June 6, 2016    5 minute read

Is Ecopetrol’s Crisis Over?

   June 6, 2016    5 minute read

Is Ecopetrol’s Crisis Over?

Colombia’s biggest and most representative company, Ecopetrol – a company that specialises in petroleum-related activities such as refinery and exploration – has suffered greatly from oil price decreases in the last few years. Ecopetrol’s earnings, credit ratings, and market capitalisation have decreased in the past two years. In Colombia, most economists attribute Ecopetrol’s crisis to falling oil prices caused by weak global demand for commodities and a constant, strong supply of oil. In fact oil prices have plummeted from $91 per barrel to $49 per barrel from 2014 to 2016 respectively (As shown in the graph). In addition, at the beginning of 2016 oil prices fell as low as $28 dollars per barrel. Although it is very early to decide whether oil prices will pick up, it could be argued that the $28 days are long gone, since oil prices have appreciated around 75% (YTD). This mild oil recovery has caused many Colombians to wonder whether Ecopetrol will recover as well. Although it is very difficult to predict the future of both the company and oil prices, some recent events indicate that Ecopetrol might, in fact, be in route to a long-waited recovery.

Crude_Oil_Performance__Crude_Oil_Price_$-bbl_TMMChart

 

Strong earnings for the first quarter of 2016

On May 3rd, Ecopetrol reported a net income (income attributable to shareholders) of COP$363 billion (approximately USD$118 million). This net income represents a 127% increase (YoY), suggesting that 2016 might be a better year for the company. In addition, Ecopetrol reported a solid EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) margin of 39.5%, amounting to almost COP$4.1 trillion. Finally, the company reported that its savings increased to COP$421 tillion. It is easy to see how the company managed to have such healthy earnings in a year in which oil prices reached their lowest levels in 12 years. Aggressive cost-cutting measures – not well-received by the public in Colombia – have allowed Ecopetrol to present such positive numbers that could signal an ongoing recovery. These positive results in turn have made investors regained some of their lost confidence in the company and the market overall.

The market’s confidence in Ecopetrol

Since the beginning of 2012 Ecopetrol has maintained its shares outstanding at 2.06 billion. However its market capitalization – given by the product of the number of shares and the share’s price – has depreciated significantly since 2014 when it reported a market capitalization of $83.32 Billion. Surprisingly, in February of 2016, Ecopetrol reported a market capitalization of only $12 Billion (a decrease of around 86% of its market capitalisation). What is interesting about this percentage decrease is that, as mentioned before, Ecopetrol has maintained its shares outstanding unchanged since 2012, indicating that its stock price must have fallen by 86% percent. In fact, as shown by the graph below, Ecopetrol’s stock prices went down from $40.45/share to $6/share, a historically low price which was reported at the beginning of February.

Although a few months ago Ecopetrol reached its lowest point, its stock price has appreciated a 54% since then and closed at $9.28 on May 26th. This price increase has consequently increased Ecopetrol’s market capitalization, two facts which could indicate that investors are starting to gain confidence in the company and its future. Although there is still much ground to recover, Ecopetrol’s recent numbers have brought back hope not only to the company but also to Colombians whose lives depend on Ecopetrol’s operations.

Ecopetrol_shareprice_Ecopetrol_shareprice_TMMChart

What does this mean for Ecopetrol?

Strong earnings reports and any type of positive news in regards to a company’s financial position will always bring benefits to the company and its investors. In fact, credit agencies have recently upgraded Ecopetrol’s rate to investment grade – the company’s credit rating had been in the so-called high risk or junk bond category since the beginning of the year – a rating which will allow the company to meet its financial obligations for the remainder of the year by being able to raise money more quickly through either a bond offering or commercial loan. Ecopetrol not only will be able to meet its financial obligations but also will be able to resume, if not, expand their operations. According to Juan Carlos Echeverry, Chief Executive Officer of the company;

“We are now resuming our refinery operations at our newer plants in Cartagena.”

The fact that the Cartagena refinery will continue operations is one of the many examples showing that the company’s directors are hopeful about the company’s outlook for the rest of 2016, a view very much needed to increase Ecopetrol’s popularity among Colombians since the company was forced to close two refineries at the beginning of the year, leaving thousands of people unemployed.

It would be difficult to assert that Ecopetrol’s crisis is over given that there is uncertainty as to whether oil prices will finally stabilise. As long as there is uncertainty in regards to the future of oil prices, Ecopetrol’s future will remain uncertain, at least partially. However, as discussed, Ecopetrol has shown toughness through rough times in the past couple years. Strong earnings reports, increased market capitalization, and investment grade credit rating are proof that Ecopetrol has managed to stay afloat in adverse conditions. This indicates that there is a brighter future for Colombia’s most representative company and, with it, a brighter future for many Colombians who rely on this successful enterprise.

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