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. It operates through one reportable segment, namely, Colombia.

Key Highlights:

• The Board of Directors paid a quarterly dividend of CAD 0.052 per share on July 15, 2020.
• The Group reported gas sales of 165 million standard cubic feet per day for the month of June 2020, which is higher than 158 million standard cubic feet per day sold in May 2020.
• As per the drilling activities are concerned the Pioneer 53 drilling rig the Pandereta 8 development well spud on June 27, 2020, and reached 9,524 feet measured depth on July 9, 2020.  The well encountered 168 feet true vertical depth of net gas pay within the producing Cienega de Oro sandstone reservoir.

Q1FY20 Financial Highlights: CNE announced its quarterly results, wherein the Company reported total revenues, net of royalties at USD 82.287 million as compared to USD 50.926 million in the previous corresponding period (pcp). The increase was aided by significant growth in the Natural gas and LNG segment. Income before income taxes stood strong at USD 24.892 million against USD 11.039 million in Q1FY19, thanks to a higher revenue while an increase in transportation expenses, depletion and depreciation costs remained a drag. The Company reported a net loss of USD 25.988 million as compared to a net profit of USD 6.274 million in pcp. The decline was driven by a significant increase in the deferred tax. The Group reported a realization price of Natural gas and LNG at USD 3.60/Mcf against USD 4.03/Mcf in Q1FY19. Capital expenditure stood relatively lower at USD 19.892 million against USD 34.725 million in Q1FY19, due to lower investment in facilities, workovers and infrastructure segment. The Company ended the quarter with cash and cash equivalents of USD 49.156 million while total assets stood at USD 745.799 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/CF based Relative Valuation (illustrative)

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

Risks: The group’s revenue is directly linked to the demand and prices of oil and natural gas. Any volatility in commodity prices or reduction in demand would affect the group’s performance.

Stock Recommendation: The stock of CNE corrected ~19% so far this year due to weak investors sentiment. The majority of the group’s production volume is subject to long-term fixed-price contracts, which limits the exposure to commodity price risk, including current volatility prices as a result of COVID-19. The group expects the demand for its natural gas in Colombia to increase in the near term due to an unusually dry winter, and in the medium to long term related to the continued decline of Colombia’s main gas producing fields. Meanwhile, the recent update released by the group suggests that demand for natural gas is increasing gradually over the past couple of months, which is encouraging. Further, the group is offering a decent dividend yield of 5.5%, which is lucrative considering the current interest rate environment. We have valued the stock using P/CF based relative valuation method and arrived at the potential upside in double-digit (in percentage terms). We have considered the industry (Oil & Gas) average multiple on NTM basis. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.78 on July 22, 2020.

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

Whitecap Resources Inc

Whitecap Resources Inc. (TSX: WCP) is a Canada based company which operates in the exploration and production of oil and natural gas. The Group receives the majority of its revenue from crude oil segment, while a part of the revenue is being derived from NGLs and Natural gas.

The Company declared a monthly dividend of CAD 0.01425 per common share, payable on July 31, 2020. 

Q1FY20 Financial Highlights: WCP declared its first quarter results and reported total revenue and other income of CAD 430.399 million as compared to CAD 184.217 million in the previous corresponding period (pcp). The significant growth was primarily driven by a net gain on commodity contracts amounting to CAD 169.173 million against a net loss of CAD 111.368 million in pcp. Total expenses increased to CAD 3,211.874 million against CAD 253.161 million, primarily attributable to the inclusion of impairment charges amounting to CAD 2,924.275 million. Stock-based compensation, interest and financing and depletion, depreciation, & amortization expense stood relatively higher than the previous corresponding quarter while lower blending, general & administrative and exploration and evaluation costs were relatively lower. Net loss and other comprehensive loss widened to CAD 2,111.474 million as compared to CAD 52.561 million in pcp. Average production volumes increased to 73,452 boe/day during Q1FY20, increased from 70,666 boe/day in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to CF based Relative Valuation (illustrative)

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

Risks: The company has significant exposure in commodity risk management contracts, which might result in losses in case of drastic market volatility. The company has a higher debt component, which might take a toll on the company’s health during the adverse economic conditions.

Stock Recommendation: The stock of WCP corrected big-time in the recent past due to weak investors’ sentiment along with a steep fall in the crude oil prices. However, oil prices have recovered significantly from the lows, and the demand is increasing, which is encouraging. The company is focusing on monitoring its credit and working capital facilities to ensure that it has sufficient available funds to meet its dividend payments and financial requirements at a reasonable cost. Further to preserve the liquidity, the group lowered its FY20 capital expenditure program at the range of CAD 200 million to CAD 210 million, from earlier projected CAD 350 million to CAD 370 million. The group is also focusing on cost reduction measures and targeting a cost savings of CAD 42 million in operating expenses. The group’s G&A cost per boe is the lowest in the sector when compared to oil-weighted peers. We believe, due to the gradual re-opening of the economies, oil demand would improve, which is likely to help in the price stabilization. Improved realization price would further cushion the income and the cash flows of the company in the coming quarters. Further, the group is offering a decent dividend yield of 7.1%, which is lucrative considering the current interest rate environment. The stock made a strong pullback rally and gained ~77% in the last three months. We have valued the stock using P/CF based relative valuation method and considered industry (energy) median on NTM basis and arrived at the potential upside in double-digit (in percentage terms). Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.39 on July 22, 2020.

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

*Please be aware that dividends are variable and not guaranteed.

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.