Ecopetrol SA (EC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the third quarter 2010 Ecopetrol earnings conference call.

My name is Noelia.

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 this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today, Wednesday, October 27, 2010, for replay purposes.

I would now like to turn the presentation over to your host for today's call, Alejandro Giraldo, Investor Relations Director.

Please proceed.

Okay.

Good afternoon, everyone.

And welcome to the conference call, where we will discuss Ecopetrol's operating and financial results for the third quarter of 2010.

Before we begin, it is important to mention that the comments by Ecopetrol's senior management could include projections to the Company's future performance.

These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could develop.

As a result, Ecopetrol assumes no responsibility in the event that future results are different than the projections of the conference call.

The conference call will be led by Mr.

Javier Gutierrez, CEO of Ecopetrol.

Also participating will be Adriana Echeverri, Chief Financial Officer; Hector Manosalva, Executive Vice President of Exploration and Production; Pedro Rosales, Executive Vice President for Downstream; Camilo Marulanda, Vice President for Strategy and Growth; and Enrique Velasquez, Acting Vice President of Exploration.

I would like now to turn the call to Mr.

Javier Gutierrez, CEO of Ecopetrol.

Thank you, Alejandro.

Good afternoon.

Thank you for joining us in this conference call.

First, I will summarize the highlights of the third quarter of 2010, which will be followed by comments from our Vice Presidents on the operational and financial results and finally review the outlook for the fourth quarter.

Let's start with slide five and review the highlights for the third quarter of 2010.

The Company continues its progress in implementing its growing strategy achieving solid operating and financial results.

We announced the presence of hydrocarbons in the Itauna well in Brazil and the presence of natural gas in the Oripaya well in Colombia.

Production from our corporate group rose 16%, reaching 632,000 barrels equivalent per day.

Diesel and gasoline hydrotreatment plants started operation in August and September, respectively, allowing the delivery of clean fuels with our oil production.

During this quarter, we made significant progress in the restructuring of the Oleoducto Bicentenario project.

Ecopetrol incorporated the new subsidiary Oleoducto Bicentenario de Colombia.

Ecopetrol has invited other companies as potential partners in these projects.

Our financial results continue to be strong and its growth highlighting the higher EBITDA of COP3.9 trillion and EBITDA margin of 46%.

EBITDA rose 11% compared with the second quarter 2010 and 30% compared to the third quarter of 2009.

Operating income amounted to COP2.9 trillion, rising 28% compared to the same quarter in 2009 and with an operating margin of 33%.

Net income amounted to COP1.7 trillion, rising 42% compared to the third quarter of 2009.

Year-to-date net income amounted to COP5.6 trillion with an increase of 57% versus the same period of 2009.

Another important milestone of the quarter was listing our ADR in the Toronto Stock Exchange market.

Finally, it is also worth highlighting the acquisition of the 51% of BP's Colombian assets, which adds new reserves, production, and potential areas for our exploratory portfolio.

In slide six, we have summarized execution of our investment plan, which amounts to $6.9 billion for 2010.

Organic investments between January and September amounted to $3.3 billion, rising 46% compared with the same period in 2009.

57% of the organic investment was allocated to production products, 5% to exploration projects, primarily for the development of heavy crudes and greening of exploratory fields.

26% was allocated in the downstream projects, mainly in the hydrotreatment plants, the Barrancabermeja refinery modernization project, as well as for the expansion of the transportation system.

3% was allocated to internal initiatives and the remaining 9% to the subsidiaries.

As previously mentioned, we acquired 51% of the BP assets in Colombia for $645 million.

Pending legal authorization of the Colombian regulators are expected to be obtained before the end of the year.

I now turn the presentation to Hector Manosalva, who will comment on the results in the upstream business.

Good afternoon, everyone.

Slide seven shows the progress made in our exploration and production strategy during the third quarter.

Regarding exploration, Ecopetrol concluded the drilling of two exploratory wells in Colombia, the Oripaya well with the presence of surface hydrocarbons, which is operate fully on by Ecopetrol, and the Gouda well, which was plugged and abandoned.

International exploratory activity included activity in three wells, Malbec and Itauna in Brazil and Runtusapa in Peru.

As of September 30, the Runtusapa and Itauna wells were again drilled, related with presence of hydrocarbons.

The Malbec well was plugged and abandoned.

In terms of the production, the corporate group reached a level of 632,000 barrels of oil equivalent per day in this third quarter, rising 16% compared to the same quarter of the 2009.

Ecopetrol accounted for 597,00 barrels of oil equivalent today.

Hocol reached 26,000 barrels, Savia with 8,000 barrels, and 2,000 barrels coming from Ecopetrol America, Inc.

