Ecopetrol SA (EC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the financial and operating results of Ecopetrol's Fourth Quarter and Year 2010 Conference Call.

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

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

We will be conducting a Q&A session towards the end of today's conference.

(Operator Instructions)

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

Alejandro Giraldo, investor relations director.

Please proceed.

Okay.

Good afternoon, everyone, and welcome to the conference call.

We will discuss Ecopetrol's operating and financial results for the fourth quarter and year 2010.

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

These projections do not constitute any commitment of the 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 on the conference call.

The conference call would be led my Mr.

Javier Gutierrez, Chief Executive Officer of Ecopetrol.

Also participating will be Adriana Echeverri, chief financial officer; Hector Manosalva, executive vice president for exploration and production; Pedro Rosales, executive vice president for downstream; Camilo Marulanda, Vice President for Strategy and Growth; Enrique Velasquez, Vice President of Explorations; and Hector Castano, Vice President of Production.

I would now like to turn the call over 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 highlight of the year 2010 which will be followed by comments from our vice president on the operational and financial results and finally review the outlook for this year.

Let's turn with slide five and review the highlights for 2010.

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

There was a significant growth in exploration activity reaching a geological success ratio of 29%.

The gross production of the corporate growth rose 18%, reaching and average production of 650,900 barrels equivalent per day.

Proved net reserves of hydrocarbon amounted to 1.7 billion barrels of oil equivalent as of December 31, 2010, an 11% increase compared to 2009.

Reserve replacement ratio was 193%.

The strategic plan was revised and updated until year 2020 confirming the goal to produce 1 million barrels of oil equivalent per day by 2015 and setting a goal of 1.3 million barrels per day of production by 2020.

The estimated CapEx amount to $80 billion between 2011 and 2020.

Regarding quality of fuel the Company began delivering diesel with less than 50 parts per million of sulfur content in Bogota, Medellin and the massive public transportation system and with less than 500 parts per million for the rest of the country.

Also, we are providing gasoline with less than 300 parts per million of sulfur in -- on the country.

In terms of expanding the transportation capacity for oil products the Company made significant progress in key projects that will leverage the future development of the oil sector in Colombia.

This excellent operation result together with favorable price environment are reflected in higher sales, EBITDA, better margins compared to 2009.

This was highlighting the EBITDA of COP16.4 trillion, a 57% rise compared to 2009 equivalent to an EBIRDA margin of 45%.

In slide six we have summarized execution of our investment plan.

Organic investments for 2010 grew 37% compared to year 2009.

57% of the organic investment was allocated to production projects mainly for the development of heavy oil field, 5% to exploration projects, 26% to downstream projects mainly for the hydrotreatment plant and the expansion of transportation system, 10% to subsidiary and the remaining 2% was allocated to corporate initiatives.

Transported volumes went up 29% between 2009 and 2010, due to the increase in the production in the investment in transportation facilities carried out by Ecopetrol.

Ecopetrol and Talisman Colombia acquired BP Exploration Company Colombia Limited for a total amount of $1.75 billion plus $100.5 million return on equity to Ocensa's shareholders.

Ecopetrol have a 51% interest in Talisman that remain.

The new name of the company is EQUION Energy for Life.

Approximately 90,000 barrels of oil equivalent per day are currently produced and operated by the company of which it have direct ownership of 27,000 barrels per day.

The 2011, 2020 strategy calls for Ecopetrol to invest approximately $80 billion.

80% of the investment will be allocated to exploration and production, and the remaining 20% to refining, transportation, petrochemicals, [common] sanitation and biofuel, the internal cash generation to finance 65% of the CapEx plan.

The oil price scenario for the plan is $60 per barrel of the WTI in dollars of 2011.

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

Good afternoon, everyone.

Slide seven shows progress made in our Exploration and Production strategy during 2010.

Regarding exploration Ecopetrol completed the drilling of 13 exploratory well to Colombia.

