Ecopetrol SA (EC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to Ecopetrol's Third Quarter Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. Now I would like to welcome our host for today's conference, Ms. Maria Catalina Escobar, acting Head of Corporate Finance and Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Ecopetrol's earnings conference call and webcast in which we will discuss the main financial and operational results of Ecopetrol for the third quarter of this year.

Before we begin, it is important to mention that the comments by Ecopetrol's senior management in this call could include projections of 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 from the projections shared on this conference call.

The call will be led by Mr. Juan Carlos Echeverry, CEO of Ecopetrol. Other participants include Hector Manosalva, Vice President of Development and Production; Max Torres, Vice President of Exploration; Juan Pablo Ospina, Vice President of Commercial and Marketing; Orlando Diaz, Interim Vice President of Refining and Processes; Maria Fernanda Suarez, Vice President of Strategy and Finance; Alberto Vargas, Financial Comptroller; Rafael Guzman, Technical Vice President; and Thomas Rueda, CEO of Cenit.

We will begin the presentation with the main achievements of the third quarter, followed by the highlights by business segment and the financial results. We will close with the outlook for the fourth quarter of 2015 and a Q&A session.

I will now turn the call to Mr. Juan Carlos Echeverry, CEO of Ecopetrol.

Thank you, Maria Catalina. Good morning, everyone, and thank you for your participation in this conference call. I want to share Ecopetrol's milestones in the third quarter, which was a challenging period.

The oil and gas industry coped with the crude oil prices even lower than in the second quarter, which led to the subsequent costs in investment costs and expenses. In addition, Ecopetrol responded to the challenges imposed by the attacks on transport infrastructure, the effect of the price difference due to El Nino weather phenomenon, the closure of the Venezuelan border, the completion of the Cartagena refinery, the largest project in the history of Colombia; and the devaluation of the exchange rate.

Such realities have demanded a timely response from Ecopetrol, supported by the Company's transformation program entailed in its 2015-2020 strategy. This program aims to reduce costs, structurally increase efficiency, maximize the potential of the current fields by means of a comprehensive program to raise the recovery factor, and change the exploration strategy. Also it aims to strengthen a new corporate culture based on three pillars- integrity, collaboration, and creativity.

Despite the challenges, the Company accomplished important results during the third quarter and the first nine months of 2015, namely structural cost savings, increased production at the fields of Castilla and Chichimene, decrease in the number of drilling days per well, active asset portfolio management, the startup of the Cartagena refinery, the most modern one in Latin America; lower dilution costs, advances in standardization aligned with industry standards, and the strengthening of (inaudible) and compliance.

During the third quarter of 2015 the financial results were impacted by the movement of the crude oil prices and the peso-dollar exchange rate. The Brent Crude benchmark fell 51% compared to the third quarter of 2014, and 19% compared to the second quarter of 2015, under the pressure of the downturn in the Chinese economy and the increase in crude inventories, among other factors. In line with this trend, the price of the crude basket decreased 54% between the third quarter of 2014 and the third quarter of 2015. The oil and gas industry has seen these low-price cycles in the past, most recently towards the end of 2008.

The peso-dollar exchange rate reached a peak of 3,239 Colombian peso per dollar. The devaluation had a positive effect on revenues, which are mostly denominated in dollars, but also caused the [cooperative] adjustment associated with the loss of the portion of Ecopetrol's hedged US-dollar debt. In this period, Ecopetrol implemented hedge accounting to reflect the natural hedge between Ecopetrol's revenues and debt, both in dollars.

Please move on to the next slide to see Ecopetrol's main achievements in the third quarter of 2015. The entire organization is generating greater efficiencies, reducing costs, and adjusting activity towards the core business, which is exploration and production, and the new realities of the price of the crude.

Up until September 30, Ecopetrol achieved budgetary savings of COP1.6 trillion, exceeding the initial goal of COP1.4 trillion, defined for 2015. This effort is reflected in the reduction of product costs. Between 2014 and September 2015, the number of drilling days per well in Castilla Field dropped from 34 to 26, and in Chichimene from 36 to 20. Please note that close to 550 wells will be drilled in 2015.

Accumulated lifting costs between January and September of 2015 was $7.29 per barrel, compared with $10.91 per barrel in the same period of 2014. Other business lines $1.03 per barrel is attributable through cost reductions and higher efficiency strategy. Whereas $2.61 per barrel is attributable to exchange rate difference, among other things.

Moreover between the third quarter of 2014 and the third quarter of 2015, the cost per transported barrel decreased by $0.60 per barrel, and the refining cost decreased by $2.16 per barrel. These [first] achievements demonstrate that Ecopetrol is prepared for the challenges imposed by the current price environment, hence Ecopetrol will pursue a new budgeted optimized target of COP2.2 trillion for the whole year of 2015.

