Fixed Income Analysis /
Colombia

Ecopetrol: Q1 19 – Weak results on lower Brent prices and COP depreciation; downgrade to Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    8 May 2019
    Published by

    Ecopetrol’s Q1 19 results were mixed – there were improvements in COP terms, but a deterioration in US$ terms. This, despite higher sales volume, strict cost controls and our slightly positive outlook on the company and the industry. We believe that ECOPET bonds will trade laterally on these financial and operational results, and since the Ecopetrol curve is already trading at fair prices, we downgrade our previous Buys to Holds and now have the full universe of ECOPET curve rated as Hold.

    Ecopetrol reported total sales of US$5.09bn in Q1 19, from US$5.12bn in Q1 18. The decline was mainly due to: 1) lower Brent prices, which averaged US$63.8/bbl in Q1 19 compared with US$67.2/bbl in Q1 18 (US$56.2/bbl for ECOPET’s crude oil basket in Q1 19, compared with US$59.9/bbl in Q1 18); 2) COP depreciation to 3,144.79/US$ in Q1 19 (average) compared with COP 2,855.62/US$ a year ago.

    Higher volumes in both local sales (390.8 thousand barrels of oil equivalent per day – mboed – in Q1 19, compared with 386mboed in Q1 18) and export sales (518.1mboed in Q1 19, compared with 465.6mboed in Q1 18) were not enough to compensate the negative effects of the drop in Brent prices and currency depreciation. Further, these higher volumes resulted in higher variable costs (US$1.951bn in Q1, compared with US$1.820bn a year ago), which explains the drop in EBITDA to US$2.3bn in Q1 from US$2.5bn a year ago.

    Still, the company saw a slight improvement in credit metrics with cash of US$2.805bn in Q1 19 from US$1.942bn at end-2018, but lower than US$2.814bn a year ago. There was also a slight sequential qoq increase in total debt at US$11.841bn in Q1 19 from US$11.712bn in Q4 18, but showed a substantial drop yoy from the US$14.654bn reported in Q1 18. As a result, debt/EBITDA in Q1 19 was 1.15x, almost the same as the 1.12x in 2018 and better than the 1.40x in Q1 18. The company’s short-term debt of US$1.268bn was more than covered by cash-on-hand at end-Q1 19.

    In sum, Ecopetrol’s Q1 19 results were mixed. There were improvements in COP terms, but a deterioration in US$ terms. This, despite higher sales volume, strict cost controls and our slightly positive outlook on the company and the industry. We believe that ECOPET bonds will trade laterally on these financial and operational results, and since the Ecopetrol curve is already trading at fair prices, we downgrade our previous Buys to Holds and now have the full universe of ECOPET curve rated as Hold. (See our earlier review here, where we had a mix of Buys and Holds on Ecopetrol’s family of bonds mainly due to our preference for short duration bonds and levels that – at the time – we believed were fair for some securities and attractive for others).