Ecopetrol SA (EC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Ecopetrol Earnings Conference Call.

My name is Noellia 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 session 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, Mr.

Alejandro Giraldo, Director of Investor Relations.

Please proceed.

Okay.

Good afternoon, and welcome to the conference call, where we will review the operational and financial results for Ecopetrol for the first quarter of 2010.

Before we begin, it's important to mention that during this call, management's comments include forward-looking statements relating to future 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 declines 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, CEO of Ecopetrol.

He is joined by several members of the Company's senior management team.

Adriana Echeverri, CFO, Nelson Navarrete, Executive Vice President of Exploration and Production, Pedro Rosales, Executive Vice President of the Downstream, Camilo Marulanda, Executive Vice President for Growth and Strategy, Mauricio Echeverry, General Counsel, Hector Manosalva, Vice President for Production.

Now I would like to turn the call to Mr.

Javier Gutierrez, CEO of Ecopetrol.

Thank you, and good afternoon, everyone.

Thank you for joining us in this conference call.

I will summarize the highlights of the first quarter of 2010 and review the progress made in executing on our strategic plan, go over the financial results for the quarter and full year and discuss the outlook for the second quarter of this year.

Let's turn to slide five and review the highlights of the quarter.

We are proud, with the operating and financial results of this quarter, which were better than those of all the quarters in 2009.

Ecopetrol's production increased 21% in the last 12 months, reaching 553,000 barrels of oil equivalent per day, the highest rate since we launched the strategic plan back in 2007.

The increase came from the successful implementation of the strategy for heavy crude development in mature fields.

The group's production achieved a growth in production of 27% in the last 12 months.

Total production reached 586,000 barrels of oil equivalent per day, which includes production from Hocol and Savia.

Our exploration activity was considerably higher than in the first quarter of 2009.

We drilled six exploratory wells, three stratigraphic wells and we acquired 9,200 kilometers of seismic equivalent.

Additionally, we placed the highest bids for 19 blocks in the resale 213 round in the US Gulf Coast.

In the downstream, our main focus was to increase the conversion, mainly in medium distillates, improving the refining margin from 500 -- $5.15 per barrel in the fourth quarter of 2009 to $6.51 per barrel in the first quarter of 2010.

Transported volumes rose by 28% and we continued expanding the transportation infrastructure, mainly for heavy crudes and upgrading our refineries.

Starting January 1st, we began delivering low-sulfur content diesel, meeting the highest international quality standards for [volatile].

Our sales volume increased 19%, driven by, first, larger exports of crude from the increasing country's production.

Second, higher demand for natural gas in diesel for power generation due to El Nino phenomenon.

The positive operating results, together with the rising WTR prices, generated solid financial results.

Operating profit amounted to COP3.2 trillion, 213% higher than in the first quarter of 2009, while net income amounted to COP2.1 trillion, 30% higher when compared to the first quarter of 2009.

The operating margin of 37% as well as EBITDA margin of 47% are the highest for the last six and seven quarters respectively.

In line with our corporate social responsibility guidelines, we achieved a 67% reduction in environmental incidents, and we invested COP10 billion in our communities.

Our supply chain strategy generated savings of COP294 billion.

Let us review the execution of our CapEx plan.

Slide six sets forth the progress of our investment plan of $6.9 billion for 2010.

The execution amounted to $804 million, 31% higher when compared to the $650 million of organic investments, back in the first quarter of 2009.

During the first quarter we did not acquire any assets.

Out of the total investments in this quarter, 71% -- $566 million, was allocated to upstream projects, mainly for development of heavy crudes in mature fields as well as exploratory activities.

28% -- $223 million, to downstream projects, mainly for refinery upgrades and the expansion of the transportation systems and the remaining 1%, $50 million, to corporate internal initiatives.

I now turn the presentation to Nelson Navarrete, who will comment on our results in the upstream.

Good afternoon to all.

Slide seven shows the progress in our exploration and production plan, which represents 70% of the Company's CapEx investment for this quarter.

The exploration activity picked up significantly during this quarter.

As was already mentioned, we submitted the highest bid for 19 blocks in the lead sales 213 round in the US Gulf Coast, which we allowed to undergo deepwater hydrocarbon exploration for the coming five to ten years.

We have 100% interest in five of these blocks, partnering with the US subsidiaries of Repsol and any in ten and four blocks respectively.

Six exploratory wells were drilled in Colombia, three in the Llanos, one in the Catatumbo, one in the Upper Magdalena and one in the Middle Magdalena Valley.