Ecopetrol's production growth was driven by heavy oil fields, mainly Castilla with 25% increase, Chichimene with 66%, and Rubiales with 95% growth.

Mature fields also had significant growth, mainly Casabe, which grew 33%, and La Cira-Infantas with a 21% increase.

Now I will turn over the presentation to Pedro Rosales, who will comment on downstream results.

Thank you, Hector.

Good afternoon, everyone.

Please go to slide eight to present the results and progress of downstream during the third quarter of 2010.

As was mentioned by Mr.

Gutierrez, the diesel and gasoline plants of the hydrotreatment project began operation during the quarter.

With this project, Ecopetrol started to produce diesel and gasoline with low sulfur content in compliance with fuel quality regulations in Colombia.

Gross margin in Barrancabermeja Refinery was $7.29 per barrel during the January-September period of 2010 compared to $4.74 per barrel in the same period of the previous year.

The margin improved due to a higher average price of products partially offsetting purchases of crude oil and products, mainly from diesel imports.

The improvement of this margin was driven by a lower [co fee] feed and a better crack spread.

Meanwhile, the project for the development of the petrochemical infrastructure concludes completion of the conceptual engineering phase.

In the fourth quarter, we will realize the review of the business model, including the analysis of the alternatives and potential partners to define the next steps in the maturation of the petrochemicals program.

In the transportation segment, we made progress in the structuring of the Oleoducto Bicentenario, whose specific purpose will be the construction and operation of a pipeline extending from Casanare Province to the Covenas Port.

This pipeline will transport the increasing production from the Llanos region.

The crude evacuation program achieved significant growth in transportation capacity.

Main increases in this quarter came from the additional transportation capacity in the Vasconia-Barrancabermeja system from 140,000 to 160,000 barrels per day, in Castilla-Apiay from 80,000 to 120,000 barrels per day, and the growth in the pumping capacity between Ayacucho and Covenas from 40,000 to 48,000 barrels per day.

Total volume of crude end products transported increased 33% in the third quarter of 2010 compared to the same period in 2009, reaching 1.048 million barrels per day.

The growth mainly came from crudes transported with 42% rights.

Finally, we began blending biodiesel and diesel at the Barrancabermeja Refinery with biodiesel supplied by our subsidiary Ecodiesel Colombia.

And since August of 2010, the biodiesel is transported on the multipurpose pipelines across Colombia.

Let's turn to slide nine.

And we can see that during the third quarter of 2010, our sales volumes grew 11% compared to the third quarter of 2009.

And the January-September period of 2010 increased 15% compared to the same period of the previous year.

Exports represented 48% of total volumes sold, mainly in crude sales.

The main destinations of our exports were the US Gulf Coast with a 40% share, the Far East with 18%, and the Caribbean with 9%.

Local sales represented 52% of total volumes sold, an increase of 12% compared with the January-September period of 2009.

The growth came mainly from a higher supply of natural gas and diesel to the power generators.

I now turn the presentation back to Mr.

Javier Gutierrez.

Slide ten shows the main milestones in corporate social responsibility and internal consolidation during the third quarter of 2010.

In order to ensure world-class human talent, the Company has been working on the development of stronger technical, organizational, and leadership skills.

Cost savings from optimization initiatives in the supply chain amounted to COP448 billion.

Regarding health, safety, and environment, the number of environmental operational incidents dropped significantly from 33 incidents during the third quarter of 2009 to 15 during the third quarter of 2010.

However, during the nine-month period ended September 30, 2010, the frequency of accidents and number of accidents per million man hours reached 1.5, up 24% compared to the same period in 2009.

Given that situation, the Company has launched additional campaigns and initiatives to prevent accidents and increase management of identified console failures.

Ecopetrol is part of the 51 companies nominated to the MAKE, Most Admired Knowledge Enterprises Global Award in 2010.

This award is the recognition to the leading companies in knowledge management.

Finally, social investment as of September of 2010 amounted to [COP53,000 million].

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

Good afternoon.

Let's move to slide 12.

As Mr.

Gutierrez mentioned, results for the quarter remained positive with increases in operating income of 32% and net earnings of 42% compared to the third quarter of 2009.

Higher crude oil prices and the rise of exported volumes drove the growth of 16% in total sales when compared to the third quarter of 2009.

On the cost side, during this third quarter, there was a total increase of 15% when compared to the same quarter of last year.

Variable costs increased mainly because of hydrocarbon purchases, imports of low-sulfur content diesel and naphtha, as well for amortization and depletion coming from new capitalizations and higher production.

Fixed cost on its side reflect more activities to contracted services, both for direct as well as joint venture and association contract operations, as well as maintenance, workovers, and depreciation, this all in line with the higher production.

