Canacol Energy is an E&P company with operations across 23 blocks and 2.5m net acres across Colombia and Ecuador. Management expects to increase Colombian, Caribbean Coast gas market share from 5% today to c 32% by the end of the decade. Long-term gas contracts, and low operating costs at US$0.3/mcf drive peer-leading netbacks of a reported US$4.54/mcf. Management focus remains on growth and cash generation, with capital being directed towards a diverse mix of portfolio opportunities, including expanding the company’s contracted gas base, growing contingent gas inventory (organic and inorganic), monetisation of light oil reserves as oil prices rise, and early-stage exploration of prospective shale acreage. According to management, Canacol Energy currently trades at 0.33x consensus RENAV and 0.78x consensus core NAV (based on net 2P reserves of 79mmboe).
Canacol’s 90mmscfd gas under contract is underpinned by long-term contracts out to 2020 and priced at US$4-7/mmbtu. Rising demand along the Caribbean Coast (+3% pa*), depletion from mature fields (-100mmscfd pa), and lack of competition (LNG imports priced at US$7-9/mmbtu*) combined with low unit costs provide for robust and secure netbacks for Canacol, currently reported at US$4.54/mcf. Expansion of pipeline infrastructure along the Caribbean Coast has the potential to boost medium-term cash flows and incentivise investment in 3tcf of net unrisked prospective resources. Canacol expects EBITDAX to increase from US$67m in 2015 to c US$175m in 2017 based on existing gas contracts, reducing leverage from 3.8x EBITDAX to 1.4x* in 2017. Some uncertainty exists around the structure/ Canacol’s interest in an SPV to be formed to own and operate a new pipeline along the Caribbean Coast; we see the pipeline as key to medium-term growth targets.
Canacol sees potential for conventional oil netbacks to become comparable to those of gas at crude prices above US$50/bbl, incentivising the monetisation of the company’s 14mmbbl 2P oil reserves (of which 8.5mmbbl are light oil) and 50mmbbl of light oil prospective resources. In addition to conventional light oil, access to 458mmbbl of mean prospective La Luna shale (749,000 net acres) is arguably viewed as a ‘free option’ by investors. Thick oil-mature shale with high organic content and desirable rock qualities bodes well for a planned fracture and test of the La Luna shale by ConocoPhillips later this year.