Ecopetrol SA (EC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Ecopetrol SA Earnings Conference Call.

My name is Noella and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms.

Lynn Morgan of MBS Value Partners.

Please proceed.

Thank you, operator.

Good morning, everyone.

Thank you for joining us for today's third quarter conference call with the management of Ecopetrol.

Participating in today's call are Javier G.

Gutierrez, Chief Executive Officer, Adriana M.

Echeverri Chief Financial Officer, Nelson Navarrete, EVP Exploration and Production and Pedro Rosales EVP Downstream Operations.

Since we will be discussing certain forward-looking statements related to Ecopetrol's future performance, potential investors and the market in general should be aware that this information does not constitute any guarantee of its performance nor the risks and uncertainties that may occur or materialize.

Ecopetrol does not make any representation nor shall assume any responsibility in the event that actual performance differs from what is provided here.

I would now like to turn the call over the Mr.

Javier Gutierrez, Chief Executive Officer of Ecopetrol.

Good morning, everyone, and thank you for participating in today's conference call to review Ecopetrol's third quarter 2008 financial and operating performance, our results for the first nine months of this year and highlights of our strategic plan.

I am especially pleased to have the opportunity to update many of you who we met on our non-deal road show mid-September when we completed our level 2 eight year listing on the New York Stock Exchange.

In today's call, I will first review our results.

As you can see from our earnings release, we reported significant growth for this year third quarter resulting from a combination of higher production and higher prices.

On slide three, wholly-owned production on oil-equivalent basis, Ecopetrol's total wholly-owned production continues to improve.

With 2008 third quarter levels up 12.5% to 441,000 barrels per day from the similar period last year.

Driven by higher heavy crude oil production from the Llanos Orientales field, continued optimization of existing fields and better recovery percentage.

Our production increased in each quarter of 2008 and was up 44% for the first nine months of 2008.

On slide four, refinery output.

Refining levels remains high in this year's third quarter.

Crude oil refined from the Barrancabermeja facility averaged 236,000 barrels per day, up 2.5% from 228,000 barrels per day in last year's third quarter.

Towards the nine months, refinery output averaged 231,000 barrels per day compared to 225,000 barrels in last year's period.

Similar to the rest of the refinery industry, coverage prices conditions have cost our 2008 refining margins to decline significant.

For the third quarter, the gross margin was $6.91 per barrel.

The average of the demand ended in July, August and September for our refining margin was $2.68 per barrel compared to $7.6 per barrel in 2007 third quarter.

Slide five, costs.

Our nine months 2008 lifting costs are below 2000 levels.

The same with transportation costs and refining costs are only slightly ahead of last year.

We believe that these costs are quite competitive and relatively low as compared to the industry average.

Increasing raw material costs have cost our lifting, refining, and transportation cost to trend upwards since 2006.

But we have been successful in implementing programs that contain these operating costs at reasonable levels.

Slide six, income statement.

Slide six is Ecopetrol's third quarter and nine-month income statement and as you can see, for the third quarter, we reported 123% increase in net income.

Achieved on 76.4% revenue growth and operating income was up 57.4%.

Slide seven, third quarter operating revenue.

Higher production and higher prices resulted in a 73% increase in operating revenues in the nine months ended September.

In terms of the composition, you can see a shift in exports, which represented 37% in the third quarter and nine months up from 28% to 27% growth activity last year.

Slide eight, sales volume by quarter.

Slide eight shows the evolution of domestic and international sales for the three quarters of 2008 versus 2007.

For the 2008 third quarter, export volume increased 51% to 223,000 barrels per day.

Crude oil production was up 11% to 441,000 barrels per day.

Our crude oil prices increased by 54.5%.

Domestic sales were relatively flat and at the same time, third quarter results were impacted by 7% strengthening of the U.S.

dollar against the Colombian Peso.

Slide nine, domestic sales volumes by quarter.

Looking at domestic sales on slide nine, you can see volume was dispersed for each quarters of 2008 and 2007.

That increase in crude reflected sales to the Cartagena refinery.

Gasoline continued to decline and diesel was steady.

There were no significant variations for the rest of the products.

Slide 10, international sales volumes by quarter.

Slide 10 details international sales volumes which have increased substantially due to the higher production.

