Nicolle Yapur and Andrea Jaramillo, Bloomberg News

CARACAS/BOGOTA
Energiesnet.com 02 08 2024

Bonds of Canacol Energy Ltd. hit a record low last week after Colombia’s largest private natural gas producer repeatedly failed to reassure investors over the outlook for earnings after it pulled out of a large sales contract. 

Canacol’s $500 million in notes due 2028 dropped to 65.7 cents on the dollar last week, down from 80.1 cents on Oct. 19, when the Calgary-based company canceled the contract with the city of Medellin, according to Trace data. The bonds are the worst performing corporate notes among Latin American peers in that period, handing investors losses of more than 15%, compared to an average gain of 9.4%, a Bloomberg index shows.

Investors now want to know about the company’s new sales forecasts and its plans to boost output. But getting a straight answer is proving difficult. Reports of production hiccups that started last year haven’t been fully clarified. At the same time, talks about a project to start output in Bolivia as a way to help compensate for backing out of the contract with Empresas Públicas de Medellín is far from reassuring investors.

“If they managed to communicate adequately, investors would probably feel more comfortable with their risk,” said Omotunde Lawal, head of EM corporate debt at Baring Investment Services in London. “People just don’t feel comfortable enough with the outlook.”

On Monday, Canacol published its guidance for this year which includes a drop in gas sales, while seeing an improvement in earnings and reduced debt levels. Bonds edged higher, rising more than a cent to 67 cents on the dollar. 

Canacol pulled out of the contract with the utility in Medellín “given a delay to the environmental permit, and increasing legal, social, and security obstacles that had arisen,” a company spokesman said in response to questions. The deal was expected to help lift sales by more than 60% in 2025. The company also said it kept investors updated via monthly operational reports.

But investors remain unsure on how the company will compensate for the loss of those future sales. As a result, Fitch Ratings on Oct. 24 downgraded Canacol’s bonds to BB- from BB with a negative outlook. And firms including BTG Pactual and Seaport Global Holdings LLC have advised investors to sell the notes.

Output Snafus 

It’s not just the lost contract that has investors worried.

The gas company has yet to recover output levels following what it called “unusual and unexpected production capacity restrictions” at its Jobo gas treatment facility in mid-August.

While the disruptions to production started to show in August, the market was officially notified almost a month later. Since then, the company has failed to provide details on the nature of the operational issues or potential solutions to increase sales, according to BTG Pactual analyst Daniel Guardiola. 

Despite regularly holding calls with investors and publishing production updates, “the most concerning thing is the lack of information,” said Guardiola.

Gas production has lagged pre-contingency levels for the past five months, even amid stronger demand for natural gas after the El Niño weather phenomenon cut hydroelectric output, he added. 

As for the Bolivia project, Lucror Analytics analyst Lorena Reich pointed out that Canacol had no experience operating outside of Colombia, so it’s not clear to what extent it can be a substitute for the Medellin contract. That adds to the general malaise of the company’s communications with investors.

“The market doesn’t like it when it doesn’t understand what is happening,” said Reich, who rates the bonds “hold.” 

–With assistance from Zijia Song.

bloomberg.com 02 05 2024