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Investing.com -- S&P Global Ratings has downgraded Canacol Energy (OTC:CNNEF) Ltd., a Colombian natural gas producer, to 'CCC+' from 'B-' amid concerns over the company's growth prospects and a low reserve replacement ratio. As of Dec. 31, 2024, the company reported a 30% replacement ratio on its proved reserves, equivalent to about 4.2 years of average reserve life at current production rates.
In 2024, Canacol Energy's revenue grew by 19% to $376 million, bolstered by average prices of $6.99 per thousand cubic feet (Mcf). However, production saw a drop to 160,664 Mcf per day, a decrease from 181,277 Mcf per day in 2023.
The credit rating agency also lowered its long-term issuer credit and issue ratings on Canacol and its senior unsecured notes. Despite the downgrade, the outlook for the company remains stable. The company is expected to rely heavily on successful investments to increase its reserve and production base over the next 12 to 18 months, while also managing upcoming debt maturities in 2027 and 2028.
S&P Global Ratings stated on April 8, 2025, that Canacol Energy does not face immediate financial stress. However, current production volumes, reserves, and growth prospects suggest vulnerable business conditions. The company's bond is currently trading below $50, roughly 50% below par, which could suggest the possibility of Canacol considering a distressed exchange to reduce total debt and increase liquidity sources for capital expenditure, if the bond market allows.
Canacol Energy's reliance on high prices to offset production declines and maintain current revenue generation is also highlighted. The company’s average prices are expected to remain at $7-$8 per Mcf as growing demand for natural gas in the region has not been met by Ecopetrol or other independent producers. However, if prices fall while demand is covered by other peers and production does not improve, Canacol's cash generation could deteriorate.
The stable outlook reflects S&P Global Ratings' view that the 'CCC+' rating already accounts for the company's low replacement ratios, rate of production decline, and potential limited access to financial markets for refinancing purposes. The company is not expected to default on its debt in the next 12 months due to its comfortable debt maturity schedule. However, improved business and financial conditions will be crucial for the company to meet the significant $200 million maturity of its revolving credit facility in 2027.
S&P Global Ratings indicated that a further downgrade could occur in the next six to 12 months under certain circumstances. These include if the company enters a distressed exchange on its debt, shows liquidity deficits, or if the current debt structure remains highly unsustainable against expected production and reserve growth prospects. On the other hand, the ratings could be raised back to 'B-' in the next 18 months if the company builds a sufficient production and reserve cushion to meet cash generation increases needed for a healthy refinancing of its debt.
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