Natilla 2 Drilling Will Expand Future Gas Production Capacity

Key Takeaways

• Leveraging strong natural gas demand and strategic market pricing could significantly boost Canacol's revenue and financial performance.
  
• New regional opportunities and strategic financing enhance growth prospects and financial stability, expanding Canacol's market footprint beyond Colombia.
  
• The company faces risks from reliance on high interruptible gas prices, exploration uncertainties, high-cost debt, and potential policy changes impacting future revenues.

Catalysts

Operates as an oil and gas company in Colombia.

• The anticipated high demand for natural gas and the company's strategic focus on interruptible market pricing could lead to increased revenues as they leverage strong pricing environments.
  
• Successful exploration and drilling activities, including prospects like Natilla 2 and Kite 1, have the potential to significantly increase gas production capacity, impacting future revenues positively by unlocking new reserves.
  
• The implementation of operational efficiencies and cost reductions throughout 2024 aims to support strong operational margins, which could improve net margins in the future.
  
• The favorable arbitration ruling with Promigas and strategic financing initiatives, such as the $75 million secured loan with Macquarie Group, bolster Canacol's financial stability, potentially increasing earnings through improved financial flexibility and lower financing costs.
  
• Strategic entry into Bolivia and new E&P contracts are expected to open regional growth opportunities, enhancing future revenue streams and expanding Canacol’s market footprint beyond Colombia.

Canacol Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Canacol Energy's revenue will decrease by -10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 50.4% in 3 years time.
• Analysts expect earnings to reach $127.8 million (and earnings per share of $3.75) by about January 2028, up from $22.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1.2x on those 2028 earnings, down from 3.6x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.51%, as per the Simply Wall St company report.

Canacol Energy Future Earnings Per Share Growth

Risks

• The company's reliance on high interruptible gas prices could pose a risk if market conditions change and prices fall, potentially reducing revenue and profitability.
  
• The exploration activity, such as the drilling of non-commercial wells like Cardamomo-1, involves significant costs and uncertainty, which might result in lower-than-expected earnings and affect net margins.
  
• While Canacol is currently benefiting from reduced natural gas supply in Colombia, an increased reliance on imported LNG and changes in national energy policies could impact future revenues and market dynamics.
  
• The $75 million loan facility with a high interest rate of SOFR plus 8% increases the company's financial obligations and could affect net earnings if revenues do not sufficiently increase to offset the debt costs.
  
• The ongoing impact of deferred income tax expenses due to foreign exchange rate changes can negatively affect net income, adding volatility to future earnings.

Valuation

• The analysts have a consensus price target of CA$4.67 for Canacol Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.5, and the most bearish reporting a price target of just CA$3.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $253.6 million, earnings will come to $127.8 million, and it would be trading on a PE ratio of 1.2x, assuming you use a discount rate of 10.5%.
• Given the current share price of CA$3.48, the analyst's price target of CA$4.67 is 25.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.