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Fixed-contract gas prices protect cash flows

Canacol Energy 26 March 2020 Update
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Canacol Energy

Fixed-contract gas prices protect cash flows

FY19 results

Oil & gas

26 March 2020

Price

C$3.60

Market cap

C$648m

C$1.32/US$

Net debt (US$m) at 17 March 2019

342

Shares in issue

180.1m

Free float

80%

Code

CNE

Primary exchange

TSX

Secondary exchange

BVC

Share price performance

%

1m

3m

12m

Abs

(16.7)

(21.8)

(17.1)

Rel (local)

8.9

2.2

1.4

52-week high/low

C$5.03

C$2.82

Business description

Canacol Energy is a natural gas exploration and production company primarily focused in Colombia.

Next events

Medellin GSA

H120

Analysts

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Canacol Energy is a research client of Edison Investment Research Limited

Canacol Energy has recently reported record annual production of 143mmscfd for FY19 in line with our estimates. Key drivers for an increase of 28% in production versus FY18 include the completion of the Jobo to Cartagena, 100mmscfd pipeline. Management expects production for 2020 to be c 205mmscfd and capex for the year of c US$114m. Although the oil and gas industry is facing severe headwinds, which include the impact of coronavirus on global energy demand and the Russia/Saudi Arabia oil price war, Canacol fundamentals remain protected due to fixed contract gas prices. As a consequence, the company is able to maintain its capex, production, EBITDAX guidance and dividend for FY20, while its peers had to resort to cuts to protect their balance sheets. Our 2P + risked exploration NAV has decreased by 2% to C$7.02/share, reflecting higher actual end-FY19 net debt of US$300m versus our estimate of US$271m.

Year-end

Revenue* (US$m)

Adj EBITDAX**
(US$m)

Cash from
operations (US$m)

Net debt***
(US$m)

Capex****
(US$m)

Yield
(%)

12/18

204.5

138.6

94.0

288.1

(75.5)

N/A

12/19

219.5

162.8

108.4

300.3

(84.3)

1.5

12/20e

302.7

259.9

219.4

252.9

(114.0)

5.8

12/21e

310.3

265.9

221.4

205.0

(116.9)

5.8

Note: *Revenue net of transport expense and royalty. **Adjusted EBITDAX is before non-recurring or non-cash charges and exploration expense. ***Cash and equivalents minus short- and long-term debt. ****Forecasts based on 2P production profile.

FY19 delivers record production

In 2019, Canacol achieved record average annual production of 143mmscfd, representing an increase of 28% compared to 112mmscfd in 2018. This was made possible due to the completion of the Jobo to Cartagena pipeline, which increased the company’s export capacity to c 215mmscfd. Canacol also announced its updated 2P gas reserves totalling c 624bcf at 31 December 2019, c 12% higher than its 31 December 2018 values.

Coronavirus does not affect take or pay contracts

Canacol’s production mix consists of 100% gas, with c 80% being sold under take or pay contracts denominated in US dollars. The remaining c 20% is sold at domestic spot prices. Canacol is therefore relatively well protected from current effects of the coronavirus on global energy demand and lower oil prices and, at a time when its oil production/price-weighted peers have to resort to capex, output and capital distribution cuts, it remains well positioned in the short to medium term.

Valuation: RENAV at C$7.02/share

Our base case valuation of Canacol stands at C$7.02/share. The company trades on an FY20e P/CF of 2.6x versus its Canadian peers on 1.2x, and its peer group of North American E&Ps with South American operations on 1.4x. We believe this premium is driven by certainty of price realisations and a strong free cash flow yield relative to peers. Also reflective of this is the fact that Canacol’s share price has only decreased c 20% since our last note, while its peer group with South American operations fell by 61%.

FY19 results and FY20 work plan

2019 was a transformational year for Canacol. With the expansion of the 85km of 20-inch gas pipeline between its operated Jobo gas processing facility and Cartagena, the company increased its export capacity by 100mmscfd. Around one month after completing the pipeline, Canacol announced that it had achieved a record 217mmscfd of natural gas sales in August 2019. This led to the company achieving a record average annual production of 143mmscfd, an increase of 28% compared to 2018. Canacol also announced its updated 2P gas reserves totalling c 624bcf at 31 December 2019, c 12% higher than its 31 December 2018 values. In 2019, Canacol also paid its maiden dividend of C$0.052/share.

