Canacol Energy's Q1 Surge and FY Outlook: Navigating Gas Markets with Caution

Canacol Energy Ltd. (CNE: Toronto; CNNEF: OTCQX) reported a robust first quarter of 2025, driven by a 745% jump in earnings per share (EPS) to C$0.93, fueled by a one-time tax recovery and rising gas prices. Despite a 6% revenue dip to C$72.7 million, the company reaffirmed its full-year outlook, signaling confidence in Colombia’s gas market and its exploration-driven strategy. Yet, challenges linger, including production declines and geopolitical risks in Bolivia. Here’s a deep dive into the numbers and implications.

Q1 Financials: Tax Recovery Masks Operational Headwinds

Canacol’s Q1 EPS soared to C$0.93, up from C$0.11 in 2024, primarily due to a non-cash deferred income tax recovery of C$19.5 million—a result of Colombia’s currency appreciation. This one-time gain overshadowed weaker operational metrics:
- Adjusted EBITDAX fell 8% to C$56.3 million, as lower natural gas sales volumes (down 14% to 128.7 MMcfpd) offset higher average gas prices.
- Production declined 13% across gas and oil, with Colombia oil output dropping 13% to 1,227 bopd.

The revenue dip to C$72.7 million reflected reduced sales volumes, even as gas prices rose by C$0.63/Mcf. Capital expenditures surged 41% to C$50.5 million, signaling aggressive drilling and facility investments.

Operational Performance: Balancing Declines with Exploration

While production and EBITDAX softened, Canacol’s exploration progress offers hope:
- Fresa-3 well began producing 8.6 MMcfpd in April, a strong start for the Lower Magdalena Valley (LMV) asset.
- Clarinete-11 and Siku-2 are online, supporting near-term gas sales. However, the Natilla-2 sidetrack, targeting deeper CDO sandstone, faces delays due to technical challenges.

The company’s FY 2025 plan includes drilling 11 exploration wells in the LMV and exploring the Valiente prospect in the Middle Magdalena Valley (MMV). Success here could offset declines from maturing fields.

Strategic Priorities: Debt Reduction and Bolivia Ambitions

Canacol’s capital budget for 2025 is set at C$143–160 million, with a focus on:
1. Debt Management: Reducing leverage from C$756 million by prioritizing free cash flow over dividends. A $5 million bond buyback in Q1 signaled financial discipline.
2. Bolivia Expansion: Waiting on regulatory approvals to reactivate four contracts by 2026, which could unlock 14 Tcf of gas reserves in the Tita field.

The company also aims to shift 21–28% of gas sales to the interruptible market to capitalize on spot pricing, which could boost EBITDA by up to C$14 million if prices rise.

Risks and Challenges

• Production Declines: Colombia’s gas output has fallen for two consecutive years, with 2025 guidance set at 140–153 MMcfpd, below 2024’s 157 MMcfpd.
• Geopolitical Risks: Bolivia’s regulatory delays could push development timelines into 2027.
• Market Competition: Imported liquefied natural gas (LNG) at ~C$16–18/Mcf threatens domestic pricing, though Canacol expects shortages to support higher local prices.

Stock Performance and Valuation

The stock has been volatile, peaking at C$5.15 in May 2024 but dropping to C$2.85 in May 2025. While the Q1 results provided a short-term boost, investors remain cautious due to execution risks and debt levels.

At current prices, Canacol trades at a price-to-EBITDA multiple of ~3x, below its five-year average of ~5x, suggesting undervaluation if exploration targets pan out. However, the reliance on one-time tax benefits and delayed Bolivia projects adds uncertainty.

Conclusion: A High-Reward, High-Risk Play

Canacol’s Q1 results highlight its ability to capitalize on Colombia’s gas demand and exploration upside. The $296 million 2024 Adjusted EBITDAX and 599 Bcfe 2P reserves underscore its asset quality. Yet, investors must weigh:
- Upside: Success in the LMV/ MMV wells could drive production recovery and valuation re-rating.
- Downside: Debt reduction timelines, Bolivia delays, and potential price erosion from imported LNG.

With a 2025 EBITDA guidance of C$264–312 million, Canacol appears positioned to grow cash flows if exploration successes materialize. However, the stock’s C$2.98 price reflects skepticism around execution. For risk-tolerant investors, Canacol offers a leveraged play on Colombia’s gas boom—but patience may be required.

In summary, Canacol’s story hinges on balancing near-term operational hurdles with long-term exploration potential. The jury remains out, but the data suggests a “hold” stance until exploration results and debt metrics improve.