Petrominerales

I like the following article published yesterday:

http://seekingalpha.com/article/881311-finding-the-oil-bargains-a-new-valuation-method

Note that the best value on the list is Petrominerales.  The author warns to think twice before buying Petrominerales, and he does not own the stock.  However, I like Petrominerales as part of a diversified portfolio because I think the risks are moderate.

The risks are as follows:

1) The company's producing assets are located in Colombia
2) $271.8 million of convertible bonds have a one time put option on 25-Aug-2013 payable in cash
3) Recent exploration failures may continue indefinitely and production will continue to decline

Why I think these risks are moderate:

1) Colombia has personal security risks, but has a spotless 50 year record of respecting contracts.  I believe that the financial risk is low.
2) Refinancing of debt will not be any problem unless the credit markets were to freeze.  The company also has a $150 million dollar undrawn credit facility and $160 million dollars in cash to draw upon.  In a nightmare frozen credit market scenario, I believe that the company would have no problem raising money by selling assets.
3) I believe that at this stock price ($8.46) the company could be runoff and the shareholder would not lose money.  Also, I believe that exploration success will come and that the company is just experiencing a string of bad luck.  This stock was over $40 in early 2011 after experiencing a string of good luck.

Downside protection:

1) 2P PV10 reserves of $2.26B before tax and $1.66B after tax
2) $328 million pipeline assets (cost basis)

Free exploration upside includes the following:

1) 99 conventional light oil exploration prospects of which about 35 have potential to be 25+ mmboe each
2) heavy oil blocks with 5 prospects each with target size of over 50 mmboe

YE 2011 2P reserves are only 51.5 mmboe so these propsects are huge potential additions!