Canacol announced that its Agueda-1-STexploration well on the Labrador prospect on the LLA23 block in Colombia'sLlanos Basin has made a light oil discovery that tested 1,832 bbl/d of 28degree API oil from the Gacheta Formation (with additional potential in theUbaque and C7 formations still to be tested). IMPACT IS POSITIVE FOR CANACOL ENERGY (CNE.TO) Canacol has larger resource potential on other blocks in LatinAmerica, but we view this well result as likely the most important in itsexploration campaign this year, as it should almost instantly start contributinghigh net back production and offset declines from Canacol’s core (andadjacent) Rancho Hermoso producing field, while supporting follow-updevelopment drilling locations.We believe the market had sold off Canacol's shares for multiple reasons,including technical trading related to Canacol's proposed merger with ShonaEnergy (SHO-V, Not Rated). However, we assume that concern around thecompany's financial health (if Rancho Hermoso significantly underperformsexpectations) was a factor that also contributed to share price weakness. Webelieve this discovery should significantly reduce such concerns, as it shoulda) contribute near-term revenues, and b) support potential reserve additionsthat will help to maintain or grow reserve based lending capacity.We had already assumed that Canacol's proposed merger with Shona Energy(SHO-V) would be approved but ourconviction in that assumption is supported by this news, since we assume thisdiscovery will make the deal significantly more appealing to Shonashareholders, from which a 2/3 approval is required in a vote scheduled formid-December.The discovery also supports our view that Canacol management has a trackrecord of value-creating acquisitions. Recall that the LLA 23 block wasacquired through the acquisition of Carrao Energy (private) in late 2011. Wehave long viewed that acquisition as a value-creating deal (albeit dependenton exploration success going forward). This now makes the third recentindication that the exploration lands acquired in that deal warranted