Canacol Energy: 10% Dividend Yield while waiting for capital gains

Introduction

Canacol Energy is a company I have followed for some time here at Seeking Alpha. Although I am looking to make capital gains from an increase in natural gas reserves and production, the share price of the company has not changed much over the last three years. The stock now trades about 50% less than it did three years ago. Canacol has not participated in the 2022 natural gas hype because the price of natural gas in Colombia is flat. Canacol is not a good option for the natural-gas price because of its predictability. While the price of natural gas in Colombia is very flat, there are few bettors and the price of natural gas will remain stable. The dividend yield of 10% is enough to keep me happy. Meanwhile, the company uses its operating cash flow to invest in its assets and increase reserves.

Cash flows are robust but capex is high

In the first quarter, the average production rate was around 185.500 Mcf/day. This translates to oil equivalent production of approximately 33,000 barrels/day. The company produced just over 600 barrels of crude oil per day, which resulted in a total of 33,600 oil-equivalent barrels and a daily net production of approximately 33,133 barrels (after subtracting the natural gases used during production).

As you can see, the average realized price of natural gas was US$5.13, a 10% increase compared to the quarter one of 2022. This is significantly higher than North American natural-gas prices. Canacol’s realized price for 2022 was not as high, but it is also not falling to the same degree as the price of natural gas in North America.

Canacol Energy reports their financial results in US Dollars. The total revenue for the first quarter was US$76.2M. This is lower than the first quarter last year. The simple reason for this is that Canacol Energy did not trade any natural gas. The total revenue was higher in Q1 of last year but margins were thin (about 4%) The revenue also decreased as the expenses were reduced, since there was no expense related to natural gas trading.

Total operating expenses were below $38M, and approximately half of those expenses related to depreciation. While the net finance costs increased, pre-tax income was still $25.7M. The net income was $16.9M. The EPS per share was $0.49. This is approximately C$0.65 for each share.

Cash flow is more important than reported net income because Canacol Energy has a lot of money to spend on its properties this year.

You can see in the table below that the operating cash flow was 31M$. This included an investment of $1.5M into the working capital and excluded approximately $9.5M for interest and lease payments. Adjusted, the operating cashflow was $23M. After normalizing cash tax payments, this would have been about $40M.

Canacol still had to spend $47.5M in capital expenditures before it could be considered cash flow positive. Canacol is currently investing heavily in assets to boost reserves before the completion of a pipeline that will serve the Medellin Market.

The guidance for the full year remains at $138-163M . This represents an average of 35-40M per quarter. Canacol’s Q1 capital expenditures were above average this year. The next few quarters should see a decrease in capital expenditures.

Canacol’s exploration efforts are beginning to pay off. In the latest update, Canacol announced that a new well called (Lulo 2 ) encountered 230 feet in net gas pay. This well will be completed, cased, and connected to the gas treatment plant. The company will be better prepared for the anticipated rise in demand for natural gases in Colombia during the second half year, as Canacol anticipates an impact positive from El Nino.

The company is continuing to drill and prepare new wells aggressively, while still paying a generous dividend. The next quarter dividend of C$0.26 a share is payable on 17 July. On an annualized base, the dividend yield has now reached almost 10%. Canacol being a Canadian-based company, Canadian dividend taxes will be deducted where applicable.

Investment Thesis

Although I originally invested in Canacol Energy to pursue capital gains, I am now happy with the generous dividend yield of 10%. The company’s cash flows are strong, and the negative free cash flow is due to the high investment made in the gas project. This was done to increase reserves and prepare the output capacity for the completion of the new Medellin Pipeline.

I’ll just have to wait. Canacol Energy does all the right thing and I still get a 10% yield on my dividends while I wait for share prices to rise. Canacol Energy has more than $70M of cash on its balance sheet, and there are no debts maturing before 2027. This allows it to continue investing in properties.

Editor’s note: This article discusses securities that are not traded on major U.S. stock exchanges. Be aware of the risks involved with these stocks.