Mr. Charle Gamba reports
CANACOL ENERGY LTD. REPORTS A 65% INCREASE IN REALIZED GAS SALES AND A 48% INCREASE IN EBITDAX IN Q1 2020
Canacol Energy Ltd. has released its financial and operating results for the three months ended March 31, 2020. Dollar amounts are expressed in U.S. dollars, except as otherwise noted.
Charle Gamba, president and chief executive officer of the corporation, commented: "The first quarter of 2020 marked a milestone for the corporation as we achieved record natural gas sales of 202 mmscfpd, up 65 per cent from the same first quarter of 2019 and up 12 per cent from the last quarter of 2019. We also closed the first quarter of 2020 with $49-million in cash and remain well funded to execute the remainder of the 2020 capital program.
"In the first quarter of 2020, we announced our Dec. 31, 2019, year-end reserves, with a proved plus probable (2P) reserves replacement ratio of 224 per cent, along with a 12-per-cent increase in 2P reserves year over year as a result of our continued exploration and development success. The before-tax net present value of our 2P reserves, discounted at 10 per cent, increased 40 per cent to $2.15-billion. A new third party engineering resource report was released containing gross prospective resources of 4.7 trillion cubic feet (tcf) in over 160 identified exploration prospects and leads as at Dec. 31, 2019, up 79 per cent since the previous report issued as at Dec. 31, 2017.
"The corporation also drilled two successful natural gas wells in the quarter, Nelson-14 and Clarinete-5. The Clarinete-5 development well finished drilling in March, 2020, and encountered 309 feet true vertical depth of net gas pay within the primary Cienaga de Oro sandstone reservoir, which represents the thickest gas pay section of any well drilled in the history of Canacol. The well will be completed and tied in late May, 2020, when drilling operations resume in the field.
"The first quarter of 2020 also saw us announce our second consecutive quarterly dividend, which is approximately 6 per cent annually at current share prices, as Canacol remains committed to maintaining our ongoing quarterly distribution.
"The corporation posted record EBITDAX of $59-million in the first quarter of 2020, resulting from its record natural gas sales. Net income during the first quarter of 2020 was negatively impacted by the depreciation of the Colombian peso (COP). The 24-per-cent depreciation of the COP effectively incurred a $41-million non-cash deferred tax expense. Without such non-cash expense, net income would have been a robust $15-million for the quarter. Should the COP normalize in the coming periods, as it has strengthened by approximately 5 per cent since March 31, a portion of this expense would effectively be reversed adding to net income realized in future periods."
Highlights for the three months ended March 31, 2020
(Production is stated as working interest before royalties.)
Financial and operational highlights of the corporation include:
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Realized contractual natural gas and liquefied natural gas (LNG) sales increased 65 per cent to 201.5 million square cubic feet per day (mmscfpd) for the three months ended March 31, 2020, compared with 122 mmscfpd for the same period in 2019. Average natural gas and LNG production volumes increased 63 per cent to 201.4 mmscfpd for the three months ended March 31, 2020, compared with 123.3 mmscfpd for the same period in 2019. The increase is primarily due to the completion of the 100 mmscfpd pipeline expansion in late Q3 2019; in addition, the LNG plant commenced operation during the three months ended March 31, 2020.
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Total natural gas and LNG revenue, net of royalties and transportation expenses, for the three months ended March 31, 2020, increased 48 per cent to $69.9-million, compared with $47.4-million for same period in 2019, mainly attributable to the increase of natural gas production.
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Adjusted funds from operations increased 51 per cent to $45.3-million for the three months ended March 31, 2020, compared with $29.9-million for the same period in 2019. Adjusted funds from operations per basic share increased 47 per cent to 25 cents per basic share from 17 cents per basic share.
- Earnings before interest, taxes, depreciation, amortization and exploration expenses (EBITDAX) increased 48 per cent to $58.9-million for the three months ended March 31, 2020, compared with $39.8-million for the same period in 2019.
- The corporation realized a net loss of $26-million for the three months ended March 31, 2020, compared with a net income of $6.3-million for the same period in 2019. The net loss is solely due to the non-cash deferred tax expense of $41.1-million, which is primarily due to the effect of the reduction in the Colombian-peso exchange rate on the value of unused tax losses and cost pools as further explained in the income tax section of the management's discussion and analysis (MD&A). The corporation also realized a foreign exchange loss of $4.3-million during the three months ended March 31, 2020, as a result of the 24-per-cent devaluation of the Colombian peso during the period.
- The corporation's natural gas and LNG operating netback decreased 11 per cent to $3.60 per thousand cubic feet (mcf) in the three months ended March 31, 2020, compared with $4.03 per mcf for the same period in 2019. The decrease is due to: (i) lower spot market gas sales prices, net transportation costs; and (ii) an increase in royalties per unit of eight cents per mcf due to increased natural gas volumes being produced at the corporation's VIM-5 block, which is subject to a higher royalty rate. The decrease is offset by a 27-per-cent reduction of operating expenses per mcf to 22 cents per mcf for the three months ended March 31, 2020, compared with 30 cents per mcf for the same period in 2019.
