Canacol Energy Ltd (TSX: CNE) is a natural gas and oil exploration and production company. The company operates in the Lower & Middle Magdalena Basins of Colombia. 

Key highlights 

• Improving Dynamics despite challenging macros: Even though the industry's proved reserves are declining, the company has claimed successful exploration and drilling activities in recent years, with a 40% CAGR increase in gas sales over the previous seven years. As a result, the company has emerged as one of the Colombia's most prominent players. The sector's overall gas supply has been sluggish in recent years and is expected to remain so in the future. However, due to a high reserve base, CNE supply is likely to stay elevated in the coming days.

• Increase in demand for spot market volumes: In Q3 2021 the realized contractual natural gas and LNG sales volumes increased 17% to 190.6 MMscfpd, compared to 163 MMscfpd for the same period in 2020. The increase witnessed by the company was mainly due to increased firm contract and spot market sales as a result of the COVID-19 pandemic restrictions being gradually lifted during the three months ended September 30, 2021.

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts in Q3 2021, which is a key positive. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group

• Lucrative Dividend yield: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, the Company paid a dividend of CAD 0.052 per share and at the last closing price of CAD 3.21, the stock is offering a dividend yield of 6.48%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.

• Corporate Guidance 2022: The company has provided corporate guidance for 2022 mainly for Natural Gas Sales Volume, EBITDA and Capital Expenditure. Below is the glimpse for that:

Source: Company Filing

Risks associated with investment

The company’s operations are correlated with the prices of oil & gas. Hence, a voltility in the commodity prices would affect the company’s overall realization and cash flow.

Financial overview of Q3 2021 (in thousands of United States dollar)

Source: Company Filing 

• In Q3 2021, the company reported total revenue at USD 81.9 million against USD 64.4 million in the previous corresponding period. The revenue increased primarily due to higher sales volume of natural gas and liquefied natural gas.
• Total operating expenses in the reported period increased to USD 48.7 million against USD 38.8 million in pcp. Higher transportation expenses and higher depreciation cost along exploration expense and natural gas trading purchase cost elevated total operating expenses.
• Income before tax in Q3 2021, stood at USD 24.8 million against USD 17.4 million in pcp, primarily due to elevated revenue.
• Due to above stated reasons the net income in Q3 2021, increased to USD 8.7 million compared to USD 2.6 million in pcp, which was partially offset by higher income tax.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine group 

Stock recommendation 

The company is well positioned to produce consistent cash flows. Furthermore, the firm does not have any large debt obligations until FY24, reducing the company's immediate repayment load. Furthermore, the company is the leading supplier to the Caribbean Coast and has a competitive cost structure, which helps its profitability and margins. Furthermore, the company is in process of drilling more wells which would open fresh avenue for cash flows. Also, the company is delivering a healthy dividend yield, which is another positive aspect for long term value investors. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” rating at the closing price of CAD 3.21 as on January 06, 2022. We have considered Nuvista Energy Ltd, Cardinal Energy Ltd, Peyto Exploration & Development Corp, etc. as the peer group for the comparison. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

1Year Price Chart (as on January 6, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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