91.62	90.6
Oil & Gas	452.41	638.28	627.7	615.45	601.93	(5.7)%	715.34	758.67	738.61
Net of share & royalties	208.7	280.6		271.47	266.28		316.45	349.73	341.73

The main natural gas asset is near Cartagena, the main crude oil producing region is in the rubiales-piriri fields in the Quifa region of Eastern Colombia. Other areas already producing are in Neiva, Chipalo, Abanico, Puli B, Rio Seco, Guaduas, and Las Quinchas.^[12] The Guaduas facility handled almost 10 million barrels of third party crude oil in 2009. 2010 spending commitments include $36.8 million to improve oil processing plants and light and medium oil production. Natural gas proced at La Creciente was marketed to the Atlantic Coast at prices higher than the average. La Creciente which has proved plus probable reserves of 455 billion cubic feet (annual report 2009) is also home to an upgrading facility. There is still ongoing exploration activity at La Creciente.

Six main pipelines are used to transport oil to upgrading facilities, pumping stations, and oil transport systems/ports; they are the ODL, Ocensa (owned by Ecopetrol which which Pacific Rubiales is jointly partnered at Rubiales), ODC, OAM, Promigas and Guaduas-Dorado pipelines. The Rubiales Field is currently the most important revenue generating asset, producing most of the company's petroleum in late 2009 (68,827 of 83,000 barrels per day although total production rose to 130,000 barrels per day in March 2010).^[13][12] For fiscal 2009 average gross daily production was at 82,887 boe per day compared to 77% higher than in 2008 (for fiscal 2009 net production after royalties was 56% higher than the year before). Negatively affecting the company's income for 2009 were oil prices (avg realized price down 29.25% since 2008 the direct effect of WTI NYMEXT prices of oil which averaged 62.09 per barrel down 37.86% since 2008). Revenue growth continued in 2009 though due to large production increases. Outside of Rubiales and Piriri the company has a number of major assets which are in the initial stages of production.

Average net production in the first three months of 2011 was 79,648 boe/d a 52.50%% increase when compared to the first three months of 2010 (52,227 boe/d); production sold per day amounted to 82,747 boe/d 25.94% greater than the year before (65,702 boe/d).^[9]

Upper Magdalena Valley

• Abinaco which produces oil and natural gas is 25% owned by it, the other 75% is held by Ecopetrol (50%) and other companies (25%). Its share of production was 819 bbl/d in 2009.
• Guaduas primarily an upgrading facility that also processes petroleum from other companies. Its 91% interest is managed by subsidiiary Pacific Stratus Energy. Cimarrona has the other 9%.
• Puli jointly owned with Interoil produced light and medium oil.
• Rio Ceibas 536 bbl/d of production, owns 27% the rest is owned by Ecopetrol (50%) and Petrobras (23%)

Llanos Basin the region includes the large Rubiales, Quifa fields (the company's working interest is at 60% to Ecopetrol's 40%, 80% of the wells drilled in 2009 were successful, 20 wells drilled in the first half of 2010)

• Moriche produces light oil. Since 2009 49.5% has been owned by Petrodorado.

