Canacol Energy has provided updated production for 2019–20, capex guidance for 2020 and its natural gas reserves at year-end 2019. Management expects production for 2020 to be relatively in line with realised average sales for December 2019 at c 205mmscfd and capex for the year at c US$114m. Capex will cover 12 wells across exploration, appraisal and development activities. The investment will contribute to Canacol’s reserve replacement and growth strategy and aims to expand its capacity to serve Colombia’s increasing gas needs. Natural gas 2P reserves increased by 12% and now stand at c 624bcf. Management is also currently working on the execution of a gas sales agreement (GSA) for an additional gas export route towards Medellin to add 100mmscfd of sales capacity by the end of 2023. Our 2P + risked exploration NAV has increased by 13% to C$7.16/share, reflecting the updated 2P reserve book.
Canacol aims to invest c US$114m in capex in 2020, which will be fully funded from existing cash and 2020 operating cash flow. This will support current and near-term gas sales capacity, which currently stands at 215mmscfd. The company anticipates EBITDA of c US$265m for 2020 from an average 205mmscfd of gas sales. The updated 2P reserves result in a reserve life index (RLI) of 8.3 years based on FY20 production guidance.
Canacol’s key focus in 2020 is delivering its largest ever exploration drilling programme. The drilling programme includes nine exploration wells, one appraisal well and two development wells. The campaign commenced in January 2020 with the spudding of the Nelson-14 development well, which encountered 309ft of net gas pay. This will be followed with spudding the second development well, Clarinete-5, in early March. Exploration drilling is scheduled to progress from Q220.
Our base case valuation of Canacol stands at C$7.16/share. The company trades at an FY20e P/CF of 3.2x versus its Canadian peers on 2.1x, and its peer group of North American E&Ps with South American operations on 2.3x. We believe this premium is driven by certainty of price realisations and a strong free cash flow yield relative to peers. Key risks remain around the ability to replace reserves, somewhat mitigated by its strong track record of exploration success, and recent 12% y-o-y increase in reserves.