So, when I noticed three months ago that Stephen Voss, the managing director of Global Energy Development (Aim: GED), the Latin America-focused petroleum exploitation, development and production company with operations in Colombia, had been on a massive share buying spree then it was definitely worthy of further investigation (Insiders major buy signal, 17 December 2012). In fact, Mr Voss had spent £202,000 increasing his holding from 125,568 shares to over 323,000 shares, the equivalent of 0.9 per cent of the issued share capital, in eight separate transactions. His buy in prices ranged from as low as 90.7p a share and as high as 106p a share. He was not alone either as chairman Mikel Faulkner spent over £52,500 buying shares at the same time at 105p and non-executive David Quint splashed out £13,750 purchasing 12,500 shares at 110p.
Moreover, it was relatively easy to find a major reason why the insiders were bullish: the board had appointed Jefferies International to act as Global Energy's exclusive financial adviser in connection with a "possible farm-out or disposal of a material portion of the company's interest in its Bolivar shale oil properties within the Middle Magdalena Valley in Colombia, South America." It was strategically a sound move because there is increasing interest in shale oil throughout the oil industry and specifically in the northern Middle Magdalena Valley Basin. Nearby activity by major oil companies, including ExxonMobil (NYSE: XOM) and Royal Dutch Shell (LSE: RDSA), indicate the Bolivar properties are within the premier area of the Middle Magdalena Shale Oil play.
So, in order to capitalise on this, Global Energy wants to ramp up production and exploit Bolivar's large reserve base. But to do so it has to boost drilling activity, which will require additional and substantial technical expertise and manpower to undertake the management of this massive shale oil development project. Hence, the appointment of Jefferies to find partners selected to develop its Middle Magdalena shale oil properties. And it was the prospect of positive newsflow on this front emerging in the months ahead which prompted me to recommend buying Global Energy Development’s shares at 103p in mid-December, targeting a rise to 140p on a three-month basis.
Sound fundamentals
It is worth noting that my interest in Global Energy’s shares was based on sound investment analysis, too. For starters, the company's market value of £34.3m equates to a 40 per cent discount to book value of £56.7m, even though net borrowings of $8.16m (£5m) are less than 10 per cent of shareholders' funds. It’s also worth pointing out that the company generates significant profits from its other operations, the majority of which comes from oil production in its contract areas located within the Llanos Basin of Colombia, South America. The plan is to maximise production volumes, reduce operating costs and utilise cash flow to develop projects within the Middle Magdalena Valley contract areas (Bocachico and Bolivar Association Contracts).
Cash generation is robust and analysts at house broker Northland Capital expect Global Energy's cash profits to have held steady at $16.9m (£11.3m) in 2012, before ramping up to $23.5m this year. This looks realistic as following the completion of the workover of the Tilodiran-2 well in the Llanos Basin, the company has completed the conversion of the inactive Rio Verde 2 to a water disposal well. As Global Energy transports and disposes of more than 120,000 barrels of water each month from its Tilodiran field, this disposal well will save an average of $4 per barrel of water on transportation costs per month.
Corporate activity
True, changes in corporate income tax changes in Columbia have muddied the picture and we await an announcement from Global Energy on the implications for the company. The restructuring of $17m of loan notes this week, which have a repayment schedule of $1.5m every quarter until the final payment of $4.5m is made in June 2015, is tempered by the annual interest charge of 12.75 per cent and the 2 per cent refinancing fee. That said, these loan notes are not convertible into shares so there is no dilution to equity shareholders and the cash flow from operations should easily cover these debt payments.
But the key driver to spark a share price rerating to narrow the discount to book value will be a farm-out or disposal to monetise the value of the company’s potentially lucrative Bolivar shale gas acreage in the Middle Magdalena Valley in Colombia. Ahead of news on this front, I am comfortable holding the shares at 96p and, if you followed my advice, the shares are still worth holding given the potential for a sharp rerating on any positive announcement.
■ Finally, I will be taking a four-week break during April to complete a book on 'Stock picking for profit', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 44 online articles, all of which are available on my homepage. These include articles on the following companies this week:
US equity market trade (Profit from St Patrick's Day, 11 March 2013)
