Q4 2016 Real-Time Call Brief

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Brief Report
Ticker : EC
Company : Ecopetrol SA
Event Name : Q4 2016 Earnings Call
Event Date : Mar 06,2017
Event Time : 10:00 AM

Highlights



During the year, Brent reached the lowest levels in the past 12 years with our average of $45 per barrel, 16% below to 2015 price.

Ecopetrol improved its sales spreads from around $12 per barrel to approximately $9 per barrel.

In 2016, EBITDA and EBITDA margin reached solid level of COP18 trillion and 38% respectively.

The margin was 3 percentage points higher than 2015 and one of the highest in the oil and gas industry worldwide.

Despite experiencing 43,000 barrels less production and lower Brent prices than in 2015, EBITDA remained stable.

The Group's average production for the year 718,000 barrels of oil equivalent per day exceeded in 3,000 than 2016 target.

The upstream EBITDA per barrel was COP$10.5, versus a target of COP$7 per barrel.

The consolidated EBITDA per barrel of all segments surpassed COP$22 per barrel.

Total savings during the year reached COP$2.2 trillion, exceeding the 2016 target of COP$1.6 trillion.

These efficiencies offset the negative impact of lower crude prices on the company's reserves, which were reported at 1,598 million barrels in 2016.

Strong operating performance was reflected in a robust cash position of COP$14 trillion, lower leverage and a sustain investment grade rating.

Net profit of COP$1.6 trillion versus a loss posted in 2015.

During the fourth quarter of the year business kept a follow up to the efficiency strategy implemented by the company incorporating in this period a structual optimization by COP$0.65 trillion for a total of COP$2.24 trillion during 2016.

In this way, we accumulated structural efficiencies between 2015 and 2016 had been COP$4.3 trillion.

For these we may highlight the heavy oil illusion strategy, which has contributed by 24% of the total efficiencies.

An example of these the upstream operating cost indicator, whose improvements are between and 10% and 25% regarding the segment CapEx the cost for per foot aided food has been improved by 44% compared to 2014.

Ecopetrol now directly operates in more than 500,000 barrels of oil per day, even with the drop in prices of close to 20% between 2015 and 2016, the production was effected by 6%, versus the previous year.

With improvement of prices during the second semester, new investments were approved and executed and allowed Ecopetrol's mitigate a decline rate of some of our fields.

These improve the production during the last two quarters, include the 20,000 barrels of oil equivalent per day, in comparison with the second quarter of the year.

Also, the starting the second half of the year, Ecopetrol make a commented Gunflint field, which increased the production of this subsidiary from 3.5 to more than 11,000 barrels of oil equivalent per day.

We would like to highlight that reduction in our lifting cost of about 12% in comparison with 2015.

At the end of the year, a 20% reduction in our dilution cost was achieved in relation to the cost of 2014, 9% of this decline was achieved in 2016 through a 2% cut in our dilution factor, representing savings of more than $215 million for the period.

In total operating cost, saving sums around COP$380 million for 2016.

For the year 2016, we have reached record levels in drilling days in our assets Castilla and Chichimene, where the reduction exceeded 40% compared to 2014 levels.

The newly incorporated Rubiales asset as a direct operations has benefited from the application of new technology and the improved drilling process that have been implemented in Ecopetrol and recorded a reduction in drilling days to 23%.

Summarizing the results from 2014 to 2016, the company managed the addition of more time 1.2 billion barrels of contingent resources.

Efforts in savings have also been important in this projects, where we have managed to reduce the breakeven price of the expansion by about 10% to through the addition efficiencies in operational and development cost.

In 2016, the SEC price is for devaluation had 20% decrease compared to 2015 going from COP$55 per barrel Brent to COP$44 per barrel Brent.

Fields like Rubiales and Chichimene represented positive reviews of reserve mainly due to the good performance of production and cost optimization.

Their research and replacement ratio, excluding price effect was 79%.

By including the price factor, the research to replacement ratio stands at minus 7%.

With these results, the research production ratio is 6.8 years.

95% of proven research are owned by Ecopetrol SA, while whole the Ecopetrol America, and contributed to the remaining 5%.

Boranda is located in the block Playon and was drilled in association with Parex as operator and with 50% participation of Ecopetrol.

The Ecopetrol affiliate Hocol drilled the well Bullerengue-2 in the block SSJN-1 operated by company with the participation of 50% of Hocol.

Equion in the block Niscota, in the Piedemonte, where the participations are Hocol 20%, total 50% on Repsol 30% was declared block an aliment.

During Equions in August and ended year in November, origin interest in this project is Ecopetrol America with 20%.

JX Nippon oil and gas exploration is 15%, on the operator analytical patrolling corporation was 65%.

