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:

• Increase in the sales volumes & strong growth forecast: The group reported an increase in the realized contractual natural gas and LNG sales of 181,813 MMscfpd (million standard cubic feet per day) in Q1FY22 against 177,633 MMscfpd in Q1FY21. The Natural gas and LNG production rose to 183,130 MMscfpd during the reported period (Q1FY22) as compared to the production of 179,474 MMscfpd in the pcp, which pushed the overall realized contractual natural gas & LNG sales.

Source: Company presentation

• Higher dividend yield: The company recently declared a dividend of CAD 0.052, which was paid on April 19, 2022. The dividend yield as per the last closing price of the stock was at lucrative levels of 7.482%, which is on the radar of the regular income-seeking investors, given the current turbulent scenario across the global markets.   

• Leader on the Environmental, Social, and Governance front: The company is committed to meet the Paris Agreement targets, and Colombia’s commitment to slash the carbon emission by 51% till 2030, which involves natural gas as a vital role in the energy transition. Below is the graphical presentation of how CNE is placed across its peers in terms of various ESG metrics.

Source: Company presentation

• Strong liquidity profile: The group’s quick ratio for Q1FY22 was reported at a higher level of 2.39x, as compared to the industry median of 0.94x. Further, the company’s current ratio was stated at 2.39x for the reported period (Q1FY22), against the current ratio of the industry median of 1.02x. The higher quick ratio and current ratio represent the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Industry beating profitability margins: In Q1FY22, the company witnessed an increase in the revenues which was on account of increased production, higher prices, and a surge in demand, which were partially offset by the increase in the overall expenses, still, the group managed to attain higher profit margins as compared to the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The group is majorly exposed to the volatility in the energy prices, specifically natural gas, and any sustained downtrend in the prices or decrease in the demand, can hamper the company’s financial health severely.

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing

• During Q1FY22, the group reported an increase in the net revenue to USD 82.70 million as compared to the net revenue of USD 75.09 million in Q1FY21. The higher sales were majorly derived from the increase in the natural gas sales volumes contracted under the firm's contract in 2022.

• The income before income taxes rose to USD 25.61 million in the reported period (Q1FY22) against the income before taxes of USD 14.07 million in the pcp. The higher revenues were partially offset by the increase in expenses particularly operating expenses which limited the overall increase of income before taxes in Q1FY22.

• The group transitioned into net income of USD 24.41 million in Q1FY22, as compared to the net loss of USD 3.06 million in the pcp.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported an increase in the adjusted EBITDA of USD 49.62 million in Q1FY22 as compared to the adjusted EBITDA of USD 46.71 million in Q1FY21. Further, the company transitioned into a net income of USD 24.41 million in the reported period (Q1FY22), from the net loss of USD 3.06 million in Q1FY21. The recent dividend of CAD 0.052 per share, brings the stocks dividend yield to 7.48%, which is very much on the radar of the regular income-seeking investors.  

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of CNE at the last closing price of CAD 2.78 on June 14, 2022. Additionally, the 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.

One-Year Technical Price Chart (as of June 14, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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