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Local authorities challenging the STAR technology

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January 27, 2014 ( newswire) Bloomberg disclosed information about Pacific Rubiales and cited Ms. Ana Maria Silva, Head of Mining and Energy at the local Comptroller’s office. According to the source, she visited Quifa oil field to evaluate the STAR project and initial results would indicate that the project is tracking below a threshold for additional recovery rates set by state-controlled Ecopetrol SA. We expect an official statement by the Government, Ecopetrol, or any other local entity to confirm or deny these allegations. As of now, we reiterate that our rating and T.P on the stock has not changed but will be revised if the news is confirmed.

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In addition to the news, we spoke to Ms. Silva, who didn’t provide any financial nor operational figures, but mentioned that the project´s reality is far less positive than what Pacific Rubiales has communicated in its financial results and press releases.

Pacific Rubiales sent an official note to market participants, where it denied all of these allegations and reiterated that the STAR technology is one of the most successful initiatives around the globe in terms of oil production recovery. In addition, three independent companies with an expertise on the industry have certified that STAR has duplicated recovery factors in Quifa. The company also denied any explosions in the oil field while testing the STAR project. Finally, Pacific mentioned that it is constantly reporting the project´s results to the Minister of Energy and to Pacific’s partner, Ecopetrol.

The news adds more uncertainty to Pacific’s shares in the market, but for us it is also uncertain whether or not this information is true. That said, we decided to draw initial conclusions regarding this issue and wait for more official information. Once again, we reiterate that our rating and T.P. will be revised if the government or Ecopetrol confirm the news.

Our T.P. COP 56,060/share is based on a DCF model with a discount rate of 13% (USD WACC); g was set at 2.0% has an implicit 2014 EV/EBITDA of 3.16x, P/E of 8.50x and P/B of 1.74x, well below PREC’s historical range and those of it’s peers. Both, total expected return and relative valuation, lead us to set a BUY rating.

Initial conclusions regarding the allegations against the STAR technology

Our valuation does not place any weight to the STAR project as it is still uncertain if it will provide positive results and will be fully applicable to producing blocks. In addition, we believe that the vast majority of market analysts do not include this project in their valuations. However, a failure or a lack of transparency in the STAR project will add more downside risk to the share’s price, as clearly demonstrated in Friday’s session (it lost 2.88%). In addition, Pacific´s chances to extend Rubiales contract with Ecopetrol will drop significantly, if not disappear entirely.

We expect an official statement by the Government, Ecopetrol or even by the ANLA to confirm or deny these allegations. As of now, we still believe this could be only a rumor that was officially denied by Pacific.

If the news is confirmed by local authorities (worst-case scenario for Pacific Rubiales), this could represent a major negative inflection point for the company. In other words, should authorities deem Pacific’s press releases and guidance regarding STAR, as false or misleading, this could undermine the public’s confidence even further, and support the market’s negative perception about the management’s delivery (reflected in the share price vs. analyst consensus TPs).

Finally, we reiterate that our rating and T.P. on the stock has not changed (PREC CB: Buy; T.P.: COP 56,060/share). However, in light of the news we recommend to be cautious and keep away from the stock in the short term or at least until more information is known. Both Target Price and Recommendation will be revised if the news is confirmed by local authorities.

Research Team


This report is property of IM Trust S.A. and/or Credicorp Capital Colombia S.A. Sociedad Comisionista de Bolsa and/or Credicorp Capital Perú S.A.A. and/or its subsidiaries (hereinafter jointly referred to as “Credicorp Capital”), therefore, no part of this the material or its content, nor any copy of it, may be altered in any way, transmitted, copied or distributed to any third party without prior and express written consent of Credicorp Capital.

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