Ecopetrol SA (EC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Ecopetrol earnings conference call.

My name is Louisa, and I'll be your operator for today.

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

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

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

Alejandro Giraldo, Investor Relations Officer, Ecopetrol.

Please proceed.

Good afternoon, and welcome to the conference call where we will review the operational and financial results of Ecopetrol for the third quarter of 2009.

Before we begin, it's important to mention that during this call, management's comments may include forward-looking statements relating to performance.

Such statements do not constitute any guarantee of performance, nor do they take into account any risks or uncertainties that may occur or materialize.

Consequently, Ecopetrol hereby disclaims any responsibility in the event that actual performance differs from comments made on this call.

Today's call will be hosted by Mr.

Javier Gutierrez, Chief Executive Officer of Ecopetrol.

He is joined by several members of the Company's senior management team, Adriana Echeverri, Chief Financial Officer, Nelson Navarrete, Executive Vice President of Exploration and Production, Pedro Rosales, Executive Vice President of Downstream, Camilo Marulanda, Executive Vice President of Growth and Strategy.

And now I'd like to turn this call to Mr.

Javier Gutierrez, Chief Executive Officer of Ecopetrol.

Thank you, and good afternoon, everyone.

Thank you for joining us this afternoon.

I will summarize the highlights of the third quarter, review the progress made in executing on our strategic plan, go over the financial results for the period, and discuss the outlook for the last quarter of the year.

Let's begin with slide five.

The third quarter of the year was (inaudible - microphone inaccessible) for Ecopetrol.

Concerning market conditions, crude oil and product sale prices improved with respect to the previous quarter, although remaining below 2008 levels.

During the quarter, we continued implementing our strategic plan and achieved the following goals.

Regarding exploration, we found preliminary evidence of the presence of hydrocarbons in four wells for the third quarter for a total of five successful wells throughout 2009.

The average crude oil and natural gas production rose 12.9% over the third quarter of the previous year.

In September, Ecopetrol reported an average production of 525,000 equivalent oil barrels per day, which exceeds initial goals by some 30%, even without considering the production of recently acquired companies, Hocol and Petro-Tech.

On transportation, the Rubiales-Monterrey line was opened as the transportation facility for heavy crude oils from the eastern plains.

The new pipeline will allow increase the production of the Rubiales Field initially from 70,000 barrels per day to 100,000 barrels at the end of 2009.

We made important progress in the execution of other relevant transportation projects, such as the Apiay-Porvenir pipeline and the Poliducto de Oriente and the Galan-Pozos Colorados projects.

Sales volumes grew 17.6%, compared to the third quarter of 2008, led by a 60% increase in exports of crude oil and 40% increase in natural gas.

Our revenues from -- for exported products represent 46% of the total, from 37% in third quarter of 2008.

Net income increased 57% over the previous quarter, due to rising production prices and a drop in expense.

Our Company issued $1.5 billion of notes -- US dollars of notes in the international capital market for the first time under favorable conditions in terms of interest price maturity, with a strong performance in the secondary market.

We also made important progress integrating the companies we acquired back in the third semester of this year and executing our CapEx plan, focusing in high impact projects.

In terms of our organizational consolidation, we signed a new bargaining agreement with three unions of the Company.

It was a significant step, because it was reached during the direct advertisement stage and has a duration of five years, two years more than the previous collective agreement.

Finally, we continued improving safety conditions and the reliability of our operations.

Now let's move on the progress we have made on our strategic plan in the third quarter of 2009.

Slide seven shows the significant progress achieved throughout the quarter toward the meeting of upstream goals.

Regarding exploration, we met the goals set for the first three quarters of the year of drilling 12 exploratory wells, seven of them in the third quarter.

Five of the wells proved be successful, yielding a geological exploration success rate of 42%.

Currently, the discovery wells are being tested, two under extensive and three under initial testing.

The successful wells are Quiriyana, one, and four in the Quifa area.

Average oil and gas production for the third quarter rose 12.9% versus the third quarter of 2008 and reached 514,000 barrels a day and in line with the yearly production goal.

The main driver was the increase in heavy crude oil production, which grew 22% compared to the third quarter of 2008.

Total crude production amounted to 547,000 barrels per day, which includes Petro-Tech and Hocol's productions.

Lifting costs for the third quarter amounted to [$6.40] per barrel, compared to [$7.60] per barrel in the same period of 2008.

Slide eight presents the highlights and key figures of the most important upstream business related subsidiaries.