For the 2008 third quarter, international sales volumes were up 51% and for the nine months that increase was 43.8%.

The [Agua Brisa] category had been able to export in December 2007.

Slide 11, WTI export prices and exchange rates for the third quarter.

We have graphed the WTI price, which is the market's reference for Ecopetrol, and the basket prices for our crude and byproducts over the three quarters of 2008 and 2007.

Also graphed here is the U.S.

dollar to Colombian peso exchange rate over the same period.

Slide 12, operating cost and expenses per quarter.

Variable cost represented 75% of cost of sales in the third quarter.

Up from 59% last year's third quarter and accounted for 90.5% of the increase in cost of sales in this year's third quarter.

Additionally, we are realizing better returns on our production field investments.

Also, we continue to gain leverage by reducing selling, general and administrative expenses as a percentage of revenues 5.3% from 6.8% last year.

We also had a negative impact on cost of sales from the appreciation of the U.S.

dollar against the Colombian peso during the quarter.

The impact of higher oil prices on our fourth year business (inaudible) on strong Colombian energy regulatory authority, ANH.

Our contractual [congregate] of crude oil from one operation agreement and our [congregate] of important models resulted in a significant quarterly increase in our cost of sales.

Slide 13, non-operating results per quarter.

Slide 13 details the sources of our non-operating results for the first three quarters of 2008 and 2007.

On a cumulative basis, non-operating income was COL$1.3 trillion from the first nine months of each year compared to a COL$1.1 trillion lost in the similar period last year.

This was mainly due to the gains and losses related to foreign exchange fluctuation.

Slide 14, balance sheet assets.

Ecopetrol continues to have an industry leading balance sheet with a significant cash position and no [GAAP].

At September period 2008, cash and cash equivalents totaled COL$5.54 trillion at 60% from year-end 2007 levels.

Accounts receivables were up at every charge of higher and oil gas prices which also cost inventories to increase from December 31, 2007 levels.

Investments doubled to COL$8 trillion reflecting an accelerated phase of exploration and production related investment in keeping with Ecopetrol's long-term strategic plan.

At the acquisition of Propilco, we have significant increased in our position in the Petrochemical business.

Slide 15, balance sheet liabilities and equity.

Turning to liabilities, it should be noted that COL$5.97 trillion in accounts payable includes COL$2.33 trillion representing dividends declared and not yet paid.

We have already paid COL$2.33 trillion in dividends this year.

As you can see, the absence of debt gives us significant opportunities to utilize our strong balance sheet to form future growth.

Slide 16, balance sheet.

Slide 16 offers another look at our balance sheet with a graphic composition of our active liabilities and equity for all three quarters of 2008.

Slide 17, cash flow statement.

Turning to our cash flow statement, cash provided by operating activities reached COL$5 trillion for the 2008 third quarter and COL$10.4 trillion for the first nine months of this year.

This represents significant increases from the comparable 2007 periods.

Net cash, at September 20, 2008, was COL$5.54 trillion, more than three times above last year's levels.

Slide 18, capital expenditures 2008.

Ecopetrol has been increasing its capital expenditures over the last five years, but the most meaningful increase have taken place this year when CapEx is expected to total approximately COL$10 trillion inclusive of our acquisition of Propilco and K2 rebuilding assets in the Gulf of Mexico.

The largest investments are being made in exploration and production, which should account for approximately 65% of this year's capital expenditure.

As you can see, we have accomplished a lot during our first three full quarters as a publicly traded company, while our growth strategy is focused on our acquisition business, we are also making important investments in our downstream operations in order to capture opportunities for synergies, higher margins, and to add value.

These investments includes programs to significantly increase refining capacity, improve (inaudible) quality, meet international environmental standards, and to build a leadership position in biofuels in Colombia and international.

In exploration and production, our main objective is to strengthen our exploratory position in Colombia, while diversifying in our portfolio with the opportunities abroad.

Today, we are active in Brazil, Peru, and the Gulf of Mexico.

Our main goals with regards to exploration and production are to add new reserves of 1.280 million barrels of oil equivalent by 2013 which will enable us to achieve a daily output of 1 million barrels of oil equivalent by 2015.

