Pay dirt beckons

That's why I have been patiently waiting for the investment I recommended in Global Energy Development (GED: 97p) to come good. It's fair to say that shares in the Aim-traded Latin America-focused petroleum exploration, development and production company have yet to fulfil the promise I envisaged when I highlighted the investment case last year ('Insiders major buy signal', 17 Dec 2012). In fact, the share price has put in a lacklustre performance even though small caps have enjoyed a fantastic rally this year.

Still, there is enough going on in the background, most of which has not been reported, to make me think that patience will shortly be rewarded.

Director buying ahead of a farm-out deal

One of the reasons for the share price underperformance has been delays in Global Energy announcing a farm-out deal on a material portion of the company's interest in its Bolívar shale oil properties, located within the Middle Magdalena Valley in Colombia.

In order to ramp up production and exploit Bolivar's large reserve base, the company needs to significantly increase drilling activity, which will require additional and substantial technical expertise and manpower to manage this massive shale oil development project. Hence, it has been working together with investment bank Jefferies to find a farm-out partner.

The company has also gained additional technical insight and feedback from discussions with several large international petroleum exploration and production companies with regards to its development plan for the Bolívar Contract Area. These insights, along with the June 2013 report from the US Energy Information Agency that described the Magdalena Valley of Colombia as a "world class stacked (vertical) shale oil play", led Global Energy to make a substantial revision in its development plans which should increase the company's recoverable 3P reserves.

Clearly, chairman Michael Faulkner is optimistic of a positive outcome to the talks as he has invested £20,000 of his own money purchasing shares in the company at 100p each late last month. That's hardly the action of an insider expecting bad news.

Managing director Stephen Voss is also optimistic of a farm-out deal being done and notes that "following the completion of our updated Bolívar Development Plan, we have resumed the partnering process, focusing on independent and mid-sized companies with higher flexibility for deal terms". Mr Voss anticipates a successful conclusion of the strategic partnering efforts "in the near future".

And it's not as if there is a lack of cash-rich partners to strke a deal with. I would be astonished if some of the high-quality operators in the area, including oil majors ExxonMobil (NYSE: XOM) and Royal Dutch Shell (LSE: RDSA), are not interested in the Bolívar properties since they are located within the premier area of the Middle Magdalena Shale Oil play.

In my opinion, any disposal or farm-out deal can only highlight the chronic undervaluation of Global Energy's shares and will bring into sharp focus the miserly valuation currently being attributed to the rest of the business, even though these operations are now generating significant profits.

Earnings upgrades

The majority of Global Energy's oil production currently comes from its contract areas located within the Llanos Basin of Colombia, South America. The focus here is on maximising production volumes, reducing operating costs and utilising cash flow to develop projects within the Middle Magdalena Valley contract areas (Bocachico and Bolívar Association Contracts). And that is exactly what the company has been doing as it more than trebled pre-tax profits to $4.1m on revenues of $19.7m in the first half of this year, albeit earnings last year were depressed.

Global Energy's cash flow performance was also notable, as the company generated almost $7m of operating cash flow and ended the six-month period with $11m of net borrowings, down from $11.7m at the start of the year, despite spending $8.15m on capital expenditure.

As a result, analyst Andrew McGeary at broking house Northland Capital has been forced to massively upgrade his forecasts for the financial year to end-December 2013. Northland was previously expecting Global Energy to produce revenues of $45.8m, up from $44m (£29m) in 2012, but in the absence of the issues that dragged down profits in 2012, full-year pre-tax profits were forecast to rise from $2.7m to $6.2m. However, with profits of $4.2m already booked for the first half, Mr McGeary now expects Global Energy to report full-year pre-tax profits of $7.8m, up from $2.7m in 2012, and that's after factoring in a $2.3m hit from the low oil price. In other words, we are nailed on to see a bumper set of full-year results.

Furthermore, Northland's previous underlying EPS forecast of 11.4¢ has shot up to 13.4¢, or 8.4p a share. So, with the shares trading on a bid offer spread of 95p to 97p, the forward PE ratio is only 12. And the earnings multiple drops even further next year as the broking house expects Global Energy's profits to rise to $8.4m in 2014 to produce EPS of 15.8¢, or 10p a share. On that basis, the prospective PE ratio falls to less than 10.

For good measure, the shares are also miserly rated on almost half Northland's risked reserves-based price target of 186p. To put the extent of the undervaluation into some perspective, at the current price, the company is being valued at only £35m or 30 per cent discount to net asset value of £50.7m.

Stakebuilding

If the combination of earnings upgrades, director share-buying and an imminent farm-out deal wasn't compelling enough, I have also noted that major shareholder HKN Inc has just lifted its stake from 34.16 per cent to 34.51 per cent. HKN and parties acting in concert with it are now interested in over 22m of Global shares issued share capital of 36.1m shares, representing over 61 per cent of the shares in issue. I am unable to shed any light on this share transaction, but it is intriguing nonetheless.

In the circumstances, I am very comfortable reiterating my previous buy recommendation on Global Energy's shares and I still believe that a target price of 140p is not only feasible, but is likely to prove very conservative if the right farm-out deal is struck. Please note that around 86 per cent of the company's issued share capital is controlled by the top nine shareholders, so Global Energy's shares can be volatile due to the low free float. I have taken this into account in making this recommendation.

Major shareholders in Global Energy Development

Finally, since the start of last week, I have published 10 other articles on the following 13 companies or trading strategies:

■ Inland ('Property plays with foundations, 7 October 2013)

■ Terrace Hill ('Property plays with foundations, 7 October 2013)

■ Sanderson ('A smart tech share', 9 October 2013)

■ Pure Wafer ('Time to chip in', 10 October 2013)

■ US debt ceiling deadline looms ('Debt ceiling dilemma', 11 October 2013)

■ Air Partner ('Gaining altitude', 14 October 2013)

■ Polo Resources ('Targeting special situations', 14 October 2013)

■ Greenko ('Targeting special situations', 14 October 2013)

■ Randall & Quilter ('Bargain shares flying', 15 October 2013)

■ Oakley Capital Investments ('Bargain shares flying', 15 October 2013)

■ Marwyn Value Investors ('Exploiting an arbitrage opportunity', 16 October 2013).

■ Entertainment One ('Exploiting an arbitrage opportunity', 16 October 2013).

■ NetplayTV ('Punting on new highs', 16 October 2013)

■ Bezant Resources ('Binary bet', 17 October 2013)