Big Profit Margins Can’t Save Ecopetrol as Drilling Fizzles

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Ecopetrol CEO Juan Carlos Echeverry
Juan Carlos Echeverry, Chief Executive Officer of Ecopetrol SA, has said he plans to boost reserves and focus on the most profitable fields. Photographer: F. Carter Smith/Bloomberg

Normally if one of the world’s most profitable oil producers also happened to be the worst performing stock, investors would see an opportunity to buy. Not in Colombia, where new deposits are proving hard to find.

Ecopetrol SA shares have slumped 54 percent in dollar terms in the past year, the worst rout among producers in the BI Global Integrated Oils Valuation Peers Index even as it posted the highest measure of profitability, according to data compiled by Bloomberg. Newly appointed Chief Executive Officer Juan Carlos Echeverry has said he plans to boost reserves and focus on the most profitable fields.

The Bogota-based company couldn’t replicate its production growth in the last decade with exploration success, according to Greg Lesko, a money manager at Deltec Asset Management LLC. At current production rates, Ecopetrol’s reserves have the shortest span among the 18 index members, and about half the group average, the data show.

“If you’re betting on higher crude prices, there are better ways of playing it than Ecopetrol,” Lesko, who manages about $300 million in emerging-market equities, said by telephone from New York. “There have been a lot of headlines about awesome projects in Colombia over the last five years. Many haven’t turned out to be so great.”

Largest IPO

Ecopetrol reserves increased 83 percent between 2008 and 2014 and will last about 8.6 years at current production rates, the company said in an e-mailed response to questions. The Orca-1 well off Colombia’s Caribbean coast was named the largest discovery in Latin America last year by industry consultant Wood Mackenzie, it said.

The shares climbed 1.7 percent to 2,070 pesos in Bogota. West Texas Intermediate for June delivery climbed $1.47, or 2.5 percent, to $60.40 a barrel on the New York Mercantile Exchange, the highest settlement since Dec. 10.

The company’s stock price slump has further to go, according to analysts. Ecopetrol, Pacific Rubiales Energy Corp. and Isagen SA are the only members of Colombia’s Colcap index whose analyst targets are lower than their actual prices.

Ecopetrol was Colombia’s largest initial public offering in 2007, with shares selling for 1,400 pesos apiece. During the six-year period that followed the IPO, the company doubled production as it tapped areas once overrun by Marxist guerrillas. Shares peaked in 2012 at 5,850 pesos, swelling the company’s market value to over $130 billion to briefly exceed that of Brazil’s Petroleo Brasileiro SA whose public-private model was followed by Colombia.

Rebel Attacks

Then, an uptick in rebel attacks and community protests last year contributed to Ecopetrol’s first decline in annual production. The company lost more output per share in 2014 than all other peers in the Americas, posting a fourth-quarter loss of 844 billion pesos ($350.8 million), its first since shares began trading.

Echeverry, who worked as a finance minister in the first term of President Juan Manuel Santos, is expected to unveil the company’s new strategy this month. In April, he said the plan would include output targets and the sale of non-strategic assets such as Interconexion Electrica SA ESP, Invercolsa SA and Empresa de Energia de Bogota SA ESP.

The divestments could raise as much as $1.1 billion for the oil producer this year as it focuses on its core business amid the slump in global crude prices, two people with direct knowledge of the matter said in February.

Limited Size

Ecopetrol’s share price now reflects the drop in global oil prices and missed production targets, according to Edgar Romero, an analyst at BBVA Valores SA. In addition, the company’s earnings are boosted by the limited size of its refining unit and lower lifting costs relative to other integrated oil companies, he said.

The oil producer’s trailing 12-month earnings before interest, taxes, depreciation and amortization margin was 33.5 percent, according to data compiled by Bloomberg. That compares with an average of 17 percent for the industry.

“There are many integrated oil companies with significant offshore production volumes,” he said. “Ecopetrol’s are still very small.”

Only six exploratory wells were drilling in Colombia during the first quarter of this year, down 83 percent from a year earlier, according to the hydrocarbons agency, or ANH. If oil prices remain at current levels, Ecopetrol will be forced to cut its annual investment spending to $6 billion from $7.86 billion this year, Christian Hernandez, an analyst at Colombian brokerage Ultrabursatiles, said.

“We expect Ecopetrol to reduce its investments in the future, which will also affect production,” Hernandez said. “As it’s not clear how Ecopetrol will increase production and reserves, we can’t recommend it.”

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