Petroamerica’s call for cash

A sign of the times, another independent raises funding as the low oil price environment continues to hit small producers hard. On 27th October 2015, Petroamerica became the next in line to ask for cash, raising USD20 million in debentures. The expensive cost of the debt at 13.5% reflects the high risk which investors are attributing to the sector, and also that of Petroamerica. The USD20 million will consist of two USD10 million tranches, with the first expected to close on or around 16 November 2015, and the second six months later.

This fund raise comes shortly after the acquisition of PetroNova and raises the question of whether Petroamerica acquired more than it could take on. A review of the PetroNova asset base suggests that the acquisition appears sensible – the CPO-7 and CPO-13 blocks provide existing production with commitment wells not required to be drilled until July 2016 and July 2017 respectively, the Tinigua block has attractive fiscal terms (0% X-factor) although a commitment well is also required by July 2016 and Petroamerica’s Put-2 position is consolidated to 100%.

Petroamerica - PetroNova combined portfolio
Source: Petroamerica

In hindsight, it can be seen that Petroamerica’s woes stem from pre-PetroNova. At the end of 2014, the company had seven exploration wells and seismic commitments and balance sheet cash of USD73 million, out of which the redemption of a c.USD40 million debenture would be required (essentially leaving the company with c.USD33 million to fund its activities). The exploration portfolio is clearly one for a USD100/bbl oil price environment where production cash flows would have funded drilling. However, at current low oil prices, Petroamerica has been loss making – balance sheet cash as at the end of June 2015 was USD23 million; netbacks fell to USD9.1/bbl for the six months ended 30 June 2015 compared with USD54.2/bbl for the same period last year. The company has spent minimal capex in 2015 to date, conserving precious cash and only spending what it needs to maintain or manage production at its producing assets (Los Ocarros and Sur Oriente).

Some of the exploration commitment deadlines have now passed without being met (no drilling has been reported to date), yet no licences appear to have been relinquished. It is expected that Petroamerica are negotiating hard with the ANH to extend these deadlines; most likely, other cash-strapped Colombian E&Ps are doing the same. Petroamerica should be able to keep the lights on for now with the new USD20 million funding going towards satisfying the commitments. However, unless Petroamerica makes a significant discovery which it can bring onstream quickly, it will be stuck between a rock and a hard place as it continues to battle a declining production base, dwindling cash flows and a shrinking cash balance. It would not be a surprise if the company brings in partners to help with some of its commitments or raises more financing. In the meantime, Petroamerica’s case is not unique and there remains a long line of E&Ps that need more cash.