Besides Ecopetrol, the company that contributed with the largest production to the group was Hocol, with an average gross of 25,000 barrels per day.

We have completed the process of integrating this company, which was acquired during the second quarter of this year, and currently identifying potential synergies to operate it more efficiently.

Hocol announced in August a condensated gas discovery in the Huron one well in the Niscota block, located in the foothills, 300 kilometers northeast of Bogota.

Hocol reported COP705 billion in revenues, COP406 billion in EBITDA, and COP168 billion of net income during 2009.

Investments in offshore international holding company of the Peruvian Petro-Tech reported for Ecopetrol a production of 7,200 barrels per day, equivalent to Ecopetrol's share of 50% of the company's total production.

Petro-Tech announced its investment plan for the next eight years for over $2.5 billion.

The goal is to increase production up to 50,000 barrels per day by 2016.

Year-to-date, Petro-Tech reported COP297 billion in revenues, COP97 billion in EBITDA, and a net income of COP55 billion.

Slide nine shows the progress achieved during the quarter in our downstream business.

Oil refining, the hydro-treatment project of the Barrancabermeja refinery is 88% completed, as of September, and is expected to become operational in the first semester of 2010.

The runs of Barrancabermeja refinery fell by 10%, with respect to the third quarter of the previous year, due to a scheduled lull production attributed to the market conditions and planned maintenance.

On transportation, the volume increased 2.5% versus the third quarter of the previous year, from 750,000 barrels per day to 769,000 barrels per day, due to increased maintenance resulting from the integrity program for lines and tanks.

The year-to-date cost of transport was COP8.1 per barrel per kilometer versus COP7.7 per barrel per kilometer in the same period of 2008.

And construction works on the Apiay-Porvenir pipeline are well underway, and we are currently in the storage phase of the Poliducto de Oriente.

We also made important progress during the quarter in the implementation of a bilateral system for the Galan-Pozos Colorados pipeline, allowing to transport different products and in both directions.

Our Oleoducto de los Llanos ODL subsidiary began operations on the Llanos Orientales oil pipeline, as outlined in the following slide.

Important progress was achieved biofuel products.

Ecodiesel plant tests are scheduled for December of 2009, and the plant is due to start production at the beginning of next year.

As for sales and marketing, it is important to highlight that our foreign sales represented 46% of total sales, up from 37% in the third quarter of 2008.

Additionally, we are consolidating new markets and continue to sell natural gas to Venezuela.

Regarding natural gas, local demand increased during the quarter, driven by higher thermal electrical generation.

Slide ten presents highlights and key financial figures of the largest subsidiaries in downstream.

Refineria de Cartagena, Reficar, generated the highest revenue from January to August, up COP2.47 billion and EBITDA of COP20 billion and a net loss of COP90 billion.

The synergy study for the Cartagena master plan and the motorization plan for the Barrancabermeja refinery was completed during the third quarter, which resulted in $3.8 billion planned Cartagena refinery project.

Year-to-date, Propilco generated revenue of COP783 billion, EBITDA of COP67 billion, and a net income of COP41 billion.

The Company made significant progress in the fields of commercial and environment management.

Ocensa reached a daily peak of transported volume of 330,000 barrels during the quarter, generating revenues of COP509 billion, EBITDA of COP285 billion, and a net loss of COP48 billion.

Oleoducto de los Llanos, ODL, began operating the Llanos Orientales oil pipeline with the Rubiales-Monterrey line in order to transport the increasing heavy crude oil production from the Rubiales field.

Production is expected to increase from 70,000 barrels per day to 100,000 barrels per day by the end of 2009.

With this new line, the goal of the Company is to improve the efficiency of operations, reduce transportation's cost, and add value to its clients.

On October 1, 2009, ODL issued bonds product of a securitization process with signed transportation contracts as the underlying asset.

The transaction amounted to COP500 billion, which will be used to expand the capacity of the pipeline up to 160,000 barrels per day and to return capital to ODL shareholders.

Slide 11 shows the progress in the CapEx plan during 2009.

A total of $4.5 billion have been invested during the year, of which 49% was allocated to acquisitions, 30% to production, 8% to refining, [6%] to transportation, and 5% to exploration.

Total CapEx investment for 2009 is expected to exceed the $6.2 billion original budget.

Besides acquisitions, results have been mainly allocated to heavy crude oil in mature field development projects, the hydro-treatment plant in Barrancabermeja refinery, and the transportation increased capacity projects.

