Ecopetrol S.A. (NYSE:EC) Q3 2022 Earnings Call Transcript

Ecopetrol S.A. (NYSE:EC) Q3 2022 Earnings Call Transcript November 9, 2022

Operator: Good morning. My name is Juan and I’ll be your operator for today. Welcome to Ecopetrol’s Earnings Conference Call, in which we will discuss the main financial and operational results for the third quarter of 2022. All lines have been muted. There will be a question-and-answer session at the end of presentation. Before we begin it is important to mention that the comments in this call by Ecopetrol’s senior management include projections of the company’s future performance. These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections shared on this conference call.

This call will be led by Mr. Felipe Bayon, CEO of Ecopetrol; Yeimy Baez, VP of Low Emission Solutions; Alberto Consuegra, COO; and Jaime Caballero, CFO. Thank you for your attention. Mr. Bayon you may begin your conference.

Felipe Bayon: Good morning and welcome to the third quarter 2022 earnings conference call. The Ecopetrol group continues to deliver solid operating and strategic results that are joined up by a successful commercial strategy and a disciplined financial management in a year in which we have delivered historical results. Firstly, I want to thank more than 18,000 direct employees of Ecopetrol and as well as our allies and contractors and partners who jointly look to make the impossible possible for the benefit of millions of Colombians and those in the areas in which we operate. In the first nine months of the year, we achieved a net income of COP26.6 trillion and an EBITDA of COP59.2 trillion, which equates to an EBITDA margin of 50%.

The net income for these nine months is 59% higher than the whole 2021 net income and 150% higher than the one observed for the same period in the last year. From this quarter’s results, I would like to highlight the following milestones. The gas discoveries in the Caribbean in the Gorgon-2 in which we partner with Shell and Shell as the operator and the Uchuva-1 well with Petrobras, the operator, both exploratory wells and the announcement by our subsidiary Hocol of the successful drilling of the Coralino-1 well, proven the presence of gas in a structure close to the Arrecife discovery in the Department of Cordoba. All this is to reiterate Colombia’s potential for gas, the hydrocarbon of the energy transition. The growth path in our production levels in accordance with the strategy outlined and announced at the beginning of the year.

The average production in 3Q was 720,000 barrels of oil equivalent per day and so far this year we have an average of 706,000 barrels of oil equivalent per day due to the increase of our execution capacity, which has improved the performance of the fields in Colombia and our growing unconventional operations in the US in the Permian. The increase in the capacity of more than 50,000 barrels per day at the Cartagena refinery, thanks to the successful start-up of the interconnection of crude oil plants IPCC project taking a firm step to guarantee the supply of fuels and Colombia’s energy sovereignty. Completion of the pilot test for the production of green hydrogen at the Cartagena refinery. This project is part of Ecopetrol’s strategic hydrogen plant within the framework of its low carbon emissions business portfolio, which we expect will contribute to our operations decarbonization goals as well as those of Colombia.

Let’s please turn to the next slide to address issues in line with our TESG strategy. During the first nine months of the year, we have made significant achievements in our TESG strategy. On the environmental front, I would like to highlight our progress in decarbonization, circular economy and natural climate solutions reflected in the following and 87% fulfillment of the annual emissions reduction goal, accumulating a reduction of 229,317 tons of CO2 equivalent so far in the year. The result of our energy efficiency program as of 3Q 2022 has led to a savings of COP97 billion and avoided the emission of 98,000 tons of CO2 equivalent. The inauguration jointly with El Dorado Airport in Bogota of the first road segment in Colombia paved with asphalt and recycled plastic low-density polyethylene in favor of the protection of the environment and waste reuse.

On the social front we continue to work for the sustainable development of the communities in the territories in which we operate. The ceremony in where we awarded scholarships for university or higher education to 65 high-schoolers’ through the Bachilleres Ecopetrol program, thanks to which we have now benefited more than 1,600 young Colombians from 32 departments in the country over the initial 36 years of the program’s existence. The contracting of goods and services for COP17.6 trillion during 2022 by the Ecopetrol Group, contributing to the economic and social development in different regions. The results achieved in the ranking of the most diverse and inclusive companies of the National Consulting Center where we obtained third place.

