Ecopetrol SA (EC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ecopetrol's fourth quarter 2015 earnings conference call. (Operator Instructions)

Now, I would like to welcome our host for today's conference, Ms. Maria Catalina Escobar, Director 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 fourth quarter of 2015 and full-year 2015.

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 Felipe Bayon, Executive Vice President; Maria Fernanda Suarez, Vice President of Strategy and Finance; Max Torres, Vice President of Exploration; Hector Manosalva, Vice President of Development and Production; Juan Pablo Ospina, Vice President of Commercial and Marketing; Thomas Rueda, CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; Rafael Guzman, Technical Vice President; and Alberto Vargas, Financial Comptroller.

We will begin the presentation with the main achievements of 2015, followed by the highlights by business segment and the financial results under International Finance Reporting Standards. We will close with the outlook for 2016 and a Q&A session.

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

Thank you, Maria Catalina. I would like to start this presentation by discussing the behavior of oil prices.

Between June 2014 and December 2015, the price of Brent crude fell about 65%, mainly as a result of the imbalance between supply and demand. Different analysts estimate that this imbalance for 2015 was between 0.7 million and 2 million barrels per day, bringing crude prices to their lowest level since the end of 2003. The excess supplies [drove] to an inventory accumulation of 1.8 million barrels per day in 2015, according to estimates by the International Energy Agency.

It is expected that lower prices begin to affect the availability of unconventional crude, which is highly sensitive to price, and of conventional crude when costly investments in exploration and production become affected.

[SAW]'s expectations indicate that supply and demand could get closer at some point in the second half of 2016. However, first it will be necessary to drain the excess inventory to see a change in the fundamentals that could point towards a recovery in the price of crude.

The drop in price drastically affected oil companies' results and unleashed a period of radical changes in the industry which is seeking greater efficiency, lower costs, and a strict capital discipline to preserve cash and long-term financial sustainability.

For Ecopetrol, the crude sales basket shrank by $43 per barrel from 2014 to 2015. The Company reacted swiftly and decisively, implementing its transformation plan throughout its entire value chain while it maintained a solid operational performance without affecting reliability and safety.

On the next slide, we will discuss some of the factors that had a particular impact on Ecopetrol in 2015. In 2015, the Company faced other situations that challenged its abilities, such as El Nino phenomenon, the closing of the border with Venezuela, and the attacks on our transportation infrastructure.

Ecopetrol's fuel supply logistics were stretched to the limit to meet the increasing demand for natural gas and liquid fuels for the thermal sector caused by El Nino, a climate event that brings severe droughts to Colombia and restricts the availability of water for power generation.

Additionally, Ecopetrol supplied a greater volume of liquid fuels to the boundary zone with Venezuela due to the decision of this country to close its border with Colombia, which curtailed [supply] that usually comes from Venezuela.

The attacks in the transportation infrastructure continued to affect production, although to a lesser extent. The number of attacks fell from 130 in 2014 to 80 in 2015.

Finally, 37% devaluation in the exchange rate in 2015 improved the Company's competitiveness. It boosted revenues from exports and transport services to cover outlays in pesos. Besides, the devaluation reduced the estimated cost for development reserves, which should be stated in dollars for purposes of economic evaluation.

[The addressed effect of the devaluation] comes from the assessment of the Company's net liability position. Part of this effect is mitigated through hedge accounting adopted as of [October 31, 2015], which uses about 50% of Ecopetrol's debt in dollars to cover acquisition of (inaudible).

In the following slide, we will take a look at Ecopetrol's key accomplishments in 2015.

Ecopetrol's priority in 2015 was to protect cash. The Company focused on cutting costs, reinventing its processes to achieve greater efficiency, allocating resources with a strict criteria of capital discipline, and accomplishing the start-up of Reficar, a key project of Ecopetrol and of Colombia.

Ecopetrol surpassed its savings target of COP1.4 trillion for 2015, managing to rack up savings of COP2.2 trillion along with COP0.6 trillion from the Group affiliates, for a total of COP2.8 trillion. With our transformation plan, we expect that these savings will be structural and contribute to Ecopetrol's financial sustainability.

Thanks to these efforts, the lifting cost maintained its downward trend and registered a reduction between 2015 and 2014. Close to 30% of this decline can be attributed to cost reduction strategies and 70% to the devalued exchange rate of 2015.

Ecopetrol still has opportunities for saving and optimization on numerous fronts -- such as [dilution], well drilling costs and times, maintenance and contracted services -- which gave rise to set an additional savings target of COP1.6 trillion for 2016.

The Group reported a net loss of COP3.9 trillion in 2015, due mainly to the low price of crude oil. As it has been the case for other oil and gas companies, the drop in crude prices caused the recognition of impairments of property, plant, equipment, natural resources, and goodwill in the amount of COP6.3 trillion, net of taxes.

Setting aside the effect of the impairment, we would have reported estimated net profits of COP2.4 trillion. In spite of this financial result, the Company has exhibited solid operating results and maintained good cash generation, reporting an EBITDA of COP18 trillion and a stable EBITDA margin of 35%.

One of the central purposes of our administration was the start-up of the Cartagena refinery, a milestone that Ecopetrol reached on October 21, 2015, with an entry into service of the [crude] unit. This unit has been producing since November, processing between 80,000 and 90,000 barrels of oil per day.

On February 24, the delayed coke plant commenced operations, and at the end of February the cracking and the naphtha hydrotreating units will do.

By the end of February, the refinery was loading 110,000 barrels per day in the crude unit.

The Group's proven reserves stood at 1,849 million barrel equivalents at the close of 2015, 11% less than in 2014, in line with average reductions reported by other companies: 1,239 million barrel equivalents corresponded to crude oil, and the remaining 610 million to natural gas.

The 45% drop in (inaudible) prices of crude oil brought down the economic limits of certain fields and prompted reassessment of plans for investment in others, reducing the reserve balance. Ecopetrol estimates a loss of 404 million barrels equivalent of proven reserves versus 2014, due to the lower oil prices.

This reduction was offset to a great extent by cost optimizations and improved efficiency accomplished by the Company and certified by our reserve auditors. These efficiencies makes possible to maintain the economic limits of other fields, as well as by the in-field drilling campaigns and good production performance at the main heavy crude oil fields. The optimizations achieved enabled the Company to add approximately 275 million barrel equivalents, compared with 2014.

