Pacific Rubiales – Neutral
Attractive fundamentals but limited upside
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July 7, 2014 (www.investorideas.com newswire) We are initiating coverage of Pacific Rubiales with a Neutral recommendation on the notes due to attractive fundamentals that include adequate leverage that compares favorably to other HY issuers, strong profitability with an average 55% EBITDA margin in the last four years, and expected deleverage plans throughout 2014. We begin with a Neutral recommendation on 2019 and 2023 bonds, as they seem fairly priced in relation to comparables and UW on 2021, as it is trading 100bps tighter in spread than its LTM average. The limited upside suggests that the market would already be incorporating the positive fundamentals of the company. Therefore due to our constructive view on the company but fair or even tight relative valuations, we begin with a Neutral recommendation on Pacific.
The company has had a sound financial profile throughout the years, due to healthy netbacks & cost control initiatives. Its Total Debt/EBITDA of 1.6x compares favorably to the covenant established at 3.5x. This ratio stands in line or even in a better position than other E&P companies in North America such as Rosetta Resources (BB-, 2.7x) and Noble Energy (BBB, 1.6x).
Additionally, the probability of debt issuances in 2014 is low as on the contrary, deleverage plans are underway with the spinoff and monetization of midstream assets. Therefore the Capex for USD 2.5bn should be mostly funded with cash generation.
The main challenge that the company faces coming into the future is the expiration of the contract on the Rubiales field (Jun-16) and its impact on reserves and production. However we are constructive on the potential impact on net production of new fields such as CPE-6 and Rio Ariari, which are expected to be producing 15-25Kboed and 25-35 respectively by 2016
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