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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.