Natural gas bounced back in recent weeks, despite a poor outlook weighing on the fossil fuel. After hitting a multiyear low of just over US$2 per million British thermal units (MMbtu) in early August 2019, it has rallied to be trading at US$2.62 per MMbtu. That has helped to lift natural gas stocks, which plunged because of softer prices.
One driller that has gained 16% since the start of 2019 and appears poised to soar higher is Canacol Energy (TSX:CNE).
Favourable market dynamics
The company, which operates in Colombia, finds itself in the unique position to benefit from local market dynamics that see it receiving higher than spot prices for the natural gas that it produces. A combination of growing natural gas consumption, aging gas fields, and a dearth of major discoveries has triggered a shortage of the fuel, forcing Colombia to start importing liquified natural gas in 2017.
The energy crisis faced by Bogota appears to be worsening, as weaker oil and gas prices coupled with a worsening domestic security environment are deterring much-needed investment in hydrocarbon exploration.
As a result, Canacol anticipates that for 2019 it will receive around US$4.83 per MMbtu sold, which is almost double the North American Henry Hub benchmark price. The ability to access higher-than-market prices saw Canacol report an impressive second-quarter 2019 operating netback of US$3.88 per MMbtu produced, which is significantly higher than most of its peers operating in North America, underscoring its considerable profitability.
Canacol is now responsible for producing 25% of Colombia’s natural gas, placing it in a market-leading position. It has a proven capacity to grow its reserves that have expanded seven-fold since the end of 2013 to be 559 billion cubic feet (bcf) by the end of 2018, which is a notable compound annual growth rate (CAGR) of 55%.
Canacol’s reserves as well as natural gas production will continue to grow at a healthy clip. It has hydrocarbon leases totaling 1.6 million gross acres in Colombia with 2.6 trillion cubic feet (TCF) of prospective gas resources. So far for 2019, Canacol has drilled two development wells and two exploration wells, which have all produced natural gas.
The company’s natural gas sales have grown almost three-fold between the third quarter 2017 and August 2019 to be 215 million standard cubic feet daily (MMscf/d). Canacol recently announced that it had achieved a record 217 MMscf/d) in natural gas sales on 24 August 2019.
Growing infrastructure, including the recently commissioned Jobo to Cartagena gas pipeline expansion, will enhance Canacol’s ability to access domestic natural gas markets and expand its sales volumes. Canacol is anticipating the construction of a gas pipeline between its operations in northeastern Colombia to the Andean nation’s second-largest city Medellin 300 kilometres to the southwest.
These factors indicate that Canacol’s earnings will keep growing at a solid clip. For the second quarter, it reported earnings before interest, taxes, depreciation, amortization, and exploration expense of US$37 million, which was 10% greater than the equivalent period in 2018.
The ability to access Medellin’s large energy market with sales expected to commence sometime in 2023 will act as a powerful tailwind Canacol’s earnings.
Foolish takeaway
The poor outlook for natural gas, where global production is expected to grow at such a rapid rate that it will continue to outstrip demand, makes natural gas producers a risky investment. That outlook is being worsened by fears of a recession, the trade war between the U.S. and China, as well as softer economic growth, which has caused energy demand to decline.
Nonetheless, supply constraints combined with growing natural gas consumption in Colombia have created a favourable operating environment for Canacol, allowing it to obtain prices for the gas that it produces that are almost double the North American benchmark.
When this is combined with its explosive reserve growth, rising production and increased access to pipeline infrastructure, Canacol’s earnings will expand at a solid clip for the foreseeable future, giving its stock a solid boost.