Amidst this difficult environment, the Company has maintained its investment grade. It's of the utmost importance for Ecopetrol to maintain its credit rating and to ensure its financial sustainability within a framework of capital discipline and operation profitability.

In the following slide, we can see the breakdown of the [COP2.8 trillion] savings achieved by the Group in 2015. The Company has successfully implemented austerity and savings measures to counteract the impact of lower revenues due to the drop in oil prices. Savings in costs with an impact on the P&L were COP1.1 trillion; 85% of them are associated with the process of renegotiating contracts for industrial maintenance, oil services, professional and consulting services.

In investments, the Company realized savings of COP584 billion, mainly due to a 21% reduction in cost per foot drilled, a 37% reduction in personnel assigned to contract oversight and [project] administration, and decreases in engineering rates and facility studies.

The Company saved an additional COP295 billion from lower dilution costs by $0.75 per barrel, due to increased tolerance for the viscosity of heavy crudes in transport systems, and COP176 billion from other cost savings initiatives.

Finally, affiliates contributed savings of nearly COP600 billion, primarily through renegotiation of contracts in transport affiliates and lower operating costs in those from the upstream.

Next slide, please. The Company's capital expenditure in 2015 was $6.5 billion. The 2016 budget is $4.8 billion, which is 26% less as compared to 2015.

The execution of the 2016 investment plan will depend on the evolution of oil prices. Given the sharp drop in prices during the first two months of this year, we have adjusted this plan. We will continuously calibrate our investments in terms of the behavior of prices and cash availability.

We will prioritize investments in production that generate cash in the short term; in exploration, the Kronos appraisal well and some onshore projects; as well as the investments needed to conclude the start-up of the Cartagena refinery and to consolidate transport capacity.

From 2011 to 2015, Ecopetrol invested $41 billion in an investment cycle that demanded major sources to strengthen the mid- and the downstream. The end of this investment cycle of these segments will enable Ecopetrol in coming years to focus on its primary activity, namely exploration and production.

On the next slide, let's take a look at the improvements in the capital resource allocation process. The business case and the economic project management meet the four criteria for value: robust prices that enable projects to withstand short-term volatility, rate of return, cash generation, and contribution to the strategy.

We have strengthened the project maturity model, with greater requirements to advance from one phase to the next, in order to secure the investment value promise. Each segment is prioritized in the portfolio optimization process depending on its own strategy and specific restrictions.

In exploration, we prioritize opportunities of higher materiality, better success (inaudible), and higher risk diversification. In production, we prioritize investments with higher value generation and positive operating margins; in the downstream and midstreams, projects that improve refining margins and leverage the value in production.

Finally, the investment committee strengthens the process of capital allocation, assigning resources only to projects that are profitable, [ensure value criteria] and short-term cash generation.

It is worth highlighting that the Company projects will be evaluated one by one, and resources will be approved or not under the strict capital allocation process. As I have expressed before, we want Ecopetrol to be slow in its thinking process, but fast in terms of execution.

Let's see the next slide, to review Reficar's progress. The industrial services unit at the crude unit of Reficar are in operations since last year. The first export of fuels was sent out to the United States and the Caribbean in November 2015 for a total of 200,000 barrels of virgin naphtha and 50,000 barrels of jet A1 aviation fuel.

This past February 24, the delayed coke unit commenced operations, producing fuel gas, liquified petroleum gas, naphtha, and diesel, which after going through the hydrocracking and diesel hydrotreatment units produced clean fuels such as gasoline and (inaudible) low-sulfur diesel.

At the end of February, the cracking and naphtha hydrotreater units began operations. The cracking unit takes diesel from the crude unit to produce streams of higher value, while the naphtha hydrotreater plant [removes throughput] from gasolines to deliver (inaudible) low-sulfur fuels with less than 50 parts per million.

In the coming weeks, the hydrocracking unit, the two diesel hydrotreating units, and the alkylation unit will be starting up.

With this group of plants, the Cartagena refinery will achieve a conversion level of 97%. The whole complex of plants [should] be operational in the second quarter of this year. The average load for 2016 is expected to be approximately 143,000 barrels per day.

I am speaking today in connection with the legal matters related with the execution of the Reficar project. First, I consider it important to explain the roles of the various control entities in Colombia.

According to Colombian law, Ecopetrol (inaudible) public resources since the government is a majority shareholder. As a result, Ecopetrol's employees have a responsibility to ensure the proper use of public resources and, therefore, their acts are subject to the control of various control agencies.

The Office of the General Comptroller, or Contraloria General de la Republica, is the entity entrusted to ensure the proper use of public resources and has the authority to investigate government employees or private workers that use or manage resources of such nature.

The Prosecutor's Office, or Procuraduria General de la Nacion, is the entity in charge of supervising government employees and their compliance with proper civil services regulations.

Finally, the Office of the Attorney General, or Fiscalia General de la Nacion, investigates crimes and prosecutes those crimes before the judges so that they come with the [appropriate] judicial process.

In 2015, the Office of the General Comptroller initiated a review of Reficar. This concluded towards the beginning of 2016, and the results are published under their website. The report doesn't mention any fiscal [fining] against Reficar, a company affiliated to Ecopetrol.

On January 26, the Office of the General Comptroller began a special audit that runs until November 2016. Ecopetrol and Reficar have diligently provided all the information needed for this audit.

As of this date, Ecopetrol has no knowledge of specific investigations against employees of Reficar or Ecopetrol by the Office of the General Comptroller.

The Prosecutor's Office currently has two open investigations: one initiated in 2012 against members of the board of directors of Reficar, and a more recent one that involves certain ministers and former ministers and other members of the Board of Directors of Ecopetrol to evaluate their role in the supervision of Reficar over the past five years.

It is necessary to clarify that Reficar execution was performed by a private American firm called CB&I and was not executed directly by Reficar or Ecopetrol.

Also, in early February, the Office of the Attorney General began gathering and reviewing information about Reficar.