On the Corporate Governance front, Ecopetrol was awarded with the ANDESCO Sustainability Award for having best practices in corporate governance 2022 environment. Additionally, I would like to highlight the balance of our second Extraordinary General Shareholders’ Meeting, in which we have 305 and 85 retail shareholders. We reached 1,096 connections in our live transmission our shareholders elected the Board of Directors which now is formed by two women and seven men and seven independent and two non-independent members. In strict compliance with the company’s bylaws the Board is composed of one member nominated by the representatives of the minority shareholders who were re-elected; three elected members who continue in office; one Board member nominated by the hydrocarbon producing departments in which Ecopetrol has a presence and was elected; and four new Board members.

The members of the Board of Directors of Ecopetrol have extensive experience and broad technical, financial and business knowledge which supports the role as a strategic advisor to the Ecopetrol Group. Finally, on the Science, Technology and Innovation front. As of 3Q 2022, we have been able to capture benefits for $136 million mainly due to the results obtained by the business technologies and digital solutions implemented, in Ecopetrol and Cenit amongst others. We advanced the first awarding phase of the NNOVATIA-2022 contest, a program, that allocated COP720 million to promote the Energy Transition and Innovation in the country. We signed a joint declaration with the representation of the State of Bayern of Germany in South America to strengthen our bilateral cooperation focused on intensifying the bilateral exchange of knowledge, innovation and technology for sustainable development and the energy transition.

I want to now pass the floor to Yeimy Baez, who will talk to you about the main advances in the business segment of Low-Emission Solutions.

Yeimy Baez: Thanks Felipe. During this quarter, we reached important milestones in the portfolio of low-carbon solutions. On the natural gas side, a pilot project was STARMAN project for the importation of liquefied natural gas on a small scale to the District of Buenaventura in order to test an alternative gas source to guarantee a reliable supply of this fuel to the city. Additionally, the Kandeo project was ratified with 12 companies from the gas and financial sector. This project aims to finance the purchase of approximately 4,000 heavy load vehicles powered by natural gas. Ecopetrol will join with an investment close to COP60 billion. It is expected that this project will spur demand for natural gas vehicles, while eliminating more than 220,000 tons of CO2 per year.

We reaffirm our social commitment with the agreement signed by Hocol and Gases de la Guajira to provide funding to connect 308 low-socio-economic households to the natural gas service by 2023. Additionally to what Felipe mentioned about the proof-of-concept to produce green hydrogen at the Cartagena refinery we continue working on the decarbonization of the public and cargo transportation industry with the introduction of fuel cell vehicles. In this line of work we made progress on the pilot for sustainable mobility in Bogota, where infrastructure will be created to recharge vehicles with hydrogen fuel cells, promoting use of low carbon solutions within the integrated public transportation system of Bogota, SITP in Spanish. The system will be live for approximately a year with the possibility of an extension for up to 10 years.

Finally, I would like to highlight that the Ecopetrol Group continues with the implementation of various low carbon technologies to generate energy from non-conventional renewable sources such as solar, wind, biomass, geothermal, among others in the areas of the country where the group operates. The operations that already have this renewable energy system have created cost savings close to COP19 billion and reductions of over 27,000 tons of CO2 per year. I will now give the floor to Alberto Consuegra who will talk about the main operational milestones.

Alberto Consuegra: Thank you, Yeimy. During this third quarter, we drilled four exploratory wells for a total of 13 wells drilled and six confirmed exploratory successes, two offshore and four onshore so far this year. By the end of the year we expect to drill 24 exploratory wells in line with the plan. The presence of gas has been confirmed in deepwaters in the Southern Colombian Caribbean in the Gorgon-2 well operated by Shell in which Ecopetrol has a 50% interest confirming the extension of the discovery made back in 2017 with the Gorgon-1 well and confirming the existence of an offshore gas province where the Kronos and Purple Angel discoveries were also found in 2015 and 2017 respectively. This outcome will allow us to proceed with the evaluation of the findings which if developed, would increase Colombia’s gas reserves.

Additionally, during October the Coralino-1 well located in the Department of Cordoba and operated a 100% by our subsidiary Hocol revealed the presence of gas in the Cienaga de Oro formation, which is undergoing initial tests to determine its technical and commercial feasibility. Moving forward with the incorporation of reserves the El Nino-2 discovery located in the Department of Cundinamarca progressed from its exploratory stage to the development and production stage. Ecopetrol has 50% interest Perenco 30% as operator and CNOOC 20%. Currently, the Ecopetrol Group has a robust and competitive exploration portfolio that drives the country’s sovereignty. Gas opportunities offer an estimated potential of 17 TCF of gas identified in 46 and eight discoveries under evaluation.

