Description

Canacol  -  CNE CN    LONG           C$3.57                                                                                                   7/25/2013

Small cap E&P Canacol Energy has base production of ~6800/day of light oil and gas in Colombia, plus it is carried by Shell, Conoco, and Exxon on $122m of spending (19 wells) in an emerging shale play called La Luna that could be transformative and we’ll begin seeing results in Aug & Sept. .

There is:

86.5m shares out at C$3.57

C$308m Market Cap

C$50m net debt

$358m EV 

3.9X EV/ Fwd EBITDA

$37,000 per flowing barrel on next year’s 9500/d guide

$10.91 per 2P BOE of 32.8m. 

$6.82 per 3P BOE of 52.5m

Canacol estimates 2.9B Barrels Net of Original Oil In Place across its land packages of 2.5m gross acres.

Capex budget is 53m for 2013.  Next year cash flow expected to exceed capx by ~20m.

Assets:

Colombia  -  (A business friendly oil and gas jurisdiction… if you’re thinking Pablo Escobar, you’re 20 years out of date.  Most of the country has been transformed thanks to strong government.  Still some FARC insurgency issues in the southern jungle areas but even they are asking for peace talks now).

Rancho Hermosa in the Llanos Basin (100% WI), 3700/d of light oil with high netbacks.  Wells have 50% declines in the first six months, but eventually taper off into nice producers.  This is the cash engine.

Esperanza – gas play with huge reserves (100% WI) doing 3200 boe/day.  18 year Reserve Life Index.  Needs some infrastructure and can grow volumes multi fold.

Putomayo Basin -  Heavy oil in southern portion of the country where the FARC (the bad guys) are active.  The Army protects the oil field but the FARC attacks the trucks bringing the oil out of the area to market so they’ve suspended production.   Will resume… eventually.

Block LLA-23  -  Light oil exploration on trend with Rancho Hermosa and other adjacent finds.  Had a find at Labrador and now aiming for Leono prospect.  Good likelihood of future production.

La Luna  - Five blocks comprising a large prospective shale play.  Greater total organic content than Eagle Ford with larger pay zone.  Clearly has the potential to be a world class production area.   Exxon, Shell and Conoco have farmed in via deals where they do the initial spending of $122m and 19 wells.  Success here would be a transformative catalyst.  First wells coming late summer from Exxon (Mono Arana well) & Conoco (Oso Pardo well).  Shell later this year in Q4.  Some 1998 tests by Harken Energy produced 7073 B/d of oil and 11.5 mmcf/d of gas back when oil was around $14 and gas was around $1.90.  This was vertical wells without fracs, so they should be able to top that nicely going horizontal with modern completions.

Equador

Kind of wish they’d sell it, but potentially big play in Equador with a 15 year incremental production contract.  Doing in-fill drilling and workover of existing wells.  Nacent industry in Equador with a govt that isn’t proven to be biz-friendly.

Opportunity:

Priced inline/below other Colombian producers but they have a big catalyst ahead with Exxon and Conoco results coming and the possible opening up of a large shale play at La Luna that could mean more than the current EV to the company.

Catalyst