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Research: Energy & Resources
In 2020, Canacol replaced 61.9bcf of production (equivalent to 170mmscfd) with 75bcf of reserves, delivering a reserves replacement ratio of 122%. This is a commendable result given the company executed a pared down drilling programme in 2020 with only six wells drilled, of which two were exploration wells. The company expects to drill 12 wells in 2021, which should continue to replace rising production, with February sales recently reported of 187mmcfd.
Written by
Canacol Energy |
Increasing reserves despite reduced 2020 drilling |
Reserves update |
Oil & gas |
9 March 2021 |
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Canacol Energy is a research client of Edison Investment Research Limited |
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In 2020, Canacol replaced 61.9bcf of production (equivalent to 170mmscfd) with 75bcf of reserves, delivering a reserves replacement ratio of 122%. This is a commendable result given the company executed a pared down drilling programme in 2020 with only six wells drilled, of which two were exploration wells. The company expects to drill 12 wells in 2021, which should continue to replace rising production, with February sales recently reported of 187mmcfd.
Year end |
Revenue* (US$m) |
Adjusted EBITDAX** |
Cash from operations |
Net debt*** |
Capex**** |
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) |
1.4 |
12/20e |
234.3 |
195.1 |
180.1 |
286.2 |
(108.0) |
7.7 |
12/21e |
228.4 |
187.2 |
156.3 |
306.5 |
(119.0) |
7.7 |
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 2019 reserves 2P production profile.
2P reserves continue to grow, production increasing
In Canacol’s latest annual reserves report, 2P reserves increased by 2.2% to 637.2bcf, although this was at a lower rate of increase than in previous years, given reduced drilling activity in 2020 due to COVID-19 restrictions. Canacol has increased 2P reserves every year since 2015, and with its high exploration success rates and continued drilling activity we expect this trend to continue. Meanwhile production rates continue to increase in 2021 with February 2021 gas sales reaching 187mmscfd, up 6% on January sales and close to the high-end of the 153–190mmscfd company guidance range for the year; our base case valuation currently reflects 172mmscfd.
Gas price pressure affects reserves valuations
Despite adding reserves across the 1P, 2P and 3P categories in its 2020 reserve report, Canacol’s technical auditors have reduced their gas price assumptions for the next five years by on average 21%, and this has reduced the technical valuation of the company’s reserves by c 20%. Canacol’s technical auditors’ gas price assumptions are broadly in line with Edison prices assumptions, which we updated as part of a wider review of the Colombia gas markets in our Outlook note published in January 2021.
Valuation: Base case valuation C$5.87/share
Edison’s risked exploration net asset value (RENAV) is based on a combination of 2P reserves and additional ‘to be developed’ risked reserves that we expect to be added over the next five years. Assumed additional risked reserves of c 72bcf/a (broadly in line with the 2020 reserves additions) drive a base case valuation of C$5.87/share. We expect to update our valuations after the FY20 results, which are due to be published on 18 March 2021.
Continued growth despite headwinds
Canacol added 75bcf of new reserves in 2020 that more than offset gross production of 61.9bcf, realising a reserves replacement ratio of 122% for the year. This was despite having to execute a pared down drilling programme as a result of COVID-19; a planned 12-well programme was reduced to only six wells, of which two were exploration. 2P reserves increased by 2.2% to 637.2bcf, although this was at a lower rate of increase than in previous years, as the company continued its strategy of steadily drilling its 162 individual prospects and leads historically underpinned by an exploration and appraisal success rate of over 80%. The company has a reserves life index (RLI) of 9.2 years based on gas production of 190mmscfd, in line with company high-end guidance for 2021, and above Canacol’s targeted RLI of eight years.
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Exhibit 1: Canacol 2P reserves growth |
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Source: Edison Investment Research, Canacol Energy |
Our base case scenario assumes a short production plateau in 2023/2024 of 235mmscfd (based on 205mmscfd of the 215mmscfd pipeline capacity and 30 mmscfd allocated to the 200MW Tesorito plant) and our upside case assumes 345mmscfd from 2025 when the proposed 285km new pipeline from Jobo-Medellin, with 100mmscfd capacity, is estimated by Canacol to come online. Under these scenarios, the RLI at current 2P levels would reduce to 7.4 years and 5.0 years respectively.
Production has continued to recover strongly, with February 2021 gas sales reaching 187mmscfd, up 6% on January sales and close to the 190mmscfd guidance for the year. Canacol plans to drill 12 wells in 2021: nine exploration wells and three development wells. The first two wells of the programme have completed drilling, with the Oboe-2 development well completed and tied into the Jobo gas processing facility. The Flauta-1 exploration well did not encounter commercial gas and has been plugged and abandoned. The rigs are currently mobilising to drill the Cañahuate 4 development well and the Milano 1 exploration well, both of which are expected to spud in the second week of March and take around five weeks to drill.