Four out of the 13 wells were -- has pollution -- Rio Zulia West-3, Quifa-6, Oripaya-1 and Akacias-1.

Two of them -- Tinkhana-1 and Ambar-1-- were under evaluation at the end of 2010.

Without taking into account these two wells, exploratory success ratio in Colombia was 36%.

Ten stratigraphic wells were drilled of which six of it with presence of hydrocarbons.

Two in Cano Sur -- Mago-1 and Draco-1 -- and four Quifa blocks -- Quifa 26, Quifa 24, Quifa 22, and Quifa 20.

International exploratory activity includes six wells -- Palomino, Saluki and Krakatoa in the US Gulf Coast, Runtusapa in Peru, and [Malde] and Itauna-1 in Brazil.

This last well located offshore in the Campos Basin, on block BM-C-29, reported evidence of hydrocarbons.

Seismic activity for the corporation rose 60%, around 25,000 kilometers, equivalent mainly due to (inaudible) of information in the US Gulf Coast.

In Colombia the largest activity was focused in blocks number eight and 10 of the Caribbean Gulf and in the heavy oil blocks in Llanos Basin.

Also, 39 blocks were granted to Ecopetrol in Colombia, Peru and the US Gulf Coast.

In terms of the production the corporation reached the level of 615,900 barrels of oil equivalent per day in 2010, rising 18% compared to 2009.

Ecopetrol account for 579,500 barrels of oil equivalent per day; Hocol with 27,000 barrels, Savia and Ecopetrol participation 7,500 barrels; and, 1,900 barrels per day coming from Ecopetrol America Inc.

Ecopetrol production growth was (inaudible) by the develop campaign in heavy crude oil field mainly Castilla with 24% increase, Rubiales with 84%, and Chichimene with 58% growth.

Ecopetrol increased the proven reserves by 11% to 1.7 million barrels of oil equivalent.

Main resources of the reserves addition were the revision and extension of (inaudible) field.

The current production ratio is 9.1 years.

Now, I will turn over the presentation to Pedro Rosales for his comments on Downstream results.

Thank you, Hector.

Good afternoon, everyone.

Let's go to slide eight to present the results and progress of Downstream.

In August 2010 diesel and gasoline hydro-treatment plant in Barrancabermeja started operations allowing Ecopetrol to produce fuels with low sulfur content.

The modernization plan of the Barrancabermeja refinery completed it's structuring and basic engineering phase, while the Cartagena Refinery signed the EPC contract reaching a 17% progress at the end of 2010.

Gross margin in the Barrancabermeja refinery was US$7.7 per barrel compared to $4.41 per barrel in 2009.

The margin improved due to a higher average price of products compared with the cost of raw materials.

The differential for the gross grew $4.97 per barrel while the price of the raw materials increased $1.68 per barrel.

Total volume of crude and products transported grew 29% reaching 1,036,000 barrels per day.

The growth came mainly from crude for export and nafta transported to the Llanos region to be used as diluents for heavy oil.

Additionally, the Company began to transport biodiesels through the pipeline.

Regarding the new transportation construction, Oleoducto Bicentenario subsidiary was incorporated.

Ecopetrol owns a 55% stake in partnership with six other companies.

Each subsidiary understood the construction and operation of the pipeline running from Cartagena province trough the Colon airport.

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

The Crude Evacuation Program achieved significant growth in the transportation capacity.

Main increases came from the addition of transportation capacity in Castilla - Apiay from 80,000 barrels per day to 140,000 barrels per day, Vasconia - Barrancabermeja from 140,000 barrels per day to 160,000 barrels per day, Ocensa from 460,000 barrels per day to 530,000 barrels per day and Apiay-Monterrey pipeline from 160,000 barrels per day to 210,000 barrels per day.

The progress capacity of Vasconia station grew by 240,000 barrels.