Production by oil field

average daily prod by field	2008 bef roy[14]	1q09 bef roy[15]	1q09 net roy[15]	2q09 bef roy[16]	2q09 net roy[16]	2009 bef roy	1q10 bef roy[15]	1q10 net roy[15]	2q10 bef roy[16]	2q10 net roy[16]	3q10 gross[17]	3q10 net roy[17]	4q10 gross[2]	4q10 bef roy[2]	4q10 net roy[2]	2010 bef roy[2]	2010 net roy[2]	3Q2011 bef roy[18]	3Q2011 net roy[18]
Rubiales/Piriri	13,288	24,626	19,701	26,508	21,207	30,514	48,896	39,117	52,497	41,998	125,945	43,463	134,160	56,442	45,153	53,065	42,452	68,958	55,166
Quifa	0	97	91	0	0	322	1078	1013	1236	1162	3109	1754	12,215	7,012	6,538	2812	2630	20,996	19,241
La Creciente	5800	8155	8088	5063	5063	7382	9900	9898	9989	9987	9351	9349	10,623	10,451	10,449	9923	9920	10,860	10,857
Puli	32	34	28	38	30	38	31	25	62	50	69	28	63	32	25	40	32
Dindal	681	823	658	776	621	744	661	529	607	486	610	442	753	526	425	586	470	740	620
Moriche	127	146	134	94	87	100	5	4	12	11	310	141	309	131	122	76	70
Quinchas	17	30	28	25	24	27	17	16	11	10	43	38	88	74	70	36	34
Abanico	777	767	729	828	786	819	1066	1139	1111	933	2650	642	2560	699	666	896	843	656	633
Buganviles	29	10	10	22	20	14	2	2	0	0	21	9	40	19	18	8	7
Rio Ceibas	524	555	444	529	423	536	530	424	511	406	1834	400	1819	487	389	506	405	457	366
Chipalo	6	7	6	5	5	6	na	na	0	0	0	0	0	0	0	0	0	0	0
Cerrito	60	6	51	82	68	77	60	60	59	59	173	138	235	185	185	111	111
Total	21,341	35,256	29,968	33,970	28,334	40,579	62,246	52,227	66,096	66,102	144,115	56,404	162,865	76,058	64,040	68,059	56,974	102,597	87,159
Gross (incl. partner's share)	46,764[19]	69,190		70,748		82,887[19]	129,686		138,382		144,115			162,865		144,307		219,136

2011 third quarter

Average total net production in the three months ended September 2011 was 87,159 boe/d a 52=4.50% increase when compared to the corresponding period in 2010 (56,404 boe/d); production sold per day amounted to 101,553 boe/d 22.73% greater than in the first quarter of 2011.^[9] Reserves are 341.73 million boe at the end of September 2011 down from 349.73 million boe on June 30, 2011. Total field production which includes internal consumption and other partner shares, was 219,136 bpd a 52.1% increase from the third quarter of 2010. Of the smallest fields Dindal/Rio Seco showed the largest increase up 109.7% to 1,279 bpd (PRE's share was only 740 bpd (up 33.8%) reduced to 620 bpd (up 40.3%) after royalties). The Rubiales/Piriri field increased 32.9% from 125,945 bpd to 167,343 bpd. Quifa showed the largest total field improvement up to 35,222 bdp from 3,109 bpd (PRE's share was only 20,996 bpd (up 1025%) which was further reduced to 19,241 bpd (up 997.0%) after royalties). Outside of the six top fields net share after royalties production was down 22.0% to 276 bpd out of a total field production of 465 bpd (down 24.5%).

For the quarter oil sales totalled 9,342,859 barrels or 101,553 bpd. 1,215,883 barrels of that represents purchases of diluents and another 837,760 barrels is purchased oil that was used in trding. 8.2 million barrels was exported 84% of which was castilla blend crude 8% Vasconia blend crude and 8% 12.5 degrees heavy oil from Rubiales. Castilla commanded $93.67/bbl (up 38.9%) and Vasconia commanded $99.31/bbl (up 32.9%). Oil that wasn't exported but used domestically was sold at an average price of $97.71/bbl (up 53.7%). The natural gas price in Colombia was regulated at $3.96/mmbtu down from $5.21/mmbtu in 2010.^[20]

12.5 degree oil is most of what was used domestically in Colombia.

2011 first quarter

Average total net production in the first three months of 2011 was 79,648 boe/d a 52.50% increase when compared to the first three months of 2010 (52,227 boe/d); production sold per day amounted to 82,747 boe/d 25.94% greater than the year before (65,702 boe/d).^[9]

2010

For the 12 months ending December 2010 total average daily net production after royalties was 56,974 67% higher than the year before. In the 3 months between the end of 2009 and early 2010 production in the Llanos basin (where heavy oil is producced) rose 47% (68,000 to 100,000 bbl/d) around the same time Pacific Rubiales secured a decade's worth of access to Ocensa's pipeline (at a cost $190 million, paid in one installment).^[12] Having strong connections with already well established petroleum companies operating in the region (Ecopetrol, Talisman) is important because it makes it easier to do business (make acquisitions, use transport infrastructure, develop partnerships). Thirty nine different companies showed a strong interest in operating in Colombia at the 2008 ronda auction and in 2010 upwards of 80 companies were permitted to enter the auction.^[21][22] Over the 2010 fiscal year 85.6% (123,581 bbls/d) of gross production before royalties (74.5% or 42,452 boe/d net after royalties) came from the Rubiales/Piriri oil field (up 80% on the year gross, up 74% on the year net). La Creciente was second at about 10,000 boe/d up 34%. The Quifa field experienced the largest increase in production during the year, going from 308 bbls/d (gross before royalties) in 2009 to 4,819 bbls/d (2,630 bbls/d net) in 2010.^[2]