All the investigations are still at the preliminary stage, and I want to emphasize that Ecopetrol and Reficar are giving the utmost importance to these proceedings. We have appointed a manager to gather all the information related to the projects in order to guarantee its integrity and organization. Likewise, we have appointed a specific spokesperson [to liaise] with the control entities for the procurement of information.

Finally, I want to point out that at this time none of the investigations refer to violations of the code of ethics or affect the integrity of the business of Ecopetrol. Ecopetrol also has implemented a special protocol to investigate these matters.

I will now hand the presentation over to Rafael Guzman, who will tell you about key results for the production segment.

For the production segment, in 2015 Ecopetrol exceeded the production target, achieving an average of 761,000 barrels of oil equivalent per day. This is the second-highest annual production in the history of the Company. The production result was higher than 2014 by about 5,000 barrels of oil equivalent per day, which is an increment close to 1% year on year.

This result was mainly due to a production increase from our direct operations in the Orinoquia region. Specifically, Castilla showed an increment of 17% compared to 2014 and a record production of 126,000 barrels of oil per day in the last quarter of 2015.

This effort was complemented by Chichimene, where production was 39% higher than in 2014, reaching an average of 78,000 barrels of oil per day in 2015.

We should also mention an increase in the production of our affiliates, specifically Equion, with a 16% increment, and Ecopetrol America, with an increase of 9%.

These upturns allow us to compensate the natural decline of our assets; changes in our participation in some of the association contracts due to the current price level; reductions in the drilling activity, mainly in assets operated by partners; environmental permit limitations; and impacts due to infrastructure attacks during the [third] quarter. The resulting balance is a positive one in a year with a difficult global price environment.

The level of production was achieved in line with our strategy of value over volume. In that regard, it's important to note that during 2015 all of our fields showed positive margins and no closures were presented, thanks to the optimization efforts in our activities.

The Company also continues to pursue sustainability in the medium and long term. The increased recovery factor program is the main driver for this strategic objective in the production segment.

During 2015, we started eight additional enhanced recovery pilots related to technologies in water injection, solvent injection, and improved water displacement. These eight pilots fulfilled the goal initially planned for 2015.

In total, Ecopetrol currently operates 29 recovery pilots, of which 22 have shown positive results in pressure increases and 15 have shown positive results in increased oil production in the contacted areas. As a tangible result, the program has managed to incorporate close to 1 billion barrels of new contingent resources in the last two years from producing fields.

Additional to the pilots initiated in 2015, it is worth highlighting the progress of the air injection pilots on the Chichimene field. The construction of the main facility is near completion, with a 94% advancement. The connectivity test was finalized, with positive results demonstrating continuity of the sands and the good connectivity between the injector and producing wells. The start of air injection is planned during 2016.

In terms of efficiency and cost reduction, we continue working to achieve structural reductions in both our operating costs and development costs. In operating costs, Ecopetrol achieved a 34% reduction in the lifting costs compared to 2014. As an example, we reduced the percentage of the wells which needed maintenance interventions during the year, going from 41% to 33% of the active wells. In addition, our interventions cost during 2015 went down by 17% compared with 2014.

In the same direction, we worked in [the south] power generation project and [tied] renegotiations in activities related to maintenance, fluid treatment, and energy.

We also continue working on reducing two main components of our total costs: use of diluent and transport. Both items sum up to about COP450 trillion (sic - see slide 13, "COP450 billion") savings compared to 2014.

On the side of the development costs, our strategy of efficiency is also delivering positive results. In terms of drilling efficiency in our operated projects, reductions between 20% and 50% were achieved in drilling times over the previous year.

In particular for Castilla, the time to drill a well was 34 days in 2014, 26 days in 2015, and it is now 19 days so far for 2016. As a consequence, our drilling cost has been significantly dropped. The average cost per foot drilled in 2015 was 21% lower than the one in 2014. For 2016, the reduction is now 29% compared to 2014.

This improvement in our capital efficiency has strengthened our assets development and their profitability even with a low-price scenario.

Now, Max Torres will comment on the results of exploration.

In exploration, we highlight as a 2015 accomplishment the exploratory success of the Kronos discovery in deepwater offshore Colombia, considered to be one of the major discoveries worldwide, and also exploratory success in SSJN-1 and CPO-09 on the onshore Colombia. All these projects incorporated contingent resources that replace more than 100% of Ecopetrol's production.

During the fourth quarter 2015, the exploration well Calasu-1 in the block Fuerte Norte was drilled in deepwater offshore Colombia and operator Anadarko, with Ecopetrol 50% participation. This well proved the presence of an active petroleum system and is considered to be a [sub-commercial] discovery.

The exploratory well Muergana Sur-1, located in the Llanos Orientales basin and operated by Ecopetrol, was plugged and abandoned as a dry hole.

Additionally, in December the exploratory well, [Pazero], located in the [Escota] block in the Piedemonte basin, was spudded. The partnership is composed by: [HoldCo], 20%; Total, 50%; and Repsol, with the remaining 30%. This well is operated by Equion and is currently drilling ahead.

In addition, through our affiliate Ecopetrol America, the drilling of the appraisal well Leon-2 in the deepwater Gulf of Mexico, operated by Repsol with a 60% participation and Ecopetrol with the remaining 40%, was ongoing. This well reached TD on February and is currently under evaluation.

Finally, as a result of the participation of Ecopetrol America in lease sales 235 and 246, in November 2015 three blocks known as Atwater Valley-009, Mississippi Canyon-978, and [Six Breaks]-685 were awarded by the BOEM. Also, during 2015 a total of 10 blocks in the Gulf of Mexico were awarded to Ecopetrol America.

Now, I'll leave you with Maria Fernanda, who will comment on reserves.

Let's first review the Company's 2015 reserve balance. Ecopetrol's 1P reserves were 1,849 million barrels of oil equivalent, which represent an 11% reduction compared to 2,084 million barrels of oil equivalent reported by the end of 2014.

The main driver for the decrease in reserves was the significant drop in oil price. The [SEC] price used for the valuation of reserves in 2015 was $55.57 per barrel, compared to $101.80 per barrel in 2014. The Company estimates that as a result of lower oil prices, close to 404 million barrels of oil equivalent were deducted from proved reserves.

