On Wednesday, before market opened, Canacol Energy Ltd. (TSE:CNE) delivered lower-than-anticipated production that was impacted by a two-week strike at the mine of one of the company’s core gas purchasers. Fourth quarter production remained at 9,970 BOE per day (or 9,682 BOE per day using a BOE conversion of 6 Mcf : 1 bbl) which was 4% lower than our forecast and down 10% quarter on quarter. That said, production has since rebounded and the firm exited June at 12,042 barrels of oil (equivalent) per day1 which we see as mainly impressive given no new wells were drilled in calendar 2015. The uptick was fuelled by success from the company’s work over program at LLA-23 and newly executed gas sales contracts into the local market.
Company also maintained plans to bring an additional 65 MMcf/d of gas on stream in December with the anticipation those environmental permits would be in place shortly to complete the pipeline loop. We remain moderately cautious on the company’s timeline given the possible for additional permitting delays and the fact that the project will take around 10-12 weeks to complete which could push construction into the October/November rainy season.
We see results at Clarinete-2 (expected to spud by the end of July) as important to de-risk the discovery and better determine the size of the field. Success could help to translate the value of the new reserves more fully into the share price and likely drive to an additional reserve uptick as the firm is targeting to prove up 209 Bcf of prospective resources.
We forecast the firm will exit the quarter with cash on hand of $38 million and net working capital of -$57 million. The firm also has a $200 million term loan and operating cash flow for calendar 2015 is anticipated to be around $40 million (our estimate), which should allow the firm to fully fund its 2015 capital expenditure program of $84 million.
Under our base commodity guidance and updated 2P net asset value per share forecast of $4.26 Company is trading at a 2P P/NAV of 59% compared to its peer group average of 116%. On a 2015 estimate EV/Debt-adjusted cash flow multiple, Company is trading at 5.3 times compared to the group at 6.8 times.
We reiterate our “Sector Perform” rating and 12 months price target of $5.00 per share, which is derived from our consistent risked net asset value per share forecast of $4.96. Commodity prices, exploration, project execution and political/regulatory are potential risks to be considered while investing.