Additionally, the capacity of the dock facility in Ayacucho rose from 8,000 barrels to 10,000 barrels and in Banadia from 3,000 barrels to 10,000 barrels.

The building of new storage facilities in these plants achieved progress allowing later increases in capacity.

The biofuels business during the second half of the year, Ecodiesel sold 38,000 tons of biodiesel of which approximately 30,000 tons were delivered to the Barrancabermeja refinery to be blended with regular diesel at 2% ratio.

Finally, Bioenergy, our ethanol from sugarcane subsidiary was granted with a free trade zone status at the end of the year with more than 100,000 hectares of sugarcane cultivated.

Let's turn to slide nine.

In 2010 our sales volume grew 11% compared to 2009.

Local sales accounted for 50.5% of total sales, while export sales were 49.5%.

Exported volume increased 18% while local sales volume went up 4%.

Growth in local sales was driven by the higher natural gas demand for generation of electricity and the rising demand of diesel mainly for vehicles and the higher jet fuel demand of air travel increased due to road closures during the rainy season.

The main destination of our export was in US Gulf Coast with 50% share for crude and 36% for products.

Other important markets for the exports were the Far Eat with 17% and Central America with 6%.

For product exports, the Caribbean accounted for 23% and the Far East for 20%.

I now turn the presentation back to Mr.

Gutierrez.

Thank you, Pedro.

Slide 10 shows the main milestone in corporate social responsibility and internal consolidation during 2010.

Regarding health, safety and environment, the number of barrels spilled due to operational situation dropped from 7,533 barrels per day in 2009 to 5,108 barrels per day in 2010.

The frequency of accidents reached [1.56] per million labor hours, 26% higher compared to year 2009.

Given this situation the Company launched different initiatives to reinforce the commitment to utilize cultural model, to develop the core HSE skills, and to revise the safety process management system.

Cost safety from optimization initiatives in supply chain amounted to COP1 trillion, a 69% improvement compared to the 607 billion in 2009.

Social investment amounted to COP159 billion in 2010, 17% more than 2009.

The new projects focused on geographical regions where the Company operate and also for people's retraining.

Finally, in 2010, the general design for the shared services center project was completed and began providing five services -- personnel selection, performance management, catering, maintenance and local transportation.

The remaining [peak] services will be provided starting July 2011.

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

Thank you.

Good afternoon.

Let's move to slide 12, please.

As Mr.

Gutierrez mentioned, results for the year were very positive.

Higher crude prices and exported volumes drove the growth of 32% in total sales when compared with year 2009.

Export sales rose 78%.

Cost and expenses during 2010 there was a total increase of 10 -- 20%, sorry, when compared with last year.

This is mainly due to a growth of 27% in variable cost as a result of higher imports of nafta used as diluents for heavy crude oil transportation, the increasing transportation services and the rise of amortization and the depletion expenses coming from new amortizable direct investments of the (inaudible) segment.

Fixed costs grew 10% due to higher depreciation, the increasing contracted services, maintenance and labor costs.

All of these items leads to rising levels of production.

Operating expenses increased 2.5% due to non-capitalized project expenses and the payment of compensations to clients because of the failure in deliveries of natural gas due to operational and weather factors in the beginning of 2010.

This increase was partially offset by a reduction of exploration and project expenses because of [lower] recognition of dry wells.

As a result of the above operating income amounted to COP13.2 trillion, 63% increase compared with 2009 reaching an operating margin of 36%.

Regarding non-operating results there was a net loss of COP1.8 trillion in the year compared with COP881 billion in 2009.

This result was mainly due to a loss of COP641 billion in subsidiaries accounted under the equity method.

Finally, the increase in the operation net income from rising production and sales together with high yield prices contributed to a net income of COP8.3 trillion.

EBITDA amount is COP216.4 trillion in 2010, 57% higher than 2009.

In slide 13, we present our segments report.

Exploration and Production segments contributed COP8.4 trillion in net income in 2010, led mainly by the increase in crude oil production as well as prices.