For 2020, Canacol’s main objectives include drilling 12 wells, including nine exploration wells, representing the largest ever exploration programme executed by the company, one appraisal well and two development wells. The company plans to invest c US$114m in capex for 2020, which will be fully funded from existing cash and 2020 cash flow. The budget also allows for a minimum of US$7m in quarterly dividends, as well as c US$15m in debt reduction in 2020. Management has also been working on delivering a definitive agreement for the construction of a new gas pipeline from Jobo to Medellin, which will increase its sales capacity by 100mmscfd to a total of 315mmscfd by the end of 2023.

Canacol cash flows protected against oil market weakness

Canacol’s production mix consists of 100% natural gas with no oil production, with c 80% of gas production sold under long-term (typically of five to 10 years’ duration and including inflation clauses) take or pay contracts denominated in US dollars and priced at the wellhead. The remaining c 20% is sold under interruptible contracts also denominated in US dollars and priced at the wellhead. The spot portion of the portfolio is usually sold at a higher price. We note that Colombia’s spot prices are not linked to global oil or gas price benchmarks, and usually these higher prices compensate for any transportation costs associated, resulting in realized prices, net of transportation, being consistent with Canacol’s fixed-priced contracts.

Consequently, Canacol is shielded from the current effects of low oil prices, which have seen its oil-weighted peers recently cutting their capital programmes, production forecasts and return of capital to shareholders. In the long term, if natural gas demand decreases in Colombia due to persistent low economic activity, only the 20% of spot pricing contracts might be affected. Nonetheless, this has not been observed yet.

As such, Canacol maintains its previously announced 2020 capex, production and distribution of capital guidance. The 2020 capital budget remains at US$114m, which is expected to be fully funded from existing cash held and 2020 cash flow. Canacol expects realized contractual gas sales for 2020 to average c 205mmscfd, 43% higher than the 2019 average. The average natural gas sales price, net of transportation costs, is expected to be US$4.80/mcf, which is in line with our expectations. Actual contractual gas sales during the period 1 January to 13 March 2020 averaged 207mmscfd.

Canacol’s forecast production, EBITDAX and cash flow from operations for 2020 are expected to be substantially higher than previous years, with management guided EBITDAX at c US$265m, US$5m higher than our slightly updated estimate. Our resulting FY20e free cash flow (FCF) of c US$75m is sufficient to cover quarterly dividends of US$7m (US$28m per year), reduce debt (Canacol estimates allocating c US$15m for debt reduction) and continue to repurchase common shares under its normal course issuer bid.


Valuation

Our 2P valuation incorporates discounted cash flows, reflecting monetisation of the company’s existing reserve base, adjusting for overheads, net debt and decommissioning provisions to arrive at a NAV. We also look at two additional valuation scenarios that include incremental reserves over and above 2P. Here we include ‘maintenance’ capex (largely 3D seismic, exploration and development wells and tie-in costs) required to add reserves to sustain a production plateau. Our DCFs utilise a standardised discount rate of 12.5%, but we provide sensitivities to this key assumption later in this note. Key model inputs for our valuation scenarios can be found in our initiation note.

In our 2P valuation case, we use reported year-end 2019 reserves of 624bcf, reflecting a relatively short production plateau of 205mmscfd sales prior to terminal decline, assuming minimal incremental drilling beyond planned development wells and zero value for acreage and prospective resource. Changes to our valuation include an updated end-FY19 net debt position of US$300m versus our previous estimate of US$271m, and lower operating costs following company guidance of US$0.25/mcf versus our previous estimates of US$0.27/mcf. Our base case valuation currently stands at C$7.02/share reflecting, a 2% decrease on our previous valuation of C$7.16/share.