On the operating side, the total volume transported during 2016 decreased in 102,000 barrels per day equivalent to 8.3% less versus 2015 reaching 1,130,000 barrels per day.

Crude oil volumes transported during 2015 decreasing 11.3% as compared to 2015 mainly due to the lower volumes produced and delivered by our shippers.

Out of the total volume of crude transported approximately 68% belongs to Ecopetrol The total volume of refined product transported through the pipelines increased in 3.7%, mainly as a result of a higher rate of used of the Galan PI system to fulfill the demand of product in the central region.

Approximately of 20% of the total volume transported through refined product pipelines belong to Ecopetrol.

I would like to refer to the financial results, which were very positive mainly to the important reductions in our operating and maintenance cost, which allowed us to optimize approximately COP$410 billion in 2016 as compared to 2015.

During the 2016, stabilization process between August and December, the refiner reached an average of 128,000 barrels per day, with a 144,000 barrels per day in December.

In terms of production, regard to Honor refinery has gradually increased its high value product yields, going from an average of 36% during the start of process to 45% during the stabilization process in middle distillates.

The refinery gross margin has grown from an average of around $3 per barrel to an average of between $8 and $9 per barrel, and a peak of $10.5 per barrel, during the stabilization base.

The gross margin of the Barrancabermeja Refinery in the fourth quarter of 2016 was $14.8 per barrel versus $15 per barrel during the same quarter of 2015.

For the full year 2016, the gross margin reached $14 per barrel, $2.8 lower than 2015.

On average, the Brent crude prices were 16% lower compared to 2015 and our investments have to be reduced over 60% that led to a reduction of 43,000 barrels per day in production.

Even with reduction of 8% in revenues the Group was able to reverse the largest prospect in 2015 and counts itself the select group of companies that have earned net profits for the year 2016.

The company posted net profit of COP$1.6 trillion.

EBITDA at COP$18 trillion and ended the year with more than COP$14 trillion in available cash.

The EBITDA margin increased 3%, reaching 38% for 2016.

The net debt to EBITDA performed significantly better declining from 2.6 on 2015 to 2.2 on 2016.

In 2015, the company reported a net loss of approximately COP$4 trillion, cost largely by the effect of oil prices forecast over the impairments and the negative effect of the peso devaluation.

At the end of 2016, Ecopetrol succeed in reversing that loss and posted a net profit of COP$1.6 trillion.

This positive change was made possible due to, first while revenues decreased COP$4.4 trillion the cost and expenses decreased COP$4.6 trillion.

In 2015, the company reported a net loss of COP$4 trillion.

At the end of 2015, Ecopetrol succeeded in reversing net loss and posted a net profit of COP$1.6 trillion.

This positive change was made possible due to first while revenues increased COP$4.4 trillion, the cost and expenses decreased COP$4.6 trillion.

The second ladder was the 18% reduction in operating expenses.

Depreciation rose 12% an increase of around COP$800 billion With cash flow hedge accounting implement in 2015, and hedging of net impairment in 2016, we subsidiary reducing the impact of exchange rates fluctuations on the income statement.

Yielding a gain of COP$968 billion in 2016, versus a loss of COP$1.9 trillion in 2015.

The recovery amount COP$689 billion was impacting the financial statement and the cash balance.

That the income tax provision totaled COP$4.7 trillion, equivalent to an effective income tax rate of 66%.

Taking into account the increase of the income tax rate from 39% to 40% in 2016.

Net profit attributable to company shareholders totaled COP$1.6 trillion COP$5.6 trillion more than in 2015 and and COP$2.4 trillion before impairment.

EBITDA margin was 3.5% higher during 2016 despite lower production and lower prices.

The downturn segment succeeded in holding EBITDA steady at approximately COP$2 trillion very close to 2015 level.

The segment EBITDA margin was above 7%.

Midstream remained a major cash generator for the business group, holding EBITDA is steady at almost COP$8 trillion and improving EBITDA margin by over 2%.

The group ended the year with the solid cash position of more than COP$14 trillion reflecting on one hand the cost and expense reduction achieved and on the other hand the lower levels of investment and debt.

Through its operations the group generated COP17 trillion highlighting an improvement in working capital.

Capital investment was COP$5.8 trillion, 62% less than in 2015.

Divestments and the recovery illegal controversy had a one-time contribution of nearly COP$1.7 trillion to the cash position.

Investment activities includes our cash outlet of COP$5.5 trillion, corresponding to short-term investment in liquid assets with maturity above 90 days.

The balance of cash and cash equivalent at the year-end amount to COP$8.4 trillion.

That when added to short-term investments of COP$5.3 trillion, provides as total of COP$14 trillion of cash available.

We will sustain adequate levels of liquidity and will maintain growth debt to EBITDA between 2.5 and 3 times.


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