The popularity of exchange-traded funds (ETFs) continues as investors and financial advisors alike become more aware of their benefits.

The unloved junior oil exploration and production (E&P) space offers some compelling opportunities for the selective investor. Latin American play Amerisur Resources (AMER:AIM) is perhaps the most interesting.

The wider E&P sector has been under considerable pressure for at least the last two years - dogged by funding concerns and a lack of the kind of discoveries capable of delivering the step change in value investors expect.

In the past 12 months the FTSE Aim Oil & Gas super sector has declined 20% and in the absence of any material finds, companies which focus on the P in the E&P will continue to get more credit from the market.

That said, the growth potential of Cardiff-headquartered Amerisur is still not fully reflected in its current valuation. At 55.8p the shares trade on 8.7 times house broker Investec’s forecast 2014 earnings per share of 6.4p. These prospective earnings are more than equalled by Investec’s estimated free cashflow (FCF) per share of 7.3p for this year.

Amerisur table

The £592 million cap owes its success to its 100%-owned Platanillo block where it has drilled a number of productive wells in the past three years. It is currently engaged in further drilling to delineate the full extent of the asset and a forthcoming independent audit of its portfolio should shine a light on the ongoing potential of the field. What is already established is Platanillo’s role as a significant producer and the company is becoming increasingly cash generative as output ramps up. The table below shows the historic and forecast progression in FCF.

The 2014 estimate is based on average production of 7,500 barrels of oil equivalent per day (boepd) (broadly in line with current levels) and assumes the company trucks its oil to the domestic market. There could be upside with plans to tap into an Ecuadorian pipeline from the second half of this year. A move which Amerisur says would reduce transportation costs by 85% and could also help output advance above the 10,000 boepd threshold.

The company’s focus is on fully exploiting the potential of its flagship asset but a seismic survey over its Put-12 block in Colombia, which has similar geology to Platanillo and is five times the size, is a likely prelude to a multi-well drilling campaign here later this year. The group also has exploration assets in Paraguay which could be drilled in 2014 and there may be some tangential benefit from President Energy’s (PPC:AIM) three-well campaign in the under explored country which is set to commence in May.

The obvious risk with Amerisur is that its fortunes are heavily tied to a single asset and country. A repeat of the national strikes which hit production last year were a reminder of this fact and similar problems cannot be ruled out in the future. Fortunately the management team has significant in-country experience. Chief executive officer John Wardle has been working in Colombia for the best part of 20 years - initially for BP (BP.) and later for Emerald Energy where he was responsible for the discovery of the Campo Rico and Vigia oil fields. Emerald, which also had assets in Syria, was acquired by Chinese state firm Sinochem for £532.1 million in October 2009.

SHARES SAYS: The consensus view looks spot on given the expected progression in cashflow and undemanding valuation.

BROKER CONSENSUS

Amerisur



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