Ecopetrol Launches $478 Million USD Austerity Plan To Weather Low Oil Prices

Given the challenging petroleum price environment observed since the beginning of 2016, Ecopetrol S.A. (BVC:ECOPETROL; NYSE:EC; TSX:ECP) has announced that it will seek to save an additional $1.6 trillion COP ($478.736 million USD) through 2016. This comes after the company announced that during 2015 the state controlled petroleum company achieved  its savings goals  for a total of $2.8 trillion Colombian Pesos (COP), of which $2.2 trillion corresponded to the parent company.

In order to accomplish this, the company has adopted a new series of savings and austerity measures aimed at optimizing cash flow and reducing costs of all of its processes. The measures are expected to help mitigate the impact of the drop in international crude prices on production and reserves, allowing for continued profitability on produced oil, gas and petroleum products.

New measures announced by Ecopetrol include:

1. The freezing of the expense budget at 50% for all areas (OPEX).
2. A freeze on personnel except for critical operational positions. The company will reorganize itself internally in order to take over the Rubiales and Cusiana fields, events that will take place during 2016.
3. The adoption of a new model of contract management. Technical and administrative management, previously handled through contractors, will be handled directly by Ecopetrol personnel, which will involve a reorganization of tasks and transfer of personnel between operational areas and sites.
4. The budget for travel will be reduced to the minimum required to support operations.
5. The elimination of consulting and professional services not strictly necessary for operations.
6. 66% reduction in advertising and sponsorship commitments. This translates into a reduction from $9 billion COP in 2015 to $3.35 billion in 2016.
7. A shock policy to ensure the efficient use of inventory. Material or parts purchases will only be authorized when the necessary part is available in Ecopetrol or affiliate warehouses.
8. Giving priority to the carrying out of business by group companies before any third parties as long as they are carried out under conditions equal to or better than market.
9. Implementation of the 2016 investment plan will depend on crude oil price evolution. Investments will be evaluated by means of a strict process of capital allocation and value creation and cash generation criteria.
10. Proceeds from the divestment plan for non-strategic assets and share ownership are expected to be between $400 million USD and $900 million for the period 2016-2017. As the 2016 budget does not have uses for proceeds derived from this program, resources obtained will strengthen the company’s cash flow.
11. In exploration, investments will be redirected to onshore projects (continental territory) and will focus on recent deep water discoveries with strong potential (Kronos).
12. In 2015, Ecopetrol obtained $3.42 billion USD in financing, while in 2016 the company has adjusted its financing needs to a range between $1.5 billion and $1.9 billion USD.

This strengthens financial metrics and seeks to preserve the company’s investment grade rating. It is estimated that in the current environment, the debt/EBITDA ratio would fluctuate between 3.8 and 4 times in 2016 and gradually drop in the following years. These figures could vary depending on the price situation, changes in the investment plan and divestment program results.

Ecopetrol, an integrated oil and gas company, is the largest company in Colombia and among the top 4 Latin American oil companies, and 50 oil companies in the world. Besides Colombia – where it generates over 60% of the national production – it has exploration and production activities in Brasil, Peru and the US Gulf of Mexico. Ecopetrol owns Reficar (pictured above), the largest refinery in Colombia and most of the pipeline and multi-product pipeline network in the country, and is significantly increasing its participation in bio-fuels.

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