Monday, October 26, 2015

A potential cash flow gusher in Colombia

With the commodity and resource markets in a severe bear market it is really hard to find companies that have potential for gains. A speculator really needs to dig deep and sift through many opportunities to find a situation with the a timely catalyst that will allow for a reevaluation by the market and hopefully a repricing of the shares upward.

I think an opportunity exists with a company called Canacol Energy (CNE.T, CNNEF). Canacol is an oil and gas exploration company operating primarily in Colombia. The company has built itself up over the years through acquiring other companies and through drilling. With the drop in oil prices Canacol made a strategic decision to switch its focus to natural gas. This was fortuitous for the company as it has very large natural gas reserves and they are located in a part of Colombia that is short on natural gas supply.

The Caribbean coast of Colombia is the target market for Canacol's gas. This region is projected to have natural gas demand grow at the rate of 6% per year over the next few years.

The company is currently completing a pipeline to this region that will be done in December 2015. Once completed the pipeline will allow the company to increase gas supply by a factor of 4X. Production will increase from a current 20MMcf/d to 83MMcf/d. EBITDA is projected to increase from 30 million to 140 million annually.

Of course this is a speculation as anything can go wrong in resource markets. They could fail to get the project done on time. The company is working in Colombia and although the government and FARC are talking about peace there could be attacks against the pipeline. The management could deliver on everything they say they will do and the market may not care. That happens in resource bear markets. However, if they do in fact get the pipeline up and running they are in for a wave of cashflow which could be used for dividends, share buybacks, and buying up weaker operators during this oil price environment, etc..

I am big bull on Colombia long term so I am comfortable with the risk. Please do your own due diligence as you are responsible for your own investment decisions.

Company Presentation

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