The Company is determined to obtain higher efficiencies and lower costs in purchases, services and maintenance costs, among others. Our goal is to obtain aggregated savings of $6 billion by [2015], vis-a-vis the cost of 2014. The advantage given by our integrated nature and our focus on efficiency, allowed us to reach an EBITDA of COP4.7 trillion in the third quarter of 2015, compared with COP5.5 trillion in second quarter of 2015, a minor reduction when compared with the oil price (inaudible).

On October 21, the new Cartagena refinery reached a key milestone in the startup process, with the first loading of hydrocarbons to the crude unit. This is the beginning of a commissioning of 31 sequential plants that make up the refinery, considered the most modern in Latin America. On November 11, the first 95,000 barrels of refining products were delivered.

Ecopetrol continued generating value for its shareholders and secured fresh cash flow with portfolio asset management, with the completion of the first divestment round of its share of interest in Empresa de Energia de Bogota, from which it obtained COP614 billion.

Other opportunities to add hydrocarbon reserves have arisen with Occidental Andina LLC, OXY, at the field La Cira-Infanta and with Parex Resources at Aguas Blancas. In exploration, an agreement was reached with JX Nippon to jointly develop exploratory activities offshore Brazil.

Let's go to the next slide to see details of savings obtained in 2015. Ecopetrol has focused its cost-reduction plan [and this is] manageable by the business areas like contract negotiation, supplier strategy, and in general optimization and operating initiatives to improve financial results.

Between January and September of 2015, on the same period of 2014, manageable item savings of [COP516 billion] were reached. In fixed costs, the highest savings were achieved in contracted service and maintenance items. And as far as variable costs in association with contract services, energy and use of tanker trucks.

In 2015 Ecopetrol obtained COP1.6 trillion in optimizations. Out of this expected impact on the 2015 P&L will be [COP1 trillion]. COP519 billion will be cash, and COP160 billion will be already invested. We highlight that there was a reduction of naphtha consumption by 7,100 barrels per day versus 79,000 barrels per day used in the third quarter of 2014, given the strategy of increased viscosity crude transported by pipelines. This is just the beginning of the dilution efficiencies, one of the key endeavors given our heavy crude oil production.

Let's go to the next slide to talk about the startup of operations at Reficar. Reficar has maximum capacity of 165,000 barrels per day. The refinery feedstock is expected to be 70% heavy crude oil, and 30% light crude, utilizing an estimated mix of 70% domestic crude and 30% imported crude. The new refinery has a conversion factor of 97% vis-a-vis 75% of the old one. This production will mainly be used to satisfy internal demand for diesel and gasoline, with some [circumstances] of naphtha being exported.

Let's see in the next slide the basket of products to be delivered by the new refinery. The refinery will produce cleaner fuels and offer environment benefit, as a result of its energy integration, its technology for the control of discharges, and the emission controls that meet the highest international standards.

We will now look in the next slide at the product volumes to be supplied by the new refinery. Gasoline and diesel inputs will decline with the (inaudible) full operation. In 2015, only 6,000 barrels a day of gasoline will need to be imported and no diesel. Starting in 2017, the Company will be self-sufficient in these two fuels. The refinery will have a mixed surplus of about 9,000 barrels a day of jet fuel, and 32,000 barrels of day of high-quality naphtha for the gasoline and petrochemical markets.

Given that the export of naphtha is more economically attractive than using it to dilute crude, Ecopetrol will continue importing naphtha for dilution, depending on its need. Reficar will supply raw material at a very competitive price to Essentia, a good company that produces and sells polypropylene and polyethylene. In 2015, this company has delivered excellent results, being one of the largest exporters in Colombia, selling to close to 25 countries.

Let's move on to the next slide to see the timeline for the startup of the refinery. The production (inaudible) for diesel under high specifications will begin in November with the startup of operations in the hydro treatment plant. This production will increase with the start of the hydrocracking plant in January 2016. The production plan for gasoline will be accomplished with the launch of the catalytic cracking, naphtha hydro treatment, and alkylation plant in March of 2016.

After that the acceleration phase of the Cartagena refinery will begin, with completion scheduled for the second half of 2016. Taking into account the startup and commissioning, average throughput in 2016 is expected to be 143,000 barrels a day.

I will now turn over the floor to Rafael Guzman who will cover the main results the of Production segment.

Thank you, (inaudible). For the Production segment, it is important to highlight the results obtained by optimization and cost-reduction measures implemented by the Company. Pushed together with the devaluation of the peso, represent a 33% reduction in the lifting cost obtained up to the third quarter, compared to the same period of 2014.

The strategy of continuous and sustainable improvement of the efficiencies continues to provide positive results in the well-drilling campaign. This improvement strengthens the profitable development of our assets, even under low-price conditions like the current one. As an example, we have the results accomplished on the drilling campaign all over the country.

On the main fields operated by Ecopetrol, Castilla and Chichimene, have reached cut backs in drilling time of 23% and 44% respectively. Comparing the results of the drilling campaign for the first semester and that of the third quarter, it's possible to demonstrate a continuous improvement in our drilling operations.

