Canacol Energy presented a 22% increase in natural gas production compared to Q219 following the achievement of one of its 2019 milestones – the Jobo to Cartagena 100mmscfd pipeline. 2019 is proving to be a transformational year for the company, with an increase in production to 215mmscfd and advanced negotiations to expand export capacity to 315mmscfd by the end of 2023. Given the forecast of stable free cash flows for the coming years, Canacol’s board of directors decided to declare a recurring quarterly dividend, starting in Q419 at US$7m. Our 2P + risked exploration NAV is in line with our previous note at C$6.35/share, a 1% decrease, reflecting a 4% decrease in our 2019 production estimate.
Following completion of the Jobo to Cartagena pipeline in July 2019, Canacol’s Q319 natural gas production increased to 215mmscfd, resulting in average natural gas production for the quarter of 147.6mmscfd, slightly below our last estimate of 161mmscfd. Natural gas operating netbacks remained in line with Q219 at US$3.86/mcf. The company achieved a 23% decrease in operating expenses through operational synergies; however, these were offset by a decrease in realised natural gas prices. Negotiations are ongoing for an additional 100mmscfd pipeline export capacity to Medellin, and the company is close to finalising the related gas sales agreement for half of the pipeline capacity with a major Colombian utility.
Canacol’s board of directors approved a US$7m quarterly dividend to be distributed to shareholders, representing c C$0.052/share or an annualised yield of 4.4%. In our previous note, we tested the company’s ability to distribute a sustainable cash dividend looking at the company’s free cash flow (FCF) generation and dividendpaying peers. Our analysis showed that a yearly cash dividend at c US$30m is sustainable at least until 2025, which is in line with the announced dividend, which corresponds to an annualised cash dividend of US$28m.
Our base case valuation of Canacol stands at C$6.35/share. The company currently trades at an FY20 P/CF of 4.2x, versus its Canadian peers on 2.0x, and its peer group of North American E&Ps with South American operations on 2.5x. 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.