Exhibit 1: Base case NAV breakdown

Recoverable reserves

Net risked value @ 12.5%

Asset

Country

Diluted WI

CoS

Gross

Net

NPV per mcf

NPV

Risked

%

%

bcf

bcf

US$/mcf

US$m

C$/share

Net debt at end 2019

(300)

(2.04)

SG&A – NPV of 5 years

(90)

(0.61)

Decommissioning provisions

(16)

(0.11)

Cash from assumed exercise of options

56

0.38

Producing assets

Esperanza

Colombia

100%

100%

276

276

1.78

490

3.33

VIM-21

Colombia

100%

100%

48

48

2.21

106

0.72

VIM-5

Colombia

100%

100%

300

300

1.45

436

2.96

Core NAV

624

624

681

4.76

Exploration/development upside

Five-year programme (800bcf gross)

Colombia

100%

45%

800

800

0.98

353

2.40

Total NAV

1,424

1,424

1,034

7.02

Source: Edison Investment Research. Note: Number of shares = 180.1m + 14.2m = 194.3m (includes dilution from all share options)

The market appears to be undervaluing Canacol’s 2P reserve base and its prospective resource, despite historically high exploration and appraisal (E&A) success rates, currently at 83%. We estimate a market-implied exploration success rate of just 80% based on 2.6tcf of net unrisked prospective resource (Gaffney Cline estimated Pmean). Exhibit 2 below shows the impact of our different valuation scenarios versus the current share price.

Exhibit 2: Edison valuation scenarios versus share price (base case at 12.5% WACC)

Source: Edison Investment Research. Note: Priced at 24 March 2020.

Discount rate sensitivity

We have used a generic discount rate of 12.5% in our valuation. This is in line with that used for funded, cash-generative E&Ps with operations in emerging markets, resulting in a valuation of C$7.02/share. At a 10% discount rate, it would increase to C$7.79/share. We provide a sensitivity to this key input below.

Exhibit 3: 2P and risked exploration NAV sensitivity (C$/share) to WACC

8.0%

10.0%

12.5%

15.0%

2P NAV

6.11

5.39

4.63

3.98

Risked NAV (800bcf risked @ 45%)

8.51

7.79

7.02

6.38

Source: Edison Investment Research

Relative valuation

Canacol currently trades at a c 50% discount to our NPV12.5 base case scenario valuation of the company’s 2P reserve base plus prospective resources. Relative to Canacol’s peer group, the free cash flow yield in FY20 (based on 205mmscfd plateau production and after maintenance capex) is high at 11.8%, supporting shareholder cash returns. Canacol trades at a P/CF multiple of 2.6x in FY20e, compared to its Canadian E&P peers on 1.2x and its North American E&P peers with South American operations on 1.4x. North American E&P peers with South American operations include Frontera Energy, Gran Tierra, Parex Resources, PetroTal and GeoPark. Since our last note, which was published before the markets crash and the oil price collapse, Canacol’s share price has decreased by c 20%, while its peer group of North American E&Ps with South American operations has declined by 61%.

We feel this is justified given the company’s historical exploration and appraisal success rates, as well as installed infrastructure capable of supporting plateau production well beyond that implied by current reserves. Other supporting factors include limited exposure to current commodity price volatility, low levels of debt and high netbacks, which could help justify a lower cost of capital than our assumed 12.5%. We provide a sensitivity to this driver in Exhibit 3.

Exhibit 4: Peer group valuation table

Company

Market cap ($m)

EV
($m)

EV/EBITDA FY20e

EV/EBITDA FY21e

FCF Yield FY20e

FCF Yield FY21e

P/CF FY20e

P/CF FY21e

Net debt/
EBITDA FY20e

Net debt/
EBITDA FY21e

Div yield FY20e

Prod FY20e

Prod growth FY20e

EV/kboed FY20e

Edison forecast - Canacol

450

791

3.18

3.11

11.8%

11.8%

2.57

2.52

1.02

0.81

5.8%

36.0

44.1%

22.0

Canacol peer group

359

490

1.36

1.27

18.7%

11.1%

1.40

1.12

0.44

0.38

5.2%

41.4

37.5%

31.8

Frontera Energy Corp

227

361

0.69

1.23

6.5%

-12.6%

0.82

0.83

0.14

0.25

17.4%

60.4

-14.8%

16.4

GeoPark

377

716

1.65

1.67

50.0%

26.4%

2.15

1.72

0.78

0.79

1.6%

48.6

21.4%

40.3

Gran Tierra Energy

77

674

2.66

1.96

23.5%

24.5%

0.47

0.41

2.36

1.74

0.0%

31.5

-9.5%

58.6

Parex Resources

1,048

653

1.49

1.18

12.8%

16.0%

2.57

2.19

(0.90)

