Business context and reporting period
Ecopetrol S.A. is a Colombian state-controlled, integrated oil and gas company operating mainly in Colombia, with exploration and production interests in the United States, Brazil, Mexico and Peru. This Form 20-F, filed April 5, 2019, reports the fiscal year ended December 31, 2018—not a standalone fourth quarter. Financial statements are consolidated under IFRS as issued by the IASB and presented in Colombian pesos (COP); amounts below are in COP billions unless stated otherwise.
Financial and operating results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | 68,603.9 | 55,954.2 | +22.6% |
| Gross profit | 27,419.5 | 19,045.9 | +44.0% |
| Operating income | 22,458.4 | 16,171.9 | +38.9% |
| Net income attributable to Ecopetrol shareholders | 11,381.4 | 7,178.5 | +58.5% |
| Cash provided by operating activities | 22,469.2 | 16,973.6 | +32.4% |
- Gross margin was approximately 40.0% versus 34.0%; operating margin was approximately 32.7% versus 28.9%; attributable net margin was approximately 16.6% versus 12.8%.
- Revenue growth chiefly reflected higher oil and refined-product prices: the average crude basket price rose to US$63.2/bbl from US$47.8/bbl, while the average refined-products basket price rose to US$77.3/bbl from US$62.7/bbl. Total sales volumes declined, partly because more domestic crude was directed to Reficar, reducing crude exports and imports.
- Net income was also affected by an impairment loss of COP368.6 billion, compared with a net impairment reversal of COP1,311.1 billion in 2017. The 2018 charge included refining and petrochemicals and transportation impairments, partly offset by an upstream reversal.
- Production averaged 720.4 thousand barrels of oil equivalent per day (mboed), up from 715.1 mboed. Proved reserves were 1,727 million boe, up from 1,659 million boe; the reserves replacement ratio was 129% (126% in 2017).
- Refinery throughput averaged 375,666 bpd, up from 347,483 bpd. Cartagena throughput improved as the refinery moved into optimization, while its gross refining margin rose to US$11.0/bbl from US$9.5/bbl. Barrancabermeja’s margin fell to US$11.8/bbl from US$13.5/bbl.
- Exploration and production generated COP9,930.5 billion of attributable net income; transportation and logistics generated COP3,424.2 billion; refining and petrochemicals reported an attributable net loss of COP1,973.1 billion.
Cash flow, debt and liquidity
- Operating cash flow was COP22,469.2 billion. Investing activities used COP8,718.8 billion, including capital expenditures of COP8,460.4 billion; financing activities used COP15,790.8 billion, including debt repayments and dividends. Cash and cash equivalents fell COP1,634.1 billion to COP6,311.7 billion.
- At year-end, loans and borrowings were COP38,062.6 billion, down from COP43,547.8 billion; net financial debt was COP23,603.1 billion, down from COP29,068.2 billion. Leverage, measured as net debt divided by net debt plus equity, declined to 29.24% from 37.61%.
- Current assets were COP27,030.6 billion and current liabilities COP17,824.6 billion, implying a current ratio of approximately 1.52 versus 1.38 in 2017. Current receivables included COP3,828.7 billion due from the Fuel Price Stabilization Fund (FEPC), up from COP2,256.3 billion.
- Ecopetrol prepaid the equivalent of US$2.446 billion of debt during 2018 and did not issue new bank loans or bonds. It established a committed US$665 million credit line as a contingent financing source. The company reported no Form 20-F reportable off-balance-sheet arrangements.
- Cash paid for dividends in 2018 included COP3,659.4 billion for fiscal 2017. In March 2019, shareholders approved a COP225-per-share dividend for fiscal 2018, totaling COP9,251.3 billion, including ordinary and extraordinary components.
Material changes, outlook and risks
- Management’s 2019 plan targets production of 720–730 mboed and investment of US$3.5–4.0 billion. The 2019–2021 plan targets production of 750–770 mboed by 2021 and investment of US$12–15 billion, using a US$65/bbl reference oil price. These are forward-looking targets, not assurances.
- The multi-year plan prioritizes upstream investment, cost efficiency, reserves growth and cash generation. Management projected US$1.45–2.0 billion of efficiencies for 2019–2021 and said planned investment could be funded by internal cash generation without additional net financing.
- Key exposures include volatile oil and refined-product prices, the Colombian peso/U.S. dollar exchange rate, Colombian political and regulatory developments, environmental approvals, community consultation, and operating disruptions. The filing reports 105 attacks on pipeline infrastructure in 2018, compared with 63 in 2017; repair costs were approximately COP153 billion.
- The Lisama 158/La Fortuna well incident led to an estimated 550 barrels of crude mixed with mud and water reaching local streams. Ecopetrol reported 730.26 barrels of oil spills in 2018, primarily due to this incident. Environmental and other investigations remain pending, and a community class action seeks approximately COP614.5 billion in damages.
- Material legal matters also include disputes over early termination of ship-or-pay transport contracts and Reficar’s ICC arbitration against CB&I, in which Reficar seeks at least US$2 billion plus lost profits; CB&I’s counterclaim was approximately US$129 million and COP432.3 billion, including interest. The filing states the arbitration outcome is unknown.
- Reficar-related Colombian control-agency investigations continue. Ecopetrol reported that Reficar’s external auditors issued unqualified opinions on its 2016–2018 financial statements, while Colombian oversight bodies had criticized Reficar’s 2016 and 2017 statements. Ecopetrol’s consolidated auditor issued an unqualified opinion on the group’s IFRS financial statements and on internal control over financial reporting.
Important facts for investors to verify
- Whether higher oil prices, refining performance and operating cash flow can be sustained, particularly after Brent’s late-2018 decline.
- Whether the 2019 production and investment targets, and the 2021 plan, are achieved while maintaining the stated leverage and investment-grade objectives.
- FEPC receivable collection timing and any resulting working-capital or cash-flow effects.
- Developments, potential liabilities and provisions relating to Lisama, Reficar investigations and arbitration, and ship-or-pay contract disputes; the filing does not establish final outcomes for these matters.
- Reserve additions, reserve-development spending and sensitivity to prices: the filing’s reserve sensitivity scenario indicates a possible reduction of approximately 3% in proved reserves.
- Foreign-exchange and interest-rate exposure, including the amount of U.S.-dollar debt hedged and the effect of peso movements on earnings and debt service.