One of the wells in the Quifa block in the Llanos showed evidence of hydrocarbons, and two are undergoing tests.

We also drilled three stratigraphic wells in the Quifa block; two of them showed preliminary evidence of hydrocarbons.

Acquisition of seismic also increased from 1,000 equivalent kilometers in 2009 to around 9,000 kilometers in 2010.

The local activity mainly focused in the blocks 8 and 10 of the Caribbean round, while internationally with -- the focus was in the US Gulf Coast.

We acquired a 35% interest in a prospect in the US Gulf Coast, operated by the company, Newfield, which is currently in the drilling phase and is subject to approval by the US Minerals Management Service.

We were also drilling two wells in the US Gulf Coast at the end of March, Krakatoa, and Palomino in partnership with Statoil and ENI, respectively.

The Palomino well turned out to be dry, while Krakatoa is in the drilling phase.

In Brazil we are drilling the Malbec well in partnership with Repsol.

Ecopetrol's production increased 21%, reaching 552,000 barrels of oil equivalent per day.

The outstanding production results were driven mainly by growth in the production of heavy crudes, mainly in the Castilla and Rubiales fields located in the Llanos Basin.

The growth in the month for natural gas which led to 28% increase in production of the Juanita fields, and the higher production from mature fields, mainly due to water injection projects.

In this end, important mentioning the production from La Cira and Casabe fields, located in the Middle Magdalena Valley, which rose production 23% and 31% in 12 months respectively.

Group production increased 27%, reaching 586,000 barrels of oil equivalent per day out of which Hocol contributed with an average oil equivalent production per day of 26,000 barrels and Savia, from Peru, with 7,000 barrels.

Our average lifting cost for the quarter was $6.50 per barrel, compared to the $5.11 per barrel in the first quarter of 2009.

This increase was due to COP1 revaluation versus the US dollar, which accounted for $1.25 cost increase, the maintenance costs of new production facilities and well service contracts.

I now turn the presentation to Pedro Rosales, who will comment on the results of the downstream.

Good afternoon to all of you.

Slide eight presents the progress in our downstream strategy.

As a result of the strategy undertaken by Ecopetrol, in order to improve the quality of fuels, on January 2010 we began delivering diesel fuels with less than 50 parts per million of sulfur for Bogota and the mass transportation systems in Bucaramanga, Pereira and Cali, and with less than 500 parts per million for the other cities of the country.

In the downstream, our main focus was to increase the conversion, mainly in medium distillates, increasing the refining margin when compared to the last quarter in 2009.

As of March 31st, the hydro treatment project for diesel and gasoline in the Barrancabermeja refinery was 97% completed.

The basic engineering for the Barrancabermeja refinery modernization plant is 43% completed.

This project will upgrade the refinery in order to load heavier crudes and reach deep conversion to produce clean fuels.

The total volume of crude and products shipped increased 28% to 977,000 barrels by day.

Crudes accounted for 77% of the volume, and refined products for the remaining 23%.

The additional infrastructure that allows transporting incremental production includes the new pumping system for the Rubiales-Monterrey pipeline and the expansion of Apiay Porvenir and Galan-Ayacucho pipelines.

Additionally, we increased volumes of low-sulfur diesel and diluents transported through the Pozos Colorados-Galan system and the Poliducto de Oriente pipeline.

The expansion of the transportation infrastructure includes 12 key projects.

As part of this program, in the first quarter of 2010, the Galan-Ayacucho-Covenas system capacity was increased in 30,000 additional barrels.

We also increased the storage capacity with a new facility of 120,000 barrels in the Vasconia pumping station.

Likewise, we made important progress in two projects.

First, the construction of a storage facility with a capacity of 170,000 barrels in Altos del Porvenir, an intermittent station of the Apiay-Porvenir system.

And second, the construction of additional 134 kilometers in the Poliducto Andino, which will add 53,000 barrels transportation capacity of heavy crude diluents by the end of 2010.

We also are undergoing the expansion of the Ocensa system to a total capacity of 550,000 barrels.

In Oleoducto de los Llanos, ODL, we are developing a project to expand the pipeline's capacity up to 340,000 barrels per day by June 2011.

Ecopetrol is evaluating the construction of a new transportation system connecting the eastern pipeline with the Atlantic coast, and is currently undergoing analysis in order to determine the best route and location.

Regarding biofuels, important progress was made in terms of completing the refinery and biodiesel plants for Ecodiesel.

The free trade zone status was granted to Bioenergy, our sugarcane ethanol project.

