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.

Chemical engineer Adolfo Tomás Hernández Núñez is Ecopetrol’s new Refining & Industrial Processes Manager (Photo courtesy Ecopetrol)

Ecopetrol (BVC:ECOPETROL; NYSE:EC; TSX:ECP) has announced that effective February 15, chemical engineer Adolfo Tomás Hernández Núñez has been appointed the new vice president of refining and industrial processes for the Colombian-government controlled petroleum company.

Hernandez has worked for 37 years in the oil and gas sector—20 years with Chevron, most recently as Upgrader Manager in Petropiar, a mixed enterprise with Chevron participation, located in Venezuela. Hernandez has also worked as business manager in Chevron’s Pascagoula, Mississippi refinery, and as regional marketing operations manager at Chevron Texaco.

The Dominican Republic native matriculated from the University of Missouri – Rolla in the United States.

The Colombian state controlled oil company also cited the time and effort necessary by the company to comply with the Toronto exchange’s listing requirements. The delisting will take effect March 2. After that time, Ecopetrol securities will continue to trade as before on the NYSE and BVC in the US and Colombia, respectively.

Ecopetrol is Colombia’s largest company and accounts for 60% of Colombia’s petroleum production. As one of the 40 largest oil companies globally, the national government of Colombia is the majority shareholder, but a minority of shares actively trade on the private capital markets. In addition to Colombian production, Ecopetrol is active in petroleum exploration and production in Brasil, Peru, and the Gulf of Mexico in the United States.

Over 120 companies competed, and Ecopetrol was among nominees such as Codensa, Fluvia, Independence, y Pacific Exploration & Production. In 2012 Ecopetrol won in the Energy Resources category with their “strategy for control of hydrocarbon powering,” and in 2014 in the Social Responsibility category with its “Diaspora” program that used old oil pipelines to create artificial reefs.

The patented EcoDiDesh technology was developed at Ecopetrol’s Colombian Petroleum Institute, reduces costs in dehydrating crude oil, reduces greenhouse gas emissions, reduces the costs in transporting crude oil, and increases the capacity of treatment facilities (such as that pictured above) without requiring additional investment. The technology has saved Ecopetrol over $100 million USD annually.

“It’s a new concept that doesn’t have antecedents in the industry,” said Andrés Eduardo Mantilla, Ecopetrol’s vice president of innovation & technology. “The process combines the use of dilutions and gravity separation, reducing the amount of water present in the crude oil without using thermal, electrical, or mechanical treatments. This guarantees obtaining high quality dehydrated crudes that can be transported under technical specifications.”

Polipropileno del Caribe S.A. markets polypropylene, polyethelyne, and resins for the plastics industry under the trade name Esenttia, and has corporate offices in Bogotá and manufacturing facilities in Cartagena. This sale process will proceed in accordance with Colombia’s Law 226 of 1995, which requires Ecopetrol S.A. to apply for and obtain the approval of the national government of Colombia.

New offshore exploration and production company to take advantage of tax benefits

Meanwhile, Ecopetrol also reports that Hocol Petroleum Limited, a fully owned subsidiary of Ecopetrol S.A., has formed a new company, Ecopetrol Costa Afuera Colombia S.A.S., as approved by Hocol Petroleum Limited’s board of directors. The new company will be responsible for offshore exploration and production activities in Colombia, which are currently being carried out by Ecopetrol S.A. as operator and non-operator.

Ecopetrol Costa Afuera Colombia S.A.S. will benefit from the tax, tariff and other benefits of Decree 2682 of 2014, as recently modified by Decree 2129 of 2015, which establishes the conditions and requirements for forming permanent offshore free trade zones in colombia.

Ecopetrol Costa Afuera Colombia S.A.S. is an indirect subsidiary of Ecopetrol S.A. and located in Colombia.  It has an authorized capital of $2 billion COP and subscribed capital of $400 million COP.

The credit line has a term of five years, amortizable for 2.5 years, with interest and principal payments to be made biannually (twice a year) at LIBOR+145 basis points. The terms are similar to the loan taken out by Ecopetrol in February of last year.

Meanwhile, Moody’s Investors Service downgraded Ecopetrol’s credit rating from Baa2 to Baa3 and placed the company’s outlook under review. While Ecopetrol remains investment grade under the new rating, the downgrade reflects a persistent environment of low oil prices, which will continue to negatively affect the company’s cash flow and financial indicators, said Moody’s. Ecopetrol’s baseline credit assessment was downgraded from Baa3 to ba3, and does not include implicit government support, said Moody’s.  While Ecopetrol is publicly traded, the government of Colombia maintains a controlling majority of shares in the company.

Standard & Poors has downgraded its outlook on Ecopetrol from stable to negative, yet the firm maintains Ecopetrol at a steady BBB credit rating. Ecopetrol’s stand-alone credit profile, which does not include the government’s implicit support, was downgraded from bbb- to bb. This decision was based on the expectation that the company’s credit metrics will likely be weaker because of lower hydrocarbon price assumptions by the rating agency.

Standard & Poors credited Ecopetrol for austerity and cost efficiency measures the company has taken to reduce the effects of the current low oil price environment. In a report, Standard & Poors observed that because of Ecopetrol’s importance, the company could likely count on backing from Colombia’s national government.

According to Standard & Poors, Ecopetrol’s liquidity resources for the next 12 months should be adequate, estimating that the sources of liquidity will exceed their uses by 1.2 times and as indicated by the Bank of Tokyo financing, should continue to have good access to market based financing resources.