(0.71)

0.0%

55.2

4.7%

32.4

PetroTal Corp

67

47

0.30

0.29

0.6%

1.3%

0.98

0.47

(0.17)

(0.16)

7.0%

11.5

185.8%

11.3

Canada

609

1,815

3.84

3.49

5.4%

-8.3%

1.16

1.03

2.80

2.60

8.4%

107.0

1.8%

35.6

Junior E&P <30kboed

37

197

3.71

3.25

8.3%

-12.6%

1.01

0.85

2.57

2.45

10.1%

17.3

3.2%

30.7

Altura Energy

9

9

2.95

1.88

-25.0%

-32.3%

2.50

1.67

0.02

0.01

0.0%

1.4

18.6%

18.7

Bonterra Energy Corp

20

230

4.75

4.30

51.6%

28.6%

0.56

0.53

4.29

3.89

7.0%

11.9

-3.6%

53.2

Cardinal Energy

27

165

4.66

4.71

8.9%

7.0%

0.95

0.79

3.82

3.86

17.1%

20.3

-2.8%

22.3

Crew Energy

17

287

5.88

6.05

36.9%

-76.6%

0.56

0.62

5.50

5.66

0.0%

21.0

-8.1%

37.5

Storm Resources

82

178

3.63

2.48

-9.1%

9.8%

2.00

1.60

1.86

1.27

0.0%

24.1

19.5%

20.3

Surge Energy

50

382

3.88

4.15

24.0%

-3.2%

0.75

0.80

3.33

3.56

30.7%

20.5

-3.4%

51.2

TORC Oil & Gas

77

316

2.05

2.01

5.5%

0.5%

0.62

0.57

1.51

1.48

30.4%

27.8

-1.8%

31.1

TransGlobe Energy Corp

32

37

2.86

1.20

36.4%

34.5%

0.74

0.67

0.43

0.18

5.7%

15.2

5.4%

6.7

Yangarra Resources

19

169

2.73

2.45

-54.2%

-82.0%

0.42

0.39

2.40

2.15

0.0%

13.2

5.0%

35.2

Intermediate E&P>30kboed

244

941

4.02

3.61

0.4%

-9.4%

1.13

1.03

3.14

2.80

7.7%

66.2

1.6%

37.3

Advantage Oil & Gas

145

366

3.16

2.50

-14.0%

-2.4%

1.62

1.12

1.82

1.44

0.0%

45.8

3.4%

21.9

Baytex Energy Corp

124

1,543

3.33

3.85

10.9%

-41.2%

0.47

0.52

3.04

3.50

0.0%

88.0

-9.9%

48.0

Bonavista Energy Corp

21

645

5.58

5.23

45.4%

-50.0%

0.23

0.24

5.39

5.05

0.0%

62.9

-0.8%

28.1

Canacol Energy

450

750

2.94

2.89

10.2%

9.5%

2.70

2.58

1.18

1.16

6.4%

36.2

41.6%

56.8

Enerplus Corp

307

698

2.26

2.16

-0.3%

-4.2%

1.11

1.15

1.20

1.15

6.0%

91.9

-9.1%

20.8

Frontera Energy Corp

227

361

0.69

1.23

6.5%

-12.6%

0.82

0.83

0.14

0.25

17.4%

60.4

-14.8%

16.4

Kelt Exploration

111

402

3.34

2.92

-8.7%

-9.9%

1.23

1.07

2.34

2.04

0.0%

35.9

19.9%

30.7

MEG Energy Corp

298

2,762

7.16

6.87

63.6%

22.7%

1.25

1.50

6.31

6.05

0.0%

94.8

1.9%

79.8

NuVista Energy

65

560

2.75

2.76

-27.5%

-26.5%

0.43

0.45

2.40

2.41

0.0%

55.2

8.7%

27.8

Painted Pony Energy

24

638

11.96

8.65

-71.8%

-19.9%

0.98

0.63

11.46

8.29

0.0%

47.8

-2.5%

36.6

Paramount Resources

101

608

3.48

2.87

-90.7%

-81.0%

0.92

0.72

2.85

2.35

0.0%

72.7

-11.8%

22.9

Parex Resources

1,048

653

1.49

1.18

12.8%

16.0%

2.57

2.19

(0.90)

