Leading International Investment Research, Edison Investment Research

Edison Investment Research

Leading International Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting.

Equity Bottom-Up

Canacol reported EBITDAX of US$55.2m for Q222, up 24% compared to Q221 due to a 29% increase in natural gas revenues as a result of both increased production and average sales prices. This resulted in strong operating cash flow, with funds from operations up 16% to US$39.1m (Q221: US$33.6m). A non-cash deferred tax expense led to a net loss of US$6.4m for the quarter due to the impact of the weakening Colombian peso on unused tax losses and cost pools. The 2022 drilling programme of up to 12 wells is progressing, with six wells successfully completed to date and the high-impact Pola-1 well to be spudded by year-end. Meanwhile, the new Colombian government is expected to change the country’s energy transition plans, having stood on a platform of ending new oil contracts. Finance Minister José Antonio Ocampo has, however, spoken of the importance of natural gas. In our view, the value of gas as a transition fuel increases with an accelerated shift away from oil and coal.

Canacol reported EBITDAX of US$55.2m for Q222, up 24% compared to Q221 due to a 29% increase in natural gas revenues as a result of both increased production and average sales prices. This resulted in strong operating cash flow, with funds from operations up 16% to US$39.1m (Q221: US$33.6m). A non-cash deferred tax expense led to a net loss of US$6.4m for the quarter due to the impact of the weakening Colombian peso on unused tax losses and cost pools. The 2022 drilling programme of up to 12 wells is progressing, with six wells successfully completed to date and the high-impact Pola-1 well to be spudded by year-end. Meanwhile, the new Colombian government is expected to change the country’s energy transition plans, having stood on a platform of ending new oil contracts. Finance Minister José Antonio Ocampo has, however, spoken of the importance of natural gas. In our view, the value of gas as a transition fuel increases with an accelerated shift away from oil and coal.

Canacol Energy - Q2 results deliver strong operating cash flow

Canacol’s recent independent prospective resources audit has assigned 7.6tcf to the company’s Lower and Middle Magdalena Valley (LMV and MMV) assets, up from 1.7tcf in 2021 and with 6.6tcf sitting in the untapped MMV. This will be key to the company’s success as it looks beyond its core LMV producing area to secure its targeted reserves replacement ratio of 200% per year (on average). The company’s first test of the MMV will be the Pola-1 well spudding in Q322, targeting 470bcf of mean gross risked prospective resources. Success here would be transformational given that Canacol currently holds 607bcf of 2P reserves. We believe the share price does not reflect the exploration upside and value the company at C$6.29/share, more than double the current share price.

Canacol’s recent independent prospective resources audit has assigned 7.6tcf to the company’s Lower and Middle Magdalena Valley (LMV and MMV) assets, up from 1.7tcf in 2021 and with 6.6tcf sitting in the untapped MMV. This will be key to the company’s success as it looks beyond its core LMV producing area to secure its targeted reserves replacement ratio of 200% per year (on average). The company’s first test of the MMV will be the Pola-1 well spudding in Q322, targeting 470bcf of mean gross risked prospective resources. Success here would be transformational given that Canacol currently holds 607bcf of 2P reserves. We believe the share price does not reflect the exploration upside and value the company at C$6.29/share, more than double the current share price.

Canacol Energy - Shift towards high-impact drilling

We have updated our valuation of Canacol Energy to reflect management guidance for 2022 and its preliminary expectations for 2021. Our valuation per share decreases to C$5.69 from C$6.12. Management expects gas sales for 2022 to be between 160mmscfd and 200mmscfd, with the midpoint in line with realised average sales for December 2021 of 183mmscfd. Capex of US$172m to US$209m will cover up to 12 exploration and development wells, three of which will step outside the company’s historical core area, as it targets a reserves replacement ratio of over 200%. Management will also focus on progressing work on the Jobo to Medellin pipeline, which will add 100mmscfd of sales capacity by the end of 2024.

