Investors Abandon Canacol Bonds Amid Production Concerns in Colombia

Canacol Energy Ltd.’s bonds have underperformed in emerging markets due to a drop in production and a lack of communication from management. Analysts highlight a 25% decrease in output and a concerning sales forecast for 2025. Despite high market prices and a stronger cash position, investor confidence remains fragile due to past issues with production and sales contracts.

Bonds issued by Canacol Energy Ltd., Colombia’s largest private gas producer, have experienced significant declines, making them the poorest performers in the emerging-market corporate debt sector this year. Industry data indicates a worrying slump in production, prompting investor concern and subsequent selloffs.

In early February, bonds plummeted after proxy data from Colombia’s commodities exchange suggested a notable decrease in output. Analysts noted that they are relying on these figures due to the company’s decision to cease monthly sales updates last year, which has contributed to worries among investors.

Cristian Fera, an analyst at KNG Securities, stated, “Since January output fell around 25% from the fourth quarter… we haven’t seen any official communication from the company in that regard.” This communication void has intensified investor anxiety regarding the company’s performance.

The situation worsened following the release of guidance for 2025, with expectations for natural gas sales set between 140 million and 153 million cubic feet equivalent per day, down from last year’s figure of 157 million cubic feet. Consequently, the bonds fell 1.6 cents on February 24, marking their last trade at 51 cents on the dollar.

Bonds due in 2028 have reported losses of approximately 7% thus far this year, contrasting sharply with the average 2.3% gain experienced by other emerging-market corporate bonds, according to Bloomberg data. Canacol did not provide any comments on this situation.

Despite these challenges, Canacol remains the leading independent gas producer in Colombia, holding a 50% market share along the Caribbean coast. Moreover, a gas supply crunch in the region continues to sustain elevated prices, which might mitigate some of the production shortfalls being experienced.

Analysts believe that Canacol’s improved cash position—augmented by a loan agreement with Macquarie Group—will enable the company to fulfill its upcoming debt obligations, which are due at the end of May. Cristian Fera noted, “As long as gas prices remain high in Colombia, and we see reserves being replaced, cash generation seems sufficient.”

Other energy companies in Colombia have outperformed the average gains for emerging-market peers this year amid the prevailing supply constraints. Nonetheless, Canacol’s turbulent history has left investors wary, particularly considering past production issues.

In 2021, Canacol issued bonds under the pretext of promising robust sales from a pipeline contract with Medellin, which subsequently fell through in 2023. This led to cash flow issues and production challenges, raising concerns about potential restructuring risks. Oriana Covault from Balanz commented, “They should be okay for the year, but considering the short-term catalysts, some investors are more cautious.”

In summary, Canacol Energy Ltd. faces significant challenges with its bonds underperforming amid production shortfalls and a lack of transparent communication from the company. Despite maintaining market leadership and benefiting from high gas prices, investor confidence remains cautious due to past missteps and current uncertainties within the production landscape. Analysts express tempered optimism regarding the company’s capacity to meet forthcoming debt obligations, provided that gas prices continue to support its cash flow.

Original Source: financialpost.com