Oil and Gas

Ecopetrol is the largest corporation in Colombia, one of the 50-largest oil and gas companies in the world, and one of the four largest in Latin America. Its controlling shareholder is the Colombian government with an 88.5% stake. It plays a key role in the economy, since oil and gas represent more than half of the country’s exports, and its payments of dividends and taxes are critical to the nation’s fiscal accounts.

Integrated Company

The firm is vertically integrated, participating in all areas of the hydrocarbons chain, with a presence in Colombia, Peru, Brazil, Angola and the Gulf of Mexico. Ecopetrol has been upgrading and expanding refining capacity, adding 85,000 barrels of oil equivalent per day (boe/d) and raising the conversion factor from 76% to 96% at its Cartagena refinery. Ecopetrol’s proven net reserves reached 2.1bn boe at the end of 2014 and average production was 755,400 boe/d, with a reserve-replacement ratio of 146% and a reserve life of 8.6 years. The firm accounts for 63% of Colombia’s oil production and 79% of installed transport capacity.

Stock Volatility

The steep decline of the local stock market since mid-2014 has been closely related to the collapse in oil prices and by the widely-shared expectation that they will remain depressed for a long period of time. Ecopetrol’s stock price has led this decline. From June 2014 to September 2015, the price of the stock and of its ADR had dropped 63.6% and 76.1%, respectively, while the Colcap Index has fallen 28.6%, with oil prices declining 57.1%. The company’s weight in the Colcap Index has also been shrinking, declining from approximately 20% in 2013 (the maximum possible weight), to 10.7% in 2015.

In this context, Ecopetrol’s ability to raise capital in the international markets should be highlighted: during 2015 the company raised a total of $3.43bn under favourable terms. The most recent bond issuance took place in June 26th, when it raised $1.5bn, at a 5.5% yield, maturing in 2026, and a bid-to-cover ratio above three times. The company is rated investment grade by Standard & Poor’s “BBB” and Moody’s “Baa2”, with a stable outlook in both cases.

The company reported consolidated revenues of COP68.9trn ($25.3bn) in 2014, 2.1% lower than in 2013, while its net income dropped 42.7% to COP7.5trn ($2.8bn), and its earnings before interest, taxes, depreciation, and amortisation (EBITDA) fell 20.1% with respect to the previous year, reaching COP22.4trn ($8.2bn). As expected, low oil prices kept taking their toll on results in 2015, up to the second quarter. During the first half of the year, realised crude prices declined 49% compared to the first half of the previous year, with EBITDA and net income declining by 74.3% and 46.8%, respectively. The collapse in oil prices have resulted in a reduction of exploration activities, which in 2014 included 21 perforations in Colombia and four abroad, while during the first half of 2015, only one perforation took place in Colombia and one abroad. The company is directing its exploration activities to offshore locations in Colombia and the Gulf of Mexico, while focusing on secondary recovery activities at the Colombian fields.

Development Strategy

Ecopetrol’s strategic framework was updated in May 2015. The new strategy is better suited for the low price environment that characterises early 2016. The expected oil production for 2020 is 870,000 boe/d, 33.1% less than the previous goal; proven oil reserves addition from 2015 to 2020 is 33.3% less than previously expected; and the $5.25bn annual exploration and production capex is 8.5% less than what was invested in 2014.

The new strategy also includes prioritising profitability over volume, cutting costs, rationalising capex, divestiture of non-core assets and controlling indebtedness. The cost-cutting measures have already borne fruit: during 2015, lifting and transportation costs per barrel have decreased 32.6% and 36.8%, respectively, compared to the previous year.