Is Oil and Gas Co. Operating in Venezuela 'An Untold Story'?

Reactivation of the pumps at the Venezuelan oil fields that New Stratus Energy Inc. (NSE:TSX.V) holds a stake in are continuing throughout the first quarter, with the goal of producing about 3,500 barrels per day (bbl/d) by the end of the year.

Gross production has been steadily rising from 116 bbl/d in January to 260 bbl/d by March 4, and the company predicts it will hit 1,000 bbl/d by the end of April.

However, after closing at its highest point since 2022 at CA$0.84 on Dec. 27, 2023, the stock has stayed below CA$0.70 since the beginning of February.

Asset manager Chen Lin, author of the What is Chen Buying? What is Chen Selling? newsletter, said he was surprised more investors haven't caught on to New Stratus, one of his top stock picks for 2024.

"It's basically an untold story," Chen told Streetwise Reports. "I don't think the market really understands it. When people see the bigger picture, it should be worth many, many times more."

The Lido-Limon and Oficina fields in Venezuela are assigned to the joint venture Petrolera Vencupet SA, of which GoldPillar International Fund SPC Ltd. holds a 40% stake. New Stratus announced in January it had acquired a 50% indirect interest in GoldPillar, giving it a 20% interest in the oil fields.

Asset manager Chen Lin, author of the What is Chen Buying? What is Chen Selling? newsletter, said he was surprised more investors haven't caught on to New Stratus, one of his top stock picks for 2024.

With a volatile political environment between Venezuela and the United States — the U.S. may soon reimpose sanctions on the country — some investors may worry about the future of such a venture there.

But Chen and other analysts said they would have little consequence for the company's business, as GoldPillar and New Stratus are not based in the U.S. or owned by U.S. subsidiaries, and GoldPillar has marketed Venezuelan crude for years without any sanctions-related issues.

"They can make money regardless of sanctions," Chen said. "Fundamentally, it does not affect their business."

Analyst Malcolm Shaw of Hydra Capital met with New Stratus Chief Executive Officer and Director Jose Francisco Arata at this year's Prospectors and Developers Association of Canada Convention in Toronto. He said the Venezuelan deal is a "good starter kit/trial balloon for NSE and could open up additional potential deals in the country in due course."

"It sounds like NSE expects to add projects in one or two additional jurisdictions in the not-too-distant future and is generally being groomed as 'the next Latin American energy champion,'" he wrote. "Time will tell. At this stage, NSE is lightly followed, so as additional projects come into the company, I think there will be time for the market to warm up to the story."

Sanction Changes Coming?

A license easing sanctions on Venezuela last fall is set to be renewed in April. Some changes are likely, as President Nicolas Maduro's administration has kept a ban on opposition frontrunner Maria Corina Machado running. Fair and free elections were the condition for relaxing the sanctions.

Echelon Capital Markets analyst Adam Gill said NSE, which the firm gave a Buy rating and a CA$1.40 per share target price, has a "high-value level" after the Venezuela deal.

"There are a lot of negative signals recently (from Caracas). And there's no way to sugarcoat that," Geoff Pyatt, the U.S. assistant secretary of state for energy resources, told Reuters. "But we're not giving up, and we've got up until the end of April to see some progress."

In a February 26 research note, Echelon Capital Markets analyst Adam Gill noted that GoldPillar noted that the decision would not directly affect GoldPillar or New Stratus. He said NSE, which the firm gave a Buy rating and a CA$1.40 per share target price, has a "high-value level" after the Venezuela deal.

The Catalyst: Undercapitalized Assets

Gill said it was part of the company's original plan of "gaining exposure in Central and South America, working with NOCs (in this case PDVSA) and bringing its technical capabilities and local relationships to help drive value creation in undercapitalized assets."

"Beyond just getting production revenue, the Company is also going to see procurement revenues for the capital investment required to reactivate the wells, market the crude, and provide PDVSA with a funding facility," he wrote. "This makes a material impact on netbacks, with expected revenue generated from these additional sources coming in at 60% of revenues in 2024."

The country represents stranded oil resources from mismanagement and underinvestment, according to a January 16 note by Cormark Securities analyst Garrett Ursu, who gave New Stratus a Buy rating with a CA$1.50 per share price target.

The company's stock is a relatively low risk from a geological perspective, given the wells have "already shown production," Gill noted

"There are also other revenue streams that lower the risk to commodity exposure near term," he wrote. "While jurisdictional risk is higher given that the assets are in Venezuela, the portfolio is expected to be diversified over time and if the U.S. reimposes sanctions, it should not impact New Stratus/GoldPillar's business. With that, we feel comfortable seeing the stock move higher."

New Stratus also said the TSX Venture Exchange has named it a Top 50 company for 2024 for strong performance on the index in the last year. The recognition is for ten companies from five sectors. New Stratus was listed as No. 2 among the energy companies.

Ownership and Share Structure

According to Reuters, about 2.4% of the company is owned by institutions, 10.8% by strategic entities, and 15.96% by management and insiders.

Top shareholders include the CEO Arata with 4.92%, Chief Geological Officer and Executive Director Marino Ostos with 4.13%, and U.S. Global Investors Inc. with 1.52%.

Its market cap is CA$75 million, with 125 million shares outstanding. It trades in a 52-week range of CA$0.84 and CA$0.21.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of New Stratus Energy Inc.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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