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Improving Profitability By Serving Many

|Includes: Ecopetrol S.A. (EC)

During my last trip to Colombia, my colleague, Nadia Laurincikova, and I had the chance to do a full-day session with the fourth-largest oil company in Latin America - Ecopetrol (EC). This big energy company has undergone a fundamental transformation in its business strategy since it went public in 2003. By shifting its accountability to multiple stakeholders, Ecopetrol has managed to more than double its revenues over the past three years.

Given Ecopetrol’s dedication to sustainability and its accountability to multiple stakeholders, we believe that if the company continues to execute its strategy diligently, it will be able to keep raising its profitability over the long term and offer attractive returns to its shareholders.

Ecopetrol recently transformed itself from a company that served just one stakeholder into a truly ethonomic business that serves many. This transformation has engineered a remarkable jump in earnings, profitability, and share price. We can all learn something from how this elephant learned to dance, to steal a phrase from former IBM CEO Lou Gerstner.

Let me start with setting the context: Ecopetrol is huge. It is the largest Colombian company and one of the 15 largest petroleum companies globally. It produces over $2 billion in cash profit (EBITDA) every quarter.  While it once primarily served the Colombian market, today nearly 40% of its business comes from exports (measured by barrels per day). It has expanded operations beyond its home country into other Latin countries, the U.S., and Asia.

The company operated for over 50 years as a state-owned utility, serving one master: the Colombian government. Sure, by extension, you might say the company served the Colombian people but management answered the call of just one entity.

But in 2003, all of that changed. Ecopetrol went public.

We’ve seen that companies that serve multiple masters, striving to operate in the intersection of profitability and common good, are better off in the long-run.  Ecopetrol’s 2003 transformation offers a compelling supporting case for this view.

This transformation shifted Ecopetrol’s loyalties dramatically. I had a chance to talk to Ecopetrol senior managers and several clients. What Ecopetrol did was shift their accountability to not only the shareholders but also clients and the environment.

The company began a series of new efforts to become more responsive to clients; the conference I spoke at was one example. Four hundred of Ecopetrol’s most important clients (major manufacturing firms, fuel retailers, plastics companies, etc.) gathered to learn about, and give feedback on, Ecopetrol’s strategy.

As part of the company’s focus on the environment, the company changed its name from ECOPETROL to Ecopetrol. That is instead of being Empresa Colombiana de Petróleos (ECOPETROL), it became Eco (ecological) petrol. By rebranding itself, it signals to the world, as well as internally, that the company stands for sustainability and environmental protection.

What we see here, if Ecopetrol executes its strategy diligently, is the transformation of an old-style, single-stakeholder firm into a more modern, ethonomic one. So far the results have been remarkable. In the last three years the company’s revenues have more than doubled to $34 billion (as of January 2, 2009) from $15 billion (in 2006), and its operating income has grown to $11.5 billion from $3.6 billion over the same period. In 2008, Ecopetrol’s stock outperformed its peer group by 14% and the market by close to 30%.

It’s obvious that Ecopetrol is doing several things right. Given the company’s strategic focus on transparency, sustainability, and accountability to multiple stakeholders, Ecopetrol is not only embracing the future of business but also positioning itself for further growth in revenues and profits.

We find this stock attractive and believe that as long as Ecopetrol continues executing on its promise, it will keep delivering strong results to its shareholders over the long-term.

Disclosure: No positions