(0.71)

0.0%

55.2

4.7%

32.4

Peyto Exploration & Development

137

1,002

4.79

4.17

3.5%

19.6%

0.79

0.65

4.07

3.55

18.6%

79.6

-1.5%

34.5

Vermilion Energy

342

1,893

4.08

3.36

40.9%

35.4%

0.86

0.81

3.27

2.69

42.2%

97.8

-2.5%

53.0

Whitecap Resources

263

1,232

3.32

3.52

25.6%

3.5%

0.94

1.03

2.55

2.70

25.5%

68.5

-3.6%

49.3

Large E&P>100kboed

2,733

7,348

3.55

3.55

15.2%

2.7%

1.51

1.35

2.20

2.27

7.6%

391.0

-0.1%

39.4

ARC Resources

728

1,434

3.21

3.54

14.1%

12.7%

1.82

1.74

1.49

1.64

15.0%

153.2

10.1%

25.6

Canadian Natural Resources

10,982

28,059

5.72

4.53

14.5%

16.8%

3.00

2.35

3.33

2.64

12.5%

1,166.3

6.1%

65.9

Crescent Point Energy Corp

336

2,670

3.44

4.69

33.3%

-35.6%

0.51

0.64

2.96

4.04

3.6%

134.2

-17.3%

54.5

Seven Generations Energy

319

1,881

2.13

2.11

5.1%

7.4%

0.49

0.48

1.73

1.72

0.0%

190.4

-6.2%

27.1

Tourmaline Oil Corp

1,302

2,698

3.23

2.86

9.2%

12.1%

1.73

1.55

1.50

1.33

6.9%

310.8

6.8%

23.8

US intermediate/large E&P

3,355

8,110

3.93

3.94

6.1%

6.9%

1.44

1.35

2.70

2.76

3.7%

315.7

7.8%

66.0

RoW intermediate/large E&P

9,499

10,572

3.14

2.86

1.3%

2.2%

2.93

2.62

1.15

1.03

8.3%

409.0

32.2%

78.9

Average

2,847

5,630

3.65

3.49

6.2%

1.4%

1.51

1.38

2.41

2.35

6.0%

233.0

10.6%

54.2

Source: Edison Investment Research, Bloomberg, Refinitiv estimates. Note: Prices as at 24 March 2020

Financials

Canacol announced that it will invest an estimated c US$114m in capex in 2020, which will be fully funded from existing cash and 2020 cash flow. It expects EBITDAX of c US$265m for the year (vs our slightly revised estimate of US$260m). Canacol’s budget also allows for a minimum of US$7m in quarterly dividends, as well as c US$15m in debt reduction in 2020. It also expects a decrease in net debt/EBTIDA in the coming years, guiding to 1.1x net debt/EBITDA for year-end 2020, compared to 2.1x in December 2019, in line with our updated estimates. We believe excess cash (see Exhibits 5 and 6) is likely to be directed at expanding Canacol’s footprint through the drill bit, considering the extensive acreage the company owns around its producing facilities. The excess cash could also offer significant capacity for returns to shareholders, either via dividend payments or a share buyback programme.

Exhibit 5: Free cash flow waterfall in FY20e

Exhibit 6: Free cash flow forecasts

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 5: Free cash flow waterfall in FY20e

Source: Edison Investment Research

Exhibit 6: Free cash flow forecasts

Source: Edison Investment Research

Exhibit 6 shows FCF generation under our 2P development scenario together with shareholder returns, taking into account the announced dividend and assuming it remains constant in the foreseeable future. We can see that with a yearly cash dividend of US$28m, under our base case scenario this is sustainable until at least 2025, even in our 2P scenario.

Exhibit 7: Financial summary

US$m

2017

2018

2019

2020e

2021e

Year-end December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT&LOSS

Revenue*

156.6

204.5

219.5

302.7

310.3

Cost of sales(opex)

(25.0)

(28.9)

(17.1)

(18.6)

(19.6)

Gross profit

131.6

175.6

202.4

284.1

290.7

General & admin

(26.5)

(28.2)

(29.0)

(24.2)

(24.8)

Share-based payments

(11.6)

(8.5)

(7.9)

(8.1)

(8.3)

Exploration expense

(27.1)

(13.7)

(3.0)

(3.0)

(3.1)

EBITDA

130.2

138.6

162.8

259.9

265.9

Depreciation

(35.8)

(44.2)

(54.3)

(73.2)

(73.2)

Operating Profit(before amort. and except.)