As part of the development of the petrochemical plant, we began the construction of two propylene storage facilities with a 30,000 barrel capacity.

Deliveries of propylene from Barrancabermeja refinery to Propilco increased by 16%.

Market analysis was finalized when -- while conceptual engineering and economical history are in progress, and they will determine the potential of Ecopetrol in the Petrochemical business.

Total volumes sold increased by 19% and trading results were improved due to the higher availability of crudes, increasing demand of natural gas and higher prices for WTI.

Our revenues benefited from the favorable market environment of higher prices and lower discounts of Castilla crudes, gasoline and diesel.

The refining gross margins for Barrancabermeja amounted to $6.51 per barrel in the first quarter for 2010, compared to $8.12 for -- per barrel in the same quarter of 2009.

The decrease in margin was driven by a lower margin in fuel oil, due from the ending of the winter season and the higher costs of raw material.

Refining cash costs for the Barrancabermeja refinery amounted to US$5.5 per barrel, US$1.40 higher than in the first quarter of 2009, mainly due to peso revaluation accounting for $100.05 and to higher costs of refinery stoppages and higher labor costs.

The latter two had a slight impact on the costs.

Transportation cost was COP7.86 per barrel, per kilometer during this quarter, compared to COP7.49 in 2009, main driven -- driver was the depreciation of new assets in the Pozos Colorados-Galan system.

I now turn the presentation back to Mr.

Javier Gutierrez.

Slide nine sets forth the most important progress in organizational consolidation during the quarter.

Reviewing our health, safety and environmental metrics during that quarter, we had nine environmental incidents compared to the 15 incidents in the first quarter of 2009 and 34 in the fourth quarter of 2009.

However, our accident frequency index, number of accidents per million labor hours was 1.32 compared to 1.24 in 2009.

We completed 93% progress in the leadership skills plan.

Additionally, the technical information center of the Colombian Petroleum Institute became the first specialized information unit in Colombia to receive that certification from the Security Management System.

Social investment for the first quarter amounted to COP10,374 million.

The Company advanced in the identification and formulation of productive projects in each of the regions where the Company operates, contributing to the generation of income for their communities.

The general shareholders meeting for 2010 was held in Bogota on March 25th, with an attendance of 10,000 shareholders.

The main decisions were, first, approval of the consolidated and non-consolidated financial statements of the Company.

Second, approval of the dividends; COP91 per share payable in three installments.

Third, election of the Directors.

Fourth, approval for the decision to increase the authorization to issue bonds for an amount of COP5.5 trillion.

Our supply chain strategy generated savings of COP294,000 million.

I now turn the presentation to Adriana Echeverri, who will comment on the financial results.

Thank you.

Good afternoon to all.

As mentioned by Mr.

Gutierrez, the outstanding operational results, together with higher WTI prices generated a solid financial performance during this quarter.

The operating margin of 37% is the highest in six quarters and the EBITDA margin of 47% is the highest in seven quarters.

Total revenues rose 71% when compared to the same quarter of 2009 and 3% compared to the fourth quarter of 2009.

The drivers for revenues were the higher prices of WTI and the increasing production of crude oil and gas.

Exports in the first quarter of 2010 include sales of crude oil and gas recorded in our refineries, recently declared as free trade zones, with tax benefits for the refiner's master plan.

Sales to these refineries amounted to 81,000 barrels equivalent per day.

Total costs rose 33%, which is lower than the growth rate of our revenues.

This total cost climb was mainly due to higher purchases of hydrocarbons and diesel imports required to comply with environmental standards of liquid fuels, as well as higher cost of services required to increase the production.

When compared to the fourth quarter of '09, costs decreased 1.4%, explained mainly by the cost seasonality, which is higher execution during the second half of the year as we all know.

Operating costs rose 18% due to higher expenses resulting from exploratory activities, including seismic acquisitions and tariffs for COP58 billion and also unsuccessful drilling mainly from the two [partly] dry wells drilled in 2009, but tested in the first quarter of 2010, worth COP61 billion.

Non-operating profit amounted a loss of COP325 billion in the first quarter of 2010.

This result is mainly due to, first, a net loss as a result of exchange rate differences amounting to COP133 billion from the effect of the revaluation of the US dollar denominated portfolio.

It is worth highlighting in this point that the net balance in foreign currency as a result of the net debt issued in US dollars last year decreased the exposure of the Company to exchange rate revaluation.

The net position in dollars amounted to $1.1 billion as of March 31, 2010, compared to the $4.3 billion that we had on March 31, 2009.

The second factor are expenses for [redress], which amounted COP188 billion.