Nevertheless, optimizations and efficiencies achieved during 2015 additioned approximately 275 million barrels of oil equivalent, partially offsetting the impact from lower prices.

Moreover, 154 million barrels of oil equivalent were added as a result of new drilling campaigns, primarily in Castilla and Rubiales, as well as [profit] provisions in some of the fields, as was the case for Chichimene.

Another favorable aspect to highlight is the incorporation of [sales] consumption of natural gas as proved reserves, for a total of 47 million barrels of oil equivalent.

I now hand the presentation over to Thomas Rueda, who will comment on midstream results.

During 2015, total transported volumes increased by 27,000 barrels per day, equivalent to 2.2% versus 2014, reaching 1,232,000 barrels per day.

Crude oil pipeline transportation increased by 2.5% compared to 2014, mainly due to the increase in the volumes transported through the Cano Limon-Covenas and Transandino pipelines as a result of the lower number of attacks against the transportation infrastructure throughout the year. Approximately 71% of the volumes transported belonged to Ecopetrol.

Transportation of refined products increased by 1% during 2015 compared to the previous year, mainly due to an increase in the volumes transported through the Cartagena-Barranquilla pipeline. This increase corresponds to imported products to fulfill the demand of the central region. Approximately 17% of the refined products transported belonged to Ecopetrol.

Midstream financial results were very positive during 2015 in terms of EBITDA, as it can be observed in the graph, mainly as a result of the important optimizations implemented for our operating and maintenance costs for an amount of approximately COP400 billion. The positive impact of the exchange rate on our crude oil pipeline revenues, which tariffs are established in US dollars, also explains these results.

As a result of these factors, transportation costs per barrel decreased by 16% during 2015 versus those of 2014.

Finally, I would like to highlight that, aligned with the CapEx discipline initiatives, the 2016 to 2020 CapEx for the midstream segment has been optimized in approximately [COP2.1 trillion]. These initiatives have been executed without compromising reliability, integrity, or safety of the operation.

With this, I hand over to Tomas Hernandez, who will comment on the downstream results.

In 2015, the gross margin of the Barrancabermeja refinery was $16.80 per barrel, $2.20 higher than in 2014, as a result of process improvements that have allowed higher yields of valuable products and the capture of better international margins.

The throughput of the Barrancabermeja refinery during 2015 decreased by 5,000 barrels per day compared to 2014, due to the scheduled turnaround of the crude unit in August. However, during the fourth quarter of 2015, the throughput was higher, due to better operational availability of process units, increasing by around 18,000 barrels per day compared to the same period of 2014.

The cash operating costs of refining and petrochemcials decreased by 39% compared to the result of 2014, thanks to the implementation of maintenance and general services optimization strategies.

The utilities master plan reached 99.3% progress, and the start-up of a new boiler was accomplished during this quarter. This master plan aims to increase reliability and efficiency of the utilities operations in Barrancabermeja.

It is important to mention that in 2015 the number of labor injuries decreased by 53% and processed safety incidents decreased by 20%. This positive trend shows the commitment of the refining business to safety and environmental performance as well as operational excellence.

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

I will now discuss the Group's financial results during the fourth quarter of 2015 and full-year 2015. Ecopetrol's 2015 results were impacted mainly by three variables: crude oil prices, exchange rates, and first-time adoption of International Financial Reporting Standards (IFRS).

Brent crude, which is our main export reference, decreased 42% during the fourth quarter of 2015 in comparison to the same period in 2014, completing an annual decline of 46% between 2014 and 2015. Ecopetrol's crude basket differential versus Brent declined by $2.30 per barrel, going from $12 per barrel in 2014 to $9.70 per barrel in 2015.

Additionally, the average exchange rate devaluated 41% during the fourth quarter of 2015 and 37% during 2015, in comparison to the same periods last year.

The Company closed the fourth quarter with total revenues of COP12.7 trillion, 10% less than total revenues reported in the same period of 2014. In 2015, revenues reached COP52 trillion, 21% less than 2014 revenue. Therefore, the Colombian peso devaluation partially offset the negative effect of lower sale prices.

The substantial decrease in revenues impacted the Company's financial result. 2015 EBITDA was COP18 trillion, 26% less than 2014 EBITDA. Fourth quarter 2015 EBITDA was COP3 trillion, approximate to 2014 EBITDA.

Furthermore, fourth quarter 2015 EBITDA margin improved and reached 24%, versus 23% in the same period of 2014. I would like to highlight that 2015 EBITDA margin was 35%, just 3% less than the reported EBITDA in 2014.

The Company's 2015 capital expenditures were $6.5 billion, versus an initial budget of $7.9 billion. These optimizations reflect the Company's capital discipline approach and the optimizations throughout the different segments which were achieved without affecting operational results nor the reliability and safety of our activities.

Cash balance at the end of 2015 was COP6.6 trillion. It reflects the Company's conservative policies towards cash management, and it is noteworthy that this amount is approximate to our 2016 financing needs, of which we have already obtained the equivalent to COP1.5 trillion.

In 2015, based on the annual impairment tests performed, an impairment expenditure of COP8.3 trillion was registered, equivalent to COP6.3 trillion after taxes. We must highlight that this recognition constitutes an accounting effect of a non-realized expense and, as such, does not involve any cash outflow.

As a result of the impacts mentioned before, the Group reported during fourth quarter of 2015 a net loss of COP6.3 trillion and COP3.98 trillion for full-year 2015. Excluding impairments, the Company would have had a net income of COP30 billion in the fourth quarter 2015 and COP2.4 trillion for year-end.

Finally, the debt-to-EBITDA ratio closed in 2.9-times for 2015. This level is considered reasonable given the substantial drop in prices and its consequent impacts on the Company's cash generation.

In the next slide, we can elaborate on the main reasons that explain income variation between 2014 and 2015.

The Group's net financial result under Colombian GAAP in 2014 was COP7.8 trillion. Under IFRS, the net result of 2014 was COP5.7 trillion.

The main reasons for the variation of the net income between 2014 and 2015 were the following. The effects of lower oil prices on costs and revenues explain a reduction of COP15.8 trillion. The FX devaluation of our revenues, cost, and hedge accounting resulted in a positive variation of COP8.5 trillion. Impairment variations between 2014 and 2015 produced a reduction of COP4.6 trillion. Income tax decreased as a result of a net loss reported by the Group in 2015 and lead to a positive variation of COP2.8 trillion.

