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Initiation of Coverage: CANACOL ENERGY - BUY

Positive turnaround story to continue; new funding sources support future CAPEX

Price: COP 12,240 / CAD 6.99 (TSX); Target Price: COP 14,200 / CAD 8.0 (TSX)

July 18, 2014 ( newswire) We are initiating our coverage of Canacol Energy with a Target Price of COP 14,200/share (CAD 8.0/share) and a BUY recommendation. We believe that recent and upcoming exploratory success will continue to have a positive impact on shares. In addition, the recent equity offering eliminates the overhang risk, at least in the mid-term. We expect the positive turnaround story of Canacol in terms of production and financials to continue in the upcoming years. Given current conditions, Canacol is the name we like the most within the local O&G industry in the short-to-mid term.

Our positive view on Canacol's turnaround story is supported by a stronger profile of 2P reserves with 42.3 mmboe (10.9 mmboe in 2011's fiscal year) and ~9 years of reserve's life. We also like the recent growth in production from 5,354 boepd in 4Q12 to 10,893 boepd at the end of March – 2014 and the exploratory success reported since 2013, which brings current production near to 14,000 boepd. Furthermore, we see no reason to expect bad news in the operating front in the short term. Thus, a higher diversification in production driven by key assets such as LLA23 and Esperanza along with less dependence from Rancho Hermoso mitigate risks and will allow Canacol to improve financials over the next two years.

The company faces challenges ahead, which we will analyze in more detail later including i) cash generation ii) leverage iii) no dividend policy, among others. That said, based on our valuation we believe that Canacol's story offers an attractive upside relative to the COLCAP index (16% vs 10%).

On a relative valuation basis, our view on Canacol's shares is based on 2015E multiples. The upcoming reserves report (expected Sept 14) along with an improvement on financials during fiscal year 2015 support our view. Our Target Price implies an EV/EBITDA and P/E 2015E of 5.3x and 5.8x vs. 5.3x and 12.9x from peers. Further upside beyond our valuation could come from the new reserves report as well as any further success on exploratory activities

Credicorp Capital

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More Info: Newswire

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