CapEx plan for 2010 will be announced by the end of 2009, once approved by the Board of Directors.

Let's take a look at our third quarter financial results.

Slide 13 shows Ecopetrol's financial results during the third quarter of the year.

Total sales during the third quarter of 2009 reached COP7.4 trillion, which represents an increase of 10% versus the second quarter of the year.

Compared to the same quarter of 2008, international sales increased to 46%, up from 37%, while total sales decreased 26%, due to lower prices.

Costs and expenses fell 15%, compared to the third quarter of 2008.

Meanwhile fixed costs rose 5%, driven by an increase in operation of maintenance and work over costs.

Operating profit increased 4% versus the second quarter of 2009 and declined 45% versus third quarter of 2008.

Non-operating loss was COP589 billion, mainly due to the negative effect of the mark to market of the financial portfolio of the 10% revaluation of the Colombian peso, during the third quarter.

Net income during the third quarter of 2009 reached COP1.2 trillion, equivalent to COP29.5 per share, a 56% increase versus the COP762 billion in the second quarter of 2009.

Year-to-date average per share for 2009 were COP88.1 per share.

EBITDA for third quarter 2009 was COP3 trillion, equivalent to an EBITDA margin of 41%.

The EBITDA increased 8%, compared to COP2.8 trillion reported for the second quarter of 2009, equivalent to EBITDA of 42%.

Slide 14 provides a summary of segment results for the third quarter of 2009 compared to previous quarters.

The exploration and production segment contributed with COP1.6 trillion to total net profit for the first nine months of the year, driven by an increase in production of heavy crude oil production in exports and production from mature fields.

The refining segment reported a year-to-date net loss of COP385 billion, due to the reduction of the refining crack spreads in the international market.

Transportation and sales and marketing segments report year-to-date positive earnings.

The corporate segment reflects a non-operating loss resulting from the negative mark to market of the investment portfolio, as well as taxes on net worth and retiree expenses.

Slide 15 shows Ecopetrol's balance sheet, which reflects the Company's sound financial position.

As of September 30, 2009, Ecopetrol reported assets of COP51.6 trillion, compared to COP50.1 trillion in the previous quarter.

Liabilities at the end of September, 2009, amounted to COP22.2 trillion, compared to COP21.9 trillion in the second quarter of 2009.

Variations in assets and liabilities resulted from the payment of the second dividend installment for COP2.9 trillion, as well as the issuance of international bonds for $1.5 billion.

The Company's cash management met CapEx COP4 million operating needs.

Initial cash position was COP12.1 trillion, and COP28.3 billion came from operations, debt, and others.

Cash needs for the first three quarters amounted to COP31.3 billion, and the final cash balance was COP7.8 trillion.

Finally, let's wrap things up with a look at our prospects for the last three months of this year.

We have accomplished the goals for the third quarter and the first nine months of the year.

We made significant progress in our strategic plan, maintained our financial strength, and reported positive results for our shareholders.

With exploration, although the plan was to drill 30 exploratory wells during 2009, several of them did not meet the required technical and economical criteria during their maturity process.

Therefore, they were replaced with other prospects, reinitiating the maturity process.

The strengthening of the portfolio to be achieved during 2009 is worthy of mention.

As we ended 2008, the portfolio had 35 prospects, and we expect to incorporate 62 new ones, 51 in Colombia and 10 abroad, toward the end of 2009.

At the end of 2009, the portfolio will have 73 prospects, which means that we will double the exploration portfolio.

In 2009, this strategy will focus on the prospects that add the most amount of value to the Company.

We feel confident that our reserve replacement index will be above 100% during 2009.

Reserves will come from exploration, fields development, and acquisitions.

We will exceed the 12% of production growth for the Company.

For our shareholders, it is important to take into account that the total installment of dividends will be paid on December.

We conclude here our presentation of results for the third quarter of 2009 and begin now with our question and answer session.

Thank you very much.

(Operator Instructions)

And your first question comes from the line of Juan Tavarez with Citi.

Please proceed.

Hi.

Thank you.

Good afternoon, everyone.

Just two quick questions.

The first one is could you -- regarding ODL, could you quantify the cost benefits that you have seen in the quarter, related to the startup here?

How much volume has been impacted, and how much costs have been lowered from -- because of ODL?

And my second question is regarding exploration, if you can just give some details.

I know that you have -- are testing five wells now, two in advanced stages.

Could you tell us, maybe, some timing on when we could hear some estimates there and if you have any numbers you can give us for 2010, in terms of how many wells you are expecting to drill in 2010?

