Ecopetrol: A Great Opportunity in a Country Far, Far Away

Aug.16.11 | About: Ecopetrol S.A. (EC)

Ecopetrol (NYSE:EC) is one of the top 40 oil companies in the world and the fourth largest oil company in Latin America, but most likely you have probably never heard of it. On one hand, it doesn’t have the media exposure of Exxon (NYSE:XOM), BP (NYSE:BP) or Chevron (NYSE:CVX); It is a Colombian company, very often associated with the guerrillas, narcotrafficking, and para-militarism of this troublesome country. On the other hand, it is because the majority state-controlled company just went public in 2007 in Colombia, which, by the way, was the biggest Latin America IPO that year as reported by Bloomberg. The company raised U.S. $3.3 billion among Colombian investors. On September 18, 2008 Ecopetrol announced the listing of its American Depository Shares (ADS) on the New York Stock Exchange (NYSE). Each ADS represents 20 ordinary shares of Ecopetrol common stock. The ADSs began trading that day on the NYSE under the ticker symbol "EC" and from that quarter, several mutual funds have been buying EC shares including:

  • Renaissance Technologies – 499,200 shares
  • Invesco 393,026 Shares
  • Fidelity Management Research 219,400 Shares
  • Neuberger Berman Group LLC 267,800 Shares

One of the many concerns for investors is the social-political stability of Colombia, and especially the guerrilla issue, which by the way operate in the same areas where the biggest exploratory projects from Ecopetrol are taking place right now. The good news is that in Colombia, the guerrilla issue -- even though it is still a problem -- is not nearly as strong as it used to be10 years ago. The last president, Alvaro Uribe Velez, created a program called “democratic security” and in its 8 years of government to-date, the political and military power of the guerrilla has been diminished to the point that they haven’t been able to perpetrate any major direct attacks to the government or to the industrial infrastructure of Ecopetrol.

Ecopetrol is among the 400 largest companies in the world, with a market capitalization of 84.63 billion or approximately one-fifth of Exxon Mobile. It is the largest company in Colombia, but also has operations in Brazil, Peru and the U.S. Gulf Coast. Its affiliates include Propilco, as well as Black Gold Re Ltda., Ecopetrol Oleo e Gas do Brazil Ltda., Ecopetrol America Inc., Ecopetrol del Peru S.A., and Equión Energía.

Colombia has proofed reserves for 2.500 million barrels , and Ecopetrol accounts for 60% of the total production. The current government is pushing hard to improve and expand Ecopetrol’s facilities so production can be doubled by 2015. This new focus is showing its first results: in the first half of 2011, Ecopetrol increased production capacity by 20% (from 590.000 barrels per day to 707.000 barrels per day) compared with the same period in 2010. Evacuation capacity also increased by 10% (from 936.000 BPD to 1,033 BPD). But the most positive indicator is that EBITDA increased 67% from U.S. $6.27B in the 1st half of 2010 to U.S. $9.31B in the first half of 2011.

The company pays a dividend of 1.27%, and its sales grew by 14% in the first half of 2011, compared with the first half of 2010 (723.000 BPD to 825.000 BPD).The biggest part of this increase was due to a healthy increase in exports (339.000 BPD to 464.000 BPD). The revenues of the company have doubled from U.S. $12.25B in 2009, to U.S. $24.51B in 2011 (through June). Given the size of this company (37% of the total volume of the Colombian Stock Market) and the way cardholders are holding and loving this stock, I don’t think the price will go down anytime soon. If the Colombian government is right and Ecopetrol does things correctly, its capacity can, in fact, reach 1.000 BPD by 2015 (or earlier). If that is the case, we would be talking of an approximately $60-$70 stock in 4 years.

In June of this year, Ecopetrol announced that the risk rating agency, Fitch, had upgraded Ecopetrol S.A.'s foreign and local currency Issuer Default Ratings (IDRs) to "BBB-" and "BBB," respectively, from "BB+" and 'BBB-'. This rating action affects approximately USD 1.5 billion of debt due by 2019. The rating outlook is stable. According to the Fitch report, Ecopetrol's ratings reflect its strong financial profile, improving production capacity, and adequate reserve levels. Ecopetrol's growth strategy and associated capital investment are considered aggressive. According to the Fitch report, the company's ratings reflect the close linkage with the Republic of Colombia, which currently owns 89.9% of the company.

Also this year Standard & Poors lifted Colombia's state-owned oil company, Ecopetrol SA. Standard &Poors raised Ecopetrol's rating a notch to BBB- (into investment-grade territory ), following a similar action on the South American country's sovereign debt rating Wednesday.

One thing I can tell you about Colombia, they have problems … yes … and many ... but companies like Ecopetrol, Grupo Sura, Grupo Aval or Bancolombia (NYSE:CIB) are extremely well managed. They are meeting international standards -- and sometimes believing in them pays off! Just check Bancolombia, whose shares were selling at $6.45 in Aug 6 2004 and are now at $63.50 (as of August 15 2011) That’s a 854% increase, while the S&P have increased 7% in the same period … and guess what? Yes! Bancolombia has also paid dividends for all those years. Could it be that Ecopetrol EC is the next Colombia gem? There is a good chance ...

Disclosure: I am long EC.