Since the start of 2012, we have seen significant pullbacks in the stock prices of many of Latin America's oil majors. Brazil's Petrobras (PBR) has fallen by 18%, Petrobras' Argentine subsidiary Petrobras Argentina (PZE) also fell by 18%, and Argentina's largest and newly nationalized oil company YPF (YPF) has dropped by 56%. In addition, Chevron (CVX), which has significant operations across Venezuela, Brazil, Colombia and Argentina, has fallen by 8% in this period. This can be attributed to growing investor concern over the falling global demand for oil and gas as the Chinese economy slows, as well as the eurozone crisis continues to deepen due to Spain's economic woes.
Investors have also been spooked by a renewed outbreak of economic nationalism in the region, with Brazil launching aggressive legal action against Chevron and Transocean (RIG) for minor oil spills, as well as introducing legislation to protect its economy from international competition. In addition, Argentina has expropriated the majority of Spanish company Repsol's (REPYY.PK) shareholding in YPF in order to nationalize the company. However, Colombia's state-controlled oil company, Ecopetrol (EC), has bucked the trend, rising by 43% since the start of 2012 to hit a new 52-week high of $67.92 on May 1, 2012. It has also risen by 6% since my last mid-March 2012 review, trading just shy of that high at $64.
Ecopetrol has reported its first-quarter 2012 results since that review and they show that the company continues to go from strength to strength as its revenues, net income, and production grow. On a like quarter-for-quarter basis, it reported a 24% rise in first-quarter 2012 revenue to $10.2 billion and a 26% increase in net income to $2.4 billion. For the first quarter 2012, the company's balance sheet also strengthened in comparison to both the previous quarter and first-quarter 2011, with a substantial 58% increase in cash and equivalents to $5.9 billion, although long-term debt also increased by 13%.
The company also lifted production by 8% from the first quarter 2011 to a record 743,000 barrels of oil equivalent per day, with heavy crude production being the standout performer increasing by 20%. Sales volumes also increased on a like quarter-for-quarter basis, with sales rising by 6% to 871,000 barrels per day for first quarter 2012, which is a 6% increase from first quarter 2011. Much of this increase in sales volumes can be attributed to higher exports to Europe, which rose by 4.2% from first-quarter 2011 and the U.S. Gulf Coast, which rose by 3.1%.
Ecopetrol has also been working hard on improving its infrastructure as well as its safety and security standards in order to sustain increases in production and reduce costs. For the first-quarter 2012, on a quarter-for-quarter basis, this saw transported volumes rise by 8% to 1,224 barrels per day. However, refinery throughput fell by 15%, primarily because of the Cartagena and Barrancabermeja refineries being taken offline for modernization refits.
Despite the company's strong results, it is also important to consider whether Ecopetrol still represents value for investors in comparison to its competitors. This is of particular importance as the company has recently set a new 52-week high of $67.92, while its South American competitors have all fallen in value. The table below shows Ecopetrol's performance and valuation measures in comparison to those competitors.
Debt to Equity Ratio
In comparison to its competitors, Ecopetrol appears to be fairly priced by the market with an earnings yield of 7%, although its PEG ratio indicates that it is undervalued based on its future growth prospects. In comparison, Petrobras, Petrobras Argentina, YPF, and Chevron all appear to be undervalued on the basis of their earnings yields. Based on their PEG ratios, all but Petrobras are a better value in comparison to Ecopetrol.
However, I believe that Ecopetrol's substantially superior profit margin and return on equity indicate that the company is very profitable and well managed, especially in comparison to its competitors. This also bodes well for the company's future growth prospects and the delivery of superior returns to shareholders. I also quite like Ecopetrol's debt-to-equity ratio, which -- except for Chevron -- is substantially lower than its competitors. Generally, the debt-to-equity ratio is a good indicator of risk and balance sheet strength and, in the case of both Ecopetrol and Chevron, indicates they predominantly rely on equity to fund their operations rather than debt. For this reason, both companies are not subject to the same degree of interest-rate risk that comes with a more heavily leveraged balance sheet.
Ecopetrol also does not appear to be as cheaply valued as its competitors when its forward 2012 valuation is considered. With a consensus 2012 EPS of $5.01 and current trading price of $64, Ecopetrol has a forward P/E of 13, which is almost double Petrobras and Petrobras Argentina's forward P/E of 7. YPF, with consensus 2012 EPS of $3.92 and a trading price of $15, has a forward P/E of 4. Finally, Chevron, with consensus 2012 EPS of $13.38 and trading price of $103, has a forward P/E of 8. On this basis, YPF is the most cheaply valued, followed by Petrobras, Petrobras Argentina, and Chevron. However, in the case of YPF, the reason for this valuation directly relates to the uncertainty regarding the company's future earnings given that it has been recently nationalized by the Argentinian government.
Despite this higher forward P/E ratio, I believe that Ecopetrol will continue to grow earnings at a greater rate than its competitors over the short term. The company has projected EPS growth for the next year of 25%, which is almost double both the industry average and YPF's 14%. It is also substantially higher than Chevron's 1.3% and Petrobras' -5%.
In addition, Ecopetrol's 2012 forecast consensus earnings per share have been improving over the last 90 days, with analysts revising their estimations upward by 20%. Petrobras' 2012 consensus earnings per share over this period have fallen by 11%, Petrobras Argentina's have fallen by 23%, and YPF's have fallen by 11%, although Chevron's increased by 6%. Ecopetrol also has a recent history of achieving or exceeding forecast consensus earnings per share, having done so for the last three quarters. This is unlike Petrobras, which missed its fourth-quarter consensus forecast earnings per share by 46%; Petrobras Argentina, which missed it by a massive 349%; and YPF, which missed by 68%.
Over the last six months, Dated Brent crude has traded at over $100 per barrel, as the chart below illustrates.
Dated Brent Crude Per Barrel
*Oil price on May 8, 2012
Furthermore, for the first quarter of 2012 Ecopetrol received an average price of $111.20 per barrel. All of which is a key contributor to the company's ongoing strong financial performance. I would also expect, despite seeing some recent pullback in oil prices on the back of falling demand from China and Europe, that the price will be maintained at current levels throughout 2012. I believe this is because of continuing supply-side constraints primarily caused by ongoing geopolitical tensions between the U.S., Israel, and Iran, as well as general instability in the Middle East due to fallout from the Arab Spring and the conflict in Afghanistan. Prices being maintained at these levels and supply remaining curtailed bode well for Ecopetrol's increasing profitability.
Finally, the company is particularly attractive in comparison to its South American competitors as it is not carrying the same degree of baggage that interferes with operational profitability. This includes, in the case of Petrobras and YPF, ongoing domestic government interference in operations as well as domestic price caps and quotas or restrictions or penalties levied on oil exports. In Chevron's case it is the ongoing burden of having to manage litigation in Brazil and Ecuador resulting from oil leaks and alleged liability for environmental damage.
There is also a greater degree of political risk in both Brazil and Argentina, which creates further uncertainty for investors. The Colombian government has taken a very favorable approach to foreign investment in order to stimulate economic growth, which is in stark contrast to Argentina or Brazil liberalizing their economic policies to create an environment further conducive to economic growth.
Accordingly, and for all of the reasons discussed, I believe that even at its current price Ecopetrol will continue to deliver strong returns to investors. It also represents a credible investment opportunity for those investors seeking exposure to the South American oil boom, without the baggage that is attached to Petrobras, Petrobras Argentina, and YPF.