Wealth Finance

When conversation turns to Latin American oil stocks, it’s apt to begin and end with Petrobras ( PBR ) , Brazil’s booming energy giant.

But increasingly, Colombian-focused oil companies like state-controlled Ecopetrol ( EC ) and upstart Canadian outfit Pacific Rubiales Energy, deserve to be part of the discussion. The shares of Ecopetrol have risen about 64% in the past year and Pacific Rubiales’ have doubled, though an analyst says there’s roughly 20% upside still left. Both companies have made dramatic production gains, enjoy good prospects for continued growth in reserves, and have thrived under the improved security climate in Colombia. Backed by billions in U.S. military aid, the country’s military has gained the upper hand against leftist guerrillas who a few years ago were lording it over the same eastern provinces where wildcatters now are drilling for crude.

Bank of America Merrill Lynch analyst Frank McGann recently reiterated a Buy on Ecopetrol, in part because of management strength. “After years of undermanaged assets, they’ve become more aggressive,” says McGann, who has a price target of 50 for the shares, up from last week’s 42.38. An exploration and development company with a market cap one-tenth that of Ecopetrol’s, Pacific Rubiales also is growing quickly under a unique management group. They are mostly former Petroleos de Venezuela executives banished by President Hugo Chavez after the 2002-2003 general strike.

Using knowledge gained in heavy oil fields in Venezuela’s Orinoco Belt, Pacific Rubiales has been the main player in boosting output at Colombia’s eastern plains, or Llanos, region, where oil has the consistency of tar. As operator, it’s developing the Rubiales and Quifa fields there in partnership with Ecopetrol. Combined, the two fields will double their production in 2010 over last year to 200,000 barrels per day and thus account for nearly one-quarter of Colombia’s crude output. Pacific Rubiales is McGann’s top Latin oil stock pick with a target price of 40, versus 32.02 last week.

It’s all quite a turnabout from 2003, when Colombia’s production was plummeting, mainly because the terror sown by the rebels made drilling too risky. Fearing the nation would lose oil self-sufficiency, then-president Alvaro Uribe ordered the privatization of Ecopetrol and began to offer extremely attractive terms to foreign oil explorers.

Seven years later, Colombia’s total annual output is expected to average 800,000 barrels of crude and 1.1 billion cubic feet of gas daily, up 48% and 90%, respectively, from 2003. It ranks 25th among the world’s oil producers, up from 29th in 2005. About 100 exploratory wells will be drilled in Colombia this year, up from only 10 in 2002.

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