The other factor were taxes and other expenses for COP227 billion.

Finally, there was a partial offset of these results with a positive effect driven by the results of the equity participation that Ecopetrol has in other companies, which reported a profit of COP238 billion.

It's important to remember that during the first quarter of 2009, we had an extraordinary net operating profit of COP1.2 trillion, coming mainly from mark-to-market gains in dollar dominated financial asset portfolios.

This first quarter of 2010, net income amounted to COP2.1 trillion, 30% higher than in the first quarter of 2009 and 20% higher than in the first quarter -- fourth quarter of 2009.

Positive results generated returns on assets and equity of 15% and 28% respectively, both of them above 2009 returns.

Now, let's turn to slide 12 to see our segment results.

Starting 2010, our segment reporting methodology has been modified.

The primary modification refers to changes for the reporting of the Sales and Marketing segment, as it will no longer have theoretical ownership of crude oil and products.

Then, Exploration and Production as well as the Refining and Petrochemical segment now account for 100% of revenues, costs and expenses related to commercialization and delivery to end-clients.

This is for exports of crude oil and refined products.

Additionally, the Corporate segment is no longer reported as it is because all the costs are allocated among the other operational segments.

Sales and Marketing segment generates revenues now from crude oil purchased from other parties.

Quarterly results per segment can be summarized as follows.

Exploration and Production segment had a net income of COP2 trillion, mainly driven by the increasing production, as we already mentioned, as well as the rise in oil prices.

Refining and Petrochemical segment reported a net loss of COP209 billion, which is more or less at $4.50 per barrel.

Hydrocarbon Transportation segment reported a net income of COP217 billion, mainly due to the revenues coming from the higher transported volume.

And finally, Marketing and Sales segment reported a net income of COP43 billion, as a result of the positive hydrocarbon sales margin.

Now, let's turn to slide 13.

On slide 13, we have a summary of Ecopetrol's balance sheet and cash flow.

Our balance sheet remains solid with low indebtedness.

As of March 31, 2010, assets amounted to COP56 trillion and liability to COP25 trillion.

Financial obligations and liability amounted to -- liabilities amounted to COP5.4 trillion and includes the local syndicated loan and international bonds, both coming from 2009 as well as the COP3.7 trillion that were allocated in our last shareholders' meeting for the dividend payment.

Our company continued to have a strong cash generation.

Starting cash balance as of January 1st this year amounted to COP4.8 trillion.

Cash generated from operating activities during 2010 amounted to COP8.2 trillion.

These sources were enough to fund the following operations for COP5.5 trillion as well as the capital expenditures for COP1.1 trillion, and therefore the additional indebtedness was not required.

Ending cash balance of the quarter was COP6.7 trillion.

I now turn the presentation back to Mr.

Gutierrez.

Let's go to slide 14.

Since 2007, we began a consolidation of the solid corporate group with operations in every link of the production chain of the crude oil and natural gas industry.

Since 2008, we made five acquisitions and current interests are profit costs, 100% of offshore international groups, the starting company of Savia Peru, 50% of [coal], 100% of Ocensa, 60% in Reficar, 100%.

For the first quarter of 2010, over 33,000 of the 586,000 barrels of daily production were contributed by our affiliated upstream companies, Hocol, Savia, and Ecopetrol America.

Similarly, companies like Ocensa and Propilco contributed with revenues, EBITDA and net profit to the corporate growth as a result of their business and operation.

On the other hand, there are other affiliates that do not make any financial contribution as they are either on a pre-operating stage or are conducting exploratory activities, having no production yet.

This is the case of Ecopetrol Peru, Ecopetrol Brazil, Ecodiesel and Bioenergy, all of them feed the expansion and diversification strategy of our company.

The crude oil transportation affiliates are not expected to generate any profit for the group, but are expected to provide solutions for the transportation of the products.

The benefits for the group are reflected in lower transportation costs.

Finally, slide 16 presents the outlook for the second quarter 2010.

We will continue increasing our production of crude and gas with important milestones in API regions, reaching a daily production of 150,000 barrels in the fields operated by Ecopetrol, up from 130,000 currently produced.

The Rubiales field could reach a daily total production of 117,000 barrels, while the Quifa field could reach 15,000 barrels per day.

Drilling of the Krakatoa and Saluki wells located in the US Gulf Coast will be completed as well as the Malbec well in Brazil.

Also, we will submit this for the 2010 Colombia National Hydrocarbon Agency round in order to increase the block's oil exploratory activity.