Thank you.

Okay.

Thank you, Juan.

In relation with the first question about the savings due to the ODL operation, an accurate number is a reduction of 50%, but Pedro Rosales, our Downstream Executive Vice President is going in detail to the answers.

Please, Pedro.

Okay.

Yes, on the ODL project, we leave out the possibility to increase the transportation capacity of the field and the production.

In this time we are transporting around -- between 60,000 and 70,000 barrels by day, and the cost is lower from a more or less $13 up to $6, less than the half.

In the next year, when we will expect to increase that volume, the unit type -- the unit cost will be reduced in a proportion, depending on the volume to be transported.

Our expectation is to have a line with 100,000 barrels by day of capacity at the end of this year, and with 160,000 barrels by day by the middle of 2010.

That's the ODL information.

And additionally, we have the possibility to increase the capacity with 100 -- 260 with an investment of $100 million.

That is a possibility for the relatively close future.

In relation with the testing of the successful wells, Nelson Navarrete, our Exploration and Production Vice President, is taking the answer and additionally, some explanation in relation with how many wells are going to complete for this year.

Okay.

Good afternoon.

Okay, as was mentioned, five out of 12 wells that we have already drilled have been successful.

That mean that they have tested hydrocarbons from the regulatory point of view.

So those are -- some of them are in the long-term phase, and so, two of them -- they have a -- they -- one called DSD is a short-term test, and we expect to continue testing those wells in the following months in order to really prove the potential of those wells.

In terms of the number of wells, we expect to finish at around 19 exploratory wells this year, and we expect to have -- having doing operation for Asia.

So we're going to be doing 19, and four they're going to finish at the beginning of 2010.

The other part of the question is the number of wells that we're expecting to drill next coming year.

We're evaluating that part, and as soon as we announce the purchase, in 2010 we will announce that number of wells we finally decided to drill.

All right.

Thank you.

Thank you, Juan.

Your next question comes from the line of Frank McGann with Bank of America - Merrill Lynch.

Please proceed.

Yes, I was just wondering if you could tell us what you think your year-end production will be, and what you're targeting for next year, and where you actually think that's going to be?

How much of that will be coming from the international operations, and how much will be coming from increased production at the fields within Colombia?

Okay, Frank, thank you.

Remember, our goal is growth, at least, of 12% per year.

Nelson is going into detail, please.

Okay.

Good afternoon, Frank.

We don't have the numbers yet, but definitely, we are targeting to increase by at least 12% of production next year of the total control group.

And you mentioned how much of this is going to come from international part?

I would say that production -- maybe Petro-Tech next year.

I don't think we will add additional international production.

Most of the increase is going to be in Colombia, definitely.

Okay.

Thank you very much.

Your next question comes from the line of Sergio Torres with J.P.

Morgan.

Please proceed.

Good afternoon, everyone.

Hello again.

Couple of questions.

One is when I look at the breakdown you provide by division, I notice that your corporate segment had actually reported a profit at the EBIT level when traditionally, one expects to have an overhead cost, and I wonder if you could explain what is the source of that profit and if it has any recurring nature?

And the second question has to do with your exploration and project expense.

I wonder how much of that entry has to do with dry well expenses?

And where -- I mean, from your other table, it looks like it comes from the US Gulf of Mexico, but wonder if you could provide more color on the location of the fields, in particular?

Thank you.

Okay.

(inaudible - microphone inaccessible), our Chief Financial Officer, (inaudible - microphone inaccessible).

Okay, for the corporate segment, what we have is that aggregation of the activities of support that we have related to the operational activities.

The most important impact is on the non-operating profit, due to the portfolios that are affected by revaluation.

In terms of the revenues that we get from there, our what we call other income, coming from, for example, leasing, activities of some assets, or they are not related to the operation of the Company directly, as any other of the five remaining segments.

Thank you, Adriana.

(Operator Instructions)

Just a moment, just a moment.

We still need to answer another part of the question.

Yes.

Okay.

Exploration.

Exploration activity expense.

About --

Okay.

Regarding the exploration and production segment, there were, reoccurring, the same dry holes that we had for the second quarter of this year.

So the additional ones are some seismic activity that will go directly to the expenses and some others that are minor.

If you want to have any disclosure of this one, we can send it out to you.

Yes, that would be great.

Thank you, Adriana.

Thank you, guys.

-- asking if you have any, in particular, with the Gulf of Mexico activity?

