Ecopetrol positions for the rebound
The twin shocks of Covid-19 and the oil price collapse have severely impacted the company’s bottom line, but it is well-placed to bounce back
Colombia’s state-controlled oil firm Ecopetrol suffered a 95pc drop in first quarter net profits, as the coronavirus pandemic and sunken oil prices ravaged the sector. But analysts say its commanding share of the Colombian oil industry means it remains resilient in a weak price environment.
Ecopetrol brought in a $34.2mn net profit in the first three months of 2020 compared with $705.6mn in the first quarter of 2019. But, while net profit collapsed, Ebitda was down by only 28.5pc year-on-year, reaching $1.35bn compared with $1.89bn.
“[This year began] with growth prospects and a defined path,” says Ecopetrol’s CEO, Felipe Bayon Pardo. “However, by the end of the first quarter, we confronted challenging and unexpected market conditions, reflected in a Brent price decline [of] over 65pc in comparison to year-end 2019.”
Pardo adds that—while capital discipline, production and reserve growth ensure the company’s sustainability in the medium and long-term—major adjustments have been necessary in the short-term.
Rolling with the punches
Upstream, Ecopetrol’s production increased very slightly compared with the first quarter of 2019, rising by 7,000bl/d to 735,000bl/d. It is unclear, however, whether that level will hold through the year, especially if the firm’s financial underperformance persists.
95pc – year-on-year drop in net profits
Multiple projects have already been affected. Domestically, Ecopetrol has shut down 300 wells and is operating with minimum personnel for health and safety reasons. Around 9,000 of the company’s 13,000 employees are working remotely.
Outside Colombia, the 97,000-acre Rodeo joint venture in Texas, where Ecopetrol has a 49pc stake and operates alongside US independent Occidental Petroleum, has currently shuttered production. However, Ecopetrol executives highlight that the field could quickly ramp up if needed.
Downstream, reduced demand led to a significant fall in sales volumes during the first quarter. Ecopetrol’s gasoline and diesel sales volumes fell by 23pc and 21pc respectively from February to March, while demand for jet fuel fell by 45pc.
Despite the short-term financial pain, the firm appears to have learned lessons from the 2016 oil crisis, according to Yessica Prieto Ramos, national director of projects and investigations for the Bogota-based NGO Crudo Transparente.
“In 2016, [Ecopetrol] had to take difficult decisions about spending and investment,” Ramos tells Petroleum Economist. “Learning from this lessened the blow of this current crisis, and the company maintains a number of positive investments in the face of this grave situation.”
According to Ramos, a number of markets—chiefly sales to Chinese refiners—give Ecopetrol a level of stability despite the global uncertainty, as long as Brent prices continue to hover around $30/bl. “The critical factor is what the company will do if Brent prices drop further and stay there,” says Ramos. “The company is at the limit of its capacity.”
“In 2016, the company had to take difficult decisions about spending and investment” Ramos, Crudo Transparente
Ecopetrol will struggle if prices fail to recover over the next few years. The same is true for many of its NOC peers elsewhere in Latin America—with the possible exception of Brazil, which has projects in place in its strategy plan to produce oil at a relatively low base until at least 2024
Speculation has swirled that the demand impact of Covid-19 coupled with thinning operating margins could lead to significant layoffs at Ecopetrol. An April report by the Colombian Petroleum Association estimated that up to 8pc of the company’s staff could be let go by the end of the year. However, Ecopetrol tells Petroleum Economist that it was doing everything possible to avoid this.
“The savings and efficiency programme implemented austerity measures on both the operating and financial sides. We have also implemented a sliding adjustment when it comes to personal expenses and salaries.”
While these austerity measures are a sharp reminder of Ecopetrol’s current travails, its strong domestic operations base means it remains a regionally stable investment opportunity, says Ramos. “Ecopetrol controls more than 80pc of production in Colombia. That gives it an important confidence margin for investors and demonstrates its sturdiness within the Latin American sector.”
Should the depths of current oil market gloom recede, investors should turn their eyes to Ecopetrol’s US fracking projects, like its Rodeo JV, Ramos suggests. Progress there could be precursor for a firmer commitment to controversial fracking projects within Colombia.