canacol energy operations update and outlook · 2021. 1. 13. · however, even with existing...
TRANSCRIPT
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13 January 2021 As we look across the E&P investment universe, few companies
potentially offer greater asymmetric risk/reward upside compared with
Canacol. The company is playing into a tightening Colombian gas market,
which should continue to support favourable pricing and longer-term
growth plans. However, even with existing pipeline infrastructure and a
conservative outlook on exploration and appraisal success, our 2P +
risked exploration base case valuation of C$5.87/share represents 59%
upside to the current share price, while the downside is protected through
existing take-or-pay contracts that suggest a low case based on 2021 take-
or-pay contracted capacity (153mmscfd) of C$3.50/share. Under our
current assumptions, which include Canacol’s dividend equivalent to a
5.7% yield, we anticipate planned capex and cash dividends to be covered
by the company’s existing cash and cash generation.
Year-end Revenue*
(US$m) Adj EBITDAX**
(US$m) Cash from
operations (US$m) Net debt***
(US$m) Capex****
(US$m) Yield
(%)
12/18 204.5 138.6 94.0 288.1 (75.5) N/A
12/19 219.5 162.8 108.4 300.3 (84.3) 1.4
12/20e 234.3 195.1 180.1 286.2 (108.0) 5.7
12/21e 228.4 187.2 156.3 307.2 (119.0) 5.7
Note: *Revenue net of transport expense and royalty. **Adjusted EBITDAX is before non-
recurring or non-cash charges and exploration expense. ***Cash and equivalents minus short- and long-term debt. ****Forecasts based on 2P production profile.
Focus on exploration to support RLI
With sufficient gas export capacity now in place to support our base case valuation,
Canacol’s focus is on converting its 4.7tcf of net unrisked prospective resource into
reserves, and in so doing extending the production plateau and supporting a
company target reserve life index (RLI) of eight years. 2021 exploration capex will
be the largest in Canacol’s history.
Exploration programme and dividend fully covered
With our end-FY20 net debt forecast of 1.6x EBITDA, Canacol is positioned to
progress with its 2021 exploration programme in addition to shareholder returns.
Under our base case scenario, the recently announced US$98–140m investment
and the US$28m dividend are covered by existing cash and cash generation for the
coming years. We anticipate that from 2022 free cash flow (FCF) will cover cash
dividends. However, in 2021, the company will have to resort to existing cash.
Valuation: RENAV at C$5.87/share
Our base case valuation stands at C$5.87/share and assumes the world will return
to normal in 2022, with gas sales resuming to pre-COVID-19 levels. With fixed gas
prices for the medium term and 624bcf 2P reserves, the downside exposure to this
valuation is limited to exploration success and decreased gas demand. In a
scenario where exploration adds zero value, core NAV stands at C$3.62/share.
Conversely, utilising existing infrastructure to the maximum suggests an unrisked
upside valuation of C$7.78/share, while the expansion case currently being
progressed could increase the upside valuation to C$9.17/share.
Canacol Energy Operations update and outlook Ready to exploit Colombian tightening gas market
Price C$3.69
Market cap C$666m
C$1.36/US$
Net debt (US$m) at 30 September 2020
329
Shares in issue 180.6m
Free float 67%
Code CNE
Primary exchange TSX
Secondary exchange BVC
Share price performance
% 1m 3m 12m
Abs (9.8) 7.9 (18.0)
Rel (local) (12.0) (0.6) (21.4)
52-week high/low C$4.63 C$2.82
Business description
Canacol Energy is a natural gas exploration and
production company primarily focused on
Colombia.
Next events
2020 drill programme Ongoing
Analysts
Ian McLelland +44 (0)20 3077 5756
Elaine Reynolds +44 (0)20 3077 5713
Edison profile page
Oil & gas
Canacol Energy is a research
client of Edison Investment
Research Limited
https://www.edisongroup.com/company/canacol-energy/2380/
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Canacol Energy | 13 January 2021 2
Investment summary
Supporting Colombia gas market as national supply diminishes
Canacol offers investors a pure play on the Colombian natural gas market, a market expected to
move into gas deficit in 2024 in the absence of LNG imports. Canacol is a key component of
national demand, currently holding a c 20% market share. High exploration and appraisal success
rates (historically above 80%) and c 4.7tcf of unrisked prospective resource should enable RLI
expansion. Low well costs at less than US$5m, excellent reservoir quality and high unconstrained
flow rates combined with largely fixed gas pricing (we estimate a realised price post-transport of
US$4.39/mcf for FY21) contribute to a company that has material FCF generation potential after
investment in new well inventory and shareholder returns.
Valuation: Prospective value in addition to 2P reserves
Canacol currently trades at a c 31% discount to our 2P NAV, with the market only ascribing full
value to its 2P reserves but not to the risked prospective resource. Our risked NAV of C$5.87/share
(C$6.57/share using a 10% WACC relative to our base case 12.5%) includes an estimated five-
year exploration drilling programme with 800bcf unrisked prospective resource and assumes a
post-3D commercial success rate of 45%. We also look at valuation scenarios based on a
sustained 235mmscfd and 345mmscfd plateau, which stand at C$7.78/share and C$9.17/share
respectively. Since January 2020, Canacol’s share price has decreased by c 13%, while its peer
group of North American E&Ps with South American operations has declined by 52%. We believe
Canacol’s outperformance relative to its peers is due to its limited exposure to downside and
current commodity price volatility, its low levels of debt and high netbacks.
Financials: Fixed-price gas contracts provide visibility of FCF
Canacol sells c 80% of its gas based on fixed-price contracts, with realisations forecast to average
c US$4.50/mcf post-transport in FY20. This leads to an Edison estimated EBITDAX of c US$195m
for the year. After maintenance capital required to replenish and grow Canacol’s reserve base and
shareholder returns in line with the new policy of a quarterly dividend of US$7m, we believe
management will direct capital to growth opportunities through the drill bit and debt reduction.
Under our base case scenario, we estimate that Canacol will have enough cash to cover 2021
planned activities and the drilling programme, as wells as to reduce its debt by US$12m and pay a
yearly dividend of US$28m. However, the dividend would not be fully covered by FCF in 2021, with
Canacol having to resort to its existing cash. For the future years, once natural gas demand returns
to pre-COVID levels, we estimate the dividend to be fully covered by FCF. Canacol expects a
decrease in net debt/EBTIDA in the coming years. We estimate FY21 net debt/EBITDA at 1.7x, in
line with company expectations.
Risks and sensitivities
We see the key risk as infrastructure access. Canacol is reliant on Promigas pipeline infrastructure
to transport its gas to end-users. While an unforeseeable event limiting gas transport capacity
would have a material impact on cash flows, this is mitigated by the fact that pipeline availability has
been in excess of 95% since operations began and through comprehensive business insurance.
Other key risks include Colombian geopolitical risk and exploration success rates. A minor valuation
uncertainty includes unit operating expense. In the short term, rising production over a
predominantly fixed cost base should ensure unit opex falls. This is likely to be offset by higher unit
royalty rates as production shifts to higher royalty paying licences such as VIM-5.
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Canacol Energy | 13 January 2021 3
Colombia proving to be a resilient economy
According to the World Bank, Colombia’s economy is the fourth largest in Latin America, as
measured by gross domestic product, behind Brazil, Mexico and Argentina. The country has
experienced unprecedented growth over the last decade. Petroleum is Colombia's main export,
accounting for more than 45% of its exports. Industries like shipbuilding, electronics, automobile,
tourism, construction and mining have grown dramatically over the past 20 years. However, most of
Colombia's exports are still commodity based.