EBITDA for the year was COP15 trillion.

Refining and Petrochemical segment reported a net loss of COP783 billion in 2010.

This segment was affected by the high cost of crude oil to the refineries, as well as by the non-operating losses coming from provisions, taxes and results from (inaudible) which reported a loss of COP385 billion.

The Transportation segment generated a net income of COP542 billion, primarily from the incremental volume of crude oil, biodiesel and other fuels transported.

Finally, the Supply and Marketing segments reported a net income of COP224 billion coming from higher exported volumes and favorable prices on purchases of crude oil during the last quarter of 2010.

It is worth to mention that Ecopetrol has continued identifying and developing cost control initiatives across all segments that should benefit the Company results as a whole in the short term.

Next, let's now move to slide 14 to give an overview of the Company's cash flow and the balance sheet for the ending of last year.

The Company continued having strong cash generation.

Initial balance for the year was COP4.8 trillion.

Operations generated additional cash for COP35.9 trillion.

New debt contributed the additional COP1 trillion and other sources COP1.4 trillion.

(Inaudible) funded operations were COP24.8 trillion, organic CapEx of COP7.6 trillion, dividend payment COP3.7 trillion and the attribution of the assets in Colombia were COP1.2 trillion.

The ending cash balance was COP5.6 trillion.

Our balance sheet remains solid with a low level of indebtedness.

Assets amounted to COP66.1 trillion.

Liabilities to COP23.6 trillion including COP1 trillion denominated local bond which is in December of last year, and a higher provision for income tax given the increase in the net income for the year.

Slide 15 represents the main results of our subsidiaries in 2010.

The most important remarks are the following.

Total sales for the corporate group during 2010 amounted to COP42 trillion.

Highest revenue were coming from Hocol, Propilco, and Ocensa.

Group net income amounted to COP8.2 trillion.

Subsidiaries with the highest net income were Ocensa, Hocol and Propilco.

Group's EBITDA was COP16.7 trillion with an EBITDA margin of 40%, 2% higher than last year mainly due to a positive operational result of the group.

Now, I turn the presentation again to Mr.

Gutierrez.

Thank you.

Let's go to slide 17 to review the CapEx plan for 2011.

CapEx plan for 2011 could amount up to $8.5 billion including approved projects for $6.7 billion and a contingent project for still pending for approval.

95% of investment are allocated to projects in Colombia and the remaining 5% investing to exploration and production projects in the US Gulf Coast, Brazil and Peru.

45% of the investment is allocated to production segments in order to increase Ecopetrol's production by 20% in 2011.

The main contributions to production growth will come from heavy oil fields in the Eastern Plains region as well as from the Mid Magdalena Valley fields.

50% is allocated to exploration mainly to drill 37 wells, of which 26 wildcats, five appraisal and six stratigraphic wells.

Another 50% is earmarked to the modernization projects of Barrancabermeja and Reficar's equity contribution.

20% of the CapEx is allocated to the expansion of transportation infrastructure increasing crude transportation capacity by 450,000 barrels per day and double the capacity to move nafta from 45,000 barrels to 90,000 barrels per day.

The remaining 5% is allocated to biofuels and corporate consolidation initially.

Let's move forward to slide 18 to present the milestone for Ecopetrol in 2011.

In exploration we expect to drill 37 exploratory wells -- 30 in Colombia and seven outside the country.

Average's group production for 2011, total reached 750,000 barrels per day driven by the growth in our main fields -- Castilla, Rubiales, Chichimene, Casabe and La Cira -- as well as the accounting of new natural gas treatment plant of 70 million cubic feet per day in Cusiana, 104 million in Cupiagua and 36 million in Gibraltar.

In transportation we will make progress in the Crude Evacuation Program and together with our partners we complete -- we'll complete the first stage of the Oleoducto Bicentenario to 120,000 barrels per day and we will increase the Oleoducto de los Llanos capacity between Rubiales and Porvenir by 200,000 barrels amongst other relevant projects.