To accomplish these goals, we will test high potential hydrocarbon areas in Colombia and abroad increased reserve recovery of new groundspills by using new strategies and state-of-the-art technologies.

And in that, that is the development of natural gas and heavy crude oil.

Additionally, we will be systematic in acquiring reserves and entering into a new joint ventures with regional and international companies in Colombia and abroad.

We will be finalizing our CapEx budget for 2009 in January and will be releasing our plans at that time.

Importantly, we have the financial resources to support our ambitious growth strategy.

Our high quality asset base and [stable] reserve levels provide a platform for which we can significantly increase our exploratory activity.

Thank you very much.

Operator, we are ready to take questions now.

(Operator Instructions).

Your first question comes from the line of [Frank McGowan] with Merrill Lynch.

Hi.

Just two questions.

One, on the FX, I know that the FX changes in the quarter affect man lines in different ways but on the financial items line, perhaps I missed it.

But I was wondering if you could quantify how much in the financial interest expense line or financial line in general, the net line is represented by foreign exchange.

And then second, could you confirm whether there were or were not any restatements to the third quarter 2007 numbers?

Thank you.

Okay.

Thank you, Frank.

Adriana Echeverri is going to take your question.

Please, Adriana.

Okay.

Foreign exchange is important but the operating results as well as the non-operating results.

In the first line in the operating results, you could say the (inaudible) are in the major parts, offset because we have imports ad exports in U.S.

dollars and when you retake that number in Colombian Pesos, of course you have a change but imports and exports offset themselves with the (inaudible).

The real effect is in the non-operating profit or loss, on slide number 14, you see that the nine-months ended last year had a difference (inaudible) as the one that we have now.

For this year, we'd be having a real devaluation of the peso against the dollar, more or less 10% for the last three months -- July, August, and September, and 7.4 for the nine-months into September of this year.

And why do we have this effect?

Because if you take a look at our balance sheet, you will find that we have a big portfolio of financial investments, assets, and cash and equivalents that are dollar denominated in most parts, in the major portion is in U.S.

dollars.

So when they are restated in here as peso, you have the effect.

And why Ecopetrol cannot offset that effect, because we have no debt.

We could have any debt or we had any debt.

In U.S.

dollars, that effect would be offset as we do in the operating side of the income instatement.

That's with regard to the financial (inaudible) changes and on your point, no, we have not had any restatement of our 2007 financial statement.

Okay.

Then, in terms of the estimated FX effects in non-operating items, if we took the difference between last year's quarter and this year's quarter would be close to what that effect would be on the financial line.

No, I don't have it right here.

But I can get it on the web when we send you the results, (inaudible) the numbers.

But when you find in the breakdown, in the financial, there it is computed, so you have extensive for FX changes and you have gains or revenues for those one, for example, in exports depending on the situation that you have, revaluation or devaluation.

Last year, we had a revaluation, and this year, we've been having devaluation.

At the very beginning if you find the first quarter results, you will find that we have still revaluation.

So the results were changing after the second quarter with the special revaluation that started on June when (inaudible) did some measures in order to stabilize the foreign exchange changes.

Okay great.

Thank you very much.

Okay.

Thank you.

(Operator Instructions).

Your next question comes from the line of Tereza Mello with Citigroup

Okay.

Hi, good afternoon.

A quick question on actually a couple of questions, first and your CapEx, I understand that you are still looking to try to do your CapEx for next year; you're still analyzing the (inaudible).

But if you had to provide a first guess based on your current scenario for oil, would you expect a decrease or increase the CapEx in 2009?

As general reference, we haven't get the approval of our Board of Directors and we are going to obtain our approval the next month but oil, as a general reference, we are -- right now, we are thinking into increasing our CapEx.

Okay, if you want the CapEx, you still have a lot of CapEx spending in 2008; do you think you are going to spend everything in the fourth quarter?

Okay, we are thinking we are going to have high level of completions of our CapEx during this year.

Okay, basically because what you're watching is our capital expenditures and those are what we call the accruals which all right the ones that are [committed but not ADS] and of course, they are not listed and show exactly how they have executed during the year.

Perfect.

By allowing the process to be committed.

Okay.

The other thing in terms -- could you provide us an update on the Llanos Oil lawsuits?

The one in Holland?

You mean Llanos Oil?

Yes.