On this same [stat], the Company has also been working on the planning and execution of different initiatives aimed at lowering the diluent cost of our heavy and extra-heavy crude. As part of this initiative, the Company managed to increase the capacity to transport crude of a higher viscosity in the Monterrey [Arone] section, allowing us to reduce 7,000 barrels of diluent used per day compared to the third trimester of 2014.

The next slide shows that during the quarter we achieved a production of 741,000 barrels of oil equivalent, which represents a reduction of 1.8% that is close to 14,000 barrels of oil equivalent per day, compared to the volume of the third quarter of 2014. This was mainly due to attacks suffered in the Cano Limon-Covenas pipeline during this period, which forced a temporary shutting of this field, Cano Limon and Gibraltar during most part of July and August months.

Compared to the third trimester of last year, Cano Limon represented a reduction of 22,000 barrels of oil equivalent, and [fuel oil gas] 4,000 as a consequence of these attacks. However, this was partially offset by the performance of the Castilla and Chichimene fields. These two fields operated by Ecopetrol, managed to increase 20% and 28% respectively if compared to the third quarter of 2014. Additionally the (inaudible) field reached a new production record 20,000 barrels per day during the month of August. This, thanks to the new wells and secondary (inaudible) that has taken place in the field.

We would also like to highlight the agreements reached during the quarter with the companies Occidental and Parex, and the assets La Cira-Infanta, and Aguas Blancas, respectively. These agreements include both development drilling and water injection pilots, which if successful could jointly add reserves. With these two new associations, we could increase production of La Cira-Infanta up to 50,000 barrels per day, and that of Aguas Blancas up to 10,000 barrels per day, in line with our strategy to continue increasing the recovery factor of our fields.

The increased recovery factor program started four new pilots during the quarter, polymer injection in Chichimene and water injection in Castilla, Provincia and Tisquirama, reaching 7 pilots of annual goal of 8 for 2015. Of the total 28 pilots initiated by Ecopetrol underway, 14 of them are already showing important incremental production.

Likewise it is worth mentioning the progress of the air injection pilot on the Chichimene field. The construction of the main facilities was completed, and total work reached 92%. At the same time during the trimester, the connectivity test was performed with positive results. This test consisted of injecting nitrogen in the pilot area to demonstrate the continuity of the sands and the good connectivity between the injector and partition wells.

Now Max Torres will comment on the results of Exploration.

Thanks, Rafael. In Exploration during the third quarter 2015 the exploration wells Kronos-1 in the block (inaudible) was drilled in deep-water offshore Colombia. The operator, Anadarko with Ecopetrol at 50% participation. This well found an interval of 130 feet to 230 feet of net gas column in the (inaudible) section, which proves the presence of an active petroleum system, and confirming the geological and geophysical interpretation.

At the close of the quarter the exploration well Kronos-1 in the block [fuerte norte] was still drilling in deep-water Colombia, with operator Anadarko and Ecopetrol 50% participation.

In addition to our affiliate Ecopetrol America, the drilling of an appraisal well, Leon-2, was initiated in the Gulf of Mexico with operator Repsol with 60% and Ecopetrol with 40% participation.

Finally, as the result of the participation of Ecopetrol America in the Gulf of Mexico Lease Sale 426 during September 2015, three blocks were assigned. GB494 and GB495 and GB539 are the (inaudible). We operate (inaudible) and Anadarko, with both companies, Anadarko and Ecopetrol, having 50% participation. Also during November, developed Lease 685 Ecopetrol America, 100% was awarded.

Now I will leave you with Thomas Rueda who will comment on the midstream results.

Thank you, Max. Good morning. During the third quarter the transported volumes decreased by 37,000 barrels per day equivalent to 3% versus the same period of 2014, reaching 1.195 million barrels per day. Crude oil pipeline transportation increased by 3.4% compared to the same period of 2014, mainly due to lower availability of the Cano Limon-Covenas and Transandino systems as a result of the attacks against the infrastructure and the time needed for repairing the damaged sectors. Of the total volumes transported approximately 71% belonged to Ecopetrol.

Transportation of refined products decreased by 1.7% versus the third quarter of 2014, mainly due to the fall of product volumes delivered via the Barrancabermeja refinery. Out of the total volume transported, approximately 15% belonged to Ecopetrol.

From the financial perspective, I would like to highlight the segment results will show an important increase in EBITDA, as compared to the one observed in the third quarter of 2014, mainly due to the initiatives that have been undertaken in order to optimize the transportation infrastructure, operations and maintenance costs, as well as a positive impact of the depreciation of the Colombian peso against the US dollar on the crude oil transportation services whose sales are established in dollars.

Regarding our projects under execution, during the third quarter we concluded some of the [specification] works in the (inaudible) station, in order to allow the different product storage and load, with a total handling capacity of around 12,000 barrels per day. In addition, we completed the construction of two storage tanks, each with 420,000 barrels capacity in the Covenas terminal to increase the operational flexibility of the port.

