Scotia: Time for an Upgrade to Sector OutperformEvent Pertinent Revisions New Old Rating: SO SP CFPS16E US$0.62 US$0.75 CFPS17E US$1.22 US$1.60 New Valuation: Based on our risked NAV ($4.91/share) that also equates to 7.2x 2015E debtadjusted CF and 1.14x our 2P NAV. Old Valuation: Based on our risked NAV ($4.98/share) that also equates to 7.8x 2015E debtadjusted CF and 1.17x our 2P NAV. Canacol announced stronger than expected Q4/F15 CFPS that we see as adding to an attractive investment thesis emerging over the next six months. Implications CFPS solid beat. Canacol reported Q4 CFPS of $0.14 (vs. our $0.11) on the back of cost improvements with production pre-released at 9,961 boe/d. Production set to grow materially. The company appears to be well on its way to bringing an additional 65 mmcf/d (10,833 boe/d) onstream in December that could more than double its Q4/F15 production of 9,961 boe/d. Canacol also announced a headline 2P year-over-year increase of 86%, the bulk of which was reported earlier this year with its February reserve update. Recommendation We are have raised our rating to Sector Outperform (vs Sector Perform) on Canacol and maintain our one-year target price of $5.00, based on our revised risked NAVPS of $4.91 (vs $4.98). Our move to Sector Outperform reflects our view that the initial results from Clarinete-2 have in part de-risked the current 158 bcf of reserves, while increasing the potential for further additions in the near-term. We also view the doubling of production as an impressive number that appears well on-track for later this year or early 2016E. Canacol announced stronger than expected Q4/F15 CFPS that we see as adding to an attractive investment thesis emerging over the next six months. The company appears to be well on its way to bringing an additional 65 mmcf/d (10,833 boe/d) onstream in December that could more than double its Q4/F15 production of 9,961 boe/d at relatively attractive netbacks even in a prolonged low oil price environment. Construction on the key items to achieving the year-end exit rate of >20,000 boe/d remains on track with the Promigas pipeline expansion to Cartagena to be completed late-Nov/Dec, along with the expansion of the Jobo gas processing plant from 50 mmcf/d to 140 mmcf/d by early-Nov. Moreover, the company reported initial results from the Clarinete-2 well / sidetrack that could imply further near-term reserves upside, but equally important the success at Clarinete-1 & 2 reaffirm in our minds the ability to sustain the incremental 65 mmcf/d (or higher) through 2016E/17E (calendar years). That said, we recognize Canacols current view that it can deliver the incremental 65 mmcf/d from the Palmer and Nelson fields alone, but see the added capacity from Clarinete-1 (tested 44 mmcf/d) as a positive buffer. Canacol also announced a headline 2P year-over-year increase of 86%, the bulk of which was reported earlier this year with its February reserve update. Current 2P reserves stand at 80.0 mmboe vs. 80.6 mmboe as of February 2015 that reflects lower oil reserves due to produced barrels, partially offset by the higher reserves at Esperanza. We also highlight that 2P reserves on VIM-5 (Clarinete) were unchanged from February at 158 bcf and appropriately do not reflect any contribution form Clarinete-2 the success of which could prove accretive in the near-term. Initial results form Clarinete-2 (1.5 km step-out) indicated 127 ft of net gas pay in two gas bearing zones with an average porosity of 23%. As a comparison, Clarinete-1 encountered 149 ft of net pay with an average porosity of 26%. The benchmark we will now be looking for is test rates to compare to Clarinete that tested at a final gross rate of 24.7 mmcf/d of dry gas with no water from the Upper CdO formation and 20.6 mmcf/d of dry gas with no water from the lower CdO. We are have raised our rating to Sector Outperform (vs Sector Perform) on Canacol and maintain our one-year target price of $5.00, based on our revised risked NAVPS of $4.91 (vs $4.98). Our move to Sector Outperform reflects our view that the initial results from Clarinete-2 have in part de-risked the current 158 bcf of reserves, while increasing the potential for further additions in the near-term. We also view the doubling of production as an impressive number that appears well on-track for later this year or early 2016E. Under our base commodity outlook and revised 2P NAVPS estimate of $4.37, Canacol is trading at a 2P P/NAV of 67% versus its peer group average of 83%. On a 2015E EV/DACF multiple, Canacol is trading at 7.8x versus the group at 5.7x. Upcoming catalysts test rates from Clarinete-2 in the coming weeks. We see the nearest term catalyst as the test results from the Clarinete-2 well that we expect in the 30-35 mmcf/d range (~10-15 mmc/d per zone). As a point of reference, Clarinete has P90/P50 prospective resources of 138-222 bcf. We also look to the announced completion of the Jobo gas plant expansion, tie-in of Clarinete-1 to Jobo and completion / commissioning of the expanded pipeline as key milestones to maintain. Natural pricing hedge to help in low oil environment. Canacols gas production (40%) has little sensitivity to changes in the commodity prices as the majority of the gas sales contracts have been set between $5-$8/mmcf, and in Ecuador (13% of total F2016 production) where the company receives a $38.54/bbl tariff. Q4/F15 netbacks averaged $26.68/boe (vs Q3 = $20.56/boe) that compare to average Colombian calendar Q2/15 netbacks of approximately $31.30-$33.20/boe (Gran Tierra, Parex, Pacific Rubiales). Balance sheet in good shape. Although Canacol is not hedged, the company is protected from downside risk on oil price movements by its fixed gas price contracts that act as a natural hedge and the company does not do not have to pay money to maintain. As of June 30, the company had cash on hand of $46M and net working capital of $63M. In our view, the company has demonstrated it can remain disciplined on capital spending and stay focused on core, near-term development projects that offer substantial organic running room. The bulk of the spending is now done save for Oboe-1 that will commence drilling in October. Looking to 2016, we will be looking for the company to exercise the same level of financial discipline while proving up reserves at Clarinete and hitting production targets to support our upgrade. Q4/F15 CFPS beat was largely driven by cost improvements that saw production and transportation costs reported at ~$15.25/bbl for light oil vs. our estimate of $16.35/bbl. Overall, Canacol reported Q4 CFPS of $0.14 (vs. our $0.11) with production pre-released at around 9,961 boe/d.