Investors fear Colombia pressured Ecopetrol into a $4 billion bailout

Ezra Fieser and Oscar Medina February 26, 2021

(Bloomberg) --The deal, as investors from Bogota to New York see it, has all the markings of a cash-strapped federal government forcing a state-run company to bail it out.

Ecopetrol SA, Colombia’s biggest oil company, would hand over about $4 billion to the government in exchange for control of another state-sponsored outfit, the electric utility giant known as ISA. From the moment word of the transaction leaked in early January, questions began to pile up from perplexed investors -- how did the deal fit with Ecopetrol’s business model? How will the price tag be settled? -- and the stock began to badly lag the broad rally in oil drillers across the globe.

Felipe Bayon, Ecopetrol CEO
Felipe Bayon, Ecopetrol CEO

Felipe Bayon understands why there’s skepticism out there but he also wants to squelch it. In a video interview from Bogota, the CEO of Ecopetrol vehemently denied that he had come under pressure from the government to buy ISA and argued that the acquisition is a key part of the company’s plan to protect the company’s core oil drilling business by adding a new source of revenue.

“If somebody tells me, ‘You are doing this because the government is asking me to do it,’ the answer is no,” Bayon said. “I’m doing this because I’m convinced this is a good business. My fiduciary duty is to preserve the value of the company.”

Like oil executives across the globe, Bayon has been weighing how to prepare for a future in which there will be less demand for the fossil fuels the company pumps. While others venture into renewable energy, Bayon spotted an opportunity in the electricity transmission business with Interconexion Electrica SA, or ISA as it’s known.

He concedes that it may seem like an unconventional fit: ISA is Latin America’s largest energy transmission company, with thousands of miles of high-voltage lines in countries across the region. It also owns toll highways in Colombia and Chile and has a small fiber optics business. Ecopetrol isn’t in those businesses, but if the deal goes through, the addition of ISA will immediately put it “years ahead” in its push to diversify its revenue base, he said.

“The fact that no other oil and gas company has done it doesn’t mean it’s a bad idea,” he said in an interview.

So far, investors haven’t been convinced. Ecopetrol shares are down 2.6% in dollar terms since early January when the potential deal was first reported. The S&P Global Oil Index, which tracks the performance of 120 oil and gas companies, is up 15% over that span, according to data compiled by Bloomberg.

Part of the doubt is driven by the way the deal has come together. The Colombian government is the majority owner of both ISA and Ecopetrol. By selling its stake in ISA to Ecopetrol, the government effectively keeps control of both companies.

Ecopetrol will sell equity and raise debt to finance the transaction, likely in the second half of the year. The estimated price of $4 billion will come in handy for the government at a time when it’s trying to plug a budget gap, which is key to helping it keep its investment grade credit rating.

But Bayon defended the proposed acquisition, which may close by the second half of the year following months of non-binding talks. If it winds up looking like a bad deal for Ecopetrol, he said he’s prepared to walk away from negotiations. Ecopetrol has been evaluating making a bid for ISA for 18 months, he said.

Lowest Reserves

It’s not a surprise that Ecopetrol is investing outside of oil and gas. Several of the biggest oil companies have moved into new business lines. Royal Dutch Shell Plc aims to become the world’s biggest power generator, others such as BP Plc have pledged to cut net greenhouse gas emissions to zero by 2050.

“All the oil and gas companies are going into renewables and everyone is moving into power generation, that doesn’t mean that that’s the only route to energy transition,” he said.

He sees the addition of ISA as part of its overall strategy, which includes reducing carbon emissions and focusing on environmental, social and governance goals. It’s also generating more solar energy for its own consumption.

Ecopetrol has struggled for years to find new oil patches in Colombia. The country has 6.1 years of proved reserves, the lowest of any oil-producing country in Latin America, according to the BP Statistical Review of World Energy. The company has turned to foreign markets in recent years, signing a joint venture with Occidental Petroleum Corp. to produce in the Permian Basin in Texas, and offshore deals in Brazil.

Even as it prepares to take on ISA, Ecopetrol is doubling down on oil and gas. It plans to invest $12 billion to $15 billion during the next three years to increase production to 750,000 barrels a day by 2023 from 697,000 in 2020.

“Oil and gas is the core of what we do, it will continue to be the core for decades to come,” he said

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