Finally during the third quarter our subsidiaries [Oleducto de los Llanos Orientales], and [Oleducto de Colombia] conducted successful tests for heavy crude oil transportation. Such tests confirmed that there are no major infrastructure adjustments required for such purpose.

With this, I hand over to Orlando Diaz, who will comment on the downstream results.

Thanks, Thomas. During the third quarter of 2015 the total Barrancabermeja refinery decreased by 18,000 barrels per day, compared to the same period of 2014, due to the [turnaround] of the one crude unit which was essentially achieved.

The gross margin of the Barrancabermeja refinery was $16.70 per barrel, $1.20 higher than the period of 2014, as result of process improvement that has allowed higher fuel supply (inaudible), and the capture of (inaudible) margin.

(Inaudible) cost of refining and petrochemical decreased by 32% compared to the third quarter of 2014, thanks to the implementation of maintenance and general (inaudible) optimization strategies. The two domestic plants reached 99% (inaudible) for commissioning. Commission and startup activities have already started during this quarter, and will finish during the last quarter of this year. This notwithstanding will increase the longevity and efficiency of the utilities operation in Barrancabermeja.

Now I turn the presentation to Maria Fernanda Suarez, who will comment on the financial results for the quarter.

Thank you, Orlando. Good morning to everyone and thank you for attending this conference call. I will now explain the financial results for the corporation in the third quarter 2015.

As President Echeverry already mentioned, we faced a challenging period during the third quarter, marked by a drop in oil price, lower production, and the devaluation of the peso-dollar exchange rate. Due to these factors, the Group generated revenues of COP13 [trillion] in the third quarter, 23% lower than in the third quarter 2014.

In spite of this, given the efforts to optimize our operations and the benefits of being an integrated company, we achieved an EBITDA of COP4.7 trillion in third quarter 2015. Consequently, this resulted in an EBITDA margin of 36% in third quarter 2015 versus 37.7% in the third quarter of 2014.

Accumulated EBITDA for 2015 was COP15 trillion, equivalent to an EBITDA margin of 38.2% compared to a 41% margin in the same period of 2014. Up until September 2015, accumulated CapEx deployed amounted to $4.7 billion, close to 16% lower than in the same period of 2014.

Out of this amount, 51% was mainly allocated to drilling campaigns at the fields Castilla, Chichimene, and Rubiales. 29% of the resources were allocated to the downstream for the advancement of the Reficar modernization project and the industrial services master plan at Barrancabermeja. 12% was invested in midstream infrastructure, mainly for the expansion of P135 at Ocensa, and in the San Fernando Monterrey pipeline project. Finally, the remaining 8% was allocated to exploration, essentially for Kronos and Calasu wells. These investments will provide the necessary resources to secure the growth and sustainability of the Company.

Cash generated by operations improved from COP606 billion in the second quarter of 2015 to COP3.9 trillion in the third quarter of 2015, mainly as a result of a lower income tax case in the third quarter of 2015, and higher operational efficiency.

Finally, the net income attributable to Ecopetrol shareholders was COP654 billion in the third quarter of 2015. This value reflects the implementation of hedge accounting according to IAS 39, which we will look into further detail along the presentation.

Let's turn to the next slide to see the drivers of the financial results for the third quarter of 2015. Revenue fell by COP3.8 trillion in comparison to the third quarter of 2014, as a result of a reduction of $41 in the average price of the crude and product basket, and lower volumes of exports of 89,000 barrels per day, mainly due to the attacks on the Cano Limon Covenas pipeline.

These negative impacts were partially mitigated by the positive effect of the devaluation of the Colombian peso over the revenues, versus the third quarter of 2014.

Cost of sales exhibited a favorable trend, diminishing by nearly COP1.9 trillion, compared to the third quarter of 2014. As you can see, the decrease is mainly explained by savings of approximately COP700 billion, originated from (inaudible) sales volumes of 75,000 barrels equivalent per day, as well as COP600 billion due to the combined effect of lower prices and a higher exchange rate. Additionally, important optimizations of around COP300 billion were achieved, mainly in contracted services and other fixed costs like maintenance and services.

The valuation of inventories decreased by COP351 billion, due mainly to accumulation of inventories needed for the startup of the Cartagena refinery, and also due to the reduction of the Group sales during the quarter.

Operating expenditures saw a reduction of 25% in the third quarter 2015 in comparison to the third quarter 2014, primarily explained by lower extraordinary expenditures given the reduction in seismic activity and lower number of dry wells recorded.

The net financial results for the quarter show a lower loss by COP141 billion, due mainly to the effect of hedge accounting. In this quarter the financial statements will reflect the full impact of hedge accounting over $5.44 billion since January 1, 2015.

Third quarter 2015 closed with a net income of COP654 billion, 62% lower than in the third quarter of 2014. Accumulated net income at September amounted to COP2.3 trillion.