Let’s continue to the next slide please. As Felipe mentioned, the production continues to grow reaching 720,400 barrels of oil equivalent per day by 3Q 2022 the highest on record since 2Q 2020 and placing us at the high end of the target range set for 2022. As compared to second quarter, production increased by 15,800 barrels of oil equivalent per day. We highlight the incremental production of our operations in the Permian and the Rubiales and Caao Sur fields. Likewise, production recovered in the La Cira, Cano Limon, and Caricare fields after community events. Also the contribution of production from the exploratory wells should be highlighted. It is important to note the increase in our execution capacity. So far this year we have drilled and completed 407 development wells, 42% more than in the same period of last year with an average use of 29 active rigs and 373 workovers.

Finally, we highlight the entry into operation of the first facilities training in Cano Sur, which will increase the production of the field by year end between 7,000 and 10,000 barrels of oil per day. Let’s move on to the next slide please. In the Permian Basin, our activities during this quarter reached an average production of 43,800 oil equivalent barrels net Ecopetrol per day before royalties. 79.2% more than in the same period of 2021 with a record production of 50,200 barrels of oil equivalent per day in September. Gas production contributed about 16% to total production. We also highlight our solid financial results. So far this year, we have generated an EBITDA of $454.5 billion, with an EBITDA margin of 88%. In line with our TESG strategy, we highlight the low emissions intensity of our Permian operations, as a result of the zero routine flaring initiative and the use of fugitive emissions monitoring systems in the facilities.

Likewise as part of Ecopetrol S.A. alliance with Accenture and AWS, to develop a digital solution for water management, a pilot project is currently being conducted in our Permian assets. By year end, we expect another channel production between 36,000 to 38,000 barrels of oil equivalent per day net for Ecopetrol before royalties, with approximately 93 wells drilled and 95 wells completed. Let’s continue to the next slide, please. In the midstream segment, transported volume increased by 63,000 barrels per day versus three quarters of 2021 mainly due to the higher production of crude and local demand for refined products. It’s worth noting, that in the third quarter of this year, we reached an all-time high for product pipeline transport exceeding 300,000 barrels per day.

In order to strengthen the company’s operation and contribute to the hydrocarbon transport business, two new tanks each with a storage capacity of 100,000 barrels came into operation at the Sebastopol station of the Mid-Magdalena trunk line, increasing the storage capacity of this strategic asset of the pipeline system by 26%. Within the framework of our TESG strategy, we highlight the inauguration of the photovoltaic solar system in Tumaco, Nariño together with the Pacific Technical Development Corporation Corte Pas, which will supply the energy required for the cocoa drying process. This project will benefit 293 families and positively impact 90% of women in the region, promoting to closing of gender gaps in the cocoa activity. Let’s go to the next slide, please.

In the downstream segment, operational integrity was maintained and exceptional financial results were achieved. We highlight quarterly historical throughput levels recorded in both refineries as well as, an increase in value because of higher diesel and jet fuel production. During the third quarter, the segment registered a combined refining gross margin of $20.3 per barrel and, an EBITDA of COP2.2 trillion. The Cartagena refinery accounted for 36% of the segment’s EBITDA during the quarter and 41% so far this year. These results were leveraged by an efficient plant shutdown execution strategy, ensuring the operational availability and reliability of the assets as well as cost control. On September 15, the Cartagena refinery increased its throughput capacity to 200,000 barrels per day an amount that exceeds the previous operating capacity by 50,000 barrels, thanks to the successful start-up of the original crude unit systems.

This project involves the effort of more than 1,500 people with 93% of labor originated from Cartagena. No injuries, process safety events and environmental incidents were reported. This expansion established the role of the Cartagena refinery as a strategic asset, to guarantee Colombia’s energy autonomy and will allow us to produce a greater volume of fuels that meet the highest international quality standards. On the other hand, the Barrancabermeja refinery, was recognized as the best in Latin America by the World Refining Association, during the Latin American Refining Technology Conference. This award highlights the refinery’s lead position in efficiency, energy transition, profitability and implementation of new technologies. In line with our commitment to TESG, the Cartagena refinery, a renewable diesel industrial trial will take place during this quarter, in order to gain information for the business case and continue our progress in the energy transition process.

