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

Key Updates: 

• Recent updates: For December 2021, the company reported its natural gas sales of 170 million standard cubic feet per day. The company conducted exploration activity across the Toronja 2 development well and reported 6,899 feet of drilling activity. Notably, the Toronja 2 well was tied into the Toronja production manifold and has been placed on permanent production.

• Share Buy-back Program: During January 2022, the group repurchased 5,307,700 Common Shares under its share buy-back program, at a purchase consideration of CAD 3.15 per share under its normal course issuer bid.

• Improved production: In 9MFY21, the company reported its Natural gas and LNG production of 181,712 *MMscfpd, which is 6% y-o-y higher than 171,475 MMscfpd in pcp. The surge was drive by improved demand on account of gradual lifting of restrictions coupled with an increase in firm contracts sales due to certain off-takers taking less contractual downtime and less undelivered nominations.

*MMscfpd =million standard cubic feet per day

• Impressive dividend yield: The stock of CNE carries an annualized dividend yield of ~6.303%, which looks attractive considering the ongoing interest rate scenario. Moreover, the group distributed a higher dividend of USD 22.2 million in 9MFY21, as compared to USD 13.5 million in pcp. This is impressive as most of the companies are lowering their dividend distribution to retain liquidity.
  

• Robust margins: At the end of Q3FY21, the company reported EBITDA margin and operating margin of 62.2% and 40.7%, respectively, as compared to the industry median of 47.8% and 30.6%, respectively. Pretax margin stood higher at 30.3% in Q3FY21, as compared to the industry median of 22.0%. 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.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• CNE declared its quarterly result, wherein the group posted total revenue of USD 9 million, surged from USD 64.4 million in the previous corresponding period (pcp). The growth was driven by a 17% y-o-y rise in realized contractual natural gas and liquefied natural gas sales volumes at 190.6 MMscfpd.
• Total expenses stood higher at USD 48.7 million from USD 38.8 million in pcp. The quarter was marked by higher Transportation expenses (USD 9.1 million v/s USD 7.0 million in pcp), inclusion of Natural gas trading purchases cost amounting USD 6.4 million.
• Income before income taxes was recorded at USD 24.8 million, stood higher from USD 17.4 million in Q3FY20. The increase was primarily due to higher revenue partially offset by higher total expenses coupled with an increase in net finance expense.
• Net income stood higher at USD 8.7 million, as compared to USD 2.6 million in Q3FY20. The surge was driven by higher income before income taxes coupled with increase in income tax expenses.

Valuation Methodology (Illustrative): Price to Cash Flow based methodology.

Analysis by Kalkine Group

Stock Recommendation:

The company reported its quick ratio and current ratio of 1.13x and 1.14x, respectively in Q3FY21, as compared to the industry median of 0.84x and 0.97x, respectively. This indicates improved liquidity profile and prudent working capital management. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Advantage Energy Ltd, Parex Resources Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the closing price of CAD 3.30 on March 02, 2022.

One-Year Technical Price Chart (as on March 02, 2022). Analysis by Kalkine Group 

 Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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