Moving to the next slide to see the main aspects of hedge accounting. Actually most of the capital debt stock is denominated in US dollars, and its revenues come from exports in dollars and local sales linked to dollar. This situation constitutes a natural hedge for the Company. To manage the foreign exchange risk over the debt stock, Ecopetrol adopted the Accounting Standard IAS 39. The hedge instrument is the portion of the debt with maturity up until 2023, and the line hedged is the revenue coming from exports during the same period.

In these transactions, $5.44 billion of debt were hedged starting on January 1, 2015, according to local accounting standards. With the adoption of these accounting standards, the effect of the hedge change rate difference over the portion of debt hedged is eliminated from the P&L, and reclassified to the account, other comprehensive income in the shareholders equity. The impact on the P&L will be accrued as hedged exports are realized.

The effect of the adoption of the hedge accounting are entirely recognized in the third quarter 2015. To assess the net impact on the P&L, take into account a positive effect of COP3.9 trillion on the financial results, minus COP1.7 trillion of deferred income tax, and the effect on export revenues for the period, for a total net impact on profit of COP2.2 trillion.

For the sake of comparison, you can find in our 3 quarter earnings report and annex that show the results for each of the quarters of 2015, with hedge accounting applied as of January 1, 2015. It is worth highlighting that hedge accounting has no effect on cash flow for taxes to be paid. For tax-related purchases, the exchange rate differences has a defined treatment under tax rules. Therefore changes on the accounting standards have no impact on [fiscal balances].

Let's go to the next slide to review the main results of each segment. The results by business segment reflect the benefit of being an integrated company. Downstream and midstream contributed with positive results that partly mitigate the net losses reported by upstream.

Upstream's revenues fell 38% on the back of lower prices and volumes sold. Cost of sales decreased by 14% primarily because of the reduction in diluent purchases and imports, and the saving obtained in contracted services. As a result, the upstream net income decreased by COP1.6 trillion compared to the third quarter 2014.

Downstream results improved by COP251 billion, a gain of COP147 billion in the third quarter 2015 versus a loss of COP104 billion in the same period of 2014. The increase was the result of higher refining margins and lower operating cost.

Finally, midstream's income increased by COP321 billion, due mainly to the positive impact of the devaluation of the exchange rate on tariff and lower maintenance on operating cost.

We will now take a look at the Group's cash flow. In the third quarter of 2015, the group generated cash to fund investments, debt service and dividend payments. The main funding sources were COP3.9 trillion of operating cash flow, and additional funds that resulted from the divestment of temporary assets and a portion of our holdings in Empresa Energia de Bogota. Ecopetrol will not need additional debt to fund the year 2015. We expect our cash generation to remain strong based on the operating efficiencies and the resources to be obtained from divestment.

I will now turn over the floor to the CEO, who will finish our presentation with the outlook for the end of the year. Thank you.

Thank you, Maria Fernanda. As you can see, Ecopetrol Group has reacted very well to the great challenges imposed by the external and internal (inaudible). The Company managed its performance with an emphasis on financial discipline and efficiency in its operations. We'll continue to focus on value-creation for our shareholders, ensuring a profitable growth within the framework of our new strategy, and looking for sustainability and financial strength in the long term.

Therefore, we will continue streamlining activities, renegotiating contracts, and searching for new cost-reduction options, with the determination to achieve our budgeted savings goal of COP2.2 trillion in 2015.

We will press deeper into divestment options in our asset portfolio, in search of business strategy that maximizes shareholder returns and generates cash flow for Ecopetrol.

As for the divestment process currently underway, we will complete the first stage in the divestment of our share interest in [ESA] on November 30. The case of Empresa Energia de Bogota, varied alternatives for the sale of the remaining percentage of our property, we'll continue to study it.

We expect to be able to operate under optimal safety conditions, allowing us to meet our Group's production goal of 760,000 barrels a day of equivalent oil for 2015. We are advancing with the process of bringing the Cartagena refinery online with the beginning of operations of the hydro treatment plant in November.

In exploration we will obtain the results of the exploratory wells [Calas-2] and Muerana-2. Also we will complete the expansion of the capacity of the Pozos Colorados-Galan multi-purpose pipeline.

Finally we will announce our new investment plan for 2016 towards the end of this year, which will reflect the necessary adjustments given the current oil price situation. We will seek growth opportunities by means of increasing the recovery factor in our fields Castilla, Chichimene, and Rubiales, and the development of new fields. For this, we will ensure the financial metrics that guarantee the sustainability of the Company.

Once again, the Company has demonstrated its resiliency, its capacity to adapt to environment conditions, and continue building value based on technical capabilities and taking advantage of the strength of the integrated company.

I would like to thank you all for your interest in the Company, and now open the session for Q&A.

(Operator Instructions) Pavel Molchanov, Raymond James

Hi. This is Luana Siegfried in for Pavel. I have two quick questions. The first one I would like to touch a little bit on production. So production was around 740,000 barrels, mainly due to attacks and natural decline. Do you guy have, by any chance, the breakdown of each effect, such as 50% was caused by the attacks, 30% by the attacks?

