As articles about Energy XXI (EXXI), Concho Resources (NYSE:CXO), Whiting Petroleum (NYSE:WLL), Oasis Petroleum (NYSE:OAS) are being released on a weekly basis, I decided to write an article about the Colombian intermediate producer Canacol Energy (CAAEF.PK), for these reasons:
1) If we count the publicly released articles about Canacol (CAAEF.PK), we will notice that this company has a very low coverage as of today.
2) Canacol and its partners have initiated some exploration programs in all the Colombian Basins (Putumayo, Llanos, Magdalena). Details about them are mentioned in another paragraph below. These programs could boost the share price quite suddenly one day if they are successful. Africa Oil (AOIFF.PK), PetroAmerica (PTAXF.PK), WesternZagros (WZGRF.PK), Mart Resources (MAUXF.PK) and ShaMaran Petroleum (SHASF.PK) are recent examples about how much the share price can rise after some positive drilling results in an exploration program.
3) Canacol is one of the most undervalued oil producers of the US and Canadian markets along with Rock Energy (RENFF.PK) and C&C Energia (CNCEF.PK). As I wrote an article about Rock Energy (OTCPK:RENFF)
and another one about C&C Energia (OTC:CNCEF), now it is the time for Canacol. In my article about C&C Energia I have also described the current macro and political situation in Colombia so I do not have anything to add apart from the fact that another American player keeps increasing its investment there. I talk for GeoPark Holdings (GPRKF.PK) from the London stock exchange which acquired the Llanos blocks of the private Hupecol.
4) I am long Canacol, and I would like the awareness about this relatively unknown company to rise, as the fundamentals are there.
According to the corporate presentation, Canacol operates primarily in Colombia but it also holds interests in Ecuador, Brazil and Guyana. In Colombia, it holds 1,6 million net acres which is spread into the 3 main oil producing Basins of Colombia. These 3 Basins are Llanos Basin (260,000 net acres), Middle Magdalena Basin (405,000 net acres) and Caguan/Putumayo Basin (945,000 net acres).
1) In Caguan/Putumayo where Canacol discovered in 2008-2009 the Capella heavy oil field which is one of the most important heavy oil fields discovered in Colombia in recent decades and hosts 1,8 billion barrels of oil. Canacol holds a 10% stake in this field while the remaining stake belongs to the Chinese giant Sinochem. This Capella discovery worked as the blood in the ocean works for the sharks, so the next giant who arrived in the area was Pacific Rubiales (PEGFF.PK) that bought a stake in Portofino contract recently. Portofino contract is situated immediately to the southwest of the Capella field. Canacol holds a 40% interest in the Portofino contract along with its 100% interest in the adjacent Cedrela, Tamarin, and Sangretoro E&P contracts which it shall explore on its own in order to capture all of the upside in the area.
2) Middle Magdalena hosts La Luna and Rosablanca formations which are Colombia's analogue to the Eagle Ford shale formation. This is why Exxon Mobil (NYSE:XOM) and Shell (NYSE:RDS.A) rushed to make a farm-out deal for a 80% WI in two of its Canacol's blocks there (VMM 2 and VMM 3 respectively). La Luna is one of the world's most productive source rocks according to the corporate presentation which also shows further details about the whopping IP of the wells there. The value of the land there has also increased 7 times in just one year! It was $125/acre in 2011, and it is over $700/acre currently.
The company has chosen to retain its 100% interest in the adjacent Santa Isabel E&P contract in order to capture all of the upside on the block should the play prove commercial on the adjacent VMM 2 and VMM 3 blocks. I also have to point out that Canacol's land in Middle Magdalena is surrounded by producing blocks which further mitigates the exploration risk.
3) Canacol's producing land is its Rancho Hermoso field in Llanos Basin.