(90.0)

41.9

97.6

175.6

181.3

Intangible amortisation

-

-

-

-

-

Exceptionals

-

-

-

-

-

Other

-

-

-

-

-

EBIT

(90.0)

41.9

97.6

175.6

181.3

Net interest

(26.3)

(34.5)

(32.9)

(29.4)

(27.5)

Profit Before Tax (norm)

(116.4)

7.3

64.7

146.2

153.9

Profit Before Tax (FRS3)

(116.4)

7.3

64.7

146.2

153.9

Tax

(32.4)

(29.2)

(30.5)

(41.1)

(45.7)

Profit After Tax (norm)

(148.8)

(21.8)

34.2

105.1

108.2

Profit After Tax (FRS3)

(148.8)

(21.8)

34.2

105.1

108.2

Average Number of Shares Outstanding (m)

175.2

177.2

178.3

178.3

178.3

EPS – normalised (c)

(84.95)

(12.32)

19.21

58.96

60.68

EPS - normalised fully diluted (c)

(84.95)

(12.32)

19.21

58.96

60.68

EPS - (IFRS) (US$)

(0.85)

(0.12)

0.19

0.59

0.61

Dividend per share (c)

-

-

-

-

-

Gross margin (%)

84.01

85.87

92.19

93.84

93.69

EBITDA margin (%)

84.01

85.87

92.19

93.84

93.69

Operating margin (before GW and except.) (%)

(57.49)

20.48

44.48

58.00

58.44

BALANCESHEET

Non-current assets

499.8

580.3

620.8

658.6

699.1

Intangible assets

43.9

39.6

53.9

122.8

193.5

Tangible assets

383.4

480.4

506.1

474.9

444.8

Investments

72.5

60.3

60.8

60.8

60.8

Current assets

196.7

124.7

133.3

165.7

213.6

Stocks

0.6

0.3

-

-

-

Debtors

50.4

68.2

69.6

69.6

69.6

Cash

39.1

51.6

41.2

73.7

121.6

Other/restricted cash

106.6

4.6

22.4

22.4

22.4

Current liabilities

(86.3)

(69.3)

(97.8)

(97.8)

(97.8)

Creditors

(86.3)

(69.3)

(89.6)

(89.6)

(89.6)

Short-term borrowings

-

-

(8.2)

(8.2)

(8.2)

Long-term liabilities

(371.0)

(430.3)

(413.5)

(398.5)

(398.5)

Long-term borrowings

(294.6)

(339.7)

(333.4)

(318.4)

(318.4)

Other long-term liabilities (inc. decomm.)

(76.4)

(90.6)

(80.1)

(80.1)

(80.1)

Net assets

239.1

205.4

242.7

328.0

416.5

CASH FLOW

Operating cash flow

65.3

94.0

108.4

219.4

221.4

Capex inc acquisitions**

(106.0)

(75.5)

(84.3)

(114.0)

(116.9)

Financing expenses

(21.2)

(36.0)

(29.5)

(30.0)

(28.6)

Equity issued

(1.9)

(3.7)

2.1

-

-

Dividends

-

-

(7.1)

(28.0)

(28.0)

Net cash flow

(63.8)

(21.2)

(10.4)

47.4

47.9

Opening net debt/(cash)

184.4

255.5

288.1

300.3

252.9

HP finance leases initiated

-

-

-

-

-

Other

(7.4)

(11.4)

(1.9)

-

-

Closing net debt/(cash)

255.5

288.1

300.3

252.9

205.0

Source: Edison Investment Research, Canacol Energy accounts. Note: *Edison revenue forecast net of royalties and transport expenses; Canacol reports revenues net of royalties before transport expenses. **215mmscfd and 315mmscfd plateau scenarios include materially higher capex.


General disclaimer and copyright

This report has been commissioned by Canacol Energy and prepared and issued by Edison, in consideration of a fee payable by Canacol Energy. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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United States of America

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Canacol Energy and prepared and issued by Edison, in consideration of a fee payable by Canacol Energy. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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