Yesterday, state-controlled oil giant Ecopetrol announced that it has paid off a $340 million USD loan from Bancolombia. Interestingly, given the difficult climate for energy companies right now, this loan — for 990 billion Colombian pesos — wasn’t due until February 2024, according to Ecopetrol.
The firm says “this prepayment was made possible by the solid cash position of the company as a result of cost efficiencies” it achieved through a plan to do exactly that. Ecopetrol highlighted its capital discipline maintained throughout 2016 and a better pricing environment for leaving it in a position to get out from under this debt so quickly. It also noted that paying off the loan was in line with its current operating plan through 2020 and was made with its investment-grade rating in mind.
Days after Fitch Ratings put Colombia’s sovereign rating on negative outlook in July, it affirmed Ecopetrol’s investment-grade rating at BBB. The agency did, however, change the oil company’s outlook from stable to negative.
There is no guarantee that Colombia won’t get hit with a downgrade in 2017. Fitch and other ratings agencies have pointed towards the tax reform currently circulating in Bogotá as a positive measure that will make up for the billions in lost revenues since oil prices fell. And with that hole in the budget replaced, public finances should be sitting on firm enough ground to avoid any further negative actions.
But this reform package is now no sure thing to pass in its full form. Colombian Finance Minister Mauricio Cárdenas has publicly assured investors that it will be passed by Congress. The national political environment following the failed peace deal with FARC, however, means that there is little certainly to be had anywhere.
President Juan Manuel Santos is expected to formally submit the reform to the legislature next week.
Whether due to reform that isn’t viewed as strong enough or other economic deterioration, any further downgrade for Colombia would obviously have negative implications for the oil firm it controls. “The credit quality of these sovereign-owned entities is linked to those of their sovereigns given their strategic importance for the countries they operate within,” said Fitch in a statement in July.
In more news reflecting Ecopetrol’s willingness to move past its “capital discipline” phase, it also recently revealed plans to drill some 80 new wells in the second half of 2016. This was announced alongside a hope for oil to sell for between $50 to $55 USD per barrel in 2017, a target range that Brent crude has already risen into. As of Friday, Brent was trading around $52 USD per barrel.
If this rally continues, Ecopetrol head Juan Carlos Echeverry said the company might drill as many as 1,000 new wells in the coming years. “We feel now at the company that we can emphasize promoting reserves and production,” said Echeverry in August, according to Reuters.