Frontera Energy - 20% position now

May 25, 2025

Investment Overview

I have made Frontera my second-largest position over the past month. I believe it is completely dislocated from the value of its parts, and we have controlling shareholders in Catalyst Group and Gramercy Capital who are incentivized to unlock that value. The recent drop in crude oil prices has created an even better opportunity.

A Bit of History

Frontera’s predecessor, Pacific Exploration & Production, went bankrupt in 2016 with $5B in debt. Catalyst Capital led the restructuring and became the controlling shareholder. The company had assets in various South American countries, primarily in Colombia, and later embarked on offshore exploration in Guyana through a joint venture with CGX Energy.

The Guyana exploration has been a disaster. Frontera has spent over $200M, and the Guyanese government is now threatening to cancel its license, potentially rendering the investment worthless. This misadventure occurred under Chairman Gabriel de Alba (co-founder of Catalyst), beginning with the initial investment in 2019. The project suffered from cost overruns during the drilling of two exploratory wells and poor data quality. Frontera attempted to farm out the asset but was unsuccessful. Despite this, the block is believed to have value, and the government expects strong interest when it is reoffered.

Frontera’s stock rallied in 2022 on Guyana hopes, reaching C$15, but has since been abandoned by investors despite ongoing free cash flow (FCF) from Colombian E&P operations and its interest in the ODL pipeline.

Ownership and Market Dynamics

Roughly 75% of the 77.5M outstanding shares are controlled by the top five holders. The stock trades an average of 25,000 shares per day. With only 25% of the float truly available, the investable market cap is about $85M at the last close. The Colombian market has fallen out of favor due to the election of a left-wing president, Gustavo Petro, further depressing sentiment.

This environment has enabled accumulation of a meaningful position at attractive levels. Catalyst, whose reputation was hurt by the Guyana failure, is now clearly motivated to monetize its stake.

Catalyst has been conducting share repurchases via substantial issuer bids (SIBs). They completed two tenders last year for 4–5% of outstanding shares at C$12, which function effectively as tax-friendly dividends. A larger tender for 10% of shares was recently announced, also at C$12, when shares have traded below C$5. This represents a C$1.18 dividend or a 25% return of capital. While the normal buyback program is largely ineffective due to poor liquidity, the company appears committed to capital returns under Catalyst/Gramercy control.

Sum-of-the-Parts Valuation

1. ODL Pipeline

Frontera owns 35% of the ODL pipeline, which transports 30% of Colombian production (~235K bpd). Ecopetrol owns the remaining 65%.

ODL generates ~$100M in EBITDA for Frontera. A $220M non-recourse loan was recently raised against this stake, providing $115M in fresh capital, funding both a $65M equity tender and a $65M bond buyback. ODL declared a $152M dividend for 2024, with $53.3M attributable to Frontera, to be used for debt retirement.

Frontera is conducting a $65M bond buyback at par plus a 3-point consent fee. The consent solicitation from bondholders allows the company more flexibility in several areas.

The key area here is the consent from bondholders would allow them to pursue strategic transactions to enhance growth and value. What this means is they will likely pursue some sort of merger/sale of the E&P operations.

2. Colombia/Ecuador E&P Operations

These assets comprise 70% heavy oil and 30% light oil and gas. Frontera purchases light oil as diluent, costing ~$2/bbl. Colombia produces ~775K bpd, with Ecopetrol the largest producer. Mid-tier peers include Parex, GeoPark, Gran Tierra, and SierraCol (owned by Carlyle). Carlyle launched a sales process for SierraCol at $1.5B (~9x 2024 FCF), suggesting high valuations for low-cost assets.

Frontera’s cost profile is more in line with Parex and GeoPark. It partners with Parex at the VIM block and with GeoPark in Ecuador. A merger with either would offer substantial G&A and operational synergies, including diluent savings.

Parex and GeoPark trade at 1.8x–2x EBITDA at $70 Brent. Valuing Frontera’s E&P assets at a conservative $600M + $50M in synergies yields $330M in equity value (after assuming $320M of debt). Including $200M cash on the balance sheet, potential returns could be ~$7.50/share post-tender.

Cash Flow Sensitivity at $65 Brent:

Capex at the low end ($190M)
Pre-tax cash flow: $80M–$115M
After-tax FCF: $55M–$67M

Heavy crude differentials have also narrowed, improving margins.

3. Puerto Bahía

This long-life infrastructure asset is undervalued. Expected EBITDA is $20M–$35M, depending on the timing of Reficar’s connection (Q3 expected). Once fully online, annualized EBITDA should approach $35M–$40M. An LPG project in 2027 could add $5M–$10M.

Frontera is also exploring an LNG terminal, which could cost $500M–$1B. For now, we value this optionality at zero.

Port infrastructure in emerging markets trades at 8x–12x EBITDA. Using 8x $35M = $280M or $4/share.

4. Guyana

Given political uncertainty and licensing risk, I assign zero value to the Guyana asset.

Conclusion

I believe Frontera will monetize its E&P operations via sale or merger, unlocking $7–$8/share in value. The port could later be sold for $4+/share. This would leave the ODL stub, SAARA (water treatment), the palm oil plantation, and potential upside from Guyana.

Even assigning zero value to those other assets, $11–$12 in capital return over the next year seems realistic. The numbers aren't a blue-sky scenario—they're conservative. A deal pause due to oil price volatility and tariff fears may delay transactions, but SierraCol’s eventual sale should provide a useful benchmark.

This all feels too good to be true—and yet, it's hiding in plain sight.

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