Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company which operates across the Colombia region. 

Key Highlights:

• Improved Prospect from recent Drilling Activity: The corporation has started drilling the Chirimia 1 sidetrack well and is focusing on reestablishing gas production from the Cienaga de Oro sandstone reservoir. The group anticipates commencing production from the above well from April 2022 onwards. This project has a potential presence of natural gas in the reservoir sandstones, which is a key positive is likely to support upcoming operations. Recently, the company highlighted that the realized contractual natural gas sales stood at 189 million standard cubic feet per day in March 2022.

• Bullish Outlook: For the remainder of 2022, the Corporation is focused on drilling of up to twelve exploration and development wells which is encouraging and would support the company’s production in coming days. Moreover, the group is targeting to acquire ~470 square kilometers of 3D seismic on the Corporation’s VIM-5 block to expand its exploration prospect inventory, which is expected to benefit the future operations. Additionally, CNE is planning to purchase a rental facilities equipment and the installation of gas compression to lower the operating expenses and increase recovery factors, etc. This would support the company’s upcoming margins as well.

• Attractive dividend yield: The stock of CNE carries an annualized dividend yield of ~7.148%, which looks attractive considering the ongoing interest rate scenario. Moreover, the group distributed a higher dividend of USD 29.4 million in FY21, as compared to USD 20.5 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.
  

• Robust margins: At the end of FY21, the company reported EBITDA margin and operating margin of 52.7% and 30.3%, respectively, as compared to the industry median of 44% and 26.4%, respectively. Pretax margin stood higher at 19% in FY21, as compared to the industry median of 15.2%. This indicates higher operational efficiencies, which is encouraging.
  

Risks associated with the Investment:

The company’s operations are correlated with the international crude oil prices, while a voltility in the commodity prices would dampen the company’s overall realisation and cash flow.

FY21 Financial Highlights :

FY21 Income Statement Highlights (Source: Company Report)

• CNE declared its FY21 result, wherein the group posted total revenue of USD 5 million, surged from USD 278.8 million in FY20. The growth was driven higher Natural gas and LNG sales of 181,084 *MMscf/ per day, up 6% on y-o-y basis.
• Total expenses stood higher at USD 0 million as compared to USD 170.3 million in FY20. The quarter was marked by higher natural gas trading purchase costs, increase in operating expense and a surge in transportation expense.
• Income before income taxes was recorded at USD 0 million, stood below USD 77.3 million in FY20 due to increase in total expenses as mentioned above, coupled with an increase in net finance expense.
• The company reported a net profit of USD 15.1 million, as compared to a net loss of USD 4.7 million in FY20, supported by a lower income tax expense in FY21.

* MMscf = million standard cubic

Valuation Methodology (Illustrative): EV to Sales based methodology.

Analysis by Kalkine Group               

Stock Recommendation:

In both Q4FY21 and FY21, the company reported a 9% and 7% y-o-y  jump in production of 186,145 *MMscf/ per day and 182,829 MMscf/per day, respectively, which indicates strong demand dynamics. We expect the above momentum to continue in the near-term considering the current geo-political turmoil and supply constraints. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Tamarack Valley Energy Ltd, Gran Tierra Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the last closing price of CAD 2.91 on April 28, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

* MMscf = million standard cubic

One-Year Technical Price Chart (as on March 28, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

Technical Analysis Summary:

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.