Foreign investment in Colombia has become a major catalyst for its economic development. In
2019, foreign direct investment inflows increased by 26% to US$14bn, with c 32% invested in the
oil and mining industries, while 21% was allocated to financial and professional services and 11% to
manufacturing. 2020 was expected to be a turning point for the oil industry, with an increase in
investment of more than 20%. However, this target is now unlikely to be met, given the current oil
price as a consequence of the impact of COVID-19 on demand. Nonetheless, the Colombian
government remains committed to the continuing development of private enterprises.
COVID-19 has triggered the deepest global recession in decades and the outcome remains
uncertain. The World Bank’s June 2020 forecast envisions a 5.2% contraction in the global
economy in 2020 and estimated that economic activity in Latin America will plunge by 7.2% in 2020
as commodity prices deteriorate, with all economies contracting with the exception of Guyana,
where the offshore oil industry is developing rapidly. Colombia’s economy is expected to contract
less than its neighbours at -4.9%. The Colombian government announced a sizeable fiscal package
of c US$3.7bn to provide additional resources for the health system, and subsequently provided
fiscal support to businesses, including the deferral of tax collection in selected sectors, lower tariffs
for strategic health imports, and special lines of credit and loan guarantees for firms in selected
sectors or those that have been severely affected by the crisis.
Colombia has a track record of prudent macroeconomic and fiscal management, evidenced by
uninterrupted economic growth since 2000. The country’s economy is proving resilient even during
the pandemic and government policies continue to emphasise the development of private
businesses and the implementation of best economic and social practices to attract overseas
investment in Colombia. This made it possible for the country to join the Organisation for Economic
Co-operation and Development (OECD) in April 2020. Prior to the pandemic, Colombia’s progress
made in competitiveness and fiscal policies, led to it attaining investment-grade ratings from
Standard & Poor’s, Moody's and Fitch.
Exhibit 1: Colombia’s GDP since 2020 Exhibit 2: Year-on-year GDP percent change
Source: World Bank, Edison Investment Research Source: World Bank, Edison Investment Research
The World Bank expects a rebound in Colombia’s economy in 2021–22, provided the pandemic is
short-lived. The low interest rate environment, facilitated by the central bank, is expected to boost
0
200
400
600
800
1,000
US
$bn
2.53.3
-4.9
3.6
-8.0
-4.0
0.0
4.0
8.0
2018 2019e 2020e 2021e
% c
hang
e fr
om p
revi
ous
year
World Latin America and the Caribbean Colombia
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Canacol Energy | 13 January 2021 4
growth in private consumption to the extent that COVID-19 containment measures can be eased. It
is also expected to facilitate a gradual rebound in investment as major infrastructure projects
resume.
Natural gas as part of Colombia’s energy transition strategy
Historically, Colombia’s energy mix has been dominated by coal and oil, with a combined share of
c 75%, with the balance coming from hydroelectricity, natural gas and non-conventional sources of
renewable energy such as biofuels and firewood. However, the country has been working to
establish a modern regulatory, institutional and market framework to diversify its energy matrix. The
president of the oil and gas regulatory agency, Agencia Nacional de Hidrocarburos (ANH), Armando
Zamora, believes natural gas has a key role to play in Colombia’s energy security and in its energy
transition, as the country aspires to reduce emissions by 20–30% by 2030, with natural gas
contributing c 20% to the energy mix by 2050 under Unidad de Planeación Minero Energética’s
(UPME) ‘Nuevas Apuestas’ scenario. The scenario is in line with Paris Agreement targets.
In 2020, Colombia registered substantial progress in energy transition, ranking 25th (34th in 2019)
among a total of 115 countries, according to the Energy Transition Index carried out by the World
Economic Forum. The Energy Transition Index also highlights that Colombia is classified as being
one of the leading countries as it has a well-functioning energy system and high preparedness for
transition, the two main components that the measurement evaluates.
Exhibit 3: Colombia energy mix
Source: IEA, Edison Investment Research
Over the past decade, Colombia produced c 1,000mmscfd, with maximum production registered in
August 2013 at c 1,200mmscfd. In 2016 and 2017, gas consumption was reduced due to higher
hydrological inputs to the national electricity system, but picked up again in 2018.
Colombia’s natural gas production used to be mainly located in the Caribbean coast from La
Guajira. However, these fields have been diminishing their contributions. As can be seen in Exhibit
4 below, the fields of Los Llanos and Valle Inferior del Magdalena (VIM), where Canacol’s fields are
located, have been increasing their contributions in recent years, while those of La Guajira are
gradually declining.
0
10,000
20,000
30,000
40,000
50,000
2010 2011 2012 2013 2014 2015 2016 2017 2018
ktoe
Coal Hydro Biofuels and waste Oil Natural gas
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Canacol Energy | 13 January 2021 5
Exhibit 4: Evolution of the national natural gas supply in recent years by basin
Source: UPME, Edison Investment Research
According to the most recent reserves information provided by the ANH, as of 31 December 2019
Colombia’s natural gas 2P reserves stood at 3.8tcf. Reserves have been gradually decreasing
since 2012 and the ANH estimated a reserve life index for the country of 9.6 years from the end of
2019 (on a 2P basis). Around 60% of these reserves are located in the Llanos Orientales basin,
followed by VIM and La Guajira.
Exhibit 5: Colombia 1P and 2P reserves Exhibit 6: Colombia year-end 2018 reserves per basin
Source: UPME, Edison Investment Research Source: UPME, Edison Investment Research
Natural gas demand steadily increasing
Colombia’s electric energy mix is made up of hydrogeneration (c 77%) and thermos-generation
plants, with the system heavily reliant on rainfall for electricity generation. Hence, natural gas
demand in Colombia is directly affected by natural phenomena such as El Niño. El Niño refers to
atmospheric events related to the warming of the sea in the central-eastern area of the Pacific
Ocean. During an El Niño event, the surface waters in the central and eastern Pacific Ocean
become significantly warmer and the usually dry regions of Peru, Chile, Mexico and the south-
western US experience rain and snow. However, the wetter regions of the Brazilian Amazon,
Colombia and the north-eastern US plunge into months of long droughts. The 2015–16 drought led
to rainfall dropping by 40% in Colombia, leading to severe hydrological drought, which persisted
until March 2016. Climatic variabilities determine the reliability of the national supply of electricity
and, consequently, of the demand for natural gas. Because Colombia’s natural gas demand can be
sensitive to El Niño, ANH takes this into consideration and fluctuations can be observed in its
forecasts.
0
200
400
600
800
1,000
1,200
1,400
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
mm
cfd
Cordillera Oriental Guajira Llanos Orientales
Valle Inferior del Magdalena Valle Medio del Magdalena Valle Superior del Magdalena
Importado
5.6
5.0 4.8 4.7 4.63.8
0.0
2.0
4.0
6.0
8.0
2014 2015 2016 2017 2018 2019
tcf
1P 2P
2.6
0.70.6
0.3 0.30.1
0.0
1.0
2.0
3.0
Llanosorientales
VIM GuajiraOffshore
VMM CordilleraOriental
Others
tcf
1P 2P
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Canacol Energy | 13 January 2021 6
Exhibit 7: Colombia natural gas demand
Source: UPME, Edison Investment Research
We highlight that Exhibit 7 above was based on estimated demand prior to COVID-19 and the
pandemic impacts on natural gas consumption. Based on what we observed in 2020, in the event
the pandemic persists, a decrease in demand is expected in the near term as countries’ economic
activity remains constricted by lockdowns.