During the fourth quarter, we expect to complete the refinery plant shutdown cycle as scheduled. In Esenttia, progress continues in the expansion of one of the plant’s capacity. Also maintain the operational stability and availability of all our business units. Let’s move on to the next slide, please. The domestic and international macroeconomic situation has generated commercial, inflationary and logistical challenges for the group. As of September, there has been a significant increase in prices, mainly of raw materials and power, which has impacted the cost structure, representing a weighted increase of 13% versus the previous year. Within the Ecopetrol Group, we have been developing comprehensive strategies to mitigate the inflationary impact and protect our ability to execute the business plan.

So far this year, we have captured efficiencies of approximately COP1.8 trillion, of which COP0.6 trillion have helped contain inflationary pressure on costs. In the absence of this efficiencies we would have had a 16% cost increase. In addition to this efficiency program we have worked to ensure the availability of inventories of materials required to operate by developing joint procurement strategies with our suppliers. The total unit cost for 3Q 2022 had a year-on-year increase of approximately $13 per barrel, primarily due to higher prices of purchases and imports of crude oil and products. The lifting cost increased by 9% versus the third quarter of 2021 from $8.45 to $9.17 per barrel, mainly as a result of greater operational levels and the influence of inflationary pressure on the cost structure.

Regarding the refining cash costs, we had a 16% reduction with respect to 3Q 2021, thanks to the higher throughput volume at the refineries. Finally, the cost per barrel transported also decreased due to the higher volume of crude oil and products transported. I now give the floor to Jaime Caballero, who will present the key financial results of the Ecopetrol Group.

See also 12 Best Software Stocks To Buy and 12 Best Fortune 500 Dividend Stocks To Buy.

Jaime Caballero: Thanks, Alberto. During the third quarter of the year, the group continued to deliver exceptional financial results, supported by strong operating and commercial performance that has allowed distinctive capture positive market conditions. EBITDA per barrel of the hydrocarbons business, which does not include ISA’s contribution, increased $27.1 per barrel, compared to the first nine months of 2021, reaching $67.3 per barrel explained by higher realization prices of the basket of crudes and products incorporation of ISA and the increase in sales volumes. Net income breakeven was $20.3 per barrel, decreasing $14.5 per barrel as compared to the first nine months of 2021, mainly as a result of higher sales volumes and improved crude and product spreads.

In the Energy Transmission and Toll Roads business, ISA’s EBITDA margin excluding the construction business closed at 83.6%, mainly explained by the positive effect of macroeconomic variables in Colombia, Chile and Peru and the entry into operation of new projects since 4Q 2021 in all of the company’s geographies. ISA’s ROE for the nine months of 2022 was 13.2% in line with the strategy of generating sustainable value. In terms of the Ecopetrol Group’s consolidated results, the following standout, EBITDA margin stood at 49.5%, driven by higher realization prices of the crude and product basket incorporation of ISA and strong performance of the Permian asset and the Cartagena refinery. ROACE continue to increase and stood at 19.1%, during the first nine months of the year, compared to 10.8% in the same period of 2021, explained by higher operating income in line with the previously mentioned factors.

It is important to highlight, the increase in EBITDA in all of the group’s segments, particularly in the downstream, which tripled its contribution compared to the previous year due to its operating stability. Likewise, the Energy Transmission and Road segment contributed stability to the Group’s revenues and operating cash flow. The gross debt to EBITDA ratio was 1.5 times, below June’s level, explained by a better EBITDA result. It is important to highlight that the increase in the debt balance observed in the quarter is explained by the foreign exchange restatement, which is mainly recognized in equity due to the use of hedge accounting and not by an increase in debt operations. In line with what was discussed in previous calls, the Ecopetrol Group continues to manage debt maturities for the third quarter of 2023, seeking to ensure the most competitive conditions in this volatile market environment.

Please let’s go to the next slide. Regarding CapEx performance, during the first nine months of the year $5.5 billion were executed, 74% more than in the same period of 2021 out of which $4.8 billion correspond to the hydrocarbon business. With this the Ecopetrol Group return to the investment execution levels recorded prior to the pandemic. On the other hand, investments executed by ISA amounted to $0.7 billion mainly focused on the transmission business. With the above we maintain the investment target in the initial range of the plan. This quarter marks the one year anniversary of the consolidation of ISA within the group’s results. So I would like to highlight some relevant milestones regarding the investment made in this company. Regarding the financing of the acquisition, during 2021 and 2022 we carried out two liability management operations for a total of $3.2 billion, which allowed us to improve the maturity profile and reduce expiries in 2023, thus the balance of the international loan taken for the acquisition of ISA amounts to $472 million, which will be refinanced over the coming months.