In our refinery, we will continue with the execution of the long term plan.

We grew the performance of this business with a high conversion factor, heavier feedstock, and high quality products and we will search for a higher share in those markets that might offer the better prices to our crude products.

Ladies and gentlemen, thank you for your patience, your conference will resume shortly.

Once again, thank you for your patience and please standby.

Ladies and gentlemen, thank you for your patience.

Your conference will resume shortly.

Once again, thank you for your patience and please standby.

You may proceed.

Okay.

We faced technical difficulties.

We will turn to slide -- we will go back to slide 17.

Javier Gutierrez Let's look at slide 17 and 18.

CapEx plan for 2011 could amount up to $8.5 billion, including approved projects for 6.7 billion and a contingent budget of 1.8 billion for project still pending for approval.

95% of the investments are allocated to projects in Colombia and the remaining 5%t investing to exploration and production projects in the US Gulf Coast, Brazil and Peru.

45% of the investment is allocated to production segments in order to increase Ecopetrol's production by 20% in 2011.

The main contributions to production growth will come from heavy oil fields in the Eastern Plains region as well as from the Mid Magdalena Valley fields.

50% is allocated to exploration mainly to drill 37 wells of which 26 wildcats, five appraisal and six stratigraphic wells.

Another 50% is earmarked to the modernization projects of Barrancabermeja and Reficar's equity contribution.

20% of the CapEx is allocated to the expansion of transportation infrastructure increasing crude transportation capacity by 450,000 barrels per day and double the capacity to move nafta from 45,000 barrels to 90,000 barrels per day.

The remaining 5% is allocated to biofuels and corporate consolidation initially.

Let's move forward to slide 18 to present the milestone for Ecopetrol in 2011.

In exploration, we expect to drill 37 exploratory wells -- 30 in Colombia and seven outside the country.

Average's group production for 2011, total reached 750,000 barrels per day driven by the growth in our main fields -- Castilla, Rubiales, Chichimene, Casabe and La Cira -- as well as the accounting of new natural gas treatment plant of 70 million cubic feet per day in Cusiana, 104 million in Cupiagua and 36 million in Gibraltar.

In transportation we will make progress in the Crude Evacuation Program and together with our partners we complete -- we'll complete the first stage of the Oleoducto Bicentenario to 120,000 barrels per day and we will increase the Oleoducto de los Llanos capacity between Rubiales and Porvenir by 200,000 barrels amongst other relevant projects.

In our refinery, we will continue with the execution of the long term plan to improve the performance of this business with a high conversion factor, heavier feedstock and high quality products and we will search for a higher share in those markets that might offer the better prices to our crude products.

We will continue developing our social and environmental strategy in order to plan our integrated management system.

Our subsidiary will bet 4.2 billion in 2011 of which Ecopetrol will contribute or lend up to $1.4 billion.

The remainder result is we'll be provided through a cash generation of each company financing operation and partner's equity contribution.

Finally, regarding the primary offering the Company will undertake the second round of the capitalization process as defined by law 1118 of the year 2006.

The date and amount of the offering is currently being undetermined.

The session is now open to questions from our participants.

Thank you very much.

(Operator Instructions)

Your first question comes from the line of Caio Carvalhal from Morgan Stanley.

Please proceed.

Hi.

Good afternoon.

I would like to ask a question referring to the shared offering.

I understand that the Colombian Congress authorized the company on an extra 9.9% primary offering.

I would like to know if the Company has a more precise timeframe on the -- on when it's expected to be conducted and, also, if the target is to issue all the 9.9% or it's actually the targeted in terms of US dollar amount and not in terms of [percent] and that is it.

Excuse me.

Due to technical problems may you repeat the question, please?

Sure.

Sure.

No problem.

