We came across a bullish thesis on Gran Tierra Energy Inc. (GTE) on Substack by The Oak Bloke. In this article, we will summarize the bulls’ thesis on GTE. Gran Tierra Energy Inc. (GTE)’s share was trading at $5.15 as of March 18th. GTE’s trailing and forward P/E were 51.50 and 20.28 respectively according to Yahoo Finance.
A large oil and natural gas drilling rig in operation, surrounded by a sprawling desert landscape.
GTE is a compelling investment opportunity, trading at a significant discount to its shareholder equity and net asset value (NAV). With a market capitalization of $170 million and shareholder equity of $413 million—including $103.4 million in cash—GTE appears deeply undervalued at first glance. However, the balance sheet is more complex, with $1.13 billion in assets offset by $720 million in debt, leaving a net equity position of $410 million. What makes this particularly interesting is that this valuation is based solely on its producing, developed, and proven (PDP) reserves, ignoring the upside potential from undeveloped and probable reserves. When factoring in 1P/2P/3P reserves, the NAV could be significantly higher, with an estimated $3.42 billion before tax or $1.83 billion after tax.
GTE operates in three key territories, with production composed of 80% liquids and 20% gas, generating approximately 47,000 barrels of oil equivalent per day (Boepd). The company holds reserves totaling $3.6 billion, which presents years of growth potential and decades of production runway. The strategy is clear: reinvest cash flow into production growth, leveraging current cash flows to drive long-term value. The capital expenditures in 2024 reflect this approach, with $162.6 million spent on acquiring i3 Energy and an additional $234.2 million allocated to property, plant, and equipment (PP&E). Despite these investments, GTE remains highly cash generative, with $239.3 million in net cash from operations, and it added $221.5 million to its cash balance through debt financing. This strong cash flow means that one year of operational cash flow exceeds the company’s entire market capitalization, a striking indicator of undervaluation.
The company has also returned capital to shareholders, repurchasing 500,000 shares in 2024 and 1.7 million shares in 2023, representing 1% and 5% of outstanding shares, respectively. However, the taxation situation is more complex. GTE has an eye-catching tax rate of 106%, dropping to 93% in 2024, which initially seems like an excessive burden. However, upon closer examination, this appears to be a strategic move. In U.S. accounting, book depreciation differs from tax depreciation, allowing companies to accelerate tax deductions and minimize tax payments in early years. This approach helps manage cash flows effectively, reducing tax burdens now with the expectation of lower tax rates in the future. The long-term tax assumption of 33% is highly encouraging and suggests that the current high tax payments are a temporary situation.
GTE’s long-term growth strategy is underpinned by its high-quality assets in Colombia and Ecuador. While Ecuador has already produced 7 billion barrels of oil equivalent (BOE), Colombia, due to years of conflict with FARC, has only produced 0.6 billion BOE. Now that the civil war is over, Colombia presents a vast, underdeveloped opportunity. The geology is contiguous with Ecuador’s, meaning the potential for large-scale production is substantial. GTE has aggressively acquired tenements in these regions, positioning itself for long-term growth. Additionally, its Canadian assets, acquired through i3 Energy, benefit from improving natural gas market conditions. A colder winter in 2024 has rebalanced supply and demand, and the future expansion of liquefied natural gas (LNG) exports will further enhance the economics of Canadian gas production.
Despite the deep discount to NAV and the strong growth narrative, risks remain. The political landscape in Colombia and Ecuador, while more stable than in the past, still carries uncertainty. Additionally, Canada’s energy policies under Prime Minister Trudeau have not been particularly friendly to oil and gas companies, which could pose challenges. However, the company’s multi-jurisdictional presence provides a hedge against regional risks while also offering exposure to multiple high-potential markets.
For investors who previously held i3 Energy shares and now own GTE stock, the strategic direction remains consistent. The company’s focus on developing reserves aligns with the prior i3 Energy strategy, and over time, the expectation is that success will come through the drill bit. Given the substantial discount to NAV, a market rerating would reward shareholders significantly. Commitments to buybacks further enhance shareholder value, making GTE an attractive investment at current levels.
Gran Tierra Energy Inc. (GTE) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 16 hedge fund portfolios held GTE at the end of the fourth quarter which was 11 in the previous quarter. While we acknowledge the risk and potential of GTE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GTE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.