Ecopetrol S.A. — 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Ecopetrol is a Colombian integrated oil and gas company reporting under IFRS as issued by the IASB. Financial amounts below are Colombian pesos (COP), unless otherwise indicated.
Key financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | COP 71.489 trillion | COP 68.604 trillion | +4.2% |
| Operating income | COP 21.027 trillion | COP 22.458 trillion | -6.4% |
| Net income | COP 15.005 trillion | COP 12.355 trillion | +21.4% |
| Net income attributable to Ecopetrol shareholders | COP 13.744 trillion | COP 11.381 trillion | +20.8% |
| Operating cash flow | COP 27.712 trillion | COP 22.469 trillion | +23.3% |
| Capital expenditures | COP 13.979 trillion | COP 8.460 trillion | +65.2% |
| Cash and cash equivalents | COP 7.076 trillion | COP 6.312 trillion | +12.1% |
| Loans and borrowings | COP 38.239 trillion | COP 38.063 trillion | +0.5% |
| Total assets / total equity | COP 133.890 trillion / COP 58.232 trillion | COP 124.643 trillion / COP 57.108 trillion | Assets +7.4%; equity +2.0% |
Margins: Gross margin was approximately 37.1%, versus 40.0% in 2018; operating margin was approximately 29.4%, versus 32.7%. The filing reports a 23.9% effective tax rate, down from 40.1% in 2018. Net finance expense narrowed to COP 1.670 trillion from COP 2.010 trillion.
Cash flow and liquidity: Net cash provided by operations was COP 27.712 trillion; investing activities used COP 10.036 trillion and financing activities used COP 17.170 trillion. Financing uses included COP 13.867 trillion of dividends and COP 3.363 trillion in repayments of borrowings and interest. The company reported net financial debt of COP 26.184 trillion and leverage of 31.02%, versus 29.24% in 2018. Current assets were COP 23.364 trillion and current liabilities COP 21.742 trillion.
Operations: Group production averaged 725.1 thousand barrels of oil equivalent per day (mboed), up from 720.4 mboed. Proved reserves were 1,893 million boe, up from 1,727 million boe; the reported reserves replacement ratio was 169%, including purchases. Refinery throughput was 375,754 barrels per day. Brent averaged approximately US$64.2 per barrel, versus US$71.7 in 2018.
Material changes versus 2018
- Revenue grew despite lower benchmark oil and product prices, supported by Colombian peso depreciation, higher sales volumes and increased transportation revenue. The average crude basket price fell to US$58.6 per barrel from US$63.2.
- Operating income declined as cost of sales rose 9.2% and net impairment losses increased to COP 1.762 trillion from COP 369 billion. Operating expenses before impairment fell 18.9%, partly reflecting a non-cash COP 1.049 trillion gain from obtaining control of Invercolsa.
- Shareholder-attributable net income increased, helped by lower income tax expense and improved net finance results. The 2019 tax benefit included recognition of a COP 1.550 trillion deferred tax asset associated with expected U.S. taxable income.
- Capital spending rose substantially, principally for upstream drilling and development and the Permian Basin investment. The company acquired a 49% interest in the Oxy Permian joint venture; its initial payment was approximately US$876.5 million.
- Proved reserves increased by 166 million boe net. Additions included 164 million boe attributed to the Permian acquisition, as well as revisions, improved recovery, extensions and discoveries.
- Transportation and logistics segment revenue rose 15.1%; segment operating income increased 14%. Refining and petrochemicals returned to positive shareholder-attributable net income of COP 118 billion, from a COP 1.973 trillion loss in 2018, although refining margins weakened.
Outlook, risks and unusual items
- 2020 response to market disruption: After year-end, COVID-19, weaker demand and oil-market supply developments contributed to a sharp Brent price decline. On March 16, 2020, Ecopetrol announced a COP 2 trillion cost-and-expense reduction and cut its 2020 investment plan by US$1.2 billion, to US$3.3–4.3 billion. The 2020 production target remained 745–760 mboed. The filing says further intervention measures could follow.
- Longer-term plan: The 2020–2022 plan originally contemplated US$13–17 billion of investment, based on US$57 Brent, and targeted production of 745–800 mboed, organic reserves replacement above 100%, and refining throughput of 370–420 thousand barrels per day. These are targets, not assurances, and the 2020 investment plan was subsequently reduced.
- Dividend: Shareholders approved a COP 180-per-share ordinary dividend for 2019, equivalent to COP 7.401 trillion. Payment was scheduled in stages, with minority shareholders paid in full in April 2020 and most of the controlling shareholder’s payment deferred to the second half of 2020.
- Principal business risks: Exposure to global oil and refined-product prices, peso/dollar movements, Colombia’s political and regulatory environment, pipeline attacks and production disruptions, environmental and social approvals, water management, climate transition, customer and financing risks, and the COVID-19 economic shock. The filing notes 72 pipeline attacks in 2019 and deferred production of approximately 660,052 barrels, versus 11,102 barrels in 2018.
- Environmental and legal matters: The 2018 Lisama 158 spill remained subject to proceedings. ANLA imposed a COP 5.155 billion fine in January 2020; Ecopetrol appealed. A related community class action seeks approximately COP 614.5 billion. The filing also describes extensive Reficar project investigations and an ICC arbitration in which Reficar seeks at least US$2 billion plus lost profits; the arbitration was stayed following CB&I-related bankruptcy proceedings, leaving the outcome uncertain.
- Other unusual items: Bioenergy and Bioenergy Zona Franca entered reorganization proceedings in March 2020 because of weak agricultural productivity and unsustainable debt; management stated these entities were not expected to have a material adverse effect on the Group. IFRS 16 lease adoption did not materially affect results. The auditors gave unqualified opinions on the consolidated financial statements and internal control over financial reporting; the internal-control assessment excluded Invercolsa, which represented 0.8% of year-end assets.
Most important facts for investors to verify
- Reconcile reported debt: the audited statements show COP 38.239 trillion in loans and borrowings, while narrative sections also refer to approximately COP 36 trillion; reported U.S.-dollar debt figures vary by measure and section.
- Track the realized effect of the 2020 investment reduction, COP 2 trillion cost program and maintained production target under COVID-19 and lower oil-price conditions.
- Assess earnings quality, including the COP 1.049 trillion non-cash Invercolsa gain, deferred tax asset recognition and the increase in impairment expense.
- Separate organic reserve additions from the Permian acquisition contribution; confirm execution and development of the 529 million boe of proved undeveloped reserves.
- Monitor cash generation against capital commitments, dividends, debt maturities and the COP 7.401 trillion dividend distribution.
- Review outcomes and potential financial exposure from the Lisama proceedings, pipeline transport disputes, Reficar arbitration and ongoing control-entity investigations.