In terms of the contribution to the group’s results, ISA has exceeded expectations in terms of revenue, EBITDA and net income generation when compared against original budgets. As of September, revenues were 16% higher than the budget estimate. Profit generation was 50% higher and the EBITDA generation was 30% higher. This continues to confirm the added value from ISA to the Ecopetrol group to the generation of stable cash flows without reducing our exposure to Brent as a group. Please let’s go to the next slide. At the end of the third quarter of 2022, the Ecopetrol Group recorded a cash position of COP 15.9 trillion, where the following items stand out. An operating cash flow generation of COP 14.9 trillion, mainly associated to the good performance of the business segments, the favorable price environment and the collection during the months of July and August of COP 6.5 trillion from the Fuel Price Stabilization Fund — FEPC for its Spanish acronym.

The account receivable from the fund amounts to COP 20.4 trillion as of end September corresponding to the accumulated amount since April. Regarding FEPC, it is important to note that the general budget of the Colombian nation for 2023 included an explicit item of COP 19 trillion to partially pay off the accumulated balances since April to-date. In addition to empowering the ministry to offset such payments against eventual dividends decreed in its favor and/or use uncommitted budget surpluses for additional payments to the fund. Also it is important to highlight that the new government initiated a gasoline price adjustment path, which is critical to slowdown the speed of such accumulation and to close the gap of local versus international reference prices.

The resources generated by the operation were used for organic capital investment for COP 5.5 trillion as well as for the outflow of COP 7.3 trillion in cash flow of which COP 2.1 trillion correspond to debt service and COP 5.2 trillion to dividends paid to the company’s shareholders and to the minority shareholders of the subsidiaries in the transportation segment. I now turn the floor over to Felipe for his closing remarks.

Q&A Session

Felipe Bayon: Thank you, Jaime. In the context of the long-term strategy energy that transforms presented at the beginning of the year we set different goals not only in terms of our operations and financial indicators, but also around the steps requires to move decisively and responsibly towards the energy transition. Several short, medium and long-term commitments on the environment social and governance fronts are part of the roadmap for our various efforts in the areas of water reuse, cumulative reduction of greenhouse effect emissions, reduction of fugitive emissions, increasing the installed capacity of renewable energies, sustainability in terms of transfers to the nation impact generation through social environment, investment a constant search of the highest safety standards in our operations.

In line with the performance, evidence in this and other fronts in our TESG strategy, we will continue to disclose in a transparent and timely manner such information to our different stakeholders, highlighting the following. In 3Q 2022, we presented our second specialized report on climate change management from the perspectives of governance strategy risks targets and metrics for 2021 following the recommendations of the Task Force on Climate Related Financial Disclosures TCFD and international best practices. We obtained 77 points in the Dow Jones Sustainability Index measurement, where more than 10,000 companies worldwide participate in such evaluation, and as such is one of the most recognized international benchmarks for good corporate practices.

Let’s now go on to the next slide. So far this year the Ecopetrol Group has been delivering solid financial and operating results that have been accompanied by milestones in each of the pillars of our 2040 strategy energy that transform. This has allowed us to move forward in an organized manner towards the energy transition, strengthening our commitment to the country and the energy security. The new Board of Directors has expressed its support for the continuity of the 2040 strategy which seeks to promote renewable and low emission energies, while continuing with the exploration and exploitation of oil and gas. The new challenges we face as an industry demand activating levers that allow us to adapt promptly, and to continue to work on generating value for our stakeholders, taking advantage of the opportunities that align with our 2040 strategy and within the framework of the decarbonization objectives.

Let’s now go to the next slide for our closing remarks. To conclude, we continue to deliver solid results to our shareholders and stakeholders even above the goals we set for ourselves in the year. We have made concrete progress in each of the pillars of our strategy, particularly noteworthy are the results that allow us to ensure supply and guarantee of the energy sovereignty for Colombia. We remain committed to creating value for our shareholders while working with the government to contribute proactively to the design of the country’s energy policy and to define different commitments within the frame of a gradual responsible and just energy transition. Once again, thanks to all of you who are participating today in this earnings call. Thanks for your time.

Thanks for your interest in Ecopetrol. And I will now open the floor for questions-and-answers.