Excuse me. We are not hearing you properly. Can you please repeat your question a bit slowly, please?

Sure. Can you hear me now?

Yes.

Perfect. So the first question would be regarding production. I would like to know if you guys could provide us some breakdown that caused that production missed, the 760,000 barrels per day goal. So you mentioned about the attacks and the natural decline. If we could have some kind of breakdown for each effect.

Hello. It's Rafael Guzman. (Inaudible) will respond to your question.

Yes. Thank you for the question. I mean the attacks affected two fields. The first one is Cano Limon. And the second one is Gibraltar. They are both connected to the Cano Limon Covenas pipeline. The total production reduction by these two fields was 26,000 barrels, 22,000 for Cano Limon, and 4,000 barrels of oil equivalent for Gibraltar.

Now the decrease in production from this field was largely offset by better production in two fields, Castilla and Chichimene, all of that compared to the same period last year. We also had some gas decreased production in (inaudible) to a normal decline. But at the end, those are the main effects of the fields.

We had another effect, which is the decline of (inaudible) field, which amounts to about 10,000 barrels a day. But all in all, the decrease was only 4,500, if we compare the same period.

That's great. Perfect. And if I can another question, if you would touch a little bit on the offshore program that Ecopetrol is developing. So if you could update us how offshore exploration is going, and the situation that offshore continues to prove to be more gas-prone than oil-prone; would Ecopetrol be interesting in putting infrastructure in place?

Thank you, Pablo. Max Torres here. I will respond to your question about our activity in the offshore. As you know, we are very active in offshore Colombia, and also active in the Gulf of Mexico. The activity in offshore Colombia, as we have announced this year, was a success. We have our first discovery in the Orca well. And we have our second discovery in the Kronos well. Both of them, they are gas-prone. And the base, and practically judging by these two discoveries is gas-prone.

Answering to your question about the infrastructure, we are evaluating the sizes of the discoveries in order to put together some development plans, appraisals, and the infrastructure will come following the understanding of the sizes of these discoveries.

But obviously we consider both of these discoveries to be the size that we could start thinking about appraisals. As a matter of fact we are planning to drill an appraisal well next year for the Kronos discovery, and in 2017 for the Orca discovery.

That's perfect.

The activity in Gulf of Mexico is oil-prone. We have already two discoveries, one with Shell and one with Repsol. And we are currently drilling an appraisal well for the discovery with Repsol, which is called Leon-2. That is an oil-prone discovery.

I hope I have answered--

No again, that's very helpful. That's very helpful. Thank you and congratulations on the quarter.

Felipe Gouveia, HSBC

Hi. Good afternoon. So my question is related to the cost-cutting initiatives. So with these new targets of COP2.2 trillion, and let's try to translate that into the lifting cost, a potential new range of lifting cost. I think the difference between the last one and the current target could be implied in $5 dollar a barrel of lifting cost. [You actually] reported third quarter of 6.9. So I think it's fair to assume this potential new range of lifting cost.

Hi, Felipe. Thank you for your question. I will tell you that the difference from the COP1.6 trillion that we have achieved and the COP2.2 trillion that we will expect to achieve by the end of the year will be impacted by almost all the sectors, and we will see still savings coming from E&P, as well as savings coming from other areas, as in corporate areas.

We are not giving any specific guidance on the specific lifting cost that we will achieve by the end of the year.

Thank you. That's very clear. If I may, just one more question with regards to dividend policy going forward. So before 2014, the dividend payment was close to 100% of net income. So do you have in mind any potential new payout for this year, or even a new range going forward as well?

Well for the dividend payout that we will have for the next year, as you know, this is a recommendation that the Board of Directors gives to the assembly on March of 2016. And it's a discussion that will be done by that moment. Anyhow, I think it's important to highlight that the numbers that the Republic of Colombia have published on the budget have diminished the amount that they expect from dividends and from amounts coming from Ecopetrol.

Thank you very much.

Daniel Guardiola, LorrainVial

Hi. Good morning, and thanks for the call. I have a couple of ones. First of all, I would like to touch on Reficar, and specifically on its CapEx. I mean looking at your filings, total final CapEx of this refinery was around $8 billion, which implies of a cost of around $4.5 billion versus initial expectations. And I would like to know if you could explain the reasons behind this additional cost, and also I mean what measures are you putting in place to prevent this over-cost from happening in the future? Thank you.

Thank you, Daniel. In regards to the costs of the refinery, we started out like [three] years ago with an estimated cost of almost $3.8 billion. However, those costs, expected costs, were based on only 20% of the planning of the actual refinery. So as the planning was finished, and the new-- at least two new units were considered, costs went up. Also as the engineering was completed, it was clear that the original estimate was completely undervalued.

So one part of the increase was due to these changes in planning and in the detail engineering. Other part was due to the compound effect of both positions and new orders (inaudible). And some effect came also from a strike, a union strike-- labor union strike in 2013, which cost approximately $500 million.

