Fitch Ratings Downgrades Canacol Energy Following Pipeline and EPM Contract Cancellations

Big three ratings agency Fitch Ratings has downgraded several of its key ratings for Canadian energy firm Canacol Energy Ltd (CNE), citing lower gas sales under contract in the years to come following the cancellation of the construction of the Jobo-Medellin gas pipeline and the associated contract with Empresas Publicas de Medellin (EPM).

“Fitch expects CNE’s volumes sold, as percentage of total gas production, under long-term take-or-pay contracts to reduce from 99% in 2023 to 50% in 2026.” (Photo credit: Canacol Energy)

Specifically, Fitch downgraded the CNE’s Long-Term Foreign Currency Rating to BB-, Local Currency Issuer Default Rating to BB, and $500 million USD in senior unsecured notes due in 2028 to BB-.

The New York-based agency also assigned a Negative Rating Outlook to Canacol Energy, which is based in Calgary and operates its business in Colombia.

“The downgrade reflects the material change in the company’s business profile as a result of the eventual reduction in its contracted gas sales, which decreased from 99% (of gas production) in 2023 to 50% in 2026,” said Fitch Ratings in a note to investors.

It added that this “material change,” which centers around the cancellation of the pipeline and EPM contract, “will lead to a reduction in contracted EBITDA over the rating horizon, which will result in an increase in the gross leverage metric, measured as total debt to contracted EBITDA, above our negative sensitivity of 3.0x.”

Without these locked-in sales and prospects, CNE may be exposed to spot-market selling and the associated revenue volatility, per Fitch.

“Fitch expects CNE’s volumes sold, as percentage of total gas production, under long-term take-or-pay contracts to reduce from 99% in 2023 to 50% in 2026,” noted Fitch. 

“The switch to higher exposure of interruptible volumes increases CNE’s business risk assessment, as it materially diverts from our previous expectation that the company would sell approximately 80% of its production volume under a fixed-price scheme over the rating horizon. Fitch projects increasing volatility in cash flows and profitability as contracted EBITDA is expected to decline over the next three years.”

Despite these current struggles and an expectation of slower production growth ahead, Fitch Ratings does note that CNE still has significant potential to improve its position in the future.

“Gas represents 70% of the regional energy matrix and will play an important role as a back-up power generation as Colombia moves away from other alternatives with higher greenhouse gas (GHG) emissions,” stated Fitch. 

“As the key gas producer and supplier for the highly dependent Caribbean coast of Colombia, CNE holds a strong competitive position, given the high start-up costs and limited conventional gas reserves. Fitch expects that the company will remain the largest supplier to Colombia’s northern coast region.”