BUY /TP:CAD 22.04 per share /COP 44,352 per share May 20, 2014

COVERAGE

Oil and Gas Sector

PACIFIC RUBIALES

Investor Open House 2014 - Pacific Rubiales

On May 15 and 16, 2014 we attended the Pacific Rubiales Investor Open House 2014 and the trip to Rubiales and Puerto Bahía. After hearing from the management new information regarding resources, reserves, costs and production we will work in our numbers to release our coverage update. However, for the moment we would like to share some key points from this visit .

Our initial thoughts regarding the company´s future catalyst remain and we still believe that Pacific Rubiales is one of the most appealing stories in the oil sector in Latin America, with an important track record of delivering sustainable growth. At the same time, the extensive portfolio of reserves and resources will contribute to the company´s further growth.

As a result, the recent sell-off (-18%) since April 17, 2014 maybe somewhat overdone and the main concern of the investors regarding cash flow and EBITDA generation will potentially turnaround in 2Q2014.

For us is more visible now the company´s central strategy for the coming years, which will be directed to the development of its existing assets with the main aim to ramp-up production shortly in its new heavy oil frontier, CPE-6 and Rio Ariri. Furthermore, the exploratory assets held by the company will confer them with a significant upside potential that has not been priced-in. Finally, they are working on the development of a series of initiatives to generate substantial savings to the company´s OPEX and also competitive advantages. These initiatives are: ODL pipeline expansion (to connect CPE-6 field), Bicentenario pipeline, PEL Power Transmission line, Puerto Bahía and OLECAR pipeline.

Production: According to the company´s estimates, 2014´s net production will reach around 165,000 bpd with Rubiales representing 40%. For the coming years, the production will ramp-up to a plateau of 200,000 bpd and Rubiales´ share will be diluted to 30-35% in 2015 and 10%-12% in 2016. The new production will come from Petrominerales, CPE-6, Rio Ariari, Quifa, Sabanero and Peru. This forecast does not consider any upside potential from the exploratory activity. Noteworthy that the current net light oil production of the company (35,000 bpd-40,000 bpd), is positioned among the top oil light producers in Colombia (Canacol: 10,893 bpd, Gran Tierra: 22,183 bpd).

To highlight, our production estimates point to an important ramp-up in Quifa SW and Quifa North as the company initially forecasted. However, after new information from the license delays in Quifa North we will revise down our initial estimates in those fields.

Reserves. For the coming years the company has set an ambitious plan regarding its reserve incorporation. For 2014, they plan to drill 37 exploratory wells, 4 stratigraphic and 14 appraisal, targeting 329.8 million barrels in risked resources (215.5 in Colombia, 26.1 in Peru, 49.2 in Brazil, 27.1 in Guatemala and 11.9 Papua New Guinea), with an estimated addition of 243 million barrels (74% of success). Looking back its historically success rate of 79%, this looks challenging but not impossible.

María Adelaida Velásquez Energy Analyst

mav@serfinco.com.co (574) 4443522 ext 6667

Jose F. Restrepo, CFA Equity Strategist

jr@serfinco.com.co (574) 3106510

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Moreover, the company will target 9 giants opportunities with 18 wells to be drilled and estimated risked net resources of 293 million barrels (Brazil 47%, Peru 20%, Guyana 14%, Colombia and PNG 19%). The total investment will be US$1.06 billion

Infrastructure Investments—Adding additional value to the company´s portfolio. The market has not recognized the hidden value from its infrastructure assets, and therefore the spin-off of those assets arises as the best strategy to get additional resources to fund its expansion and pay some of its debt. According to the company´s estimation, the total value of its Midstream vehicle could be around US$1.2 - US$1.5 billion, and they expect to spin-off between 30% and 40%, while they will retain the capacity rights. As we have stated in our coverage initiation the assets held by this vehicle in the first phase are: ODL (35% W.I.), Bicentenario (43% W.I.) and PEL (100% W.I.). The IFC has presented a non-binding appraisal letter agreement for 35% to 40% of Pacific Midstream (Up to US$400 million), with closing expected in 2H2014. International expansion. Mexico is one of the company´s long term bets and they have possibilities to partnership with Pemex in some fields. On the other hand, Venezuela also looks attractive for the company; however, until the political environment does not improve, the company will not be interested in any relation there. Regarding its international portfolio, the company is targeting for 2014 114.3 million barrels. Moreover, in its 2014-2018 international strategy the company counts with exploration opportunities higher than 500 Mmboe, classified as “giants” (2 prospect in Peru with estimated resources of 223.3 million barrels, 2 leads in Brazil with 452.9 million barrels, 2 leads and 1 prospect in Guyana with 120.1 million barrels and 1 prospect in Papua New Guinea).

Figure 1. Reserve Incorporation (Million BOE)

Source: Pacific Rubiales Investor Open House.

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2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

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1) RUBIALES FIELD TRIP

The company´s ability to develop the necessary facilities to boost its reserves and production shortly has been more than demonstrated in its Rubiales and Quifa fields. Something that we expect to occur in the new company´s heavy oil fields, CPE-6 and Rio Ariari.