If you take those effects away, there are still some extra costs that could be attributed to a lack of productivity, to insufficient management capabilities, et cetera, which the contract allowed us to claim. We are in the process of doing that. But let's say not all of the extra costs are due to these events. So if you compare the cost of Reficar, the new refinery with the capacity of 165,000 barrels per day of refined products, the cost is not outrageous. It's basically aligned with other similar facilities. But the difference (inaudible) basis in the regional number and the final figure has several effects compounded of course.

I hope that this answers your question.

Yes. Thanks, Juan Carlos. And I mean looking forward for future projects, what measures are you putting in place to prevent this from happening again? And if you could (inaudible) with us also, I would like to know if there's currently a formal investigation regarding these over-costs in Reficar.

First, we are refocusing our strategy towards exploration and production. We have already invested heavily in downstream and midstream. Most of the necessary assets for us are already in place in Barrancabermeja, I mean Cartagena. And also in the pipelines for crude and refined products. So we are still investing. And we'll still be spending some money in mining maintenance costs, and also some investment, marginal investments. For example, we plan to transport crude with higher viscosity that imposes some investments in our pipeline, also the Barrancabermeja refinery needs some revamping here and there. So we'll keep some investments.

But we are refocusing our Company towards exploration and production. So this is the first issue. Second, the transformation processing on which we are now working heavily, which will last until 2018, is focused on creating a culture of cost-cutting of capital discipline of very strong steps towards approving investments and towards basically keeping the discipline on doing the new operation, the new (inaudible) exploration that Max Torres has championed, and (inaudible) of a recovery, enhanced recovery, championed by Hector Manosalva and Rafael Guzman.

So we still, of course we need to keep a close eye on cost-cutting and capital discipline. And that's basically the long-term solution to avoiding extra costs of (inaudible).

Thanks, Juan Carlos. And is there a formal investigation from the state agencies regarding the over-costs of the refinery of Cartagena?

We have two investigations for (inaudible) and one with (inaudible). We have already been there. And we have invited both of these agencies to visit the refinery. Both of them have been very open to hear all the arguments, the total representation of how these seven years evolved, see the capacity of the new facility to produce high-quality refined products. And of course we're going to be in this for the next two or three years.

Thank you very much.

(Operator Instructions). Pedro Medeiros, Citigroup

Thank you. Congratulations for the results. I have three very objective questions, okay? The first one is on the guidance for potential cuts to achieve cost savings of roughly COP2.2 trillion. You mentioned on the presentation that roughly COP0.5 trillion were achieved on the manageable cost portion out of the COP1.6 trillion achieved so far. Can you comment how much is the manageable cost portion out of the COP2.2 trillion that you expect to achieve, and whether there is any potential upside risk for them to that particular target?

The second question is, thanks so much for the disclosure on the deals with OXY and Parex. But it's more of a confirmation. Can you walk us through whether those initiatives are for La Cira and Aguas Blancas could actually add to reserves for this year-end reserves?

And the last question is if you can already comment on CapEx or potential CapEx changes for 2016 in light of the current crude oil rate and currency, or at least talk about from a (inaudible) point of view whether the current oil price and the forward oil price curve could actually provide any positive or negative impact to the investments you plan on the upstream development part? Thank you.

Hi, Pedro. Let me talk to your third question. We will not provide numbers for 2016, as we are now in the process of discussing the budget for next year. What we can tell is that out of executed CapEx of 2014 of $8.6 billion, we expect to execute this year $7.2 billion, so a reduction in 16% in executed CapEx between last year and this year. The numbers for next year will be published as soon as we have approval from the Board of Directors.

The first question I will ask Maria Fernanda Suarez.

Thank you, Pedro. Well, from your question regarding how much of the COP2.2 trillion will be coming from manageable costs, I will say from what we published regarding management costs, you'll see an additional of around COP40 million to COP50 million additional to the manageable cost that you already saw in our reports.

Regarding the risk, I will say that we already have set all the necessary things in place to achieve the COP2.2 trillion. However, there are always risks that any change in conditions might come that might change. But we expect to achieve the COP2.2 trillion.

Okay, regarding the question about the OXY and the Parex deal for La Cira and Aguas, the first thing I would like to say is that these two projects are new in our portfolio. So they were not included in our original target of 1.4 billion barrels of increased reserves to 2020. The second thing is that we have worked with both of these operators. And they will be working on known technologies like water injection. As a matter of fact, OXY has been doing with us water injection in the (inaudible) in the main reservoirs. These are projects for additional reservoirs within the field.

In total, this 200 million growth for the La Cira (inaudible) field and 55 million growth for the Aguas Blancas field, big water technology that we know we (technical difficulty).

Juan Dauder, Bancolombia

Thank you very much. I have two questions about production. I want to know in the first one, how about Cano Limon and how is it performing the attacks and during the fourth quarter? I want to ask you as well about Guajira declining rate. How do you expect Guajira field to continue performing? And what is the expected declining rate you expect for the coming quarters?

