Canacol Energy Ltd.

Canacol Energy Ltd (TSX: CNE) is engaged in the business of exploration and production of oil and natural gas in Colombia. The Company holds an interest in Oleoducto Bicentenario de Colombia which owns a pipeline system that focuses on linking Llanos basin oil production to the Cano Limon oil pipeline system. The Company operates through one reportable segment, namely, Colombia.

Key Highlights:

• The Group declared a quarterly dividend of CAD 0.052 per share, payable on October 15, 2020.
• The company reported natural gas sales for the months of July and August 2020 at an average of 162 million standard cubic feet per day.
• Canacol maintains 2 drilling rigs under contract, Pioneer 53, and Pioneer 302, and plans to drill 4 additional wells during the remainder of 2020. The Pioneer 302 rig is currently mobilizing to drill the Fresa- 1 exploration, located close to the Corporations Jobo facility.  Fresa 1 is anticipated to spud in late September 2020.

Q2FY20 Financial Highlights: CNE declared its second quarter-results, wherein the Company posted total revenue of USD 54.405 million, reflecting a growth of 14% on y-o-y basis. The group reported sales volume of realized contractual natural gas and liquefied natural gas at 152.2 MMscfpd, against 120.5 MMscfpd, in Q2FY19. Within the average natural gas and LNG production, the company witness a volumes growth of 24% on y-o-y basis to 151.1 MMscfpd. The growth was driven from the completion of the 100 MMscfpd pipeline expansion during Q3FY19, partially offset by the lower demand on account of COVID-19 pandemic. Adjusted funds from operations stood at USD 31.181 million, indicating a growth of 22% on y-o-y basis. Net income stood at USD 17.715 million, increased significantly from USD 1.878 million in the previous corresponding period (pcp).

Q2FY20 Financial Snapshot (Source: Company Reports)

 Key Risks: The Group’s revenue is directly linked to the demand and prices of oil and natural gas and a volatility in the commodity prices or reduction in demand would impact the Company’s performance adversely.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CNE corrected ~24% so far this year, due to a drastic correction in the crude oil prices on account of oversupply scenario. Amidst an ongoing slowdown in the industrial and manufacturing activities, the company’s operations stood relatively uninterrupted during Q2FY20, which is a key positive and assures stability in its performance. The increase in natural gas production and the 100 MMscfpd pipeline expansion during the third quarter of FY19 has contributed to the overall business growth, which is impressive. The group saw an additional 8 MMscfpd of gas sales nominations during the month of July and August 2020, which is impressive. Furthermore, the company is expected to conduct two drilling rigs under contract, Pioneer 53, and Pioneer 302, and plans to drill 4 additional wells during the rest of 2020.  Despite the slow recovery from the Covid-19 pandemic in Colombia, the Corporation expects its sales to be inside the previously released guidance range of 170 MMcfpd and 197 MMcfpd. Despite a challenging macro environment, the Company has continued its dividend payment program from the existing cash and operating cash flows, which is commendable. At the last traded price, the stock was offering a dividend yield of 5.89%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Parex Resources Inc, TORC Oil & Gas Ltd and Viper Energy Partners LP etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.53 on September 24, 2020.

CNE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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