Fitch Expects to Rate Ecopetrol's USD2B Proposed Issuance 'BBB'
CHICAGO -- May 20, 2014
Fitch Ratings expects to assign a rating of 'BBB' to Ecopetrol S.A.'s
(Ecopetrol) proposed USD2 billion senior unsecured issuance. The company
expects to use the proceeds from the issuance to finance its investment
program as well as for general corporate purposes.
KEY RATING DRIVERS
Ecopetrol's ratings reflect the close linkage with the Republic of Colombia
(FC and LC IDRs of 'BBB' and 'BBB+', respectively), which currently owns 88.5%
of the company. Ecopetrol's ratings also reflect its strong financial profile
and improving production levels. Ecopetrol's growth strategy and associated
capital investment are considered aggressive and, in Fitch's view, could be
challenging to achieve. Ecopetrol is expected to maintain a financial and
credit profile consistent with the assigned rating.
Linkage to Sovereign
Ecopetrol's ratings are linked to the credit profile of the Republic of
Colombia, which owns 88.5% of the company's total capital. The company is also
linked closely with the Colombian government through its reliance upon the
receipt of the price difference from selling fuel in the local market instead
of the export market. The company generates approximately 20% of government
revenues and is of great strategic importance to the country given that it
supplies virtually all liquids fuel demand in Colombia. The company also owns
100% of the country's refining capacity.
Aggressive Growth Strategy
Ecopetrol's growth strategy is aggressive and could be challenging for the
company. The company plans to increase consolidated production to 1.3 million
barrels of oil equivalent per day (boepd) by 2020, from 788,200 boepd of
consolidated production during 2013. It also intends to increase refining
capacity to 420,000 barrels per day (bpd) from 335,000 bpd. These aggressive
goals increase both business and event risk. Fitch believes that Ecopetrol
will face challenges in meeting these goals.
Improving Operating Metrics
The company's operating metrics have been improving during recent years and
are now considered somewhat in line with the assigned rating category.
Ecopetrol's reserve life stood at 8.1 as of year-end 2013. The company will
need to maintain its average Reserve Replacement Ratio (RRR) at or above 164%
in order to maintain or increase its reserve life profile while still reaching
its 2020 production target. Failure to maintain this level of RRR while
increasing production to the company's stated target will reduce Ecopetrol's
reserve life, which will imply a the need for higher investments in the
Strong Financial Profile
Ecopetrol maintains a strong financial profile with USD14.6 billion of EBITDA
and USD11.6 billion of debt as of the latest 12 months (LTM) ended March 2014.
This translates into a financial leverage ratio of approximately 0.8 times
(x). The company reported moderate leverage (measured as total proven reserves
to total debt, of approximately USD4.2 per barrel), sizable reserves, and
increasing production levels. These factors, plus its dominant domestic market
share, allow the company to generate consistently strong cash flows from
operations and meet its obligations in a timely manner. Liquidity is adequate
with USD5.5 billion of consolidated cash and equivalents as of March 31, 2014.
Aggressive Capex Plan
Ecopetrol plans to finance its USD68.5 billion capital expenditure program for
2014-2020 using internal cash flow generation and debt issuances, as well as,
possibly, additional primary-equity offerings. These could increase
Ecopetrol's total floating capital to as much as 20%. Due to the high dividend
policy and aggressive capital expenditure plan, free cash flow (FCF) is
expected to be under pressure in the foreseeable future. In addition, debt
could continue rising, while leverage is expected to remain within the
assigned rating category.
An upgrade could result from an upgrade of Colombia's ratings coupled with
continued financial and performance strong operating; namely, maintaining or
increasing the reserve life ratio as production grows.
A downgrade could occur following a downgrade of Colombia's sovereign ratings,
an increase in leverage beyond Fitch's expectations (e.g. above 3.0x), weak
operating performance resulting in a sustained production-to-reserves level
below five years, and/or a sharp and extended commodity price downturn.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Jose Luis Rivas
+57-1-3269999 ext. 1016
+57-1-3269999 ext. 1110
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
Press spacebar to pause and continue. Press esc to stop.