Moody’s Affirms Baa3 Credit Rating and Negative Outlook for Ecopetrol

In a report issued this week, credit rating agency Moody’s Investors Service maintained its Baa3 investment grade rating for Ecopetrol. Moody’s also maintained its negative outlook for the Colombian state-controlled oil company while affirming both its local currency issuer rating and senior unsecured regular bond/debenture at Baa3.

In its assessment, the big three rating agency cited Ecopetrol’s “improving credit metrics and strong liquidity,” but recognized the remaining risk associated with its low 6.7 years of reserve life even though “the company’s liquidity and financing flexibility supports organic and inorganic reserve replacement.”

Furthermore, Moody’s noted that “Ecopetrol’s finding and development costs have been high, resulting in low returns and weak reserve replacement with more constrained capital spending.” This could mean that “achieving further material efficiencies in adding new reserves could take several years with success dependent in part on exploration,” according to Moody’s.

Controversy surrounding Reficar, the main refinery in Cartagena operated by a subsidiary of Ecopetrol, also weighs on the company’s short-term outlook. “Moody’s will watch closely any developments arising from investigations around cost overruns involving the expansion and upgrade of Ecopetrol’s refinery Reficar and potential consequences on the company’s liquidity or operations,” stated the New York-based agency in its report. “Currently, there is limited visibility on how … several investigations by Colombian authorities may impact Ecopetrol.”

The positive news is that higher — although still in-flux — oil prices and improved capital efficiency mean that Ecopetrol has an increased borrowing capacity, in addition to around $5 billion USD of cash on hand, to “fund the investment in new reserves.”

Moody’s was also encouraged by its projections that the Bogotá-based oil company will end 2017 with a debt-to-EBITDA ratio at 2 times, “which positively compares to its internal maximum limit of 3 times.”