The Long and Short

Politics in Columbia plays to Ecopetrol

| June 23, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Political disarray in Columbia is oddly turning into a positive for the country’s oil and gas sector and for Ecopetrol. Attempts to reform the country’s health and pension systems along with its labor laws have sparked a fresh wave of street protests and promise prolonged legislative deadlock in Bogota. President Gustavo Petro’s approval ratings also have been on the decline, exacerbated by allegations of corruption at the highest levels. Columbia’s consequently limited capacity to focus on the oil and gas industry has relieved some pressure on Ecopetrol spreads.

Columbia’s recent fiscal update, which forecasts higher deficits in 2023 and 2024, has added strain to the sovereign spread performance, despite the expectation of lower fuel subsidies gradually reducing the deficit. However, the update did offer implicit support for Ecopet regarding the Fuel Price Stabilization Fund (FEPC) balance, which is a positive for the company’s credit fundamentals. As the market awaits indications of potential sovereign issuance levels in the coming weeks, the aftermath of a new issue or its delay is predicted to further tighten the sovereign spread differential, which has already converged by over 10 bp in recent sessions to approximately 127 bp in the mid-term and 128 bp in the long term.

Ecopetrol, despite a decrease in Brent crude prices during the second quarter this year, delivered a robust performance in terms of operating and financial results in the first quarter. The average daily production of 719.4 thousand barrels of oil equivalent (mboed) reflected a 4% year-on-year increase and remained relatively stable compared to the previous quarter. The refining segment achieved a record level by processing 412 thousand barrels per day (mbd).

EBITDA reached COP 17.8 trillion, marking a 12.2% gain year-on-year and an 11.5% improvement over the fourth quarter of 2022. This led to a gross debt/EBITDA ratio of 1.5x, remaining unchanged from the previous quarter, as higher volumes offset the impact of lower prices, with some influence from foreign exchange devaluation. The current leverage level indicates a slight under-leveraging of the credit, considering the target of around 2.0x, allowing room for incremental debt issuance. However, the recently announced dividend payout will absorb some of this capacity during the year. The dividend payment to the parent company will effectively offset the remaining COP 34.2 trillion FEPC receivable balance, with approximately COP 5 trillion remaining for 2022 and around COP 8 trillion accruing in the first quarter of this year.

The pro-forma low leverage provides a cushion to manage a potential decrease in average Brent prices in 2023, fund a capex plan of approximately $6 billion per year for the next couple of years, and handle higher taxes under the new regime. The new tax system for oil and gas operators in Colombia may exert some pressure on cash generation, although the progressive structure safeguards balance sheet metrics when oil prices fall below $67.3 per barrel, triggering a return to the generic, nominal 35% corporate tax rate.

Following the January bond issuance, the $1 billion bank debt issued in December 2022, and the recently announced Bancolombia loan, the company faces approximately $1.35 billion in maturities for the remainder of 2023, which is expected to be absorbed through additional bank lines and available cash. Consequently, the overhang from new issuances has completely dissipated for the company, while the FEPC remains as a shrinking liquidity concern. Furthermore, despite lower oil prices, the cash generation for the remainder of the year is projected to be sufficient for addressing the contingent liquidity issue. Additionally, the FEPC accrual has decreased from approximately COP3.3 trillion per month to less than COP2 trillion, thanks to lower international prices and higher domestic prices. Although the spread differential between Ecopet and Colombia in the mid-term and long-term has converged, the company’s solid fundamental drivers and the anticipated lower EBITDA are expected to contribute to its outperformance compared to the parent company. As a result, the relative spread differential is predicted to tighten further from its current levels, although the absolute spreads may be influenced by any forthcoming sovereign new issuances.

Figure 1: Summary Financials

Source: Company reports, Santander US Capital Markets

Figure 2: ECOPET 2033 vs COLOM 2033

Source: Bloomberg, Santander US Capital Markets

Figure 3: ECOPET 2045 vs COLOM 2045

Source: Bloomberg, Santander US Capital Markets

Declan Hanlon
declan.hanlon@santander.us
1 (212) 973-7658

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