Above photo: A tanker takes on 200,000 barrels of gasoline & 50,000 barrels of Jet-A aviation fuel destined for the US & some Caribbean islands, refined at Ecopetrol’s Reficar refinery in Cartagena (photo courtesy of Ecopetrol).

Headquartered in Bogotá, Colombia, Ecopetrol S.A. (Ecopetrol) (BVC:ECOPETROL)(NYSE:EC)(TSX:ECP) is the largest integrated oil and gas company in Colombia. It is responsible for over 60% of total Colombian oil production and has a proved hydrocarbon reserve position of roughly two billion barrels of oil equivalent at the end of 2014. For the twelve months September 30, 2015, the company generated revenues of $22.5 billion USD and it had total assets of $59 billion through three business segments:

1. Exploration and Production (E&P, 51% of revenues and 56% of EBITDA for the last twelve months ended September 31, 2015)
2. Refining activities (34% of revenues and 5% of EBITDA)
3. Transportation and logistics (15% of revenues and 39% of EBITDA). Its production averaged 740.9 mboe (million barrels of oil, equivalent) in the third quarter of 2015, 2% below that of the year before.

Ecopetrol’s ratings downgrade was triggered by persisting stressed oil prices, which will continue to negatively affect the company’s cash flow generation and credit metrics, increasing its credit risk. While Ecopetrol has no material debt coming due in the next two years, weaker cash generation and higher leverage, coupled with limited funding availability overall for the oil industry, will hurt the company’s ability to continue with its capital spending program to sustain reserves and production.

Ecopetrol responded in a statement, that (translated from Spanish) “The company continues its efforts to reduce costs and protect the generation of revenues in light of the continued slump in international petroleum prices. The enterprise has embarked on a transformation plan that reduced costs by $2.2 billion COP in 2015. Ecopetrol is launching new efficiency and cost-savings initiatives for 2016.

Moody’s joint-default analysis continues to assume a high probability of support from the government of Colombia (Baa2 stable). In addition, the agency’s assumption for default dependence between Ecopetrol and the government continues to be moderate. This assessment now results in a three-notch uplift of Ecopetrol’s senior unsecured rating to Baa3 from its ba3 BCA.

Moody’s review of Ecopetrol’s Baa3 senior unsecured ratings and ba3 BCA will focus on the degree of the impact that depressed oil prices will have on the company’s cash generation. The analysis will also consider opportunities that the company may have to reduce costs further, as well as on its flexibility to adjust capex down or sell assets in order to protect liquidity. In addition, Moody’s will assess the government of Colombia’s ability to support the company on a timely manner.

Downgrades:

• Issuer: Ecopetrol S.A.
• Issuer Rating (Local Currency), Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade
• Multiple Seniority Shelf (Foreign Currency), Downgraded to (P)Baa3 from (P)Baa2; Placed Under Review for further Downgrade
• Senior Unsecured Regular Bond/Debenture (Foreign Currency), Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade

Outlook Actions:

• Issuer: Ecopetrol S.A.
• Outlook, Changed To Rating Under Review From Stable

Ratings Rationale

Despite Ecopetrol’s strong efforts to improve operating efficiencies and reduce capex to protect its liquidity position, the company’s credit metrics will deteriorate further as a consequence of persistent low oil prices. “Moody’s estimates that Ecopetrol’s leverage will exceed 5 times by the end of 2017, from 3.3 times in September 2015, with low prospects of recovery in the medium term”, said Nymia Almeida, a Vice president and Sr. Credit Officer at Moody’s.

The company’s Baa3 ratings and ba3 BCA continue to reflect Ecopetrol’s status as Colombia’s leading oil and gas producer, accounting for about two-thirds of the country’s production and 100% of the supply of oil products. The ratings also take into consideration that Ecopetrol counts upon stable cash flows from its midstream subsidiary, which includes Ocensa (Baa3 positive).

In late 2015, Ecopetrol announced a cut on its 2016 capex program to $4.8 billion USD, which compares to the $6.7 billion previously planned for the year, and to the $7.4 billion spent in 2014. Over 60% of Ecopetrol’s capex is focused on exploration and production. Lower annual capex starting in 2016 will be driven mostly by reduced investments in downstream, which will decline materially during the year as the upgrade of the Reficar refinery approaches completion, expected by the company for the first half of 2016.

Moody’s expects that, during this period of lower operating cash flows, the government take as a percentage of the company’s net income will remain below the usual 80%; the ratings agency notes that the dividend payout ratio in 2014 (paid in 2015) was 70%.

Ecopetrol has a weak liquidity position that includes $3 billion USD of cash and cash equivalents as of September 30, 2015 to cover the company’s short term maturities of about $1 billion for 2016 and 2017 plus interest, capex and dividends. For the next twelve to eighteen months, Moody’s expects a weakened EBITDA in the USD1.5 billion neighborhood, along with $4.8 billion in annual capex, and around $3 billion in interest, dividends and taxes. Further depreciation of the Colombian peso would affect the company’s financial flexibility, despite it generating around half of revenues and EBITDA in US dollars, because about 85% of its debt is denominated in hard currencies. While Ecopetrol could sell certain non-core and core operating assets, this would be a challenge under current oil market conditions.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Investors, analysts, and other interested individuals may see the Credit Policy page on www.moodys.com for a copy of these methodologies.