Ecopetrol Plans to More Than Double Exploration Investment This Year Following Cost-Saving Efforts in 2016

Earlier this week, Ecopetrol released its fourth-quarter and full-year results, showing earnings (EBITA) of 18 trillion Colombian pesos, or around $6 billion USD, in 2016. Net profit for the year came in at 1.6 trillion pesos, or around $500 million USD, with the state-controlled oil company seeing its production falling to 718,000 barrels of oil equivalent per day, a drop of 43,000 barrels per day compared to 2105. The 16% fall in the average price of Brent crude was another major contributing factor to the earnings results.

“2016 was a year of enormous challenges for Ecopetrol,” said Ecopetrol CEO Juan Carlos Echeverry in a statement. “The oil industry experienced the lowest crude prices in 12 years, thus resulting in cuts in investment. The quest for efficiencies and liquidity became the mantra in surviving the crisis.”

But now, with the price of oil rebounding somewhat and the company believing the worst of the crisis to be in the rear-view mirror, it is mounting a “new exploration strategy” that Echeverry says will be the central component of the company’s efforts in the coming years. He revealed that Ecopetrol will more than double its exploration investment to some $650 million USD.

“Adding reserves and maintaining the pace of production are the company’s focus,” he said. “The exploration campaign will be stepped up significantly in regions of high prospectivity. Investment in exploration will rise from $280 million USD to $650 million USD, thus increasing offshore wells from 2 to 6 and onshore wells from 5 to 11 from 2016 to 2017. Enhanced recovery will continue to leverage additional reserves in mature fields. We stress that a strong cash position allows us to assess opportunities for inorganic growth in the Ecopetrol Business Group’s reserves.”

Echeverry says that early results can already being seen. In a joint project with Anadarko Petroleum Corporation and MCX Exploration LLC, the Warrior well proved a discovery in the Gulf of Mexico and this highlighted the plan to partner with other firms as a means to increase production while diversifying investment risk. “Colombia’s offshore is a region of high potential,” said Echeverry. “During the fourth quarter, two wells, Purple Angel (Kronos appraisal well) and Gorgon, were being drilled to have a better assessment of the potential of the Colombian Caribbean.”

This comes after Ecopetrol spent the bulk of 2016 tightening its belt and “focused its efforts on reducing costs, producing profitable barrels, prioritizing investments, strengthening cash flow and, at the same time, maintaining its investment-grade rating,” said Echeverry. According to the company, its cost-saving moves and push for more efficiency saved 2.2 trillion pesos, or nearly $750 million USD, in 2016.

Overall investment in 2016 hit $2.5 billion USD, and the chief executive noted that its EBITDA margin grew by 3% compared to 2015 and “is one of the highest in oil and gas industry.” Pipeline closures, largely due to an insurgent attack that shut down the Caño Limón-Coveñas pipeline for 45 days, also cost the company 25,000 barrels per day during that period.

Good news came in the form of Ecopetrol’s mid-year full takeover of control of the lucrative Rubiales Field, which it had held dually for decades with the Toronto-based Pacific Exploration & Production Corp. Echeverry credited “efficiencies and structural changes achieved in practically every business line” for that transition occurring successfully and said that the transfer “demonstrated our operating capacity.”

He also said that production is being increased through company’s attempts to raise recovery results. “The improved recovery program is a reality,” said Echeverry. “Eighteen pilot projects were active in 2016, 12 of which showed production increases. In this phase, the program has contributed 1.65 million barrels of accumulated reserves of oil. A significant share of these results was achieved in large fields such as Castilla and Chichimene.”

In his comments, Echeverry also discussed the impact that refining improvements, plant renovations, crude quality, and ongoing strategic aims had — and will continue to have in the years to come — on Ecopetrol’s strategy.

The full remarks issued by the CEO are reprinted below:

2016 was a year of enormous challenges for Ecopetrol. The oil industry experienced the lowest crude prices in 12 years, thus resulting in cuts in investment.

The quest for efficiencies and liquidity became the mantra in surviving the crisis. Added to this scenario were the challenges raised by the peace negotiation process, the closure of the border with Venezuela, El Niño climate Phenomenon, completion of the Reficar and Bioenergy projects, and approval of the tax reform.

Ecopetrol focused its efforts on reducing costs, producing profitable barrels, prioritizing investments, strengthening cash flow and, at the same time, maintaining its investment-grade rating.

Investment in 2016 totaled USD 2.5 billion. The company’s operating and financial performance was solid, as a result of the adjustment measures. EBITDA and EBITDA margin rose to 18 trillion pesos and 38% respectively; EBITDA margin grew 3 percentage points over 2015, and is one of the highest in oil and gas industry.

At 718 thousand barrels of oil-equivalent per day, the company exceeded its 2016 production target by 3 thousand barrels. This was despite a drop in production by 25 thousand barrels of oil-equivalent per day for 45 days, due to the closure of the Caño Limón Coveñas oil pipeline; and a 16% drop in Brent prices.

The fourth quarter closed with a robust cash position of 14 trillion pesos (approximately USD 4.7 billion), reducing financial leverage and allowing opportunities for inorganic growth.

The resumption and operation of the Rubiales and Cusiana fields demonstrated our operating capacity, which has benefited from the efficiencies and structural changes achieved in practically every business line. Ecopetrol is currently operating at over 500 thousand barrels of oil-equivalent per day directly.