Colombia moving towards deficit in natural gas supply
The supply-demand balance of natural gas in the medium term prepared by ANH points to a
national level deficit of natural gas in 2024.
Exhibit 8 below presents production in 2019–25e and the country’s projection of demand as
published by the Ministry of Mines and Energy. In this scenario, the country could move into deficit
from 2024, although these forecasts and the timing of the expected deficit are subject to variations
from unpredictable events, such as El Niño.
Exhibit 8: Colombia’s natural gas supply and demand
Source: UPME, Edison Investment Research
In its efforts to avoid what could be an imminent gas deficit crisis, the Colombian government has
been studying a range of solutions, with LNG imports at the top of the list. The government
commissioned its first LNG terminal on its Caribbean coast in December 2016. This is a floating
storage and regasification unit (FSRU) located in Baru, and the government is now studying the
option for a second facility in the Pacific. This would provide flexibility of import sources (eg cargoes
from the US can serve the Caribbean terminal while a Pacific coast terminal could, for example,
receive cargoes from Peru). On 30 June 2020, UPME relaunched a bidding process to design,
construct and operate a new LNG facility and a pipeline in Buenaventura, on the Colombian Pacific
Coast. However, imported natural gas comes at a cost, traditionally indexed to US Henry Hub
pricing. We estimate that a landed cost of US$5.0–6.0/mcf at Cartagena based on a Henry Hub
0
400
800
1,200
1,600
mm
scfd
Residential Industrial Services CNG Transportation Oil industry CCGT
El NiñoEl Niño
0
400
800
1,200
1,600
Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25
mm
scfd
Supply Demand Canacol
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Canacol Energy | 13 January 2021 7
price of US$3.00/mcf would be achievable, for example if we were to adjust Japan spot LNG prices
for transport from the US to Colombia (rather than Japan).
Exhibit 9: LNG pricing versus Canacol realised price post transport
Source: Edison Investment Research. Note: *Adjusted for shipping costs to Colombia rather than Japan.
In Exhibit 9, we can observe that in 2020 LNG prices were depressed globally and were lower than
Canacol realised prices. However, this reflected the oversupply of LNG when most economies were
in lockdown due to COVID-19. Henry Hub and LNG prices have since recovered to pre-pandemic
levels, helped by some bounce back from the pandemic and also by seasonal winter demand.
Higher LNG prices are expected in the future as a normalisation of demand from LNG offtakers is
observed and production of US-associated natural gas declines with lower oil production, resulting
in higher Henry Hub gas prices.
Canacol sells gas under fixed-price gas contracts, from one to 10 years duration with long-term
contracts typically of five- to 10-year duration, including inflation clauses. Based on current
contracted volumes, our forecasts for average realisations (post-transport) are shown in Exhibit 10
below. These are based on company guidance and as provided in Canacol’s last published reserve
report. This forms the basis of our medium-term price forecasts for Canacol, beyond which we use
US$5.50/mcf and 2.5% inflation.
Exhibit 10: Canacol contracted gas prices – FY19 reserve report
Five-year gas price forecast 2020 2021 2022 2023 2024
Canacol 2019 reserve report (US$/mmBtu) 5.38 5.56 5.84 6.16 7.59
Edison forecasts (US$/mcf) 4.50 4.39 4.61 4.73 4.85
Source: Canacol Energy, Edison Investment Research
Colombia’s largest independent natural gas producer
Canacol Energy was launched as a private company in February 2008, initially involved in the
exploration of oil assets onshore Colombia with the Capella field discovery and acquisition of the
Rancho Hermoso Field in the Llanos basin. The acquisition of Shona Energy in December 2012
provided a gas leg to Canacol, leading to a series of successful gas discoveries in the Lower
Magdalena, Colombia. Continued consolidation of gas assets, exploration success and licence
awards enabled Canacol to amass a leading onshore position in the basin, making the company a
key supplier of gas along the Caribbean coast. Canacol’s year-end 2019 2P reserve base of 624bcf
equates to an RLI of 8.0 years based on gas sales of 215mmscfd (current installed export
capacity). While current contracts are typically five to 10 years in duration and underpinned by
existing reserves, Canacol is looking to add to its reserve base to provide the basis for expanding
production capacity and extending existing gas contracts.
0.00
2.50
5.00
7.50
10.00
12.50
Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019 Jan 2020
US
$/m
cf
Henry Hub JLNG spot JLNG adjusted* Canacol GSA
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Canacol Energy | 13 January 2021 8
Exhibit 11: Canacol 2P gas reserve growth (bcf)
Source: Edison Investment Research, Canacol Energy
Positioned for growth
Canacol holds a large resource base covering eight blocks and 1.4m acres and has consistently
used best-in-class technology to de-risk its resource potential. The company holds gross unrisked
mean prospective resources of 4.7tcf (independently assessed in an audit carried out by Gaffney,
Cline & Associates (GCA) in 2020), and has set itself a target of maintaining its 2P reserves life for
more than eight years and to have at least a 200% reserve replacement ratio. To achieve this, the
company has a conveyor belt strategy to steadily drill 162 individual prospects and leads to convert
resources to reserves. This strategy is driven by an exploration and appraisal drilling success rate
of more than 80%, which is underpinned by Canacol’s use of Amplitude Versus Offset (AVO)
analysis of 3D seismic data.
Exhibit 12: Canacol acreage
Source: Canacol Energy
In late 2019, Canacol expanded its existing acreage in the Lower Magdalena Valley with the award
of the conventional exploration contract VIM-33, while also establishing a new core area in the
Middle Magdalena valley with the award of two blocks, VMM-45 and VMM-49. All the blocks were
awarded at a 100% operated interest and have increased the company’s acreage by 29% to 1.4m
net acres. The extension into the Middle Magdalena Valley will allow Canacol to continue
372411
505559
624
0
200
400
600
800
Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019
bcf
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Canacol Energy | 13 January 2021 9
successfully exploring to replace declining production from the mature fields of the Llanos basin.
The GCA audit included the prospective resources across these new blocks.
VIM-33 sits more than 100km to the east of the company’s current producing area. It covers an
area of 155,310 acres and will require the acquisition of 62km2 of 3D seismic and one exploration
well during the three-year Phase 1 of the contract. VMM-45 covers 12,442 acres and requires
geological studies to be carried out and one exploration well, while VMM-49 requires the acquisition
of 200km2 of 3D seismic and three exploration wells.
2020 drilling programme continuing successfully into 2021
Canacol started 2020 aiming to drill 12 wells. However, with COVID-19 restrictions this was paired
back to eight wells, as shown in Exhibit 13. Six of these wells were drilled with two being carried
over into 2021, namely Siku-1 and Flauta-1.
Exhibit 13: 2020 wells
Well Well-type
Rig Pioneer 53
Nelson-14* Development
Clarinete-5* Development
Pandereta-8* Development
Pandereta-4* Appraisal
Siku-1** Exploration
Rig Pioneer 302
Porro Norte-1* Exploration
Fresa-1* Exploration
Flauta-1** Exploration
Source: Canacol Energy. Note: *Wells drilled/underway. **To be drilled in 2021.
The Nelson-14 and Clarinete-5 2020 development wells were completed and tied into production
and, after a delay due to the COVID-19 outbreak, the Pandereta-8 development well was tied into
the manifold, ready for production, having tested at a final rate of 15.3mmscfd. The first exploration
well in the 2020 programme, Porro Norte-1, is currently suspended, waiting to be tested.
Pandereta-4 and Fresa-1 were drilled in late 2020, and Canacol has yet to report on the results of
both these wells.