Yes.

No, we are carrying exactly the same ones that we had by the first quarter, in terms of materiality.

I think we -- in next quarter, we probably will include the cost associated with the well that we'd drill with any in the Gulf of Mexico type T -- it was a dry hole, so that I suppose -- I expect it's going to be included in the (inaudible).

That's great.

Thank you.

(Operator Instructions)

And your next question comes from the line of Frank McGann.

Please proceed.

Yes, this is a -- should be a simple question, I think.

I'm looking at the cash flow statement, both the consolidated and unconsolidated.

In the Net Increase in Investments, there's a major positive number, and I can't remember what that was for.

It's about 5.5 -- or [COP5.000 billion], and I can't remember what that is.

Could you remind me?

I can't understand the question.

Mike --

Frank.

Frank, I --

Yes, okay.

No, on the cash flow statement, under Investing Activities, there's an amount for the nine months, "Net Increase in Investments," that on the unconsolidated is COP5.455 billion, and I'm just wondering -- it's a positive number or a negative investment, and I can't remember what that was related to.

What you were taking --

Maybe it's a revaluation of assets.

I don't know.

Sorry.

Page number?

Yes.

You are --

Page 20.

Wait now.

Page 20.

Page 20, the middle.

Okay.

Page 20, the middle.

Investing Activities, net increase in investments, investment in natural and environmental.

Yes, we have in the column, January - September, 2009, 5.455, is the one to which you refer, okay, Frank?

Yes.

That's exactly it.

What is your doubt?

No, what does it relate to, because it's a very large number, and I cannot remember what that related to.

Okay, now, this is that -- what we call Investing Activities there is what we call in Spanish (spoken in Spanish), which means investment in other assets and real things.

So I can send you the breakdown for that, but in general terms, please remember that as the year goes by, we increase this particular line, even that executions go in the last semester of the year, and this is the amount that we'll carry, in terms of the cash flow, the most -- or the biggest effect of the CapEx plan of the Company.

Okay, but it's kind of a negative CapEx then, and then you get -- something you end up paying later on?

Is that how it works?

Yes.

Okay.

Thank you.

Your next question comes from the line of [Natalia Gudela] with [Interdorosa].

Please proceed.

Hello.

Good afternoon to everyone, and I would like to know how can the production profile for the rest of this year and next year change with the increase in production of Rubiales related to the ODL pipeline?

And how much will Ecopetrol have left in volumes net of [royalties after this]?

May you repeat, Natalia, the last part of your question?

The last part, please.

Yes.

I would like to know how much will Ecopetrol have left in volumes, net of royalties, after the increase in production, due to the entry of Rubiales, even the ODL pipeline?

Okay.

Yes.

The -- if I understood the question, how much -- the first part, you say.

Okay.

Currently, up to September we have produced, on average, 487,000 barrels of oil per day.

While we expect to have at the end of the year to be about 490,000 barrels of oil per day for the Company.

For the consolidated group, we need to add a production from Hocol and Petro-Tech that -- so, definitely, as we mentioned before, we'll end up the year with a growth of higher than 12%

And regarding the Rubiales field, yes, definitely, by the end of the year, we expect to increase the total production of the field to 100,000 barrels of oil per day.

We're currently producing, like, 83,000 barrels of oil, so -- in -- oh -- on -- in that sense, we -- on average, we own like 55% of the production for those fields.

So definite, at the end of the year, we will have additional volume for -- from Rubiales field.

And remember that Hocol is producing a gross number of 25,000 barrels per day, and our participation in Petro-Tech Peruana is around 7,000 barrels per day.

That represents 32,000 barrels per day that you mark out today.

Ecopetrol's volume, that is, [Nelson mentioned], at the end of the year, will be around 490,000, 495,000.

Okay, so we're talking around an increase of [20 million thousand] barrels, given the ODL pipeline, because of [Rubiales]?

Yes, but it's important to mention that 15 days ago, when the operation began, we were at 11 of 70,000, okay?

70,000.

Okay.

And it has increased very fast.

The total increase between the initial operation of the ODL line and the end of the year are going to be around 30,000 barrels per day, because we were at 70 when the line came in operation.

Okay.

Thank you very much.

And at this time, we have no more questions in the queue.

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

Alejandro Giraldo for any closing remarks.

Sir?

Okay.

So thank you all for participating in the call.

The recording is available in our website.

For further questions, contact us at our investor relations department.

Thank you, and good afternoon.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.