Our correspondent, Frida Ghitis writes:
Shares of the Colombian oil giant Ecopetrol (EC) soared more than 60 % last year, but in the last few months investors look like they’re having some “Guayabo” – a hangover after the party. Why EC stock has faltered is no secret: many more shares are coming to market.
About 90% of EC belongs to the Colombian government. EC announced it would sell another 10% of its shares to help fund investment of $80 bn in an ambitious expansion plan. EC would hit the accelerator to step up exploration, upgrade infrastructure and boost production and profits. The money would come from new debt, earnings, and new share issuances After that sale the government would own 80% of EC.
That was expected. But then what Colombians call “winter” arrived with a vengeance. Temperatures did not fall, but rain did, catastrophically, with landslides and floods that killed hundreds and left millions homeless. The government decided to cash in more EC shares to pay for what it called a “state of economic, social and ecological emergency”. Dec. 29, Colombia's Congress approved a law permitting the additional sale.
Investors are understandably concerned about a sharp rise in the number of shares available for sale. But there is also confusion and misunderstanding. People mistakenly believe that the funds from shares sold under the expansion plan will now be spent to rebuild bridges and highways, with no benefit to Ecopetrol. That is incorrect. Nothing has changed in the EC 10-year plan. The “winter” funding will come from more government share sales. The planned investments are still on schedule.
As the timetable is unclear, the downdraft will continue until the market absorbs the increased amount of EC stock for sale. Colombian authorities say they will be careful in the rollout to avoid harming existing shareholders.
When it's over, private investors will own a bigger piece of Ecopetrol than originally planned. That is good. All the reasons we had for liking the stock remain in place. Take an aspirin for your Guayabo and hold.
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