Okay.

Do you expect any loss there, will you do any provisions?

We don't expect any.

This is the reason all situation that we have in hand -- the process that we have a similar situation in the United States, we have (inaudible) Ecopetrol in terms of that situation and we didn't expect any impact of the little situation in Holland.

Okay.

And if I may, another question.

What is your current expectation for oil and gas production growth in 2009?

We are also in the process to establish our goals, but anyway, as a general reference, it is going to increase too.

Okay.

Thank you very much.

Okay, a pleasure.

(Operator Instructions).

And you have a follow question from the line of Tereza Mello.

Okay, it's me again.

I didn't want to ask too many questions in a row but there are no other questions.

Could you talk a little bit about your dividend policy?

Do you have any formal policy?

Would you consider reducing this then because of a weaker outlook in the short-term at least for oil prices?

Okay, Tereza.

Our dividend policy is the payment side as we told you when you came up here.

In fact, we paid to our (inaudible).

According to Colombian law, Colombian companies have to present a general assembly a proposal which should be no less than 70% of what we call the liquid net income.

Which is net income less the legal reserve, which is at the time, 10%?

Okay.

That is a proposal that goes along with the reserve that the company wants to make, let's say huge capital expenditures or investments or any plans that the company has for the near future.

So according to that, if you take a look through the presentation that we made in the road show, you will find our dividends paid in that ratio and so on for the last five years.

And all of that goes along with the idea that we pay the dividends when we do not need the money or we make reserves as we did in 2004 for future capital expenditures and the oil crisis outlook by that time was (inaudible) as it is right now.

And those reserves that were paid in 2006, given that oil prices were rising and those reserves were no longer needed, given that we had the cash.

Now, as Mr.

Gutierrez already explained to you, we are in the process of getting the approval of our 2009 budget.

So after that, if our CapEx, as we expect, is going to go up and we need any additional reserve, we will propose that to the general assembly so that it will be approved and then the dividends will go in line with that.

Okay.

My question actually is more on the sense, would you rather increase it next year to leverage the balance sheet a little bit and pay a higher dividend or you'd rather -- finance most of your investments next year with cash.

No, we are no going.

Not going to raise bet?

Not pay dividend.

We don't have any dividend.

That is not the business.

Okay.

And finally, could you give me an update on your pension liabilities?

I understand that your pension fund, the assets are lower than the liabilities?

Do you have any timeframe to solve the situation?

Yes, we have.

Recently, we have obtained the approval of the Finance Minister and we are going to implement it before the end of this year.

Okay.

Yes, finally.

But if you remember anyway that the way you have to be is that it would still have to be bigger than the assets because it is not a good business, it's 100% of your future lies, so what we are going to do is what we call permutation (inaudible) and we already got the approval as Mr.

Gutierrez told you.

So those two portions, assets and liabilities will be spun out (inaudible) balance sheet and after that, you will all see the mix portion of that which is let's say, no more than COS1 billion.

Okay.

Great.

Maybe important to portion that anyway, we continue to guarantee the obligation.

Okay?

Okay.

And it is going to continue -- can you remind me, it's defined benefits plan and it is going to continue to be like that?

(inaudible) from the pension plan.

Your pension plan is a defined benefit plan?

No special plan, as you know, Ecopetrol like any other company in Colombia is going to be regulated by the General Regimen that is going to be the same conditions for all the Colombian people.

The special regimens are going to be in place only up to July 31, 2010 and is going to be applied only to the people that strictly complied with the conditions before that date, that condition, we are not going to have any special plan for the people after that date and all the people would be regulated by the general conditions by the same regulation in Colombia and they must to apply to the public pension fund.

Okay.

Thank you very much.

Okay.

Thanks, Tereza.

Your next question comes from the line of Andres Jimenez with Interbolsa.

Yes, good morning, gentlemen.

Basically, two questions.

I have an understanding that your wells in development are currently 516 plants at this year that you are currently right now at 433 and that your year-to-date or your expectations at the close of the year is going to be 600.

My question would be how many more of these wells do you actually have in line fore development during the year 2009 to actually close what you already have and finish your inventory.

My second question would be related to --

Wait a moment, Andres.

Okay.

Please can you repeat the question and Nelson Navarrete is going to answer.