Gas price assumptions and reserves NPV implications
In conducting its 2020 reserves report, Canacol’s technical consultants, Boury Global Energy Consultants (BGEC), assumed a markedly lower gas price outlook than in 2019 to value the company’s reserves, as shown in Exhibit 2. Average price assumptions over the period 2021 to 2024 are 21% below the price realisations assumed at the end of 2019.
This reflects a reduction in Canacol’s fixed-price gas contract realisations during 2020 and probable pricing pressure from gas sales at interruptible price forecasts, given reduced demand due to COVID-19. The new gas price outlook is broadly consistent with Edison’s existing gas price assumptions as we had previously assumed that prices would come under some pressure for the coming years. For more details of the basis for Edison’s gas price outlook, and the wider gas supply/demand and price outlook in Colombia refer to our January 2021 Outlook note.
Exhibit 2: BGEC gas price assumptions vs Edison forecasts
Five-year gas price forecast |
2021 |
2022 |
2023 |
2024 |
2025 |
2019 reserve report (US$/mmBtu) |
5.53 |
5.81 |
6.12 |
7.55 |
- |
2020 reserve report (US$/mcf) |
4.39 |
4.93 |
5.12 |
5.29 |
5.59 |
Edison forecasts (US$/mcf) |
4.39 |
4.61 |
4.73 |
4.85 |
5.50 |
Source: Canacol Energy, Edison Investment Research
As a consequence of the reduced gas price outlook, BGEC has reported a c 20% reduction in NPV-10 valuations for Canacol’s gross reserves (Exhibit 3). Given Canacol’s low operating costs, this pass through of prices to valuation is what we would have expected.
Exhibit 3: BGEC reserves valuations
Gross reserves |
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Proved developed producing |
Total proved |
Total proved + probable |
Total proved + probable + possible |
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Product type |
(PDP) |
(1P) |
(2P) |
(3P) |
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Canacol Energy gross reserves summary December 2019 |
Conventional natural gas |
bcf |
251.9 |
394.1 |
623.8 |
884.8 |
Total oil equivalent |
mmboe |
44.2 |
69.1 |
109.4 |
155.2 |
|
Before tax NPV -10 |
US$m |
877.2 |
1,345 |
2,145 |
2,879.3 |
|
After tax NPV-10 |
US$m |
703.3 |
1,033.4 |
1,583.2 |
2,087.2 |
|
Canacol Energy gross reserves summary December 2020 |
Conventional natural gas |
bcf |
276.9 |
394.8 |
637.2 |
951.1 |
Total oil equivalent |
mmboe |
48.6 |
69.3 |
111.8 |
166.9 |
|
Before tax NPV -10 |
US$m |
750.8 |
1,030.6 |
1,688.2 |
2,407.1 |
|
After tax NPV-10 |
US$m |
631.5 |
822.6 |
1,269.8 |
1,758.8 |
|
Difference |
Conventional natural gas |
bcf |
10% |
0% |
2% |
7% |
Total oil equivalent |
mmboe |
9% |
0% |
2% |
8% |
|
Before tax NPV -10 |
US$m |
-14% |
-23% |
-21% |
-16% |
|
After tax NPV-10 |
US$m |
-10% |
-20% |
-20% |
-16% |
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Source: Canacol Energy
As a reminder, Edison’s base case valuation (total NAV) is based on a combination of 2P reserves and production from an additional 800bcf of target volumes that we expect to be discovered and developed over the next five years. Our valuation assumes a 45% success rate from this exploration activity hence we are adding effectively the equivalent of 72bcf of risked additional gas volumes to the reserves inventory on an annual basis. Given Canacol’s continued strong reserves replacement ratio and high exploration success, we remain confident of this approach for the foreseeable future.
Based on our previous modelling of reserves and to be discovered volumes of gas, our base case valuation for Canacol (including net debt, SG&A etc) is US$846m or C$5.87/share (using a 12.5% discount rate). Full details of this valuation, and upside and downside sensitivities, can be found in our Outlook note published in January 2021. We expect to update our valuation to reflect the updated reserves and other material differences after the FY20 results (which are due to be published on 18 March 2021).
