.TD says Canacol Energy going to .90 from .32 cents now, Research report on Canacol Energy (CNE) Canacol announced that its Agueda-1-ST exploration well on the Labrador prospect on the LLA23 block in Colombia's Llanos 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 the Ubaque and C7 formations still to be tested). IMPACT IS POSITIVE FOR CANACOL ENERGY (CNE.TO) Canacol has larger resource potential on other blocks in Latin America, but we view this well result as likely the most important in its exploration campaign this year, as it should almost instantly start contributing high net back production and offset declines from Canacol’s core (and adjacent) Rancho Hermoso producing field, while supporting follow-up development 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 Shona Energy (SHO-V, Not Rated). However, we assume that concern around the company's financial health (if Rancho Hermoso significantly under performs expectations) was a factor that also contributed to share price weakness. We believe this discovery should significantly reduce such concerns, as it should a) contribute near-term revenues, and b) support potential reserve additions that 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 our conviction in that assumption is supported by this news, since we assume this discovery will make the deal significantly more appealing to Shona shareholders, from which a 2/3 approval is required in a vote scheduled for mid-December.The discovery also supports our view that Canacol management has a track record of value-creating acquisitions. Recall that the LLA 23 block was acquired through the acquisition of Carrao Energy (private) in late 2011. We have long viewed that acquisition as a value-creating deal (albeit dependent on exploration success going forward). This now makes the third recent indication that the exploration lands acquired in that deal warranted investment, following positive indications from the Mono Arana-1 well on the VMM 2 block (partnered with Exxon Mobil) announced in late October and encouraging indications from the Achote-1 well on the Portofino block (partnered with Pacific Rubiales) announced in late September.Agueda-1-ST was drilled as a sidetrack to the original Agueda-1 well (drilled in 2007) by re-entering and sidetracking to drill the Labrador prospect. The Labrador prospect was identified on recently acquired 3D seismic, with potential identified in the C7, Gacheta, and Ubaque formation structurall up dip of the original Agueda 1 well.The well encountered 70 feet of potential net oil pay:10 ft in the C7 Formation with average porosity of 23%;42 ft in the Lower Gacheta Formation with average porosity of 30%;18 ft in the Ubaque Formation with average porosity of 26%.The Lower Gacheta was perforated in 3 separate intervals, and produced at a gross rate of 1,832 bbl/d (1,466bbl/d net to Canacol) of 28 degree API light oil with 0.6 % water cut, 43 mcf/d of gas and a GOR of 24 scf/bbl during a 48 hour production test.Canacol holds an 80% operated working interest in the LLA23 block, immediately adjacent to the Rancho Hermoso field area (where it operates under a risk service contract with Ecopetrol). As a result of the more favourable royalty terms on the LLA 23 block, netbacks for any potential developments on LLA23 should be substantially higher than at Rancho Hermoso. We assume there could be substantial synergies from operating a development at Agueda-1-ST immediately adjacent to the existing Rancho Hermoso field.Outlook is Canacol plans to continue production testing of the Lower Gacheta in the short term, with produced oil being transported to the nearest point of sale. Upon completion of the production test of the Lower Gacheta, Canacol plans to test the deeper Ubaque reservoir, and the well placed on permanent production from either zone thereafter. Canacol is formulating plans to drill several development wells into the Labrador discovery. In addition, five other exploration prospects identified on seismic are being licensed for drilling in 2013.We have tentatively added an assumption of 1.3 mmbbl of 2P reserves at Agueda-1-ST to our Base NAVPS estimate. In addition, we have de-risked our total resource assumptions for the LLA 23 block slightly. These changes have increased our near-term production and cash flow expectations, as well as our NAVPS estimates.Note, however, that our risked assumption of 7 mmbbl net to Canacol’s 80% working interest in LLA23 remains below management’s pre-drill estimate for the block of 11 mmbbl.