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Colombia' s Ecopetrol struggles after showing much promise

BY DAN MOLINSKI

BOGOTA -- Many people who invest in Latin America are asking themselves what happened to Ecopetrol, whose market value briefly overtook that of Petrobras in 2012, but which has since languished after missing production targets and failing to come up with any big oil finds.

This year was going to be Ecopetrol' s moment to shine as Colombia, Latin America' s fourth largest economy and third most populous country, began pumping a record 1 MMbopd, and the government sought a peace deal with leftist rebels who frequently sabotage oil pipelines. Ecopetrol is 89% owned by the government and accounts for 60% of the country' s total oil output.

Some even thought Ecopetrol could soon stand alongside national oil majors such as PDVSA, Petrobras, and Pemex.

Those expectations have wilted after the company widely missed its 2012 oil production targets, saw profits shrink more than expected, and suffered a sharp rise in costly guerrilla attacks on its pipelines. The company hasn' t notched any big oil discovery, and there are also concerns that global oil prices are headed lower.

Ecopetrol' s stock price is down nearly 20% this year, compared with a 6% decline in the Bogota stock market' s main index, and off 25% from its all time high a year ago.

Juan David Ballen, one of Colombia' s top energy analysts at Bogota brokerage Alianza Valores, attributes the stock price drag to growing pains. He said investors who drove Ecopetrol' s share price up to nearly four times what they sold for in the 2007 initial public offering were focusing on astronomical profit growth that allowed them to ignore the company' s stagnant oil reserves.

With 1.9 Bboe in proven reserves, and a market capitalization of $97 billion, Ecopetrol' s market value to reserves makes it way more expensive than Petrobras or Exxon Mobil.

"The company' s quarterly profit growth rates, 80% on average in 2010 and 2011, were never sustainable" Mr. Ballen said. "Growth rates are now stable; that is, zero, and this is why the share price has fallen. One could say the company has now entered a period in which it' s maturing."

The "maturing phase" came just as global investors were starting to take notice of Ecopetrol, which had been trading without much fanfare since 2007 when the government sold about a 10% stake in a series of public offerings.

In early 2012, Petrobras was leading stocks lower in Brazil, a long-time favorite among foreign investors from Wall Street to Asia, and Ecopetrol seemed like a promising alternative.

In May 2012, Ecopetrol had surpassed Petrobras in terms of market capitalization. Colombia' s economy had grown 6.6% the previous year, and attacks on oil pipelines, most of which are owned by Ecopetrol, had fallen to 84 from 184 in 2003.

Within weeks, analysts around the globe were putting Ecopetrol on their hot stock lists, and company CEO Javier Gutierrez was in New York giving television interviews, touting the insignificant impact of guerrilla attacks on its facilities.

Four months later, Ecopetrol announced disappointing 2012 earnings and the Defense Ministry said rebel attacks on oil pipelines nearly doubled in 2012 from a year earlier to 151. The oil company attributed part of the blame for the weak results to the increase in costs of safety of transport infrastructure.

Ecopetrol officials turned down interview requests for this article.

Mr. Ballen, the analyst, sees Ecopetrol as a solid company with outstanding long-term prospects, although he believes the stock price has further to fall in the short to medium term, probably to between 2.02 and 2.24. Growth remains a concern, as Ecopetrol' s own output target of 1.3 MMbpd by 2020, from the current 754,000 bpd, implies 8% average annual growth, compared with 19% annual growth since 2007.

Mr. Ballen says the only way for Ecopetrol shares to zoom higher in the coming months is if it announces a big oil find.

A successful peace agreement between the government and leftist rebels could help move in that direction, as it would open up to exploration huge land areas, such as the Caguan region in southern Colombia, which are currently unexplored because of the danger of kidnappings and attacks, he added.

Dow Jones Newswires

04/29/2013

 

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