HispanicBusiness

Cash, Working Capital and Debt

At December 31, 2012, the Corporation had cash, cash equivalents and restricted cash of $52.6 million, a working capital surplus (excluding short-term bank debt and derivatives) of $52.0 million, and total bank debt (short and long- term) of $99.4 million. The increase in debt during the quarter is primarily related to the Shona acquisition.

In connection with the closing of the Shona business acquisition on December 21, 2012, the Corporation entered into a senior secured credit agreement for $45.0 million. This credit facility carries a term of one year, is repayable in full upon maturity, bears interest at 15% per annum, payable quarterly, and is secured by the assets of Shona. In consideration for entering into the credit agreement, the Corporation agreed to a "phantom warrant payment" arrangement such that the Corporation will pay an amount (in cash or Canacol Shares, at the election of the Corporation) equal to the in-the-money amount of 2,697,292 common share purchase warrants of the Corporation at an exercise price of C$4.50 per Canacol Share. The phantom warrant payment may be demanded partially or in full at any time for a period of three years.

The Corporation expects to refinance this Shona term loan with the existing lender during calendar 2013 into an amortized term facility.

At December 31, 2012, the Corporation had $41.0 million drawn under its existing syndicated credit facility and an additional amount of $5.8 million was guaranteed under a letter of credit for a total of $46.8 million. The $5.8 million letter of credit is expected to be cancelled and replaced for a significantly lower amount during calendar Q1 2013.

In late December 2012, the Corporation received notice from its lender that the borrowing base was re-determined to $33.0 million, compared to the total amount drawn or guaranteed under the facility at the time of $46.8 million. Consequently, under the credit agreement, the Corporation must cure the deficiency of $13.8 million through equal instalments of $2.3 million per month over the next six months. The results of the Corporation's recent successful light oil well on the LLA 23 block were not considered in the borrowing base re-determination as sufficient information was not available at the time.

At December 31, 2012, $17.5 million was drawn under the Corporation's other Colombian credit facilities, a decision taken in December 2012 to ensure adequate short-term liquidity while the syndicated credit facility was under re- determination.

Outlook

The Corporation plans to spend capital expenditures of $67 million in calendar 2013 on drilling, workovers, seismic, production facilities, and pipelines in Colombia and Ecuador, and anticipates net average production before royalties of between 7,500 and 8,500 boepd over the period. As indicated above, average net daily production for the month of January 2013 and from February 1 to February 10, 2013 was approximately 7,800 boepd and 8,000 boepd, respectively.

In calendar 2013, the Corporation will focus on: 1) building out production and reserves from recent oil discoveries on LLA 23 and VMM2 and increasing production levels from the newly acquired Esperanza gas field in Colombia via new sales contracts; 2) continuing to increase production and reserves from the Libertador-Atacapi oil fields in Ecuador; and 3) execute a significant oil-focused exploration program in Colombia targeting 44 million barrels of net risked prospective conventional light and heavy oil, and unconventional light oil resources. Exploration projects of significance for calendar 2013 include exploration wells on LLA 23 targeting light oil, exploration wells on each of the Corporation's three Middle Magdalena blocks (Santa Isabel, VMM2 and VMM3) targeting both shallow conventional light oil and deeper unconventional shale oil, and the continuation of the heavy oil exploration program on assets in the Putumayo-Caguan Basin. Funding for the calendar 2013 capital program is expected to come from working capital, operating cash flows and debt facilities.