Taking all of these variations into account, the Group reported in 2015 a net loss of COP3.98 trillion and net income before impairments of COP2.4 trillion.

Let's move forward to the next slide to review results by segment. All of the business segments made remarkable efforts to reduce costs and increase efficiencies in order to offset the drop in oil prices and preserve the Company's cash flow. As an upside of being an integrated Company, midstream and downstream results helped counterbalance upstream losses.

E&P income fell COP6.6 trillion, mainly attributable to lower oil prices which were partially offset by the optimizations achieved in maintenance, contracted services, dilution costs, and administrative expenses.

Downstream had an upturn in its net income, of COP300 billion, as a result of improved margin and lower operational costs in contracted services, materials, and supplies.

Midstream continued to show a solid performance, with an increase of COP1.2 trillion in its net income, due to the positive effect on its fees of the Colombian peso devaluation, as well as lower costs from contracted services and materials utilized for operational purposes.

Please continue to the next slide to review sources and use of funds. The cash flow generation in 2015 was mainly affected by the sharp decline in oil prices, to which the Group responded in a promptly manner through its investment and cost reduction efforts as well as optimizations across all segments.

Additionally, resources were obtained from the sale of temporary investments, along with the first round of the divestments program; specifically, the sale of Ecopetrol's stake in Empresa de Energia de Bogota.

Funding needs were completed with net debt of COP4.1 trillion, or $1.4 billion.

The Company's final cash balance remains at a strong level as a demonstration of our cautious and conservative approach toward cash flow management.

In the following slide, we'll explain our 2016-2017 divestment plan. During 2016 and 2017, we estimate to collect $400 million to $900 million from non-strategic divestments. I would like to highlight that most of the divestments are non-oil and -gas related. Up to date, we have announced the sale of Propilco as well as the sale of our stake in Empresa de Energia de Bogota and ISA.

In the case of Propilco, we expect to commence the first stage in the second quarter of 2016, which is addressed to special beneficiaries as ruled by Law 226. Once this stage is concluded, we can move forward to the second stage, where the remaining shares can be offered to all investors.

2016 cash flow budget does not include any funds from divestments. Any proceeds coming from the program will strengthen the Company's cash flow.

I will now hand the presentation to President Echeverry.

Before I finish this presentation, I would like to discuss the process of organization reinvention we carried out as a result of the change in the strategy defined by the Board of Directors in 2015.

Ecopetrol had outsourced a great number of activities, which led the number of [indirect] employees to reach 48,000 by the end of 2014. Nowadays, that number has been reduced to 23,000 employees, implying a 25,000-labor cost optimization during last year.

Additionally, one of the key elements of this process was the renewal of most of the management team, which has been actively engaged in the consolidation of projects needed to achieve Ecopetrol's transformation.

Ecopetrol is working with its labor unions to develop relationships of trust based on principles of mutual respect and recognition, taking the well being of its workers, retirees, and their families, always within a framework of efficiency and sustainability.

Let's go to the next slide so we can see the outlook for 2016. The oil price fundamentals of 2015 are still in place and will demand greater adjustments by the Company. 2016 represents a transition period for the business segments in the corporate group.

Cash protection and capital discipline will continue driving the Company's decisions throughout 2016.

We will continue to consolidate austerity measures, as well as efficiency and cost reductions, in order to generate additional savings of COP1.6 trillion this year. These additional savings will help us navigate the current price environment and produce profitable barrels.

That being said, the Company's future cannot solely be built upon savings. As we have already done, we will further strengthen our exploration and production portfolio, targeting lower breakevens, technical risk mitigation, and the identification of additional projects that guarantee future growth of the Company.

It is important to emphasize that in 2016 we will conclude important investments in our down- and midstream segments, allowing as of 2017 for resources of approximately $1 billion to be redirected towards exploration and production.

Aside from operational excellence, another crucial element for the future is financial excellence. It is of the utmost importance for Ecopetrol to preserve its financial metrics and the Company's investment-grade rating.

We will adjust our 2016 borrowing so as to keep the debt-EBITDA ratio from exceeding 4. The Company will [tackle the markets] for between $1.5 billion and $1.9 billion, and the Company has already raised nearly $425 million with local and international loans.

Our financial sources for this year do not include asset divestments which, upon materialization, will enhance our cash position.

CapEx and OpEx adjustments could lead to the closure of certain non-profitable fields, as occurred recently with Cano Sur with the production of 1,200 barrels per day. This decision accentuates our commitment to prioritize value creation over volume. Thanks to lower operational costs, under current oil prices we can preserve more than 96% of our production.

Finally, in light of lower oil price forecasts for 2016-2017, we are updating our medium-term plan to reflect the current price environment and the payback from Ecopetrol's transformation process.

Thank you very much. And we now open the line for the Q&A session.

(Operator Instructions) Luiz Carvalho, HSBC.

I basically had three questions here. I think that the first one might be addressed by Juan Carlos. You mentioned during the presentation that the net debt to EBITDA is close to 3- and the maximum level would be 4-times. So, can we expect that the leverage would increase during 2016? Or, it's more something in the long term? And how do you think that the rating agencies will see that?

The second question will go to Max, on the exploration side. You mentioned Kronos has contingent resources already. Do you have, through the exploration plan, any timeline that you expect that Kronos might turn 1P reserves? And when are we going to get the impacts on the [proved] reserves of the Company?

And the third question would go to Maria Fernanda, on the divestment front. You mentioned that part of the divestment is not included -- $500 million, it's not included to the cash generation for 2016. But I would like to know if you can give us a color about what will be the impact from the asset sale on the cash generation? In summary is, if you sell those assets, what's the impact to the cash generation that those assets are currently generating?

This is Juan Carlos Echeverry. In terms of your first question, the idea for us is to maintain a very conservative view towards debt. We want to secure our solid basis for the investment grade, to keep the investment grade.

And of course, this year has been challenging in terms of cash because of the price of oil. Fortunately, it's evolving north, but nobody can guarantee where it will come in the near future. It's a yo-yo, and we have to prepare for that.

