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Company Update: Pacific Rubiales - BUY

Adjusting down T.P. for 2014; BUY rating remains unchanged
Price: COP 30,460; Target Price: COP 42,200

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February 7, 2014 ( newswire) We are reducing our T.P. to COP 42,200, but maintain a BUY rating. Adjusting for lower forecasts of international oil prices and the company’s net production guidance for 2014 had a negative effect on our T.P. Further, we are assigning a discount to our fair value estimate based on an analysis of 2P reserves – after tax NPV at 10%.

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Based on consensus on lower than previously-expected oil prices for the coming years, we reduced our forecasted prices by an average of 4% (2014-2018). (For an in-depth discussion, see our note on Ecopetrol published on February 7th, 2014). In addition, the company reduced its oil price realization estimate from around 100/bbl to 90-95/bbl for 2014. Also, initial guidance indicates that average net production will be in the 148-162 kboed range, which is, according to the company, equivalent to a 15%-25% YoY growth. Nevertheless, our previous estimates were above the upper limit of this production target range. In terms of net production, we will be focusing on the contribution of new producing fields such as CPE-6 and Ariari. We are not placing any weight to the Rubiales field beyond 2016, as we are assuming it will revert in full to Ecopetrol. Therefore, positive news on this matter should add to our fair value estimation and the market’s perception on management’s delivery.

Finally, announced monetization of investments in the midstream business (USD 400 mn for about 38% of the recently created SPV Pacific Midstream) at attractive multiples may lead to additional value discovery during 1H2014.

Our T.P. of COP 42,200 implies multiples of 7.2x P/E 2014E and 2.4x EV/EBITDA 2014E compared to peer group’s 13.4x P/E 2014E and 5.4x EV/EBITDA 2014E. Our T.P. represents a 16% discount from our fundamental value estimation of COP 50,250, equivalent to 8.1x P/E 2014E and 2.9x EV/EBITDA 2014E.

For charts, tables and the full report, see the attached file.

Credicorp Capital

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