Got Oil? Consider This Under-the-Radar Latin American Oil Play

by David Fessler, Investment U Senior Analyst

Thursday, July 21, 2011: Issue # 1562

This week, I’m in downtown Seattle, at the luxurious Fairmont Olympic Hotel, speaking at a regional meeting where several hundred people are in attendance.

There’s just one problem: The hotel’s internet connection went kaput for an entire day. So much for technology…

If you’re a journalist, it’s an immediate panic situation, since we’re generally writing no matter where we are. My fellow editors and I ended up across the street at Starbucks.

One of my sessions was on natural gas, but something else caught my eye this week. It was a recent report by the Energy Information Administration (EIA) on a Latin American oil-producing country I keep my eye on.

I’m not talking about Brazil and its quasi-state-controlled giant, Petroleo Brasileiro S.A. (NYSE: PBR). Most of you know it as Petrobras. With a market capitalization north of $211 billion, Petrobras is the biggest oil company in Brazil, and the eighth-largest company in the world by market capitalization.

While its long-term growth prospects certainly look bright, Petrobras will be spending huge amounts of capital to get at its oil. Most of it lies hundreds of miles out at sea, and five or six miles down.

Colombia: The Other Latin American Oil Giant

The country I’m talking about is Colombia, a place most Americans associate with the manufacture and export of illegal drugs, not oil.

As you can see from the EIA graph below, Colombian oil output has been steadily on the rise. This past May, Colombia produced an average of 927,000 barrels per day, the highest levels in over a decade.

Colombian Oil Production

In fact, Colombian oil output is steadily increasing, rising over 30 percent from 2005 through the end of 2010.

Why is Colombia oil output going up?

The number one reason is increased security for the country’s pipeline network. The country had only 31 attacks against pipelines in 2010. This compares to hundreds per year back in the early 2000s.

The second reason is perhaps just as important as safer pipelines. Colombia has gone to great lengths to improve the investment climate for outside companies.

It lengthened exploration licenses, lowered royalty rates and increased opportunities for private firms to participate in oil ventures within its borders. Foreign firms may own 100 percent stakes in ventures within its borders, a practice nearly unheard of in South America.

According to figures from the Oil & Gas Journal, Colombia has 1.9 billion barrels of proven reserves of crude. That makes it the fifth-largest producer in South America. That reserve number will likely go up, as additional exploration takes place in licensed areas that were auctioned off last year.

Colombia is a small country, and it only consumed 296,000 barrels per day in 2010, according to the EIA. That meant over half of its production was exported, with about 73 percent of that going to the United States. That additional supply has helped the United States offset declines from Mexico and Venezuela.

Colombia Restarts Oil Industry with Ecopetrol

In an attempt to restart its upstream oil industry, the country has undertaken a partial privatization of its state-owned oil company, Ecopetrol S.A. (NYSE: EC).

With a market cap of $85 billion, it’s the largest company in Colombia, and its principal oil producer. Ecopetrol is one of the world’s top 40 oil producers. It expects oil output to reach 750,000 barrels a day this year, up 22 percent from 2010.

In 2011, Ecopetrol plans to spend $1.3 billion on exploration, consisting of over 40 exploratory wells. It’s shelling out $10.6 billion for a new ultra-modern refinery.

It’s also the lead investor in a new $4.2 billion pipeline project that will connect its oil fields to the Caribbean port at Covenas. Just last month, the bond-rating agency Fitch upgraded both Colombia and Ecopetrol’s debt rating.

The stock traded up about 66 percent last year, but plenty of upside lies ahead, especially with increasing global oil prices and Ecopetrol’s increasing production.

Investors who want additional exposure to the oil sector, and an off-the-radar way to play it, might want to consider adding a few shares of Ecopetrol to their portfolios.

Good investing,

David Fessler