On the downstream, we expect to begin operation of the environmental and hydrogen plants and reach the mechanical completion of the hydrotreaters in the hydro treatment plants, begin commercial operation of Ecodiesel and finalize the basic engineering of the Barrancabermeja refinery modernization project.

We'll also continue to advance in the expansion of the transportation systems of the Ocensa, Poliducto, the Los Llanos and Poliducto Colombia.

We are also evaluating the needs to transport increasing volumes of crude from the (inaudible) plants.

Based on the (inaudible) market, environment and operational results, most likely we will not require financing for the second quarter and we estimate that our total funding needs for this year will be significantly lower.

However, we will continue in the process of completing the authorizations for possible funding later in 2010 and for coming years.

The estimated lower financing needs do not compromise the execution of the CapEx plan.

We are updating our strategic plan, reducing the gap and reaching our goal of 1 billion barrels of oil equivalent per day in 2015.

As the closing remarks, the results of the first quarter reflect the capability of the company to achieve its goals, with sustainable and profitable growth for our shareholders in the coming quarters and years.

Thank you.

Now we are open for the session of Q&A.

Thank you so much.

(Operator Instructions)

Your first question comes from the line of Natalia Agudelo with Interbolsa.

Hello, everyone.

I have one question.

I would like to know, what effect are you expecting this year in terms of exchange rate, considering that the net asset position in dollar terms has come down considerably for the first quarter and that future financial needs could have a positive effect, also considering your revaluation trends for the year?

Thank you, Natalia.

Adriana is going to take -- answer, in relation with the effect of the exchange rate.

(inaudible) Natalia.

I think it's difficult to say.

No one, in fact can have an exact prediction of what the exchange rate would be.

However, what we can really tell you is, first, that we are having now a net position in US dollars that is less than we used to have at least a year ago.

This net position is going to be balanced much more with the times, since we are kind of consuming our portfolio -- US dollar denominated portfolio, to have, of course, all the monies available for our capital expenditures program.

Then we really expect this exchange rate impacting our financial statement to be lower and lower with the times.

Could we expect the financial needs to be covered in dollars?

Yes, we have a long position in US dollars when we are speaking about revenues.

Then financial indebtedness in US dollars has so much sense for Ecopetrol that it would be the preferred rate or the preferred currency rate.

However, we had -- we have to have a balance between peso and dollar denominated indebtedness.

We already contracted dollar (inaudible) last year, but this year we also have to balance that.

We have currently $1 billion approved by the US (inaudible) for our capital expenditures this year.

But we also are preparing ourselves to address the local capital markets, then we can have a balance between dollars and pesos all the time, so that the balance can be offsetting the exchange rate revaluation and we also can have availability in both currencies, peso and dollar.

Okay.

Thank you very much.

(Operator Instructions)

You have a follow-up question from the line of Natalia Agudelo with Interbolsa.

Hi, everybody.

It's actually Jose Restrepo.

I'm on the conference with Natalia.

I have a question.

We have been hearing that the government is going to implement a fiscal rule or establish stabilization funds.

How will this measure affect Ecopetrol in the churn, in the near future and the medium term?

Okay.

Adriana is going to say the answer, but -- okay.

Jose, even if we don't have any further information that you already have, we do not expect that stabilization fund to have any effect on Ecopetrol, given that we are, of course, paying our royalties and our taxes and all that to the central government and they are making the fund by themselves without any impact on Ecopetrol, as well as in the other companies that they receive revenues from.

Okay.

Thank you.

Your next question --.

-- really we don't have any information of what is the status of that initiative.

Your next question comes from the line of [Jose Bernald] with [Stanford] New York.

Hello.

Good afternoon, everybody.

Well my question is, if you can please give -- tell us what is the average cost of the debt and if it's possible also the breakdown, what is the cost in local currency versus foreign currency?

Thank you.

Yes.

Adriana, please.

We have dollar and peso denominated debt.

The cost of the peso denominated debt is IPC plus 4%.

In the case of the external indebtedness, which is the bonds that we issued last year, it's 7.6%.

Sorry, the first one is not IPC, it's DTF.

Sorry.

DTF.

Okay.

Thank you.

(Operator Instructions)

At this time, I'm showing there are no further questions in the queue.

I'd like to hand the call over to Mr.

Alejandro Giraldo for closing remarks.

Okay.

Thank you all for participating in the call.

I'd like to remind you that a recording of the call and the presentations are available on our website.

Finally, for additional questions, contact us at the investor relations department in (inaudible).

Thank you very much, and have a good afternoon.

Thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.

Have a great day.