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Canacol Energy | 13 January 2021 10
Exhibit 14: 2020 drilling locations
Source: Canacol Energy
The first exploration well of the 2020 programme, Porro Norte-1, was spudded in July 2020 by the
Pioneer 302 rig and reached total depth (TD) of 11,810 ft in August. The well sits in the north of
VIM-5, away from the core gas field area, and was targeting multiple stacked targets in a four-way
anticline structure. The well encountered 24ft of potential gas pay within the Cicuco limestone of the
Cienaga de Oro (CDO), a new play type on the VIM-5 block. The well was suspended and will be
tested with a workover rig at a future date.
Exhibit 15: Porro Norte-1 map Exhibit 16: Porro Norte-1 seismic cross section
Source: Canacol Energy Source: Canacol Energy
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Canacol Energy | 13 January 2021 11
The Pioneer 53 was mobilised to drill the Pandereta-4 appraisal well in late October 2020 and was
designed to target the western extension of the CDO in the Pandereta field. The well targeted CDO
sandstones in a fault-dependant closure down dip and 500m laterally displaced from Pandereta-1,
and investigated a significant gas show related to the fractured basement in Pandereta-1.
Exhibit 17: Pandereta-4 depth structure Exhibit 18: Pandereta-4 seismic cross section
Source: Canacol Energy Source: Canacol Energy
Fresa-1 was also drilling in October 2020. Located in VIM-21, the well was testing a fault dependent
closure c 1.2km south of the Arianna field and close to the company’s Jobo facility.
Exhibit 19: Fresa-1 fluid factor extraction with intra CDO depth contours
Exhibit 20: Fresa-1 seismic cross-section
Source: Canacol Energy Source: Canacol Energy
Five wells carried into 2021
In December 2020, Canacol announced its capital guidance for 2021, which included the planned
wells for the year (Exhibit 21).
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Canacol Energy | 13 January 2021 12
Exhibit 21: 2021 planned wells
Block Well Well-type
Esperanza
Milano-1 Exploration
Fragata-1 Exploration
Canahuate-4 Development
Nelson-9 Development
VIM-21 Aguas Vivas-1 Exploration
Cornamusa-1 Exploration
VIM-5
Saxofon-1 Exploration
Corneta-1 Exploration
Pifano-1 Exploration
Siku-1 Exploration
Flauta-1 Exploration
Oboe-2 Development
Source: Canacol Energy
Canacol plans to drill 12 wells in 2021, the bulk of which will be exploration, with nine exploration
wells and three development wells. Five wells in the programme will be carried over from the
original 2020 programme as a result of COVID-19 related operational delays: Milano-1,
Cornamusa-1, Oboe-2, Flauta-1 and Saxofon-1, while Siku-1 was added to the programme in
September 2020 and has also been shifted into 2021. The company estimates that this programme
will cost c US$66m. A further US$23.5m has been identified for the testing and tie-in of successful
exploration wells.
Canacol also plans to carry out two large 3D seismic programmes to identify and delineate gas
prospects for future exploration drilling. The Redoblante survey will acquire 469km2 across the VIM-
5 exploration block, and the Mayupa survey will acquire 186km2 across the SSJN-7 exploration
block.
The first wells to be drilled in the 2021 programme will be Flauta-1 and Oboe-2. The 302 rig is
currently mobilising to VIM-5 to drill the Flauta-1 well, which is an analogue of Clarinete-1 and will
target potentially stacked charged CDO sandstones in a three-way fault-dependent closure.
Exhibit 22: Flauta-1 fluid factor extraction superimposed with Upper CDO depth contours
Source: Canacol Energy
Meanwhile, the Pioneer 53 is currently mobilising to the Oboe-2 development well. Both Flauta-1
and Oboe-2 are expected to spud in the third week of January. The company intends to keep the
Pioneer 53 and 302 rigs under contract throughout 2021 in order to deliver the 2021 programme.
Siku-1 will target the CDO in an undrilled fault north of the Clarinete field and east of the Oboe field.
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Canacol Energy | 13 January 2021 13
Exhibit 23: Siku-1 fluid factor extraction at Lower Attic Exhibit 24: Siku-1 seismic cross-section
Source: Canacol Energy Source: Canacol Energy
Management
Charle Gamba – president & CEO: Mr Gamba founded Canacol Energy in 2008. He has held a
variety of technical and management roles with major and mid-sized international oil companies,
with the majority of his professional career focused on E&P in South America. Prior to creating
Canacol, Mr Gamba was vice president of exploration for Occidental Oil & Gas based in Bogota,
Colombia. In his eight years with Occidental, he lived and worked in Ecuador, Qatar, Colombia and
the US, working in a variety of technical and management roles. He has also worked for Alberta
Energy Company in Argentina and Ecuador, and for Canadian Occidental in Australia, Canada, and
Indonesia. He started his career as a geologist with Imperial Oil in Calgary, and holds an MSc and
PhD in geology.
Jason Bednar – CFO: Mr Bednar is a chartered accountant with more than 18 years of direct
professional experience in the financial and regulatory management of oil and gas companies listed
on the Toronto Stock Exchange, TSX Venture Exchange and the US Stock Exchange. He has been
the CFO of several international oil and gas exploration companies, most notably the founding chief
financial officer of Pan Orient Energy Corp, a South-East Asian exploration company which, during
his tenure, grew organically to operate 15,000bbl/d and reached a market cap of C$700m. He has
previously sat on the board of directors of several internationally focused E&P companies, including
as past chairman of Gallic Energy. Mr Bednar began his career in the chartered accountancy firm of
Brown Smith Owen in 1993 before moving into financial controller roles at oil production
companies. He holds a Bachelor of Commerce degree from the University of Saskatchewan.
Ravi Sharma – COO: Mr Sharma joined Canacol in October 2015. He is a reservoir engineer with
30 years of oil and natural gas experience in the Americas, Middle East, Russia, Australasia and
Africa. He has held progressively senior management roles at major E&P companies worldwide,
most recently head of production & operations with Afren where he was responsible for production,
development and operations activities in West Africa. Prior to this, he was global petroleum
engineering manager for BHP Billiton Petroleum. Mr Sharma also held the position of worldwide
chief reservoir engineer for Occidental Oil & Gas. He holds a BSc and MSc in mechanical
engineering from the University of Alberta.
Mark Teare – SVP exploration: Mr Teare joined Canacol Energy in early 2009. Previously, he was
at AEC International and EnCana where he held a series of senior management positions in
Ecuador and Brazil. Over his 30-year career, he has had extensive experience with a number of
-
Canacol Energy | 13 January 2021 14
senior international Canadian energy companies operating in North America, South America and
Australasia. He holds an MSc in geology.
Sensitivities
Generic sector risks are as follows:
◼ Commodity price: as with all companies operating in the upstream oil and gas sector, returns
are driven by underlying commodity prices. Canacol is not immune, with the bulk of the
company’s gas sales leveraged to contracted gas prices. Over 80% of gas is currently
contracted, with average pricing after transport of c US$4.50/mcf.
◼ Supply chain: upstream project returns are driven by a combination of commodity price, project
operating and capital costs and fiscal regimes. An important consideration is the availability and
cost of equipment and personnel.
◼ Political: risks are largely specific to the country of operation. The Colombian oil industry
continues to be affected by pipeline attacks, with reports suggesting that 71 attacks occurred
on oil pipelines in 2019. The 770km Caño Limon is a top target for bombings and has suffered
several attacks this year, according to Ecopetrol. In most instances, operators find alternative
routes for production and exports. Gas pipeline attacks appear to be far less common, and
Canacol has not experienced any outages due to such events.