Okay, yes please.

Basically, what is your backlog or what is your pipeline for your wells of development, because to my understanding that you had in your budget, 516 for this year, and that you're going to overpass that to 600.

Okay, yes, please, Nelson.

How many development wells are going to be completed?

No, how many more are you going to have in inventory to develop?

How many do we have in inventory to develop?

Okay, as you mentioned, the budget for the year is 513 developing wells.

Up to September, we have drilled 433 and we are currently drilling now, we have an additional plan to complete more than 600 wells this year.

So this time for progress --I just want to mention that we have wells in our direct field that are operated by Ecopetrol, but also, we have wells that are drilled by our partners in the joint venture contracts.

So in the current program, we are expecting to finish with more than 600 wells this year.

Okay, and that would (inaudible).

(inaudible) Andres?

No.

Basically, my question is after you complete those 600, what is going to be your pipeline going forward because you're going to get to a point in which this is going to finish.

No.

Actually what I meant was that these are developing wells, so year by year, in our budget plan, it is in progress, we are expecting for the year to drill (inaudible) an amount of wells similar to we have drilled this year.

So it is part of our budget program for 2009 and it is to keep drilling developing wells in the current field.

Okay.

Yes, that was my question.

My second question would be from my understanding, that in these results, you do not have actually Topeco or do you have your investments from abroad.

If you did an impact of those two investments inside those results, what could we expect?

We haven't filled it yet.

And you will begin when then?

According to Colombian law, we only consolidate with our figures for what we call the (inaudible) once a year by the end of the year for the 12 months ended end of December 31 of every year.

So in the full year results, you will see (inaudible) as well as the other subsidiaries and other companies that we have (inaudible).

So you're going to oblige by Colombian GAAP and not by U.S.

GAAP on that.

Let us remind the following -- let us remember.

Ecopetrol is currently subject to Colombian governmental entities GAAP, right?

And that is our standard.

Given that we are not foreign issues for the American market, we have also to comply with U.S.

GAAP but only for reporting, and that is done on the days of every current deviation of results.

And that is going to be done by the end the year, not quarter by quarter.

So the results that you are taking a look right now, the ones that we are presenting right now are preferred under Colombian GAAP for governmental entities.

Okay.

Thank you very much.

Okay, Andres.

Your next question is a follow up question from the line of Frank McGowan.

Yes, Just a follow up on that question.

What you're talking about I assume is the cash flow and perhaps, balance sheet items.

The other operations, those flow in some lines on the income statement in some ways under Colombian GAAP and then I guess maybe if you could just restate what you're hedging policy is, and is there any effects included in this quarter or in the fourth quarter, I know generally, you are pretty well balanced.

Can you repeat the question please?

Yes.

Just following up on the last question in terms of what is exactly included in the income statement, did you exclude earnings from Propilco and other operations but you're just not consolidating for the other --

Okay.

Take Ecopetrol only.

Is Propilco in that?

No.

No.

Not included.

We are not including --

Even as equity income?

(inaudible) our subsidiary.

Okay.

Even as equity income or on some line, there in no --

No, you will see where our investment is (inaudible) subsidiary located at, they are in our balance sheet when we say, let's start July 14, non-current assets, you will find 8 billion investment, there you will find Propilco.

Yes.

Or the other ones also, the Peru and the other.

We report on the other investments that we have.

But those were consolidated as an investment, not the result of the company, those are the values of the shares that we have outstanding in each one of those companies by the end of September.

So any income that comes from those -- from equity income or however you would want -- it is not included on the income statement in anyway?

No.

We apply what we call in Colombia Neto Participacion.

Legal translation of that.

So it's not on the P&L in other words?

Okay, our members have not consolidated in a formal way.

And we include the results of the subsidiaries through the participation method that is in the north operation side of the segment results, we include the participations and the results of our subsidiary, it is not a formal consolidation process, but it is the process in which we consider the results of our subsidiaries through the participation methods.

Okay, your percentage of net income of those operations would be in other non-operating revenues and expenses?

Yes.

That is -- okay.

Okay, great.

And I'm showing you have no further questions at this moment and I'd like to turn the call over to management for closing remarks.

Okay, thank you for joining us today.

We look forward to keeping you updated on our program.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.