And finally one is about the right to hike pricing. I want to know what contracts are the most effective with reduction in prices [amid] this right. Thank you.

Okay. Juan Camilo, thank you for your question. For the first part, the Cano Limon, we have been able to go back to the production we had before the attacks. That amounts to about 30,000 barrels per day, net for Ecopetrol. And if we don't have any external issue like the one we had in the past that could be the production for the field for the last quarter.

The second question was about the La Guajira declining production. Yes. It's a mature field. It has produced cash flow for many, many years. And we're currently seeing a decline of about 13% to 15%, which is the natural decline of the well.

Sorry. Just one follow-up. Is that 13% and 15% decline rate an annual rate?

Annual rate, yes, that's annual.

There's one more about the right to hike pricing. What are the main contracts being affected by this thing? Thank you.

Sorry. I didn't understand the question.

You said in your report that you're suffering from the effect of the right to hike pricing agreements. What are the main contracts offerings on these agreements?

Yes, thanks. I understand that. The main contracts that have been affected because of hike prices, La Cira, Kifa and [Cowanorte]. The total effect for this third quarter compared to the third quarter of 2014, is about 12,000 barrels. So most of it is Kifa. And Kifa is about 7,000 of the 12,500, so half and half the other two.

Perfect. Thank you.

David Gamboa, TPH

Hi. Good morning, and thanks for the opportunity of these questions. I had two, if I may. First one is we've seen your peers put out some sort of estimated future oil price for the next couple of years in order to be able to balance cash flow with CapEx and dividends. I'm just wondering if you were able to provide us, based on the current plans of the Company, any oil benchmark that you would need for the next couple of years to cover CapEx plus dividends with your cash flow, excluding disposals.

The second question would be around exploration. You've mentioned that Ecopetrol is turning focus to the E&P, and changing the exploration strategy going forward. I want to know if you can provide some more color around the areas that you're looking to expand Ecopetrol for organic growth in terms of exploration, and if you can provide us some color of how do you see deep-water economics under the current environment. So any comment around deep-water costs that you've seen coming down with your experience in the Gulf of Mexico and in Colombia. Thank you.

David, thank you for the question. First I will have to say that, as you know, we don't give any guidance right now on the oil prices that we use for our (inaudible) or for our portfolio analysis. So unfortunately I cannot give you that guidance. I will pass that question to Max.

Hello, David. Max Torres here. I will comment on your questions about our new E&P focus and our exploration strategy. You asked about organic growth and what are the areas that we are planning to study or [the paper] in our strategy. Essentially the strategy that we had was deep water offshore Colombia and Gulf of Mexico. Those are our present focus for growth.

We are also looking and following very careful the developments in Brazil and in Mexico. And in our region, Ecuador. So those are the areas that we are mainly focusing today. And we are planning to expand our activities.

As far as costs on the deep water, the deep water we see that the costs are decreasing slowly. Essentially the deep water is in the activity worldwide, the area that's been hit the most. We see that most companies are delaying or cutting the deep-water activity, obviously because of high costs and marginal economics.

We are not the exception. And we also see some constrains on our budget for the deep water, as our partners as well. And essentially we had a very-- at the beginning of the year, we had a very aggressive deep-water plan. And we see how our partners and ourselves, we are seeing these budgets being cut.

I'm sure that the rig costs and drilling costs and steel costs will start coming down in the next year. And that will help us increase the activity in the offshore. I think Gulf of Mexico is the one where you can see right now some of these costs coming down. Unfortunately in the rest of the world, I think those costs and that increased activity will be delayed. And I'm sure Colombia will not be an exception. I think we will see some delayed plans for 2016 and 2017.

But I'm sure that those costs and the drilling costs will come down in the near future. You need, we need to balance again the activity and make the deep-water profitable again. Thank you.

Thanks for that.

Edgar Romero, [BBVA]

Yes. Hi, good morning, and thank you for the presentation. I have two quick questions. The first one is regarding your current production level. I would like to know how much output you're having right now. And the second one is regarding the CapEx figures for the next year. When would you release this figure? Thanks.

Edgar?

Yes?

Can you please repeat your question regarding current production?

Yes. What is your current production level?

Okay. Thank you.

Edgar, as we mentioned before, currently we are not-- we cannot reveal any CapEx figures for next year, since we are still discussing within the Company and with the Board of Directors the budget for next year. We expect to be revealing those to you probably between in the second and the third week of December. But until then, we will have to ask you to wait.

Yes, Edgar about the second question, as you have seen we have produced [761,000] barrels of oil equivalent per day up to the third quarter. And that compares well to our target of 760,000 for the year. What we expect is to be very close to the original target we set up for the year. And that of course is if we don't have major events like the ones-- external events like the ones we had during the third quarter. So we will be very, very close to our target.

And I'm not showing any further questions in the queue. I will like to turn the call back to management for any final remarks.

Thank you all for having participated in this conference call. And we expect to see you or talk to you in three months' time. Thanks all.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day, everyone.