So, we are more or less in a ratio of 3, debt to EBITDA. We have considered that during this year that can evolve, and we have said 4 as an indicative maximum for us. And the idea is that in upcoming years, as we are balancing the divestments of non-strategic assets and also in our growth plan, we should be able to go back to below 3, hopefully -- well, as soon as we can.

But the idea is to maintain a very conservative stance in terms of debt issuance. Of course, that implies a very delicate balance between cash and investment.

Max Torres, here. I will comment on your questions about Kronos timelines and impact on the future of the Company.

Our plans are to drill Kronos-2. Maybe it's going to be September or October. The drillship from Anadarko will return from west Africa, who is drilling three wells there for them. So, as soon as that campaign is finished, that drillship will return to offshore Colombia, and we are planning to drill our first appraisal well in the Kronos structure.

As you said, we already have announced contingent resources in excess of 200 million barrels as a result of the Kronos-1. My impression and my guess is that obviously Kronos-2, which is an appraisal, is going to improve that number or is going to give us a better perspective of what the Kronos discovery is.

Based on that well, we will design further appraisals, a further appraisal campaign, probably a third well and a fourth well. And based on that assessment, we will define the development plan.

Right now, the impact of Kronos is probably 2022-2023, depending on what kind of development plan and what kind of market we're targeting. So, that is the impact that we expect, at least on a timeline as you requested from Kronos.

We will continue our exploration campaign in [onshore] Colombia.

We also are planning to drill Orca-2, which is the appraisal well from the Orca discovery with Petrobras, late 2014. And also, that is going to have an impact around the same time, 2023-2022.

And also, we will continue drilling additional production wells with partners like Shell, Repsol, additional wells with Anadarko.

So, in summary, I think the impact of the offshore Colombia exploration campaign should have a great impact on the future in the Company and also on the resource base that the Company will have for the future.

Regarding divestments, this is part of our plan for these transitions that we are experiencing during 2016. What we expect regarding the impact on cash generations of the divestments that we have already announced is less than 10% of the cash generation of the total amount that we are announcing.

So, if at the end we sell $500 million, you can expect that the cash generation will be 10% of that amount.

Okay. Well, very clear.

Bruno Montanari, Morgan Stanley.

I had three questions. First one, can you update us on your production guidance for 2016 and perhaps long term for 2020, as well? And if you could share with us the production level of the Company's most important [views] for these years, such as Castilla, Chichimene, and Rubiales?

The second question is, I understand that there is a request from the industry to have lower pipeline tariffs in 2016. So, if you could provide us with an outlook for those tariffs this year, that would be great.

And then, the final question is on your reserves. Can you provide us with a breakdown of oil versus gas? Or, when we look at the total reserves declining 11%, how much of the decline is only for oil reserves?

Bruno, I'm sorry, but can you please repeat your second question? We couldn't hear it correctly.

The second question is about the pipeline tariffs. We understand that there is a request in the country to lower the tariffs in 2016. So, I was wondering if you could provide us an outlook for the pipeline tariffs this year?

We have issued a target of CapEx for 2016 of $4.8 billion. And our target for this year and for the transformation program are set in terms of efficiency and efficient barrels more than volumetric targets.

Since the first two months of this year were challenging in terms of price of oil, we have been revising our numbers, and we will work in terms of CapEx like in an evolved fashion.

So, as soon as the price recovers -- and we have seen positive development in the last weeks, but nobody can count on that -- we should achieve our target of $4.8 billion of CapEx. But nothing guarantees that that can be observed at the end of the year.

So, we will be focusing on balancing the cash generation of the Company and the CapEx, so that the amount of CapEx actually invested will determine the number of wells that we can drill, and that, in turn, will determine the production.

So, for the time being, we are being very conservative in terms of issuing any target in terms of volume, in terms of volumetric numbers, and have stressed the fact that we are pursuing efficient barrels, profitable barrels, and of course the target CapEx of $4.8 billion.

The second question about reserves will be answered --. Sorry. About the pipeline. Thomas Rueda will [respond on that].

This is Thomas Rueda, from Cenit. You're absolutely right. There's been a request by the producers to the Ministry of Mines to review the pipeline tariffs.

Let me give you a bit of flavor on this. We have been discussing tariffs within the regulation. That's a very important part. It has to be discussed within regulatory terms. But we have been discussing with the producers for a while now. And we understand that the situation has gotten worse and that there's something that needs to be done.

So, we have been working within our transportation companies in order to present to the transport, to the producers, very soon in the next few weeks something that we think can be a win-win situation.

I think it's important to say that our business depends on the volumes -- and we know that -- and it's important to say that we are working on a proposal that's going to come very soon.

My name is [Fidel Ligal], from reserve department. About our reserve about the gas, 610 million equivalent barrels, and it is equivalent 33% of the reserve. The other amount is 1.2 billion barrels of oil. That [is including] NGLs.

That's all.

Perfect.

Pedro Medeiros, Citigroup.

I just have two quick questions here. The first one is, you mentioned on the conference call that all fields had positive margins in 2015. Considering the cost efficiencies that were achieved to date and if you were to mark to market the current oil price and currency, would you give any color of how much of the Company's existing production will be operating with a negative margin at this point?

And my second question is if you can reiterate what's the base oil price [in] the minimal return threshold within the projects inside Ecopetrol's guidance for investing $4.8 billion? In particular, the $3 billion to be invested in upstream.

If you can give a bit more color on the flexibility within this number? As you pointed out that you would evolve the plan according to your operating cash flow and the behavior of oil prices. If you don't mind giving a bit more details about what's the real flexibility within the $3 billion number and how much of that will be dedicated to exploration?

Pedro, our apologies. Can you please repeat the last question that you had?

Sure. It's related to CapEx. It's a follow-up to the CapEx of $4.8 billion. I understand the number might still be under revision. And as was pointed out before, you might work out the number, evolving it according to your operating cash flow.

What I wanted to understand is inside the number what's the base oil price you're assuming in the minimal return threshold for the projects?

And if you don't mind to give a bit more detail on what's the actual flexibility to work out that number? Like, can we see a much lower number in 2016? Do you have the flexibility to really deliver a much lower number given the contractual position at this point?