Speaking of operating expenses, they decreased due to lower exploratory expenses and fewer dry wells.

However, there was an increase in commercial and trade expenses derived from the economic recognition related to cancellation of natural gases delivered to some counterparties due to operating and weather factors.

As a result of the above mentioned, we had an operating income of COP2.3 trillion with an operating margin of 33%, which compares to COP2.2 trillion and 30%, respectively, of the same period last year.

Regarding nonoperating results, there was a net loss of COP556 billion in the third quarter.

This result was mainly due to a loss of COP293 billion in subsidiaries accounted under the equity method.

There was also a net loss of COP128 billion explained by peso revaluation, net allowances for COP25 billion, and a net financial income positive COP98 billion.

And there were other minor expenses for COP10.8 billion.

Net income for the third quarter was then COP1.7 trillion, as Mr.

Gutierrez mentioned, 42% higher than the one that we had in the same quarter last year.

And net margin was 20%.

Finally, the increase in volumes and prices generated an EBITDA of COP4 trillion for the quarter, which is 32% higher when compared to the same period of 2009.

Let's take a look to segment results shown in slide 13.

Exploration and production segment generated COP1.8 trillion of net income, led by already mentioned increasing crude oil production and prices.

EBITDA for this segment for the third quarter was COP3.8 trillion.

Moving to refining and petrochemical segment, it reported a net loss of COP190 billion in the third quarter.

The most relevant aspect of this segment during this period was the reduction of imports of premium diesel since the hydrotreatment plant of Barrancabermeja Refinery started production.

Imports were around 40% and now we are expecting to be around -- 40,000 barrels per day, sorry, and now are expected to be around 11,000 barrels per day only.

Transportation segment generated a net income of COP74.8 billion in the third quarter of this year, thanks to an incremental volume of crude oil, biodiesel, and other fuels to be transported.

Finally, supply and marketing segment reported a net income of COP39 billion, coming from higher traded volumes of crude oil and premium diesel.

Let's now move to slide 14 to have a brief overview of the Company's cash flow and balance sheet as of the close of this third quarter.

The Company continues having a strong cash generation.

The initial balance for the quarter was COP7.9 trillion.

Operations generated additional cash for COP8.7 trillion.

All these sources were enough to fund operations for COP6.1 trillion, organic CapEx of COP1.5 trillion, dividend payments of COP1.2 trillion, and the acquisition of BP assets in Colombia for COP1.2 trillion additional.

The ending cash balance was COP6.8 trillion.

Our balance sheet remains with lower levels of indebtedness.

Assets amounted to COP60 trillion and liabilities to COP24 trillion, including dividends and financial debt.

Gross financial debt-over-EBITDA ratio was 0.34.

Moving to slide 15, here we show the main results of our subsidiaries for the quarter.

Total sales for the corporate group during this third quarter amounted to COP9.9 trillion.

Besides Ecopetrol itself, highest revenue come from Reficar, Hocol, Propilco, and Ocensa.

Group net income amounted to COP1.7 trillion.

And subsidiaries with the highest net income were Hocol, Savia, and Comai.

Group EBITDA was COP4 trillion with an EBITDA margin of 41%, higher than last year mainly due to the positive operational results of the whole group.

Now I turn over the presentation again to Mr.

Gutierrez.

Let's go to slide 17 to review the outlook for the remaining of the year.

In exploration, we expect to drill 23 exploratory wells and to reach the goal of acquiring 15,500 kilometers of seismic equivalent.

Average group production for 2010 should reach 615,000 barrels per day, driven by the growth in our main fields, Castilla, Rubiales, Chichimene, Casabe, as well as our mature fields in the Magdalena Valley.

In transportation, we expect to complete the partners to the Oleoducto Bicentenario, make the purchases of materials, and long-delivery equipment for this project.

In the same way, we must complete the Ocensa expansion to 560,000 barrels of oil per day and start the operation of the Oleoducto de Los Llanos capacity increase between Rubiales and Cusiana to 240,000 barrels of oil per day.

Finally, the car tank loaded facilities in Ayacucho and Banadia will start operation.

We also expect to obtain the legal authorizations to conclude the acquisition of BP assets in Colombia.

And in December, we will disclose our investment plan for 2011.

In terms of financial results, EBITDA should reach 40% by the end of the year.

In summary, we are optimistic on achieving the goals for 2010 and continue reaching the milestones set for the coming years.

The session is now open to questions from our participants.

Thank you.

(Operator Instructions)

Your first question comes from the line of Frank McGann from Bank of America.

Okay.

Good afternoon.

Just two questions really.

One is just to confirm that the production in the third quarter included nothing for the BP assets.

And do you think those might be included in fourth quarter production.