Exhibit 4: Financial summary
|
US$m |
|
2018 |
2019 |
2020e |
2021e |
Year-end 31 December |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
||||||
Revenue* |
|
|
204.5 |
219.5 |
234.3 |
228.4 |
Cost of sales (opex) |
(28.9) |
(17.1) |
(15.6) |
(16.4) |
||
Gross profit |
175.6 |
202.4 |
218.7 |
212.0 |
||
General & admin |
(28.2) |
(29.0) |
(24.2) |
(24.8) |
||
Share based payments |
(8.5) |
(7.9) |
(8.1) |
(8.3) |
||
Exploration expense |
(13.7) |
(3.0) |
(3.0) |
(3.1) |
||
Adjusted EBITDAX** |
|
|
138.6 |
162.8 |
195.1 |
187.2 |
Depreciation |
(44.2) |
(54.3) |
(61.2) |
(61.2) |
||
Operating Profit (before amort. and except.) |
|
|
41.9 |
97.6 |
122.1 |
114.6 |
Intangible amortisation |
- |
- |
- |
- |
||
Exceptionals |
- |
- |
- |
- |
||
Other |
- |
- |
- |
- |
||
EBIT |
41.9 |
97.6 |
122.1 |
114.6 |
||
Net interest |
(34.5) |
(32.9) |
(29.4) |
(28.9) |
||
Profit Before Tax (norm) |
|
|
7.3 |
64.7 |
92.7 |
85.7 |
Profit Before Tax (FRS 3) |
|
|
7.3 |
64.7 |
92.7 |
85.7 |
Tax |
(29.2) |
(30.5) |
(15.0) |
(31.7) |
||
Profit After Tax (norm) |
(21.8) |
34.2 |
77.7 |
54.0 |
||
Profit After Tax (FRS 3) |
(21.8) |
34.2 |
77.7 |
54.0 |
||
Average Number of Shares Outstanding (m) |
177.2 |
178.3 |
181.0 |
180.6 |
||
EPS - normalised (c) |
|
|
(12.32) |
19.21 |
42.95 |
29.92 |
EPS - normalised fully diluted (c) |
|
|
(12.32) |
19.21 |
42.95 |
29.92 |
EPS - (IFRS) (US$) |
|
|
(0.12) |
0.19 |
0.43 |
0.30 |
Dividend per share (c) |
- |
0.05 |
0.21 |
0.21 |
||
Gross margin (%) |
85.87 |
92.19 |
93.34 |
92.83 |
||
EBITDA margin (%) |
85.87 |
92.19 |
93.34 |
92.83 |
||
Operating margin (before GW and except.) (%) |
20.48 |
44.48 |
52.11 |
50.17 |
||
BALANCE SHEET |
||||||
Non-current assets |
|
|
580.3 |
620.8 |
664.5 |
719.2 |
Intangible assets |
39.6 |
53.9 |
116.8 |
181.7 |
||
Tangible assets |
480.4 |
506.1 |
486.9 |
476.6 |
||
Investments |
60.3 |
60.8 |
60.8 |
60.8 |
||
Current assets |
|
|
124.7 |
133.3 |
144.7 |
112.4 |
Stocks |
0.3 |
- |
- |
- |
||
Debtors |
68.2 |
69.6 |
69.6 |
69.6 |
||
Cash |
51.6 |
41.2 |
52.7 |
20.3 |
||
Other/ restricted cash |
4.6 |
22.4 |
22.4 |
22.4 |
||
Current liabilities |
|
|
(69.3) |
(97.8) |
(97.8) |
(97.8) |
Creditors |
(69.3) |
(89.6) |
(89.6) |
(89.6) |
||
Short-term borrowings |
- |
(8.2) |
(8.2) |
(8.2) |
||
Long-term liabilities |
|
|
(430.3) |
(413.5) |
(410.8) |
(398.8) |
Long-term borrowings |
(339.7) |
(333.4) |
(330.7) |
(318.7) |
||
Other long-term liabilities (inc. decomm.) |
(90.6) |
(80.1) |
(80.1) |
(80.1) |
||
Net assets |
|
|
205.4 |
242.7 |
300.6 |
335.0 |
CASH FLOW |
||||||
Operating cash flow |
|
|
94.0 |
108.4 |
180.1 |
156.3 |
Capex inc acquisitions**** |
(75.5) |
(84.3) |
(108.0) |
(119.0) |
||
Financing expenses |
(36.0) |
(29.5) |
(30.0) |
(29.7) |
||
Equity issued |
(3.7) |
2.1 |
- |
- |
||
Dividends |
- |
(7.1) |
(28.0) |
(28.0) |
||
Net cash flow |
(21.2) |
(10.4) |
14.1 |
(20.3) |
||
Opening net debt/(cash) |
|
|
255.5 |
288.1 |
300.3 |
286.2 |
HP finance leases initiated |
- |
- |
- |
- |
||
Other |
(11.4) |
(1.9) |
0.0 |
(0.0) |
||
Closing net debt/(cash)*** |
|
|
288.1 |
300.3 |
286.2 |
306.5 |
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. **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 2019 reserves 2P production profile.
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