Fitch Ratings: Ecopetrol’s Reserve Life Could Fall to Less Than Six Years

Fitch Ratings says that it expects Ecopetrol‘s revamped business plan to lower the state-controlled oil giant’s capital expenditure and reduce its leverage given the rise in oil prices during the last few months.

In its analysis, the New York-based ratings agency noted that the company had around a 3.5 leverage ratio as of last September 30, when it reported $5.2 billion USD in earnings (adjusted EBITDA) compared to $18.0 billion USD of debt. This even improved a few weeks later when Ecopetrol paid off a $340 million USD loan to Bancolombia early.

Ecopetrol continues to reel from the effects of the oil-price deterioration in recent years, however. As a result, Fitch Ratings believes that the company’s reserve life could fall to less than six years.

“The hydrocarbon price downturn has weakened Ecopetrol’s reserve life to 7.1 years,” said Lucas Aristizabal, senior director at Fitch Ratings. “Investment reductions are expected to affect its ability to replenish reserves in the long run above production levels, which could continue to reduce reserve life to less than six years and weaken the company’s standalone credit profile.”

The agency speculates that Ecopetrol lacks the flexibility to slow down production in order to preserve reserves due to the fact that some 80% of the company’s proven reserves are already developed. Thus, curbing production would not make economic sense.

As the company has transitioned its strategy, Ecopetrol head Juan Carlos Echeverry has reflected a desire to increase output, noting last August that some 1,000 new wells could be drilled in the coming years.

Ecopetrol Credit Rating

Overall, Ecopetrol’s credit rating remains highly tied to Colombia’s sovereign rating, says Fitch Ratings, given “the strategic importance of its downstream business.” The agency also highlighted this week that Colombia, as one of three investment-grade Andean region countries, along with Chile and Peru, has weathered the commodity downturn well.

In these three nations, this was “underpinned by the strength and flexibility of their macroeconomic policies and fiscal and external buffers,” which separated them from the lower-level resiliency seen in Bolivia, Ecuador, and Venezuela.

Colombia’s tax reform passed in the final days of 2016 was a move towards preserving its BBB rating, which Fitch Ratings and Standard and Poor’s both put on negative outlook last year. But that has not gotten the nation, nor Ecopetrol by association, out of the woods yet.

Fitch says that the ability of Colombia, Chile, and Peru to maintain their ratings stability “depends on their ability to preserve fiscal space and buffers, rebuild weaker fiscal revenue bases and sustain policy credibility.”