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. The Company operates through one reportable segment, namely, Colombia.

Q2FY20 Financial Highlights: Canacol Energy declared its quarterly results, wherein the Company posted total revenue of USD 54.405 million as compared to CAD 47.689 million in the previous corresponding quarter. Sales volume of realized contractual natural gas and liquefied natural gas increased to 152.2 MMscfpd in the current quarter as compared to 120.5 MMscfpd a year ago. While average natural gas and LNG production volumes increased 24% on y-o-y basis to 151.1 MMscfpd during Q2FY20. The growth was driven by added revenue from the completion of the 100 MMscfpd pipeline expansion during Q3FY19, offset by the lower demand on account of COVID-19 pandemic. Adjusted funds from operations reported a growth of 22% on y-o-y basis to USD 31.181 million. The Company reported net income of USD 17.715 million, increased significantly from USD USD 1.878 million in the previous corresponding period.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The Group’s revenue is directly linked to the demand and prices of oil and natural gas and a volatility in the commodity prices or reduction in demand would impact the Company’s performance adversely.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of CNE corrected ~22%so far this year due to a demand destruction scenario driven by COVID-19. Despite a challenging macro environment, the Company has continued its dividend payment program from the existing cash and operating cash flows, which is commendable and indicates a robust balance sheet and liquidity. The increase in natural gas production and the 100 MMscfpd pipeline expansion during the third quarter of FY19 has contributed to the overall business growth, which is impressive. Despite the worldwide uncertainties and disruptions caused by the Covid-19 pandemic, Canacol’s operations continued on relatively uninterrupted during Q2, including the drilling of Clarinete-5 and its 43 MMscfpd production test. The Group is currently completing the Pandereta-8 development well, which encountered 168 feet true vertical depth of net gas pay. Furthermore, the Company commences its Porro Norte-1 exploration well and is expected to improve its overall exploration. In order to ensure liquidity, the Company has altered its payment of USD 30 million 2018 Credit Facility to December 2022 and issued USD 46 million Senior Unsecured Revolving Credit Facility and USD 75 million Senior Unsecured Bridge Term Loan, respectively. Despite the slow recovery from the Covid-19 pandemic in Colombia, the Corporation expects its sales to be inside the previously released guidance range of 170 MMcfpd and 197 MMcfpd. Further, at the last traded price, the stock is offering a dividend yield of 5.73%, which is lucrative considering the current interest rate environment. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a lower double upside potential (in % terms). For the said purpose, we have considered industry (Oil & Gas) average on NTM basis. Hence, considering the aforesaid facts and current price movement and risk, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.63 on August 17, 2020.

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

Enerplus Corporation

Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets in Canada and the United States. The Company derives the majority of the oil production from the Williston and Waterfloods basins, while Marcellus provides a significant portion of natural gas production.

The Company announced a quarterly dividend of CAD 0.01 per common share, payable on August 14, 2020.

Q2FY20 Financial Highlights: Enerplus declared its second-quarter results, wherein the Company posted total revenue of CAD 111.174 million, as compared to CAD 348.885 million in the previous corresponding period (pcp). Production, during the second quarter, stood at 87,360 BOE per day, declined 13% on y-o-y basis. The lower production was primarily attributable to the temporary curtailment of production during the period coupled with the suspension of all operated drilling and completion activity in response to the significant decline in crude oil prices. The Company recorded an average realized price of crude oil at CAD 30.55 per bbl, against CAD 74.42 per bbl in pcp. The Group curtailed ~25% of its liquids volumes during the May to protect against selling oil at negative margins. Loss before taxes stood at CAD 722.673 million, as compared to a profit of CAD 119.953 million in pcp, due to a lower sales, the inclusion of asset impairment and goodwill impairment costs, while operating expense, transportation costs, depletion, depreciation and accretion and general and administrative stood lower than the previous corresponding quarter. Net loss, during the quarter stood at CAD 609.323 million, as compared to CAD 85.084 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is directly linked to the price and demand of crude oil. Any volatility in demand and price of the commodity would hamper the group’s performance.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of ERF reacted to the volatility in the crude oil price in the recent past and tumbled ~55% so far this year. The Company is expecting its FY20 production to be in the range of 88,000 BOE to 90,000 BOE per day, including 49,000 to 50,000 barrels per day of crude oil and natural gas liquids. Capital expenditure is expected at ~CAD 300 million, and the Company expects to complete its non-operated drilling programs in the Marcellus, and North Dakota, which is a key positive and is expected to improve business prospects in the coming days. We expect, with easing norms and gradual reopening of the manufacturing and industrial activities, the international crude oil price is expected to improve, which would help the group in reporting higher income and improve profitability. The stock gained 20% in the last three months and outperformed the index by ~9%. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Crescent Point Energy Corp, ARC Resources Ltd. And Baytex Energy Corp etc., for the comparison purpose. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 4.13 on August 17, 2020.

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

Disclaimer

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