- Net capital expenditures for the three months ended March 31, 2020, were $19.9-million. Net capital expenditures included non-cash adjustments related to decommissioning obligations of $1.3-million and right-of-use leased assets recognized of $1.3-million.
- As at March 31, 2020, the corporation had $49.2-million in cash and cash equivalents, $3.7-million in restricted cash, and $54.5-million in working capital surplus.
Outlook
Most energy companies worldwide have been heavily impacted by both the drastic drop in world oil price and demand related to the measures taken to limit the COVID-19 pandemic. Canacol has largely been insulated from the effects of low oil prices given the company's focus on gas production, with the blend of its gas sales being weighted toward 80 per cent fixed volume and take-or-pay contracts priced in U.S. dollars at the wellhead.
Canacol's take-or-pay natural gas contracts have seen no instances of force majeure, with payments for deliveries being up to date with no events of default. For the months of April, May and June, 2020, Canacol has allowed take-or-pay off-takers to defer a maximum of 20 per cent of their contracted volumes to be delivered in the last six months of 2020, with cash collections either occurring in April, May or June, or at the time of delivery. Additionally, all parties have agreed that the annual contractual downtime of these contracts shall be taken during the months of April and May, if not already taken earlier in the year. These concessions impacted the month of April, 2020, in the following manner: April, 2020, nominated volumes totalled 147 mmscfpd, less than 10 per cent of which are allowed to be taken in the latter half of 2020 (up to 20 per cent deferral), and take-or-pay income received, of which the off-taker has lost the right to take its gas, totalled three mmscfpd. These amounts totalled 150 mmscfpd of cash and nominated natural gas sales. An additional average of 13 mmscfpd for the month of April was deemed contractual downtime by seven off-takers, which will have the effect of increasing sales in the latter half of 2020.
As a result of the country-wide shutdown imposed in Colombia on March 26, 2020, which remained largely in effect until April 27, 2020, the company saw industrial, construction and commercial demand for gas decrease significantly as workers in these industries remained at home. As a result, there were virtually no interruptible gas sales for the month of April, 2020. With the return of manufacturing and construction activities in most of Colombia on April 27, 2020, and the country-wide shutdown scheduled to be lifted completely for all sectors on May 26, 2020, the corporation expects interruptible demand to continue to increase and stabilize through the summer months of July and August, 2020. Should this interruptible demand not return to the Colombian gas market, the period of July forward (once the off-taker deferral period expires, as described above) is anticipated to have contracts of approximately 162 mmscfpd, with 2020 annual sales thus being approximately 170 mmscfpd.
The corporation's best estimate is that demand will begin to increase once the quarantine measures are lifted and, under that scenario, its full-year 2020 guidance remains relatively intact. Full-year 2020 production guidance would be 197 mmscfpd, with the assumption that interruptible sales return by August, 2020. It is management's belief that average sales volumes for 2020 will be closer to this level than a low case sale of 170 mmscfpd implied by only selling into the take-or-pay contracts for the remainder of 2020.
Canacol remains very well capitalized, with a net debt to EBITDAX (12-month-trailing) ratio of 1.8 times, and is still anticipated to exit 2020 with a significant increase to its existing cash balance, which was $49-million at March 31, 2020. The corporation expects to exit 2020 with a net debt to EBITDAX ratio of approximately 1.3 times.
Canacol's production operations at the Jobo facility were uninterrupted during the quarantine. The company's Jobo gas processing facility continues to operate with several shifts of workers quarantined at the facility. As a result of the quarantine, the corporation has experienced an approximately two-month delay in the rig move from the last drilled well of Clarinete-5 to its next scheduled location of Pandereta-8. This delay and a small delay of the commencement of the corporation's planned second rig, now anticipated to be operational in July, 2020, have led to Canacol now expecting to drill nine wells in 2020, down from its original 12-well guidance. Capital expenditures have been revised to $108-million, down from $114-million, as the corporation has shifted its near-term focus to facilities and flow line construction in preparation of increased gas production.
The corporation expects Colombian demand for its natural gas to increase in the near term, related to the current 20-year-low level of the hydroelectric reservoirs due to an unusually dry winter in Colombia, and in the medium to long term, related to the continued decline of Colombia's main gas producing fields. Colombia's hydroelectric reservoirs are currently at a 20-year low due to the unusually dry winter. In May, 2016, during the last El Nino phenomenon, the level of the reservoirs was 41 per cent. Currently, the aggregate level of electric power generation reservoirs is 32 per cent. The months of June and July are forecasted to have rainfall well below the historical averages, and there is further uncertainty with respect to the levels of rainfall in the following months. This will result in the need for a higher-than-normal usage of gas to power the thermoelectric plants to ensure that adequate electricity is supplied to the country, most particularly to the Caribbean coast.