And is that included in your 615,000 per barrel a day estimate for the year.

And then secondly, in terms of year-end reserves, I was wondering -- I know you obviously can't give a number now, but what you're thinking in terms of additions that could be related to either the work you've been doing in your -- in the fields this year, what you've learned about the reservoirs, and from your exploration activity, as was as perhaps more importantly the recovery factor and your moves to improve the recovery factor, what kind of effect that could have on year-end reserves.

Thank you, Frank.

You're completely right.

The BP's production isn't included in the third quarter and isn't included in the projection for the end of the year.

It's not included, okay, nor in the results of the third quarter, nor in the projection for the end of the year.

And in terms of the reserves that are -- only that we can mention up to now is maybe to remember the goal that we mentioned at the beginning of the year that it is the addition of 350 million of reserves for the year.

But it's just the estimation that we announced at the beginning of the year.

Okay.

Well, maybe then you could just -- in terms of your work to improve the recovery factor, what -- how quickly -- I believe in the New York meeting, you said that the recovery factor's currently 18% and the goal is to get it to 30%.

And I'm just wondering how quickly or how much can you improve that on a year-by-year basis?

And what might that translate into reserves perhaps?

Okay.

Okay.

Right now, we are, as you mentioned, at 18%, yes.

Right now, we have plans to go initially to 24% and then to 30%.

And Enrique is going to (inaudible - background noise) to the main aspects, yes, of the plan, yes.

Okay.

Hi, Frank.

It's Enrique.

How are you?

Great.

Thanks.

How are you?

Okay.

Frank, okay.

And Mr.

Guterriez said, we plan to increase from 18% to 32%.

And the idea is to grow in a 3% annual basis.

Okay?

Okay.

Okay.

Great.

Thank you very much.

Okay.

Thank you, Frank.

(Operator Instructions)

Your next question comes from the line of Sergio Torres from JPMorgan.

Good afternoon, everybody.

I have a couple of questions on the exploration plans, one related to Brazil.

What are the next steps for the well in the Itauna field?

And the second question is when do you plan to start doing exploratory work in your CPE2, CPE4, and CPE8 blocks?

I'm trying to gather whether you have seismic work done already.

And when do you expect to start drilling?

Okay.

Thank you, Sergio.

Enrique's taking the answer, please.

Hi, Sergio.

It's Enrique.

Hello, Enrique.

How are you?

I'm fine.

Thank you.

Regarding the [based on that] question, we are drilling ahead right now.

We are like at 4,000 meters drilling ahead.

And as you know, the total depth will be around 5,400 meters.

So the plan is to continue drilling until we reach the goal, which is the result (inaudible) permission.

So and in summary, we are drilling ahead.

And we are very encouraged with the results.

Regarding the second question, regarding exploration activity in the CPEs, we plan to drill a couple of wells in the CPE2 and the CPE4.

And as maybe what you acknowledged, the CPE8 is operated by Talisman.

We are partners 50-50.

And also, the plan is to drill another two wells.

So in total, we plan to drill six wells before the end year.

So that is six wells in 2010?

Yes, I mean [stratigraphic in 10.]

Okay.

Stratigraphic six in 2010.

You got it.

Correct.

Yes.

Okay.

Okay.

Great.

So that means that you have seismic imaging already, et cetera?

As you know for a stratigraphic test, we don't nee seismic.

The idea is to get some information.

With that information, we can plan better than seismic [imaging].

Okay.

So let me just get this straight.

I'm sorry.

So it's two in CPE, two in CPE4.

Those four are strats?

Yes, yes, sir.

So the six of them will be stratigraphic wells.

Yes.

Okay.

Great.

Thank you, Enrique.

You're welcome, Sergio.

Your next question is a follow-up question from the line of Frank McGann from Bank of America.

Yes, thank you.

Just to -- was wondering what your plans are for Hocol and Savia right now, what you're thinking in terms of production potential there over the next several years.

Right now, the Hocol's production is around 27,000 barrels per day.

They have a goal to be at 56,000 barrels per day in 2016.

And the goal for the next year is around 30,000 barrels per day.

And in the case of Savia, right now, their production is around 16,000 barrels per day.

They are planning to go to around 20,000 barrels per day the next year.

And the goal for 2015 is 50,000 barrels per day, Frank.

Okay.

Okay.

That's very helpful.

Thank you very much.

Okay.

(Operator Instructions)

And there are no questions on the line.

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

Alejandro Giraldo for closing remarks.

Okay.

Thank you, Natalia.

Okay.

So thank you, all, for participating in today's call.

For additional questions, you can contact us in the Investor Relations Department.

And good afternoon.

Thank you for your participation in today's conference.

This concludes your presentation.

And you may now disconnect.

Have a great day.