Company-specific risks are as follows:
◼ Fiscal/country risk: Canacol’s operations are geographically concentrated. On a standalone
basis, the company is exposed to changes in fiscal terms and perceived country risk. Fiscal
terms are viewed as compelling relative to other comparable jurisdictions, with low royalty rates
and tax offsets.
◼ Geological: Canacol is focused on a proven basin with proven play types and high historical
exploration and appraisal success rates across its core area (VIM-21, VIM-5, Esperanza and
SSJN-7, VIM-19, VIM-33). Geological risk is typical of an exploration-biased independent E&P,
but reduced through the company’s historical success and ability to tie AVO anomalies to gas-
bearing sands.
◼ Financial: Canacol is well financed with Edison-estimated net debt of US$287m at end FY20 and
net debt/EBITDA of 1.6x. Forecast net debt is expected to fall as the company generates FCF
from higher gas sales. Fitch rates Canacol’s senior secured bonds at BB- and Moody’s at B1.
◼ Major shareholders: Cavengas has a c 18.1% stake in Canacol Energy, which is represented
by two board seats. Canacol sees Cavengas as a long-term shareholder with which it has a
close working relationship. The second major shareholder of Canacol is Fourth Sail Capital with
c 16.6% participation.
Valuation
In this section, we look at three DCF-based valuation scenarios. Our 2P valuation incorporates
discounted cash flows reflecting the monetisation of Canacol’s existing reserve base, adjusting for
overheads, net debt and decommissioning provisions, to arrive at a NAV. We also look at two
additional valuation scenarios that include incremental reserves over and above 2P. Here we
include ‘maintenance’ capex (largely 3D seismic, exploration and development wells and tie-in
costs) required to add reserves to sustain the production plateau. Canacol guides 2021 production
at 153–190mmscfd, with the low end of the range accounting for FY21 take-or-pay contracted
capacity and the high end of the range assuming that interruptible gas sales improve as natural gas
demand recovers from the impacts of COVID-19. We estimate FY21 gas sales at 171.5mmscfd.
-
Canacol Energy | 13 January 2021 15
Canacol also provided guidance for its 2021 investment programme ranging from US$98m to
US$140m, dependent on how demand for gas materialises during the year. We estimate FY21
capex at US$119m.
Our DCFs utilise a standardised discount rate of 12.5%, but we provide sensitivities to this key
assumption later in this note. Key inputs for our valuation scenarios are shown in the table below.
Exhibit 25: Valuation scenarios and inputs
2P base case
235mmscfd sustained plateau
345mmscfd sustained plateau
Plateau production* (mmscfd) 235 235 345
Gas monetised (bcf) 624** 1,829 1,882
Additional gas recovered above 2P (bcf) 0 1,205 1,258
Life of field average opex (US$/mcf) (0.28) (0.32) (0.32)
Life of field average capex (US$/mcf) (1.18) (0.86) (0.88)
Realised price post-transportation 2021*** (US$/mcf) 4.39 4.39 4.39
Source: Edison Investment Research. Note: *Production profiles provided later in this report. **2P of 624bcf at year-end 2019. ***Realised price post-transport for fixed-price contracts at US$4.50/mcf FY21. Prices escalated by 2.5% thereafter.
Exhibit 26 below shows our estimates of NAV per share, at varying scenarios, compared with the
current share price. We include an additional scenario (risked exploration NAV) that adds the
estimated value of risked prospective resource (800bcf risked at 45% commercial chance of
success) to our 2P base case. 800bcf broadly equates to a five-year programme of around eight
wells per year, with an average target size of 20bcf. We assume a 45% chance of commercial
success. The market appears to be undervaluing Canacol’s 2P reserve base and its prospective
resource, despite historically high exploration and appraisal (E&A) success rates, currently at 84%.
Exhibit 26: Edison valuation scenarios versus share price (base case at 12.5% WACC)
Source: Edison Investment Research. Note: Priced at 18 December 2020.
Base case: 2P valuation plus risked prospective resource
In our 2P valuation case, we use reported year-end 2019 reserves of 624bcf. Our 2P valuation
assumes a relatively short production plateau of 235mmscfd sales (based on 205mmscfd of
215mmscfd maximum pipeline capacity and 30mmscfd of natural gas allocated to El Tesorito
200MW Power Plant) prior to terminal decline, assuming minimal incremental drilling beyond
planned development wells and zero value for acreage and prospective resource.
3.62 4.32
5.87
7.78
9.17
0.0
3.0
6.0
9.0
12.0
2P valuation(base case 12.5%
WACC)
2P valuation(10% WACC)
Base Case: 2P + riskedprospective upside
235mmscfdsustained
345mmscfdsustained
C$/
shar
e
Share price: C$4.04/share
-
Canacol Energy | 13 January 2021 16
Exhibit 27: Forecast 2P production profile Exhibit 28: 2P operating cash flows
Source: Edison Investment Research Source: Edison Investment Research
Given Canacol’s historical exploration success rate across the Esperanza, VIM-5 and VIM-21
blocks plus acreage with a total GCA estimated unrisked prospective resource of 4.7tcf, there is
material value in its ability to replace produced reserves and add to behind-pipe reserves.
Exhibit 29: Base case NAV breakdown
Recoverable reserves Net risked value (@12.5%)
Asset Country Diluted WI CoS Gross Net NPV per mcf NPV Per share
% % bcf bcf US$/mcf US$m C$/share
Net debt at end 2019 (300) (2.08)
SG&A - NPV of 5 years (90) (0.62)
Decommissioning provisions (16) (0.11)
Cash from assumed exercise of options 62 0.43
Producing assets
Esperanza Colombia 100% 100% 195 195 1.38 270 1.87
VIM-21 Colombia 100% 100% 58 58 1.96 114 0.79
VIM-5 Colombia 100% 100% 371 371 1.30 483 3.35
Core NAV
624 624 522 3.62
Exploration/development upside
Five-year programme (800bcf gross) Colombia 100% 45% 800 800 0.90 324 2.25
Total NAV 1,424 1,424 846 5.87
Source: Edison Investment Research. Note: Number of shares: 195.9m includes dilution from all share options.
With fixed gas prices for the medium term and 624bcf 2P reserves, downside exposure is limited to
exploration success and decreased gas demand going forward. In a scenario where exploration
would add zero value we reach a core valuation of C$3.62/share.
Discount rate sensitivity
A key sensitivity when considering the value of Canacol’s asset base is the discount rate, and within
this, the country risk applicable to a company with 100% of cash flows from a single asset in
Colombia. We have used a generic discount rate of 12.5% in our valuation. This is in line with that
used for funded, cash-generative E&Ps with operations in emerging markets. We provide a
sensitivity to this key input below.
Exhibit 30: 2P and risked exploration NAV sensitivity (C$/share) to WACC
WACC 8.0% 10.0% 12.5% 15.0%
2P NAV 4.98 4.32 3.62 3.04
Risked NAV (800bcf risked @ 45%) 7.22 6.57 5.87 5.29
Source: Edison Investment Research
There is potential justification for using a slightly lower discount rate based on Canacol’s current
fixed coupon (bullet repayment in 2025) bond priced at 7.25%, with the company fully funded for its
share of future drilling expense. Canacol is therefore not reliant on expensive sources of capital
such as heavily discounted equity issues or industry capital in the form of farm-outs.