Our journey began with a flight over the Rubiales fields, its facilities, the new Rubiales energy substation and the new African Palm plantation as the most remembered locations. Different from our previous visits, this time we had the opportunity to know the Agrocascada project and its location. It is important to point out that this project will have two reserve osmosis plants (500 Mbwpd each plant) and one of them is currently under construction. The company is expecting to plant 5,000ha of African Palm and 1,300ha have already been seeded. With this project, the company will have a sustainable alternative for water disposal and will provide a new source of water resources for agroindustrial projects. Finally, this will provide a lower cost option for incremental water disposal.

One of the main concerns during the trip was the reestablishment of the Rubiales production. According to the company, Rubiales conditions have been reestablished after the dry season ended. Currently the field is producing over the 1Q2014 rates, and close to 194,000—196,000 bpd.

Source: Pacific Rubiales Investor Open House.

Figure 2. CPF-1 Rubiales field Figure 3. Agrocascada facilities at the Rubiales field.

Figure 4. African Palm Crops

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1) PUERTO BAHÍA PROJECT

Description: Located in the Cartagena bay area, Puerto Bahia is a large scale multipurpose port facility developed in a 106ha lot which will have specialized infrastructure for storage and handling of crude oil and derivatives, and for general cargo.

- Liquids operation: Comprises up to 10 tanks of 330k bbl - 5 in the first stage-, a liquid terminal with a jetty for 2 loading positions (one for Aframax vessels and one for Suezmax vessels) with an installed capacity of 150K DWT, and by a truck loading and downloading station (60k bpd capacity). This area should be operational by mid-September 2014 and will be operated by Oiltanking International. Additionally, Puerto Bahia will be connected to the national pipeline network through Olecar pipeline (300k bpd capacity) and to Reficar through a 7km pipeline (100-120k bpd).

- General Cargo Operation: This operation (containers, bulk and general cargo) is being developed in 35ha with 620 meter berth and should start by 2014YE.

Opinion: This project will almost double the country´s oil export capacity and will increase the sector’s competitiveness due to lower storage and handling fees. Also it will reduce the dependence on Coveñas as the only large port for crude export, and will complete the operation with storage and export/import operation with access to the national pipeline network.

As for the equity market the main effects should be 1) Enhanced reliability of the crude and products logistics (less risk) accompanied with the intrinsic cost reduction -benefiting PRE and Ecopetrol mainly- and 2) the future IPO of Puerto Bahia, forecasted to mid-2016, will give access to investors to the oil service sector and unlocking value for Pacific Rubiales' shareholders.

Future restrictions are: Olecar pipeline capacity, possible operational interruptions due to attacks to the national pipeline infrastructure- up/unloading facility partially offset this issue-.

Source: Pacific Rubiales Investor Open House.

Figure 5. Truck Loading Facility Figure 6. Jetty Loading Positions.

Figure 7. Storage Tanks

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Bogotá

Centro de Negocios Andino

Carrera 11 No 82—01. Piso 6

Tel: (571) 6514646

Medellín

San Fernando Plaza—Torre 1

Carrera 43A No 1— 50. Piso 10

Tel: (574) 4443522

Bucaramanga

Metropolitan Bussiness Park

Carrera 29 # 45 - 45 of 910

Tel: (577) 6970367

Cartagena

Torre Empresarial Protección

Carrera 3 No 6A—100 Of. 801

Tel: (575) 6930292

Barranquilla

Centro Empresarial Las Américas

Calle 77B No 57—141.

Tel: (575) 3606030

Cali

Av 9 Norte Calle 13 Norte Esquina

Local 203

Tel: (572) 4858585

The analyst certifies that the opinions expressed in this report accurately reflect his personal opinion about the company of concern. Also, the analyst certifies that he has

not received, is not receiving and will not receive any direct or indirect payment in exchange for expressing a specific recommendation in this report.

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International Equity Trading Desk

Andres Jimenez Juan P. Vieira Andres Gomez

Head of Equity Head of Trading Head of Electronic Trading

aj@serfinco.com.co jv@serfinco.com.co ag@serfinco.com.co

(574) 3106553 (574) 3106515 (574) 3106544

Daniel Marin Andres Upegui Jose F. Restrepo, CFA

Equity Trader FX Trader Equity Strategist

dm@serfinco.com.co au@serfinco.com.co jr@serfinco.com.co

(574) 3106518 (574) 3106587 (574) 3106510

Research Team

Maria Velásquez Rafael España Alejandro Isaza

Energy and Utilities Consumer Services and Holdings Cement and Construction

mv@serfinco.com.co re@serfinco.com.co ai@serfinco.com.co

(574) 4443522 Ext. 6667 (571) 6514646 Ext. 4228 (574) 4443522 Ext. 6642

Nicolas Noreña

Financial Services

nnt@serfinco.com.co

(571) 6514646 Ext. 4225

mailto:au@serfinco.com.comailto:mv@serfinco.com.comailto:re@serfinco.com.comailto:ai@serfinco.com.comailto:nnt@serfinco.com.co