CALGARY - Investors bid takeover target Petrolifera Petroleum Ltd. and acquirer Gran Tierra Energy Inc. higher the day after the two Calgary-based South America-focused oil and gas companies announced they would combine.

The all-stock deal, valued at $195 million US, was announced after markets had closed on Monday.

At the close on the Toronto Stock Exchange Tuesday, Gran Tierra was up one cent at $8.30, having recovered throughout the day from an early slide of 26 cents to $8.03.

Petrolifera ended up 21 cents to $1.01 and Calgary-based Connacher Oil and Gas Ltd., which founded Petrolifera and owns 18 per cent, closed ahead eight cents to $1.45.

Petrolifera had been looking for a partner or buyer since last September after it concluded it lacked the capital to develop its holdings in Argentina, Colombia and Peru.

Analysts praised the deal but noted the $1.03 per share deemed price being paid represents a 29 per cent premium over Monday's Petrolifera closing price and the price metrics per flowing barrel and barrel of reserves also appear expensive.

In an interview from a London conference, Shane O'Leary, chief operating officer for Gran Tierra, defended the agreement.

"They've done a good job in assembling attractive assets but unfortunately, as a company, they've been undercapitalized so they haven't been able to properly exploit the assets," he said.

"The opposite is true of Gran Tierra. We've got a very strong balance sheet so we think we can unlock a lot of the value that they have been unable to do."

O'Leary pointed out that Gran Tierra is in the same countries as Petrolifera and it will be able to quickly integrate the two operations.

Alex Klein of Dundee Capital Markets agreed Petrolifera is worth more than its market price.

"Despite the perception that Petrolifera's assets may be of lesser quality, we believe the lack of capital investment has largely contributed to the company's declining production base," he wrote in a note.

"Petrolifera's shareholders should be happy having obtained an offer that represents a 29 per cent premium to yesterday's closing price and GTE shareholders should be comforted by the fact that we calculate the transaction is accretive per share on most measures."

Analyst George Toriola of UBS concurred.

"We like this acquisition and see the deal as accretive to Gran Tierra's 2011 cash flow per share (two per cent), production per share (six per cent) and proved plus probable reserves per share (44 per cent)," he wrote.

Gran Tierra is expected to issue about 19 million shares, giving the Petrolifera shareholders about eight per cent of its equity.

Dick Gusella, chairman of both Petrolifera and Connacher, said the sale was the best outcome of the strategic alternatives process and noted Connacher has agreed to tender its Petrolifera shares.

"We're comfortable with the quality and calibre of the paper we're receiving," he said.

He said the Gran Tierra shares it receives will likely be "monetized" at a future date.

Connacher provides office space and has an administrative services deal with Petrolifera, which has just six employees in Calgary.

In the third quarter of 2010, Petrolifera reported production of 3,564 barrels of oil equivalent per day, about 81 per cent of which was crude oil and natural gas liquids. It has proved plus probable reserves of about 14.3 million boe as of the end of 2009.

Gran Tierra's 2P reserves are expected to increase 41.7 million boe after the deal closes.

Petrolifera owns an interest in three exploration blocks in Colombia, three in Peru and five in Argentina.

dhealing@calgaryherald.com