And just one last detail about it. Within the $3 billion to be invested in upstream, how much of that is dedicated to exploration?

I will answer the one regarding production. As you pointed out, during 2015 we had positive margins for all of the fields in Ecopetrol. So, we didn't have to close any production.

For the prices we have seen in the first weeks and first months of 2016, we have announced that we have closed production in two fields: Cano Sur and Acacias. Now, that production out of the total for the Group production is less than 1%.

But in addition to that, I would like to add that we continue to look for improvements, both for the operation and the development of these fields. These two fields have significant potential for us, and we expect that this temporary closure of the fields will stop at some point due to efficiencies we'll gain.

Pedro, regarding the $4.8 billion for Ecopetrol target investment for this year, we have inflexibility in at least $1.5 billion coming from refining and transportation: refining approximately $1 billion and transportation approximately $470 million. So, those two parts are quite inflexible.

The remaining parts, we have targeted $2.3 billion for production and $660 million for exploration. These two are -- in exploration, this is a crucial target, which is the appraisal well for Kronos and also some commitments that we had. And we're aiming to do more exploration onshore in order to target cheaper barrels and barrels that we can get sooner out of the ground.

But of course, out of this $660 million, depending on price, we will be calibrating how much we can explore this year, taking into consideration the things I just mentioned that are definitely going to happen, of course depending on the dialogue with Anadarko, et cetera.

In terms of production, out of the $2.3 billion that we have in our target, we are balancing the availability of costs with the needs of maintaining production in our main oil fields: in Castilla; in Chichimene; we'll be receiving Rubiales at the end of June; et cetera.

So, we're maximizing the cash generation of our producing fields and monitoring very, very closely the price and the cash generation in order to invest as much as we can.

But these are more or less -- this is the split of the $4.8 billion: $1.5 billion completely inflexible, and the other ones we'll manage like a valve. We open the valve if we have more cash, higher price, and we close it very slowly, otherwise.

Recall that 2016 due to these numbers is a transition year. For next year, the $1.5 billion of transportation and refining will not be anymore important for our CapEx. For next year, we will have at least $1 billion more available for exploration and production. So, 2017 onwards looks much more promising in terms of growth for both exploration and production.

Okay. Very clear.

Alex Burgansky, Deutsche Bank.

I just have a couple of questions. First of all, I want to come back to the question on the production guidance versus CapEx. In your December press release, you suggested that your CapEx guidance of $4.8 billion for 2016 was associated with the production targets of 755,000 barrels per day in 2016.

So, I understand that you try to be flexible with CapEx this year. But if you were to spend $4.8 billion, can you please confirm that you will still be able to reach the 755,000 barrels per day target? So, that's the first question.

And the second one, on the oil recovery rates, if you could perhaps elaborate on what oil recovery was assumed in your reserve reports? And how do you expect that oil recovery ratio will evolve over time?

The first question, we have -- the answer is, yes. If we can spend $4.8 billion in CapEx, we will most likely achieve the target of 755,000 barrels per day. This of course, having witnessed what happened in January and February, was definitely challenged, but those two figures are related.

In terms of oil recovery, I would prefer Rafael Guzman to answer that question.

Alex, actually, I would like if you could explain a little bit better your answer. I do not fully understand it.

I was -- my question is what oil recovery ratio has been assumed in the reserve reports? And what do you expect will happen to the oil recovery in the future years?

Okay. We have a very comprehensive program on the increased recovery factor from all of our fields. The main provider of reserves in the short term is of course continue our campaign in in-field drilling in our main fields like Castilla, Chichimene, and Rubiales.

In addition to that and thinking about midterm and longer future, we have water injection which we already apply in fields like [Acita], [Geragi], and some others. But starting last year, we are also injecting water in Chichimene and Castilla.

This water injection will of course increase the recovery factor, and that depends on a field-by-field basis. But what we have seen already is that decline in production is lower in the areas we're starting to inject water and we see also increments of production from these fields.

But in addition to that, we go into thermal recovery and other [partially] methods.

Overall, we expect to reach a 23% recovery factor with the current reserves. And with a program for increasing recovery, we expect to reach a 28% recovery factor by year 2020. And we will continue looking for opportunities to improve these recovery methods and continue increasing the recovery factor.

Is that (multiple speakers)?

Sorry. Can I please confirm? So, it's 28% by 2020? 23% is by what year?

23% is what we already have, including the reserves. Basically, what we have produced already is 19% of the total oil. With the reserves, we reach a recovery factor of 23%. And with -- what we have produced with the current reserves plus what we will incorporate as reserves for 2020, we will reach 28%.

Okay. Very clear.

Daniel Guardiola, Larrain Vial.

I have a couple of questions here. First of all, I would like to touch on your cost structure. And in that sense, I was wondering if you could please share with us what's your current operating netback? And if you could provide us with a breakdown of your costs in the E&P segment?

And my second question is, I would like to know your thoughts and by how much can you further reduce your cost structure without hurting your targets of production for 2016?

Daniel, could you please repeat the second question? I didn't understand the second one.

The second question, basically I would like to know how much further room do you have to reduce your costs without hurting your production targets for 2016?

2015 and what we aim to achieve in 2016 is combine operation excellence with financial excellence. That means, yes, we have to reduce costs, but we will have to also improve the portfolio of projects that we have and manage technical risk, adding assets that have better materiality.

So, in doing that, we have reduced costs via renegotiation of contracts and via reducing, for example, the number of days on average to drill our wells, reducing the amount of dilutent that we use for our heavy crude oil, and the lifting costs, et cetera. Across the whole chain of value, we have achieved efficiencies and implemented our transformation program.

In doing that, we have had reductions in the cost of refining, of transportation, and of production. The breakdown of that is difficult to provide it here, but we can help you in understanding basically all the reductions. Some of them are in the press release.

Let me ask Rafael Guzman to tackle your second question.

Complementing what Dr. Echeverry was saying on the reduced costs, what you can see on the slide of where we presented costs of, for example, drilling, we show the numbers of days of drilling that we have achieved and we also show the record well. Our expectation is that we will be closer and closer on the average to the actual, the current record well.

But that will be continue decreasing the cost of the well, and that doesn't imply any additional risk that we're taking for production or any other risk.