-
500
1,000
1,500
2,000
-
100
200
300
400
bcf
mm
scfd
(400)
(200)
0
200
400
600
800
Cas
h, U
S$m
NRI Revenues E, A & C (WI) Opex (WI)
Tax paid FCF post-tax
-
Canacol Energy | 13 January 2021 17
Valuation of prospective resource
GCA estimates c 4.7tcf of net unrisked prospective resource and c 1.4tcf of net risked prospective
resource across Canacol’s existing acreage. Typically, for our E&P coverage, we value a
company’s 2P reserve base and risk the potential of committed, funded exploration. In the case of
Canacol, which has a rolling 3D seismic and E&A programme, we have included 800bcf of unrisked
prospective resource (we estimate this would broadly equate to a five-year 3D seismic and drilling
programme assuming an average prospect size of 20bcf) and conservatively assumed a 45%
success rate. Our assumption is lower than Canacol’s six-year historical rate of over 84% and
reflects the fact that prospects move further away from ‘known gas’. Our base case valuation is
highly sensitive to assumptions around risked exploration potential and we therefore provide
sensitivities to our key inputs below.
Exhibit 31: Risked valuation sensitivity to prospective resource assumptions C$/share
Prospective resource (bcf)
Commercial chance of success (%) 400 600 800 1,000 1,200 1,400
15% 4.00 4.19 4.37 4.56 4.75 4.94
30% 4.37 4.75 5.12 5.50 5.87 6.25
45% 4.75 5.31 5.87 6.43 7.00 7.56
60% 5.12 5.87 6.62 7.37 8.12 8.87
75% 5.50 6.43 7.37 8.31 9.24 10.18
90% 5.87 7.00 8.12 9.24 10.37 11.49
Source: Edison Investment Research
235mmscfd sustained plateau scenario: C$7.78/share
In this scenario, we assume Canacol is able to maintain an annual average rate of 235mmscfd from
2022 (based on 215mmscfd maximum pipeline capacity and 30mmscfd of natural gas allocated to
El Tesorito 200MW Power Plant). We cap total recoverable gas at year-end 2019 2P reserves at
624bcf, and fully risked 1.4tcf of prospective resource (in line with GCA’s Pmean estimate). The
cash flow profiles below include the cost of ongoing seismic surveys, development and exploration
well costs and result in monetised volume of 1,848bcf.
Exhibit 32: 235mmscfd case production profile Exhibit 33: 235mmscfd operating cash flows
Source: Edison Investment Research Source: Edison Investment Research
For this scenario we arrive at a NAV of C$7.78/share (Exhibit 34).
-
500
1,000
1,500
2,000
-
100
200
300
400
bcf
mm
scfd
(400)
(200)
0
200
400
600
800
Cas
h, U
S$m
NRI Revenues E, A & C (WI) Opex (WI)
Tax paid FCF post-tax
-
Canacol Energy | 13 January 2021 18
Exhibit 34: 235mmscfd scenario NAV breakdown
Recoverable reserves Net risked value (@12.5%)
Asset Country Diluted WI CoS Gross Net NPV per mcf NPV Per share
% % bcf bcf US$/mcf US$m C$/share
Net debt at end 2019 (300) (2.08)
SG&A - NPV of 5 years (90) (0.62)
Decommissioning provisions (16) (0.11)
Cash from assumed exercise of options 62 0.43
Producing assets
Esperanza Colombia 100% 100% 565 565 0.91 516 3.58
VIM-21 Colombia 100% 100% 163 163 1.22 200 1.38
VIM-5 Colombia 100% 100% 1,101 1,101 0.68 751 5.21
Core NAV
1,829 1,829 1,122 7.78
Source: Edison Investment Research. Note: Number of shares: 195.9m includes dilution from all share options.
345mmscfd sustained plateau scenario
This represents an upside case with a production plateau of 345mmscfd from 2025 (based on
315mmscfd maximum pipeline capacity and 30mmscfd of natural gas allocated to El Tesorito
200MW Power Plant). As in our base case, we use 624bcf of year-end 2019 2P reserves plus
risked prospective resource additions of 1,277bcf. This scenario includes the incremental costs of
3D seismic and exploration and development well costs to sustain this higher level of output.
Exhibit 35: 345mmscfd case production profile Exhibit 36: 345mmscfd operating cash flows
Source: Edison Investment Research Source: Edison Investment Research
For this scenario we arrive at a NAV of C$9.17/share (Exhibit 37).
Exhibit 37: 345mmscfd scenario NAV breakdown
Recoverable reserves Net risked value (@12.5%)
Asset Country Diluted WI CoS Gross Net NPV per mcf NPV Per share
% % bcf bcf US$/mcf US$m C$/share
Net debt at end 2019 (300) (2.08)
SG&A - NPV of 5 years (90) (0.62)
Decommissioning provisions (16) (0.11)
Cash from assumed exercise of options 62 0.43
Producing assets
Esperanza Colombia 100% 100% 709 709 1.14 809 5.61
VIM-21 Colombia 100% 100% 124 124 1.46 180 1.25
VIM-5 Colombia 100% 100% 1,049 1,049 0.65 677 4.70
Core NAV
1,882 1,882 1,321 9.17
Source: Edison Investment Research. Note: Number of shares: 195.9m includes dilution from all share options.
Relative valuation
Canacol currently trades at a c 37% discount to our NPV12.5 base case scenario valuation of its 2P
reserve base plus prospective resources. Relative to Canacol’s peer group, the free cash flow yield
in FY21e is high at 10.5%, supporting shareholder cash returns. Canacol trades at a P/CF multiple
-
500
1,000
1,500
2,000
-
100
200
300
400
bcf
mm
scfd
(400)
(200)
0
200
400
600
800
Cas
h, U
S$m
NRI Revenues E, A & C (WI) Opex (WI)
Tax paid FCF post-tax
-
Canacol Energy | 13 January 2021 19
of 2.7x in FY21e, compared to its large Canadian E&P peers also 2.6x and its North American E&P
peers with South American operations on 3.2x. North American E&P peers with South American
operations include Frontera Energy, Gran Tierra, Parex Resources, PetroTal and GeoPark. Since
January 2020, Canacol’s share price has decreased by c 21%, while its peer group of North
American E&Ps with South American operations has declined by 49%.
Exhibit 38: Share price performance of Canacol and its peers since January 2020
Source: Edison Investment Research, Refinitiv. Note: Prices as at 7 January 2021.