Canacol announced recently an 98% increase at its 2P Reserves which hit 16,1 MMbbls (94% oil and 6% liquids). The company replaced 200% of its 2P Reserves in 2012. It produced 10,814 bbl/d on average in Q4 2012. Based on the $41M long term debt (convertibles included) and its $31M cash as of June 2012, it trades just for 27,000 $ per flowing barrel (100% oil) and 4x its annual funds from operations. It also trades for $19/MMbbl of 2P Reserves (94% oil and 6% liquids) and it has a pbv=0,9.
The company has experienced a Revenue growth of 50% yoy and $18,5M annual earnings in FY 2012 from losses in FY 2011.
I must also point out that Canacol sells its oil at a small discount to the Brent price as it exports it from Colombia. This is a strategic advantage that adds a strategic advantage to the company. The company does not sell its oil to the WTI or Edmonton price like most US-based and Canadian companies that operate in North Dakota, Texas, etc.
Reasons for the upside potential
These below are the factors which can trigger a significant rise at the share price:
1) The gross undervaluation of Canacol in comparison with the other oil weighted peers in Colombia and South America, like BPZ Resources (NYSE:BPZ), Americas Petrogas (OTCPK:APEOF), Parex Resources (OTC:PARXF), Gran Tierra Energy (NYSEMKT:GTE) or Petrominerales (OTCPK:PMGLF).
2) According to its Q3 2012 report, Canacol expects to close the following transactions during the October-December 2012 period:
a) The sale of part or all of its working interests in the Caño Los Totumos, LLA 10, and Morochito E&P contracts, along with its interest in the Entrerrios production contract, which are all considered immaterial to its Colombian portfolio. The company owns LLA 10 E&P contract (39% working interest), Caño Los Totumos E&P contract (51% working interest), Morichito E&P contract (15% working interest) and Entrerrios production contract (operator, 60% working interest).
b) The farm-out of its Brazil REC-T-170 (operator, 100% working interest) and its Guyana Takutu PPL (operator, 70% working interest) land as Brazil and Guyana are considered non-core for the Corporation. The Corporation is in advanced negotiations with a potential partner to farm-out 50% of its 100% operated working interest in the REC-T-170 block and all or part of its working interest in the Takutu PPL in 2012. It is currently reviewing bids from interested parties.
3) If the drilling results from the ongoing Portofino exploration contract of Pacific Rubiales (OTC:PEGFF) in Caguan/Putumayo Basin are positive. Pacific Rubiales is the operator of this contract. The neighbors are the Chinese Sinochem and the Colombians Ecopetrol (NYSE:EC) and Hupecol (private).
4) If the drilling results from the ongoing exploration programs of Exxon Mobil and Shell in Middle Magdalena Basin are positive. These 2 giants are the majority owners and operators of the 2 blocks where Canacol owns a 20% WI. It is worth noting that the neighbors are the Chinese Sinochem, the Colombian Ecopetrol, Repsol's subsidiary YPF SA (NYSE:YPF) and Nexen (NXY) which was recently acquired by the Chinese CNOOC (NYSE:CEO).
5) If the drilling results from the ongoing LLA 23 exploration contract (92,000 net acres with 80% WI) are positive. The LLA 23 contract is located immediately north of and on trend with the Rancho Hermoso field in Llanos Basin.
The Corporation's production guidance for calendar 2012 is expected to average between 14,000 and 16,000 bopd, net after royalties. This guidance excludes any production from potential future exploration successes.
Despite the fact that Canacol has a significant upside potential, i bear in mind as a shareholder that this is an exploration company which carries the inherent risk of disappointing drilling results that applies to any oil exploration company.
Although the company has a market cap of $270M, the share price is below $1 currently. This puts Canacol automatically (unfairly though in my opinion) in the penny stock category. As a result, investing in penny stocks carries a higher than average risk and consequently investors should not rely solely on the information presented. Rather, investors should use the information provided as a starting point for doing additional independent research on Canacol in order to form their own independent opinion.
Disclosure: I am long CAAEF.PK, OTCPK:RENFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.