As we look across the E&P investment universe, few companies potentially offer greater asymmetric risk/reward upside compared with Canacol. The company is playing into a tightening Colombian gas market, which should continue to support favourable pricing and longer-term growth plans. However, even with existing pipeline infrastructure and a conservative outlook on exploration and appraisal success, our 2P + risked exploration base case valuation of C$5.87/share represents 59% upside to the current share price, while the downside is protected through existing take-or-pay contracts that suggest a low case based on 2021 take-or-pay contracted capacity (153mmscfd) of C$3.50/share. Under our current assumptions, which include Canacol's dividend equivalent to a 5.7% yield, we anticipate planned capex and cash dividends to be covered by the company's existing cash and cash generation.
Our base case valuation stands at C$5.87/share and assumes the world will return to normal in 2022, with gas sales resuming to pre-COVID-19 levels. With fixed gas prices for the medium term and 624bcf 2P reserves, the downside exposure to this valuation is limited to exploration success and decreased gas demand. In a scenario where exploration adds zero value, core NAV stands at C$3.62/share. Conversely, utilising existing infrastructure to the maximum suggests an unrisked upside valuation of C$7.78/share, while the expansion case currently being progressed could increase the upside valuation to C$9.17/share.