-100%
-75%
-50%
-25%
0%
25%
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Reb
ased
Canacol North American E&P peers Brent S&P oil and gas
-
Ca
na
col E
nerg
y | 1
3 J
anuary
2021
20
Exhibit 39: Peer group valuation table
Market cap
(US$m)
EV
(US$m)
P/CF FY20e
(x)
P/CF FY21e
(x)
EV/EBITDA FY20e
(x)
EV/EBITDA FY21e
(x)
FCF yield FY20e
(%)
FCF yield FY21e
(%)
Net debt/ EBITDA
FY20e (x)
Net debt/ EBITDA
FY21e (x)
Div yield FY20e
(%)
Production FY20e
(kboed)
Prod growth FY20e
(%)
EV/kboed FY20e
(US$m/kboed)
Edison estimate - Canacol 492 821 2.23 2.69 2.92 3.49 18.8% 10.5% 1.02 1.30 5.7% 41.2 94.4% 19.9
Canacol peer group 680 953 (5.05) 3.20 6.73 4.20 -8.6% 13.4% 1.62 0.77 2.6% 32.5 34.7% 31.2
Frontera Energy 680 953 (5.05) 3.20 6.73 4.20 -8.6% 13.4% 1.62 0.77 2.6% 32.5 34.7% 31.2
GeoPark 275 621 1.72 1.52 3.60 3.51 6.2% -2.2% 0.43 0.42 12.7% 47.9 -9.0% 13.0
Gran Tierra Energy 774 1,419 5.13 5.47 7.29 6.28 -5.9% 5.7% 1.74 1.50 0.4% 40.6 1.8% 35.0
Parex Resources 151 884 2.29 1.08 11.80 4.73 -30.9% 28.7% 8.02 3.22 0.0% 22.6 25.7% 39.0
PetroTal 2,037 1,685 7.09 4.94 6.28 4.42 7.8% 10.3% (1.47) (1.04) 0.0% 46.5 5.4% 36.2
Canada 164 158 (41.50) 2.96 4.68 2.03 -20.1% 24.4% (0.60) (0.26) 0.0% 4.8 149.6% 32.6
Junior E&P30kboed 57 222 1.65 1.28 5.79 5.01 2.5% 6.7% 3.93 3.40 0.0% 12.1 9.3% 18.3
Advantage Oil & Gas 706 1,256 3.31 2.54 5.71 4.63 -2.9% 7.4% 2.32 1.91 2.3% 62.1 7.3% 20.7
Baytex Energy 258 446 2.95 1.80 4.53 2.88 -15.9% 13.2% 2.23 1.42 0.0% 45.1 6.8% 9.9
Birchcliff Energy 380 1,813 1.53 1.39 5.30 5.16 9.1% 17.5% 4.15 4.04 0.0% 80.5 -7.0% 22.5
Canacol Energy 399 1,093 2.69 1.50 7.55 4.01 -20.9% 23.5% 3.60 1.92 1.8% 76.4 3.3% 14.3
Enerplus 525 824 3.27 3.76 4.32 4.07 8.2% 4.4% 1.72 1.62 2.6% 30.8 12.0% 26.7
Frontera Energy 783 1,121 2.98 2.78 4.00 4.05 2.5% 4.0% 1.39 1.41 2.8% 90.6 -5.2% 12.4
NuVista Energy 275 621 1.72 1.52 3.60 3.51 6.2% -2.2% 0.43 0.42 12.7% 47.9 -9.0% 13.0
Paramount Resources 178 760 1.53 1.39 5.11 5.15 -12.3% -5.4% 3.32 3.36 0.0% 50.0 1.3% 15.2
Parex Resources 582 1,226 5.33 2.43 7.97 5.09 -14.4% 6.7% 3.29 2.10 0.0% 67.7 16.3% 18.1
Peyto Exploration & Development 2,037 1,685 7.09 4.94 6.28 4.42 7.8% 10.3% (1.47) (1.04) 0.0% 46.5 5.4% 36.2
Whitecap Resources 414 1,326 2.19 1.42 6.53 5.04 -9.1% 2.5% 4.26 3.28 2.1% 79.5 9.2% 16.7
Large E&P>100kboed 1,929 2,899 5.07 5.03 7.61 7.55 7.0% 6.7% 2.54 2.52 3.0% 68.0 47.5% 42.6
ARC Resources 7,546 12,740 3.87 3.06 6.86 5.24 5.9% 10.1% 2.78 2.30 2.2% 411.4 4.0% 24.3
Canadian Natural Resources 1,781 2,458 3.60 2.99 6.67 4.72 10.5% 11.2% 1.91 1.35 3.7% 158.8 2.2% 15.5
Crescent Point Energy 31,507 49,704 7.57 5.14 11.58 7.39 4.5% 9.3% 4.02 2.56 3.8% 1,158.6 6.1% 42.9
Ovintiv 1,417 3,418 2.12 2.52 4.25 5.79 13.4% 8.1% 2.90 3.95 1.7% 121.1 -9.2% 28.2
Seven Generations Energy 4,490 11,651 2.52 2.18 5.26 4.99 -0.4% 8.0% 3.16 3.00 1.6% 535.9 -3.4% 21.7
Tourmaline Oil 1,800 3,421 2.81 2.58 7.58 4.45 7.6% 10.5% 3.45 2.02 0.0% 182.7 -0.2% 18.7
US 4,282 5,787 4.62 2.93 5.82 4.09 -0.5% 13.5% 1.26 0.89 2.2% 311.0 28.6% 18.6
RoW 4,925 6,770 1.44 4.02 6.70 5.11 7.7% 16.8% 1.98 1.75 0.3% 86.7 14.1% 91.5
Average 4,448 7,182 3.53 3.88 6.60 5.18 2.2% 9.1% 2.71 2.22 1.5% 191.4 9.7% 37.8
Source: Edison Investment Research, Refinitiv. Note: Prices as at 7 January 2021.
-
Canacol Energy | 13 January 2021 21
Financials
Before COVID-19, Canacol generated strong netbacks per unit of production at a reported FY19
US$3.82 pre-tax, with cash flow from operations at US$108m. Despite the impacts of COVID-19 on
natural gas demand in the first half of 2020, the company was able to maintain healthy netbacks of
c US$3.60/mcf. Over our forecast period, royalties on a unit basis increase from US$0.66/mcf in
FY19 to US$1.00/mcf by FY25 as production shifts from lower royalty paying blocks to VIM-5. This
is partly offset by operating costs, which are largely fixed as they are spread across a growing
production base.
Exhibit 40: Netbacks (2P scenario)
2019 2020e 2021e 2022e 2023e 2024e 2025e
Realised price post-transport (US$/mcf) 4.76 4.50 4.39 4.61 4.73 4.85 5.50
Royalty (US$/mcf) 0.66 0.76 0.74 0.81 0.85 0.88 0.97
Opex (US$/mcf) 0.28 0.25 0.26 0.27 0.27 0.28 0.29
Pre-tax netback (US$/mcf) 3.82 3.49 3.39 3.54 3.60 3.69 4.24
Production (mmscfd) 142.6 171.2 171.5 203.3 235.0 235.0 175.6
Source: Edison Investment Research
Our 2P case forecasts a material reduction in net debt and gearing, assuming returns to
shareholders remain in line with current levels of US$7m per quarter. Excess cash is, in our view,
likely to be directed to expanding the company’s footprint through the drill bit.