2nd quarter 2010 pacific rubiales exported 4.6 million barrels of oil to refineries in the United States, Singapore and the Ivory Coast while another 400 thousand barrels of crude oil produced at the rubiales oil field was sold domestically. Natural gas sales totalled 61 mmscf/d a 96.8% increase when compared to the first quarter of 2009 (31 mmscf/d in the 2nd quarter of 2009 which sold at an average price of US$4.69 per mmbtu). 63,303 bbl/d was transported by pipleines (80%) and trucks and pipelines. The ODL approved expansion of operations at the rubiales and quifa oil fields which will eventually raise production there to 340,000 bbl/d.

1st quarter 2010 pacific rubiales sold 4.5 mil bbl crude oil abroad (mostly to the US and China) and 0.4 million barrels domestically. It added 251 mil bbls (mmbl) of gross resources in the northern part of Quifa while in Moriche it was 1.22 mil bbls of net reserves before royalties (0.43 mil bbl after royalties). Natural gas sales totaled 59.7 mmscf/d from the oil field La Creciente at an average price of $4.95 per mscf. Of the 55,934 bbl/d transported by trucks and pipelines (92% by pipelines) 39,043 bbl/d was from the rubiales field a 246% increase over the first quarter of 2009. Average daily sales of oil and gas sold doubled to 65,702 bbl/d (oil 55,734, gas 9968). Total gross 129,686 (136,000 april 30) (88% higher than 1qfy09). of that 56,700 is net, 32 blocks in colombia and peru.

Business and Financials

Key Metrics USD million	2006[23]	2007[23]	2008[12]	2009[12]	1HFY09[24]	1HFY10[24]	9M10[17]	2010[25]	9M11[18]
Net Sales	na	80.416	579.064	639.201	270.994	740.223	1145.644	1661.544	2369.343
ebitda	(0.15)	27.6	268.065	275.527	(47.16)	176.79	652.053	922.853	1385.923
Operating Income	(0.15)	27.6	124.821	51.028	11.262	225.966	374.367	550.96	861.13
Net Income	(0.154)	17.814	76.698	(153,574)	(65.904)	80.053	112.909	217.61	473.502
total assets	0.625	789.946	2299.11	2762.66	2448.93[26]	3280.72	3566.75	3855.09	4656.27
operating costs	0	33.123	253.24	293.99	127.043	265.528	426.277		308.612 (3Q)
depl, depr, amm	0	18.951	104.67	196.14	86.534	133.648	204.199		476.328
foreign exch eff	0	7.856	31.736	65.372	(24.303)	(21.183)	(41.557)		41.841
total boe mil	0	7.7	8.3	12.9	6.659	11.767[16]	na	6.556 (3Q)	9.343 (3Q)
Current Assets	0	172.71	190.217	670.899	299.13	584.08	1,003.62	984.39	1283.79
Long Term Debt	0	7.687	11.646	442.159	313.79	434.012	443.699	655.150	698.05
Shareholders Equity	0.14	570.13	1499.515	1500.977	1446.27	1866.543	1926.542	2035.07	2623.89

The largest jump in financial data in company history happened in 2008 when revenue jumped to 653% to $577.5 million from $83.5 million, net income rose to $76.5 million from $13.3 million (on account of positive factors which included foreign exchange gain and other income sources, average daily production for fiscal 2008 was 21,341 boe/d from 34 exploration and production blocks in Colombia and Peru). In 2008 of the twelve oil wells drilled in the llanos and lower magdalena basins nine of the successful drills were in the llanos basin.^[27]

2011 third quarter

Second highest quarterly revenue on record (72 cents a share up from 26 cents a share loss in the first quarter of 2011). Revenue increased 103%, price of oil increased 42%, production increased 43%. Total debt down $44 million/5.9% since December 2010.^[18]