Meanwhile, Colombia's total gas production continues to decline. In April, 2020, the Ministry of Mines and Energy reported that proven gas reserves in Colombia decreased by approximately 18 per cent, from 3.8 trillion cubic feet (tcf) at the end of 2018, to 3.1 tcf at the end of 2019. This decrease in reserves was partially related to production of approximately 0.4 tcf during 2019. Conversely, Canacol's gas reserves and production increased significantly.
Given these natural gas market fundamentals of declining gas supply, excluding Canacol, and stressed and uncertain hydroelectric production, Canacol remains very well positioned to capture any increasing demand once the Colombian economy begins to normalize after the lifting of quarantine.
COVID-19 response
In accordance with the World Health Organization, along with the federal, provincial and municipal government agencies in the jurisdictions in which it operates in Colombia and Canada, the corporation has implemented strict protocols to support the safety and health of its employees, contractors and the communities in which it operates. Actions that have been taken to prevent the spread of the virus include the introduction of flexible work hours and arrangements for office employees, modified shift strategies to support physical distancing in the field, medical monitoring of all staff, and increased cleaning and sanitization in all locations.
Non-essential office employees in both Bogota and Calgary have been working remotely from home since late March. On May 11, 2020, executive management and key personnel returned to the office to work, with the remainder of employees working from home for the foreseeable future. In the corporation's Jobo production station, two crew rotations have been lodged permanently on location for a period of 28 days, with access to and from the facilities being strictly forbidden. Production operations have not been impacted as a result. The corporation's drilling rig was idled on March 26, 2020, upon the completion of the Clarinete-5 drilling operation in response to Colombian federal quarantine measures and it is anticipated that it will be mobilized to the Pandereta-8 development drilling location commencing on May 27, 2020.
During April and May of 2020, approximately $65,000 (U.S.) was donated by the Colombian and Canadian employees of Canacol to support at-risk communities in the five neighbouring municipalities of the company's field operations as well as in Bogota. The Entretejiendo, Project Union and CES Waldorf foundations converted the donations into a continuing distribution of market baskets comprising food staples, hygiene products and basic medical supplies for more than 10,500 families, senior citizens and orphans. More details can be found on the Canacol and Entretejiendo websites.
FINANCIAL HIGHLIGHTS
Three months ended
March 31, March 31,
2020 2019
Total natural gas, LNG and crude oil revenues,
net of royalties and transportation expense $ 70,994 $ 49,404
Adjusted funds from operations (1) $ 45,281 $ 29,907
Per share -- basic ($) (1) 0.25 0.17
Per share -- diluted ($) (1) 0.25 0.17
Net income (loss) and comprehensive income (loss) (2) $ (25,988) $ 6,274
Per share -- basic ($) (0.14) 0.03
Per share -- diluted ($) (0.14) 0.03
Cash flow provided by operating activities $ 38,018 $ 25,255
Per share -- basic ($) 0.21 0.14
Per share -- diluted ($) 0.21 0.14
EBITDAX (1) $ 58,870 $ 39,822
Capital expenditures, net dispositions $ 19,892 $ 34,725
As at
March 31, Dec. 31,
2020 2019
Cash and cash equivalents $ 49,156 $ 41,239
Restricted cash $ 3,697 $ 4,524
Working capital surplus $ 54,501 $ 50,676
Total debt $ 388,483 $ 392,946
Total assets $ 745,799 $ 754,062
(1) Non-IFRS (international financial reporting standards) measure.
(2) The net loss realized during the three months ended March 31, 2020, is solely
due to the non-cash deferred tax expense of $41.1-million, which is primarily due
to the effect of the reduction in the Colombian-peso exchange rate on the value of
unused tax losses and cost pools. In the event that the Colombian peso strengthens
in the future, the corporation would realize a deferred income tax recovery for
the period.
OPERATING HIGHLIGHTS
Three months ended
March 31, March 31,
2020 2019
Natural gas, LNG and crude oil production,
before royalties (1)
Natural gas and LNG (mcfpd) 201,398 123,291
Colombia oil (bopd) 315 433
Total (boepd) 35,648 22,063
Realized contractual sales, before royalties (1)
Natural gas and LNG (mcfpd) 201,524 122,025
Colombia oil (bopd) 298 440
Total (boepd) 35,653 21,848
Operating netbacks (1)
Natural gas and LNG ($/mcf) 3.60 4.03
Colombia oil ($/bopd) 20.13 23.64
Corporate ($/boe) 20.49 23.00
(1) Non-IFRS measure.
This news release should be read in conjunction with the corporation's interim condensed consolidated financial statements and related management's discussion and analysis. The corporation has filed its interim condensed consolidated financial statements and related management's discussion and analysis as at and for the three months ended March 31, 2020, with Canadian securities regulatory authorities. These filings are available for review on SEDAR.
Canacol is an exploration and production company with operations focused in Colombia. The corporation's shares are traded on the Toronto Stock Exchange under the symbol CNE, the OTCQX in the United States under the symbol CNNEF and the Bolsa de Valores de Colombia under the symbol CNEC.
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