Ecopetrol (NYSE:EC) has been on quite the rollercoaster ride as of late. After their stock price rose to an all-time high of just over $60 in 2013 the stock has been on a downward spiral to a current price of $16.89. Their has been some justification for a stock price decrease in the last few years, but not one of this magnitude. Some scares that have lead to a decrease involve the very fast drop in oil prices, as well as political uncertainty in Colombia.
Rebel Concerns
When investing in a company it is always important to take into consideration the political background of the company. With Ecopetrol being located in Colombia, the stock does not have the political stability that an Exxon (XOM) may have. The main fears of investors regarding the political background in Colombia is the presence of a rebel group called the Revolutionary Armed Forces of Columbia aka FARC. This group has held a presence in Colombia for about 50 years.
Due to the presence of the rebel group, and their efforts to sabotage big oil in Colombia, Ecopetrol was only able to produce an average of 819,000 boe/day as of December 4, 2014. While this remains a concern for investors, it should be noted that these rebels have been around for a half-century, and has not stopped Ecopetrol from great growth from 2009 to now when they tripled cash and cash equivalents, and also tripled accounts receivable. As of December 17th, the rebels had also proposed a cease-fire.
Company Fundamentals Are Solid
As I stated earlier, Ecopetrol has tripled their cash and cash equivalents from $2.149 billion in 2009 to $7.225 billion in 2014. As of September 30, 2014 Ecopetrol had $74 billion in assets compared to only $12 billion in current liabilities. This shows that Ecopetrol can sufficiently, and easily pay its debts while earnings may be lower due to the price of oil. It also goes to show the discount that Ecopetrol is currently trading at. Ecopetrol's market value is only half of its current assets, and $3 billion short of (assets-liabilities).
An Income or Value Investors Gem Stock
An income investor can look at his company with very favorable light. At its current price it yields 13.87%. I do however believe that this year we will see a dividend cut as we have seen with so many other companies in the oil sector. This is because the current payout ratio at last years dividend would be about 1.05, which makes this dividend unsustainable due to a lower net income because of oil prices last year. Even if the dividend is cut in half, which would cause the payout ratio to be around .65, not a comfortable payout ratio, but one that is sustainable until oil prices rebound, would leave the yield at around 7%, still a very good yield with a company poised for growth.
When a value investor looks at a stock that has a current market cap below assets, their mouths begin to drool. When these same investors see that market cap is trading below (assets-liabilities) they go berserk. This is exactly what this stock is doing, and is heavily undervalued. The company's long term horizon has not changed in recent months, and because of this it makes this stock a perfect value investors pick.
If All Of That Is Not Convincing Enough
The growth of this company will be even greater than when it was at its high of about $60/share in the long-term for the same reason that I have complete confidence that it will survive in the short-term.
Ecopetrol will be ending a project in their Cartagena refinery that will double output from 65,000 to 120,000 b/d and by 2017 this refinery will output 200,000 b/d. This is important news for Ecopetrol as refineries make profit off of the spread between oil and oil products. When prices of oil drop fast, and remain volatile, like we have seen in the last six months, the prices of oil products drop much slower. This leaves a large spread and can yield large profits for refineries.
The company has already been in talks with buyers and states that they will be very competitive with United State's refineries and their prices. Not only will the refinery section of Ecopetrol push future growth, it will also have short-term catalyst opportunities after the conference call and will keep Ecopetrol's bottom line intact during this slump in oil prices.
Near-Term And Long-Term Future Prices
I am currently setting a price target of $22 for March 31st. I justify this price by the near term catalyst of hearing good news regarding the refinery business, as well as realizing that if market cap traded equal to (assets-liabilities) price per share would equal $18.08, for a 7% return. In the long term I fully expect prices to return to their highs of about $60, and increase even further from there depending on the successfulness of the refinery business. In the long term I believe the company will trade at least even with its total assets, which would be an increase of 113% to at least $35.98.
Colombia will do whatever it takes to protect its largest oil company, as well as one of its largest sources of revenues. Ecopetrol already owns most of the pipelines in the country, along with many refineries. The infrastructure is there, in place, for when oil returns to its historic highs and we could see a very sharp increase in stock price when oil begins to rebound. The timing of the rebound is what has everyone so interested in the oil sector and differs greatly depending on who you ask. But, as I stated above, Ecopetrol's refining business should be seen as a near term catalyst as well as a buoy for the company's net income in the event that oil prices stay low longer than expected.