2010 year end

88% of EBITDA was from international sales, 6.5% from gas sales and 5.5% from sales in Colombia. USD 21.6 million in operating expenses was saved due to the company entering into currency risk management contracts (by way of accounting hedges).^[25]

During 2009 net blending costs (the diluents used at upgrading facilities) were halved by using imported natural gas. 71.4% of assets are property and equipment. Capex was $149 million in the first half of 2009. On a per barrel of oil basis transporation related costs rose 3.9% to $9.82 from $9.45 while lifting and other production costs fell $3.65/boe or 38% to $5.88/boe. The much lower price of oil (about 30% lower compared to 2008) was the biggest reason revenue, ebitda, net income did experience significant increases. Although average daily production (net) was about 56% revenue was only 10.4% higher, ebitda 2.8% (because of more shares ebitda per share decreased 3.7% for basic but increased 1.6% for diluted) and net income was a loss compared to a gain the year before in 2008. Funds flow from operations per share fell 27.9% for basic and 23.8% for diluted.^[8]

Trends and Forces

Stability in Colombia contributing to an increase in investment

Marxist rebels activity had negatively impacted foreign investment into Colombia for decades however more recently the government won victories in their battle for control.^[10] Less political risk, better investment regulations and more infrastructure development (also committed to by Ecopetrol, one of the biggest oil companies in the world) helps Pacific Rubiales expand and grow.^[10]

References

1. ↑ Pacific Rubiales Energy Corp Company Profile. Retrieved on 2010-10-14.
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} Pacific Rubiales Energy 2011 First Quarter Management Discussion and Analysis (March 10, 2011).
3. ↑ Pacific Rubiales Dilutes Interest In Two Wells Of Buganviles Block Of Colombia (September 2010).
4. ↑ Pacific Rubiales Scoops Up 6 Blocks in Colombia (2010-06-23).
5. ↑ Ronda 2008 Bidding. Retrieved on 2010.
6. ↑ Pacific Rubiales executes agreement with Petrodorado for additional interest (2010-09-06).
7. ↑ Risks of Doing Business in Colombia (2010-08-16).
8. ↑ ^{8.0 8.1} Pacific Rubiales Energy consolidated financial data for the 2009 fiscal year (2010).
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5} Pacific Rubiales Energ Management Report & Analysis (2011).
10. ↑ ^{10.0 10.1 10.2} Pacific Rubiales Energy Branches Out Into Refining, Coal (2010-11-08).
11. ↑ Pacific Rubiales Ramps 2P Reserves in Llanos Basin (October 4, 2011).
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} Pacific Rubiales Energy 2009 Annual Report (2009-12-13).
13. ↑ pacific rubiales energy production and reserves
14. ↑ 2009 Management Discussion and Analysis PRE (2010-03-12).
15. ↑ ^{15.0 15.1 15.2 15.3} Pacific Rubiales First Quarter Report 2010 (2010-03-13).
16. ↑ ^{16.0 16.1 16.2 16.3 16.4} Pacific Rubiales Energy Second Quarter 2010 Results (2010-08-10).
17. ↑ ^{17.0 17.1 17.2} Pacific Rubiales Third Quarter 2010 Management & Discussion Financial Report (2010-11-09).
18. ↑ ^{18.0 18.1 18.2 18.3} Pacific Rubiales Third Quarter 2011 Management & Discussion Report (October 2011).
19. ↑ ^{19.0 19.1} Pacific Rubiales 2009 Annual Report (January 2010).
20. ↑ Pacific Rubiales Third Quarter 2011 Management & Discussion Report Oil and Gas Sales page 12 of 33 (October 2011).
21. ↑ Colombia to Auction Off 230 Oil-Exploration Blocks (2010).
22. ↑ Pacific Rubiales Awarded Six Blocks in the "Ronda Colombia 2008" Bidding Process (2008-11-10).
23. ↑ ^{23.0 23.1} Pacific Rubiales Energy 2007 Annual Report (2007-12-31).
24. ↑ ^{24.0 24.1} Pacific Rubiales Energy Second Quarter 2010 Financial Results (2010-08-12).
25. ↑ ^{25.0 25.1} Pacific Rubiales Energy 2010 Annual Financial Statements (2011).
26. ↑ Pacific Rubiales Energy google finance
27. ↑ Fiscal 2008 update Pacific Rubiales Energy (2008-12-31).