Exhibit 41: Pre-tax netbacks US$/mcf (2P scenario) Exhibit 42: Gearing and net debt/EBITDA (2P scenario)
Source: Edison Investment Research Source: Edison Investment Research
We expect an EBITDAX of c US$195m in FY20 and US$187m in FY21 as we model lower average
realised gas prices (US$4.50/mcf in 2020 vs US$4.39/mcf in 2021), even though our FY21 gas
sales estimate remains relatively in line with FY20 at c 171.5mmscfd. The company expects net
debt/EBTIDA of 1.7x in FY21, in line with our estimates. Under our current assumptions, the FY20
cash dividend stands at 67% of FCF. However, in FY21 we anticipate Canacol will have to utilise
existing cash reserves for shareholder distributions. We anticipate that FCF will again start covering
cash dividends from 2022 onwards, assuming the world recovers from COVID-19 and demand
returns to normal, as can be observed in Exhibit 42.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2019 2020 2021 2022 2023 2024 2025
US
$/m
cf
Pre-tax netback US$/mcf Opex US$/mcf Royalty US$/mcf
(5.0)
(2.5)
0.0
2.5
5.0
(400)
(200)
0
200
400
2019 2020 2021 2022 2023 2024 2025
US
$m
2P ND 2P ND/EBITDA
-
Canacol Energy | 13 January 2021 22
Exhibit 43: Canacol’s dividend sustainability
Source: Edison Investment Research
42
8
47
63 66
28 28 28 28 28
0
25
50
75
100
2019 2020 2021 2022 2023 2024
US
$m
FCF Cash dividend
-
Canacol Energy | 13 January 2021 23
Exhibit 44: Financial summary
US$m 2017 2018 2019 2020e 2021e
Year-end December IFRS IFRS IFRS IFRS IFRS
PROFIT & LOSS
Revenue 156.6 204.5 219.5 234.3 228.4
Cost of sales (opex)
(25.0) (28.9) (17.1) (15.6) (16.4)
Gross profit
131.6 175.6 202.4 218.7 212.0
General & admin
(26.5) (28.2) (29.0) (24.2) (24.8)
Share based payments
(11.6) (8.5) (7.9) (8.1) (8.3)
Exploration expense
(27.1) (13.7) (3.0) (3.0) (3.1)
EBITDA (54.3) 86.1 151.9 183.3 175.8
Adj EBITDAX 130.2 138.6 162.8 195.1 187.2
Depreciation
(35.8) (44.2) (54.3) (61.2) (61.2)
Operating Profit (before amort. and except.) (90.0) 41.9 97.6 122.1 114.6
Intangible amortisation
- - - - -
Exceptionals
- - - - -
Other
- - - - -
EBIT
(90.0) 41.9 97.6 122.1 114.6
Net interest
(26.3) (34.5) (32.9) (29.4) (28.9)
Profit Before Tax (norm) (116.4) 7.3 64.7 92.7 85.7
Profit Before Tax (FRS 3) (116.4) 7.3 64.7 92.7 85.7
Tax
(32.4) (29.2) (30.5) (15.0) (31.7)
Profit After Tax (norm)
(148.8) (21.8) 34.2 77.7 54.0
Profit After Tax (FRS 3)
(148.8) (21.8) 34.2 77.7 54.0
Average Number of Shares Outstanding (m)
175.2 177.2 178.3 181.0 180.6
EPS - normalised (c) (84.95) (12.32) 19.21 42.95 29.92
EPS - normalised fully diluted (c) (84.95) (12.32) 19.21 42.95 29.92
EPS - (IFRS) (US$) (0.85) (0.12) 0.19 0.43 0.30
Dividend per share (c)
- - 0.05 0.21 0.21
Gross margin (%)
84.01 85.87 92.19 93.34 92.83
EBITDA margin (%)
84.01 85.87 92.19 93.34 92.83
Operating margin (before GW and except.) (%)
(57.49) 20.48 44.48 52.11 50.17
BALANCE SHEET
Non-current assets 499.8 580.3 620.8 664.5 719.2
Intangible assets
43.9 39.6 53.9 116.8 181.7
Tangible assets
383.4 480.4 506.1 486.9 476.6
Investments
72.5 60.3 60.8 60.8 60.8
Current assets 196.7 124.7 133.3 144.7 112.4
Stocks
0.6 0.3 - - -
Debtors
50.4 68.2 69.6 69.6 69.6
Cash
39.1 51.6 41.2 52.7 20.3
Other/ restricted cash
106.6 4.6 22.4 22.4 22.4
Current liabilities (86.3) (69.3) (97.8) (97.8) (97.8)
Creditors
(86.3) (69.3) (89.6) (89.6) (89.6)
Short-term borrowings
- - (8.2) (8.2) (8.2)
Long-term liabilities (371.0) (430.3) (413.5) (410.8) (398.8)
Long-term borrowings
(294.6) (339.7) (333.4) (330.7) (318.7)
Other long-term liabilities (inc. decomm.)
(76.4) (90.6) (80.1) (80.1) (80.1)
Net assets 239.1 205.4 242.7 300.6 335.0
CASH FLOW
Operating cash flow 65.3 94.0 108.4 180.1 156.3
Capex inc acquisitions
(106.0) (75.5) (84.3) (108.0) (119.0)
Financing expenses
(21.2) (36.0) (29.5) (30.0) (29.7)
Equity issued
(1.9) (3.7) 2.1 - -
Dividends
- - (7.1) (28.0) (28.0)
Net cash flow
(63.8) (21.2) (10.4) 14.1 (20.3)
Opening net debt/(cash) 184.4 255.5 288.1 300.3 286.2
HP finance leases initiated
- - - - -
Other
(7.4) (11.4) (1.9) 0.0 (0.0)
Closing net debt/(cash) 255.5 288.1 300.3 286.2 306.5
Source: Edison Investment Research, Canacol Energy accounts. Note: *Edison revenue forecast net of royalties and transport expenses; Canacol reports revenues net of royalties before transport expenses.
-
Canacol Energy | 13 January 2021 24
Contact details Revenue by geography
2650, 585 8th Avenue South West Calgary, Alberta, Canada, T2P 1G1 CA +1 403 561 1648 www.canacolenergy.com
Management team
President & CEO: Charle Gamba CFO: Jason Bednar
Mr Gamba founded Canacol Energy in 2008. He has held a variety of technical
and management roles with major and mid-sized international oil companies, with the majority of his professional career focused on E&P in South America. Prior to creating Canacol, Mr Gamba was vice president of exploration for Occidental Oil & Gas based in Bogota, Colombia. In his eight years with Occidental, he lived and worked in Ecuador, Qatar, Colombia and the US, working in a variety of technical and management roles. He has also worked for Alberta Energy Company in Argentina and Ecuador, and for Canadian Occidental in Australia, Canada and Indonesia. He started his career as a geologist with Imperial Oil in Calgary, and holds an MSc and PhD in geology.
Mr Bednar is a chartered accountant with more than 18 years of direct
professional experience in the financial and regulatory management of oil and gas companies listed on the Toronto Stock Exchange, TSX Venture Exchange and US Stock Exchange. He has been the CFO of several international oil and gas exploration companies, most notably the founding chief financial officer of Pan Orient Energy Corp, a South-East Asia exploration company, which during his tenure grew organically to operate 15,000bbl/d and reached a market cap of C$700m. He has previously sat on the board of directors of several internationally focused E&P companies, including as the past chairman of Gallic Energy. Mr Bednar began his career in the chartered accountancy firm of Brown Smith Owen in 1993 before moving into financial controller roles at oil production companies. He holds a Bachelor of Commerce from the University of Saskatchewan.
COO: Ravi Sharma SVP exploration: Mark Teare
Mr Sharma joined Canacol in October 2015. He is a reservoir engineer with 30 years of oil and natural gas experience in the Americas, Middle East, Russia, Australasia and Africa. He has held progressively senior management roles at major E&P companies worldwide, most recently head of production & operations with Afren where he was responsible for production, development and operations activities in West Africa. Prior to this, he was global petroleum engineering manager for BHP Billiton Petroleum. Mr Sharma also held the position of worldwide chief reservoir engineer for Occidental Oil and Gas. He holds a BSc and MSc in mechanical engineering from the University of Alberta.
Mr Teare joined Canacol Energy in early 2009. Previously, he was at AEC International and EnCana where he held a series of senior management positions in Ecuador and Brazil. Over his 30-year career, he has had extensive experience with a number of senior international Canadian energy companies operating in North America, South America and Australasia. He holds an MSc degree in geology.
Principal shareholders (%)
Cavengas Holdings SRL 18.06
FOURTH SAIL CAPITAL LP 16.57
BlackRock Inc 4.38
Dimensional Fund Advisors LP 1.85
Norges Bank 1.2
Elliot Gregory D 0.76
Fiera Capital Europe/Cayman Is 0.62
100%%
Colombia
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Canacol Energy | 13 January 2021 25
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