My question is referring to the potential shares offering of the -- I understand that the Colombian Congress authorized the company to offer an extra 9.9% on top of the 10.1% already floating in the market.

I would like to know a little bit about the timeframe of it and if the company expect to issue all the 9.9% or a smaller amount.

Okay.

I think it is important to try to be precise in terms of the definition.

First of all it's important to remember that the Colombian Congress approved the Capitalization Process Law 1118 of 2006 to issue up to 20% of the shares of the Company in a primary offering that resulted for the need of the Company.

We went to the market in August 2007 with 10.1% but it was this precise number that we need to liberate Ecopetrol's of certain limitations we had at that time.

Now, we still have a 9.9% available to go through the market.

And, as we have mentioned several times now the Company is preparing to go to the market -- and as we mentioned during the conference -- with the second round of that -- of this process.

Now we are under preparation and we're going to announce the amount and the date when we are ready.

Additionally, as you mentioned, the government through law decree -- not the Congress, law decree approved the selling of up to 10% of the shares that the government owns in Ecopetrol.

It's a process that is going to be completely coordinated with Ecopetrol's administration and it is completely clear up to now that all these process, that the under preparation is the offering of the second round of the 1118% law capitalization process.

And as I mentioned before, the amount of the 9.9% that we are going to offer and the date are under the process of the definition by our Board of Directors, and we are in the process of the approval by the official entity that participate in the process.

That is -- what, we cannot announce.

And clearly that is completely defined that we're going to have a complete coordination between the Colombian Government and the Company, and we are completely aware of the importance of the protection of their price of the shares in the market.

Okay.

Thank you very much.

Okay.

Thank you.

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

Please proceed.

Hi, good afternoon, everybody.

Hi, Sergio.

Hi, I have a question -- hi.

I have a question regarding the decline in revenue at Ocensa that generated a negative EBIT and -- in the fourth quarter.

I wonder if you could elaborate on the market conditions that brought that about and if the situation, whatever that was has normalized by the first quarter.

Could you give us an update on that?

Thank you.

Okay.

Okay.

Adriana has the explanation.

Please, Adriana?

Hi, Sergio.

The point here is that as you know all the transportation subsidiaries are supposed to keep all the -- all the revenues or the benefits to the (inaudible) segment since they are transporting the volume that we are supposed to realize that the international markets have better prices.

Then if you take a look through the transportation subsidiaries, they are the net income of zero or close to zero -- something like that.

In the case of Ocensa what we had this year was a repayment of a kind of a premium that was given by Pacific Rubiales during the year in order to be taken into account into future expansions of the company to be able to verbalize their future production.

So we received that and that's why Ocensa seemed it to have better net income.

Then after that, Ocensa returned to the original situation that was first -- the thing that happened in the first place and the second thing that happened, the last year -- very important was the decapitalization of the company.

If you remember, there was a new company that was then incorporated in order to have those money out of the company and have them free to be able to invest in the segment of another company that is now denominated Ecopetrol Transportation Investments.

So those were the most important events that happened -- same time the last year.

But it has nothing to do with the market conditions or something that was happening there extraordinary, different from those things.

Okay.

Thank you, Adriana.

(Operator Instructions)

Your next question comes from the line of Nick Evanoff from Prudential.

Hi.

A quick question -- quick question about CapEx.

The $8.5 billion for 2011, does it include the acquisition budget?

And if not, do you have any acquisition budget for this year and how much do you plan to spend on acquisitions?

Thank you, Nick.

Any acquisition budget is included on the $8.5 billion plan -- investment plan.

We would have -- and we need it to be approved specifically by the board of directors and we must present it to the board of directors.

But the current members doesn't include any acquisition.

Thank you.

At this time, there are no further questions.

I would now like to turn the call back to Alejandro Giraldo for closing remarks.

Okay.

Thank you to all the participants in today's call.

For additional questions, you can contact us at the Investor Relations Department, and good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.