The improved recovery program is a reality. Eighteen pilot projects were active in 2016, 12 of which showed production increases. In this phase, the program has contributed 1.65 million barrels of accumulated reserves of oil. A significant share of these results was achieved in large fields such as Castilla and Chichimene.

The discovery of oil in the Warrior well, in the United States’ Gulf of Mexico, is the result of Ecopetrol’s new exploration strategy, which includes joint ventures with top-tier companies to diversify risk, engage in further exploration and increase the probability of discoveries. Warrior is Ecopetrol Group’s fifth discovery in this prosperous oil region, and is contributing to increasing the company’s contingent resources.

The exploration campaign has also yielded good results in the Lower Magdalena Valley (Bullerengue) and Middle Magdalena Valley (Boranda).

Colombia’s offshore is a region of high potential. During the fourth quarter, two wells, Purple Angle (Kronos appraisal well) and Gorgon, were being drilled to have a better assessment of the potential of the Colombian Caribbean.

In refining, the greatest achievement was the startup of the 34 Reficar units, giving way to the stabilization and testing period. December saw a record load of crude for refining: Reficar, with 150 thousand barrels of oil, and Barrancabermeja, with 230 thousand barrels of oil per day, for 21 days. Average margin per barrel of Reficar rose from USD 2.8 per barrel between January and July to USD 8.4 since August, once all the units were fired up. In the future we will continue stabilizing and optimizing Reficar’s load and margin.

Another refining milestone was the change in Barrancabermeja’s operating layout, which stabilized operations and yielded an average conversion factor of 73%. This refinery’s EBITDA also rose to 2.1 trillion pesos, two times higher than in 2014.

The company’s priority is to extract greater value from the crude it markets. 2016 saw higher sales referenced to more liquid indicators, strengthening the crude basket. The Brent-basket spread for Ecopetrol’s crude in 2016 was -9.4 dollars, 3 cents less than in 2015.

The quality and consistency of our crude is a significant value lever. As part of our dilution efficiencies strategy, we improved crude transport viscosity from 200 to 400 centistokes (cSt). Since the fourth quarter, the Ocensa oil pipeline has increased its viscosity handling capacity to 600 cSt. This has contributed to lower costs and a lower dilution factor, which fell from 19% to 17% between 2015 and 2016, and saved the Ecopetrol Group near one trillion pesos.

Consolidated savings for the year totaled 2.5 trillion pesos, exceeding the savings target of 1.6 trillion pesos set for 2016. Out of this, 2.2 trillion were structural savings. The principal savings levers were lower dilution of heavy crude by approximately 660 billion pesos, and 375 billion pesos in operating and maintaining transportation assets.

These greater efficiencies were critical for mitigating the impact of lower crude prices on the 2016 proven reserves balance. Reserves are at 1.6 million barrels of oil-equivalent, 14% less than the 1.85 million figure in 2015.

We estimate the price impact negatively affected reserves by 202 million barrels of oil-equivalent. In 2016, the SEC price used for valuation fell 20% versus 2015, from $55.6 USD per barrel to $44.5 USD per barrel. This decline in reserves, due to the price effect, was offset by an addition of 186 million barrels of oil-equivalent attributable to efficiencies and new drilling projects, among other factors.

Net profit attributable to Ecopetrol Group shareholders totaled 1.6 trillion pesos, versus a 2015 loss of 3.9 trillion pesos. This was despite of 6.8 trillion pesos in lower revenue during the year due to lower crude prices. The higher profits were due to savings and efficiencies. Not counting the impairment impact, the company saw earnings of 2.3 trillion pesos in 2016.

Challenges in 2017 are no less serious. Adding reserves and maintaining the pace of production are the company’s focus. The exploration campaign will be stepped up significantly in regions of high prospectivity. Investment in exploration will rise from $280 million USD to $650 million USD, thus increasing offshore wells from 2 to 6 and onshore wells from 5 to 11 from 2016 to 2017. Enhanced recovery will continue to leverage additional reserves in mature fields. We stress that a strong cash position allows us to assess opportunities for inorganic growth in the Ecopetrol Business Group’s reserves.

The company will continue to pursue its Transformation to ensure operational and financial sustainability. We have named Phase 3.0 of the business Transformation plan Ecopetrol’s New Frontier. It will focus on opening up new markets; multi-year field development plans; improved return on assets; attracting and retaining the best human talent; and committing ourselves to integrity, respect for the environment and shared prosperity with the communities in which we operate.

The 3.5-billion-dollar 2017 investment plan will focus on opportunities to generate value for the Business Group.

As for Reficar, the stabilization stage will be completed, and in the second half of the year global performance will be tested. Efforts will focus on improving margins and load, and on adding value.

The Company has launched a new corporate stakeholder’s management strategy, seeking sustainable and shared prosperity with communities in the operating regions, the development of local governability, and contributions to the country’s peace agreement. It has also strengthened its leadership in every area, its commitment to life and the effective mitigation of risks to individuals, facilities and processes.

Ecopetrol has once again addressed the challenges imposed by the price environment. It has ended the year as a transformed, operationally sustainable and financially robust company. The breakeven for the operational profit was reduced due to the efficiencies achieved over the past years.

The future looks promising. The 2020 business plan is based on three fundamental pillars: (1) protection of cash and cost efficiency; (2) strict capital discipline; and (3) growth in reserves and production; these pillars will strengthen the company’s financial sustainability and afford it opportunities for both organic and inorganic growth, generating value and profitability for its shareholders.