We downgraded Ecopetrol S.A.’s (ECOPET) family of bonds in May following weak Q1 19 results and on tight yields. In Q2 19, not much has changed with results remaining soft, partially due to lower Brent prices and scheduled maintenance works. In addition, yields remain low relative to its main regional peers, and is among the most expensive in our integrated oil and gas sector coverage.
Although there was a sequential improvement in Q2 19 on a yoy basis, Ecopetrol’s total sales of US$5.65bn was only marginally higher than the US$5.086bn in Q1 19, but lower than the US$5.979bn in Q2 18. Similarly, EBITDA in Q2 19 was US$2.563bn, slightly higher than the US$2.347bn in Q1 19, but lower than the US$3.03bn in Q2 18.
Cash on the balance sheet fell to US$1.72bn, from US$2.805bn in Q1 19 and US$2.176bn in Q2 18. On a positive note, total debt decreased to US$11.666bn versus US$11.842bn in Q1 19 and US$11.713bn at end-2018. As a result, the leverage ratio was very low at 1.2x in Q2 19, almost the same as in Q1 19 and lower than the 1.4x in Q2 18. Although the Q2 19 ratio was higher than the debt/EBITDA ratio of 1.1 at end-2018, we believe there is nothing to worry about.
Despite the soft results, the company continued to make positive strides in all its segments (upstream, midstream and downstream), increased the number of producing wells, continued its exploration programme, took advantage of its profitable JV in the US, and committed to its production target of 720,000-730,000 barrels of oil equivalent per day (mboed).
We emphasise that the main reason for our Hold recommendation is the low yields at which ECOPET bonds are trading, putting them at the lower-end of regional peers (albeit justified by its low leverage and conservative but steady expansion programmes). Still, it is difficult to assign any other recommendation, as we see limited upside at these levels, despite what we believe are positive fundamentals going forward, which would otherwise suggest no downside (barring an oil shock that does not appear to be on the horizon anyway).
ECOPET’s Baa3/BBB-/BBB bonds are trading as follows: its US$1.8bn, 5.875% senior unsecured 2023s at US$111.54 (ALLQ) to yield 2.86%; its US$1.5bn, senior unsecured 2026s at US$111.485 (ALLQ) to yield 3.42%; its US$850.0mn senior unsecured 2043s at US$130.807 (ALLQ) to yield 5.13%; and its US$2.0bn senior secured 2045s at US$114.06 (ALLQ) to yield 4.9%.
We reiterate our Hold recommendation on the basis of tight valuation and expectations of future financial improvements.