Natural gas producers continue to languish after being hit hard by the prolonged slump in natural gas, which commenced in 2014. While there are signs that the outlook for natural gas is improving, many upstream producers, except those with a significant amount of oil production, have failed to rally. That has created an opportunity for investors seeking exposure to natural gas and higher prices. One of the best plays on natural gas is Canacol Energy Ltd. (TSX:CNE). Now what? Canacol has positioned itself to become one of the leading natural gas producers in the Latin American nation of Colombia,…
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Natural gas producers continue to languish after being hit hard by the prolonged slump in natural gas, which commenced in 2014. While there are signs that the outlook for natural gas is improving, many upstream producers, except those with a significant amount of oil production, have failed to rally. That has created an opportunity for investors seeking exposure to natural gas and higher prices. One of the best plays on natural gas is Canacol Energy Ltd. (TSX:CNE).
Canacol has positioned itself to become one of the leading natural gas producers in the Latin American nation of Colombia, which, after decades of self-sufficiency, is facing a shortage of the fossil fuel. This shortage has become so acute that Colombia, for the first time in 2017, was forced to start importing natural gas in the form of liquefied petroleum gas. Those supply constraints are being exacerbated by rising consumption of natural gas across all sectors of the economy. It has, in fact, become an important commercial fuel used in a range of industrial applications as well as becoming increasingly popular for use in homes.
The government, which is battling electricity shortages in a range of regions, is also considering expanding the national electricity-generating capacity by adding gas-fired power plants, which will drive demand higher. Consumption will also expand as Colombia’s economic growth picks up because of booming tourism and a vastly improved security situation, which is unlocking decades of pent-up growth.
This will be a boon for Canacol, which has reserves of 505 billion cubic feet of natural gas and 14 million barrels of oil. It also possesses tremendous exploration upside, holding acreage that has estimated potential gas resources of greater than two trillion cubic feet. That potential is underscored by Canacol’s natural gas exploration success rate of 86% and its latest discovery of the Breva 1 gas exploration well in the VIM 21 block located in the lower Magdalena Basin.
Canacol is focused on becoming a pure-play Colombian natural gas company, and, as a result, has focused the majority of its capital spending on expanding its natural gas operations. It is a low-cost operator with transportation and production costs totaling US$0.81 for every thousand cubic feet of natural gas produced compared to about US$0.91 for Painted Pony Energy Ltd. (TSX:PONY).
Unlike its North American peers, Canacol enjoys an average price of US$4.75 per million British thermal units (Mmbtu) sold, which is more than the spot price for natural gas. That means Canacol is far more profitable than natural gas producers operating in North America, which is evident from its first-quarter 2018 results, where it posted a gas operating netback of US$3.71 per Mcf sold. This is almost US$2 greater than the US$1.74 reported Painted Pony, highlighting Canacol’s superior profitability because of higher realized contracted prices in Colombia, which were triggered by that nation’s natural gas shortage.
There are a range of signs that these supply constraints will continue for some time, because there have been no major natural gas discoveries in Colombia for a considerable period, and gas consumption continues to grow.
Canacol’s ongoing exploration success in Colombia, the quality of its assets, and the favourable conditions in that nation’s natural gas market all bode well for the driller to continue reporting healthy results. These will give its stock a solid boost, meaning that Canacol has the potential to double in value.
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Fool contributor Matt Smith has no position in any stocks mentioned.