We have updated our valuation of Canacol Energy to reflect management guidance for 2022 and its preliminary expectations for 2021. Our valuation per share decreases to C$5.69 from C$6.12. Management expects gas sales for 2022 to be between 160mmscfd and 200mmscfd, with the midpoint in line with realised average sales for December 2021 of 183mmscfd. Capex of US$172m to US$209m will cover up to 12 exploration and development wells, three of which will step outside the company’s historical core area, as it targets a reserves replacement ratio of over 200%. Management will also focus on progressing work on the Jobo to Medellin pipeline, which will add 100mmscfd of sales capacity by the end of 2024.

Canacol Energy - Canacol maintains drilling pace into 2022

Senior Credit Analyst, Lucror Analytics

Leonard Law, CFA

Senior Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

Recognizing the importance and value-add of Factor Investing in fixed income, Lucror developed the Smart Quant Navigator (SQN), an intuitive platform that helps clients devise and implement factor-based strategies ranging from pure quant to active fundamental, with integrated ESG.

Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Lucror Analytics' ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable). We assess Canacol's ESG as "Adequate", in line with its "Adequate" Environmental and Governance scores. The company has a "Strong" score for the Social pillar. Controversies are "Immaterial" and Disclosure is "Strong".

Lucror Analytics' ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).  We assess Canacol's ESG as "Adequate", in line with its "Adequate" Environmental and Governance scores. The company has a "Strong" score for the Social pillar. Controversies are "Immaterial" and Disclosure is "Strong".  

Canacol Energy’s H121 production averaged 176.3mmscfd, demonstrating its continued resilience as Colombia recovers from COVID-19, and was above the midpoint of management’s full year production guidance of 153–190mmscfd. In August, sales were 186mmscfd. The 2021 drilling programme of up to 12 wells is well underway at an estimated capex of US$98–140m, and has delivered a discovery at Aguas Vivas 1, which encountered the thickest net pay for the company to date. Canacol targets a reserves replacement ratio (RRR) of 200% annually, which we estimate requires an active drilling programme of c 12–16 wells per year over the next five years (assuming a 70% success rate), and discovering gas outside the current core producing acreage. Meanwhile, a new gas pipeline will open up the interior market in Colombia from 2024.

Canacol Energy’s H121 production averaged 176.3mmscfd, demonstrating its continued resilience as Colombia recovers from COVID-19, and was above the midpoint of management’s full year production guidance of 153–190mmscfd. In August, sales were 186mmscfd. The 2021 drilling programme of up to 12 wells is well underway at an estimated capex of US$98–140m, and has delivered a discovery at Aguas Vivas 1, which encountered the thickest net pay for the company to date. Canacol targets a reserves replacement ratio (RRR) of 200% annually, which we estimate requires an active drilling programme of c 12–16 wells per year over the next five years (assuming a 70% success rate), and discovering gas outside the current core producing acreage. Meanwhile, a new gas pipeline will open up the interior market in Colombia from 2024.


Canacol Energy - Shares do not price in exploration upside

Canada

Canacol Energy Limited is an international junior energy company with production and exploration operations located in South America. The Company's operations are focused in Colombia, with operations also in Ecuador.

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Canacol Energy (CNE CN)

Canacol Energy - Q2 results deliver strong operating cash flow

Canacol reported EBITDAX of US$55.2m for Q222, up 24% compared to Q221 due to a 29% increase in natural gas revenues as a result of both increased...

Edison Investment Research

Canacol Energy - Shift towards high-impact drilling

Canacol’s recent independent prospective resources audit has assigned 7.6tcf to the company’s Lower and Middle Magdalena Valley (LMV and MMV)...

Edison Investment Research

Canacol Energy - Canacol maintains drilling pace into 2022

We have updated our valuation of Canacol Energy to reflect management guidance for 2022 and its preliminary expectations for 2021. Our valuation...

Edison Investment Research

Canacol - ESG Report - Lucror Analytics

Lucror Analytics' ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable). We assess Canacol's ESG as...

Lucror Analytics

Canacol Energy - Shares do not price in exploration upside

Canacol Energy’s H121 production averaged 176.3mmscfd, demonstrating its continued resilience as Colombia recovers from COVID-19, and was above the...

Edison Investment Research

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