Vinícius Andrade and Maria Elena Vizcaino, Bloomberg News

BOGOTA
EnergiesNet.com 03 27 2024

Bonds of Canacol Energy Ltd. are getting hammered after the largest private natural gas producer in Colombia said its liquidity had slumped as it struggles with weak production volumes.

Notes maturing in 2028 tumbled as much as 20 cents on the dollar in just three days to fresh lows of about 46 cents after the company reported that it had only $39.4 million left in cash or equivalents. That’s down by about 30% from the year earlier — and only marginally above the amount it needs to meet coupon payments due in May and November.

It was the final straw for some investors. While the notes have been declining since October, when the firm canceled a key contract for a pipeline in the city of Medellin, the recent selloff has doubled the six-month decline. Pledges from management of the Calgary, Canada-based company to consider asset sales and set up a new credit facility failed to ease concerns.

“People are not happy with the sudden U-turn with the pipeline last year, while some shortfalls and output and operational hiccups are not helping sentiment,” said Eduardo Ordonez, portfolio manager at BI Asset Management in Copenhagen. 

Canacol reported a drop in output and saw net debt rise 37% to $674 million at the end of 2023 from the year earlier. Moreover, the replacement ratio — a key metric that assesses the firm’s ability to sustain future output — for proven and probable reserves fell to a “meager” 31%, BancTrust & Co. said.

With debt rising, cash ebbing away and reserves weakening, the company “does not have much room for error,” analysts from Seaport Global Holdings LLC warned last week. 

A representative for the company pointed to Chief Financial Officer Jason Bednar’s comments on a call on Friday, where he told investors all of Canacol’s models include the scheduled interest payments and that it expects to keep leverage below the threshold that would trigger the breach of bond covenants.

Debt as a share of earnings before items stood at 2.85 times at the end of 2023, up from 2.31 times at the end of 2022, but still below the 3.25 that would trigger some covenants.

Distressed Debt

Canacol bonds have now handed holders losses of more than 20% in the past three months, the worst returns in Latin America according to a Bloomberg index. Meantime, other energy companies in Colombia — EnfraGen Energia Sur SA, Gran Tierra Energy Inc., AI Candelaria Spain, SierraCol Energy Andina — have largely outperformed the 2.2% return in the index during that period.

The company’s 2028 notes now yield about 20 percentage points over similar US Treasuries — a level considered as distressed. 

BCP Securities, which downgraded its recommendation to negative when bonds hovered at 68 cents, remains bearish. 

“The market is trying to find a level,” said Ben Hough, director of corporate research at the firm in Greenwich, Connecticut. “We don’t see free cashflow equilibrium based on current guidance.”

Lost Confidence

Seeking to calm investors, Canacol rushed to cancel dividends and postponed the drilling of an exploration well in efforts to preserve cash, according to an announcement last week.

It also said it could sell its Arrow Exploration Corp stake — valued at around $20 million — and enter into a short-term credit facility if further cash is needed. 

The next coupon payment is on May 24 for $14.4 million, according to data compiled by Bloomberg. Canacol is unlikely to face difficulties making its upcoming payments, per Lucror Analytics. 

“The cushion from liquidity is gone and reserves are only getting worse,” JPMorgan Chase & Co. analyst Alejandra Andrade wrote in a note. “This sets up 2024 to be a much trickier year for the company in our view, leaving no room for error unless the company can secure other lines of credit.”

bloomberg.com 03 26 2024