Now, referring to the first question on the netbacks of the cost of the upstream, what we have said in the past is that we can use cash on average in most of our fields on Brent prices between $20 and $30 per barrel. And that's most of our production; that's 95%-98% of our fields.

Thank you. And if I may squeeze in another one question, I'd like to know if -- bearing in mind that your leverage structure should further deteriorate in 2016 as oil prices stay low, I would like to know if you have considered on partially divesting your stake in Cenit?

Daniel, I'm not sure if I'm understanding the question. Can you please (multiple speakers)?

Well, my question is, I see that for 2016 you are planning on raising additional funds from divestitures from non-strategic assets. And in that sense, I would like to know if you're considering on partially divesting your equity stake that you currently have in Cenit, which is a midstream business?

Okay, Daniel. I see what is your point. Currently, we have a target of identified assets with the potential to be divested of $1.4 billion. Out of that, the target for this year and the next year is between $500 million-$900 million. Those resources are not included in our cash generation for this year, because it's uncertain the date on which some of those assets will be sold.

So, if those assets are sold, that would add to the cash generation for this year, next year. It will be extra source of funds.

And in those assets, Cenit is not included. So, recall that this is a transition year. This is a year in which we are spending $1.5 billion in the mid- and the downstream that will not be present next year. So, the cash position and the financial position will be relieved as of 2017 onwards of those expenditures.

And in the process of achieving financial excellence, we're considering divesting some assets that are not strategic for our current strategy and in a fashion that gives us room in the next -- I don't know -- 20 months to sell those assets.

So, I expect that we have answered your question.

Yes, thank you, Juan Carlos.

Anne Milne, Bank of America.

Thank you for the transparency in your press release and presentation, as well. Two questions. The first one I think you indirectly answered in the last question, or the one before that, and it was, you've provided a lot of information on your lifting costs, your reduction in your average cost per well. I was just wondering if you have a range of what your estimate is for 2016, in terms of all-in E&P production cost?

I think you mentioned that the fields you currently have are, I think you said, between $20 and $30. So, I would say mid-$20s would be maybe your all-in cash costs for this year, is what you're saying? That would be my first question, is just confirming what the all-in cash cost of production would be?

The second is that you have a maximum leverage target for this year of 4-times. I was wondering if you could provide the average oil price assumption behind that and the average FX rate, since those are two very key variables?

And then, the final question is if you could just provide an updated figure on the percentage of costs that you have in both US dollars versus COP, both on the upstream and downstream?

Regarding your first question, last year -- we have had a moving target. Last year, we issued a plan of cost savings of $800 million. That was around May/June. Then, in September/October, witnessing what was happening with the international price of oil, we issued another target of additional $400 million. And in January, since the price went down so drastically, we issued another plan of around $400 million.

For this year, we have identified still renegotiation in contracts, expenditure in many areas, with which we can achieve savings of COP1.6 trillion. And we are keeping the programs in which we are savings costs; for example, reducing the amount of dilutents for our heavy oils. We're now transporting as of now at 400 [tentative stocks] of viscosity, our heavy oils. And so on, and so forth.

So, we are reducing cost (inaudible) to validate all of our oil fields, especially those of heavy oil and high-production water in Llanos Orientales.

We have in terms of the price for 2016 -- well, the current prices are below our target. I cannot tell you exactly what was the price we used for our oil calculations, but definitely was above $30 per barrel, which is what we have witnessed in the first two months.

We have a leverage, as you say, of a maximum leverage of 4, a ratio of 4, and we expect afterwards to reduce that ratio with cash generation, with hopefully better prices, and with more barrels per day production. And again, we will be seeking financial excellence and trying to protect our debt metrics in order to guarantee that we keep the investment-grade rating.

I don't know if I answered your questions properly.

Yes. Just if you have a breakdown of the percentage of costs upstream and downstream, US dollars or foreign currency versus COP?

Anne, yes, we estimate that for 2016 around 50% of the fixed costs are in dollars and 90% of the variable costs are in dollars.

Great.

Pavel Molchanov, Raymond James.

This is Luana Siegfried, in for Pavel. I have two quick questions. I would like to confirm that this year's target for production continues to be 755 MBOE per day, and apologies if I missed this before.

And on a related note, is there a chance of an upwards revision in the production targets for this year, given the Rubiales field reversion by June?

As we said before, the 755,000 barrels per day target is connected with a target of investment of $4.8 billion. As you may understand, of course with the beginning of the year, the price of oil was surprisingly low. So, we will be calibrating the amount of investment during the year. And of course, the number of barrels we can [strike] will depend on that.

So, yes, the 755,000 barrels per day is not a fixed target. It will be adjusted depending on the amount of cash we have and that, in turn, on the price of oil.

There is no revision of those targets depending on Rubiales. We have a very close knowledge of Rubiales. We have a weekly meeting with them. Remember, we are partners with Pacific in Rubiales. So, we know that field very well.

Our engineers have already been preparing a team for one year for the transition day, which is end of June. So, that will actually affect the average, but that's taken into account in the numbers I just provided.

So, probably, I ask Rafael to complement on this.

Just maybe to complement, that 755,000 guidance that we gave last year already includes the production from Rubiales, the additional production we'll get from Rubiales once the field is operated and fully owned by Ecopetrol. So, there is no change to that number, because it was already included there.

Okay. Sounds great.

Ladies and gentlemen, this concludes our Q&A session for today. I would like to turn it back to Juan Carlos Echeverry with his final remarks.

Thank you very much to you all for participating in this conference call and for your interest in our Company.

I just want to finish this conference call by stressing that 2016 is a transition year. We're aiming for operational excellence and for financial excellence.

We are monitoring the price of oil, because these are challenging times for oil and gas companies. And we are preparing a new portfolio, a renewed portfolio, for exploration and production. And we will have lower needs of cash for the transportation and refining assets as of 2017.

So, next year, we'll have a platform for growth which is solid and in which we expect to have achieved most of our transformation program already at the end of 2016.

So, stressing that this is a transition year towards a more promising future, and thanking you all for having participated in this conference call. Have a good day.

Ladies and gentlemen, this concludes the program and you may all disconnect. Have a wonderful day.