Ecopetrol SA (EC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. Welcome to Ecopetrol third-quarter 2016's earnings conference. At this time, all participants are in a listen-only mode to prevent background noise. (Operator Instructions). We will have a question-and-answer session later and the instructions will be given at that time.

And now I would like to welcome and turn the call to Maria Catalina Escobar, Head of Corporate Finance and Investor Relations.

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 2016.

Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management can 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 materialize. 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, Exploration Vice President; Hector Manosalva, Vice President of Development and Production; Patricia Zuluaga, Commercialization and Marketing Acting Vice President; Luisa Lafaurie, CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; Rafael Guzman, Technical Vice President; and Carlos Alberto Vargas, Vice President of Transformation.

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

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

Thank you, Maria Catalina. Welcome to all for attending this third-quarter 2016 results conference. I am pleased to share with you quarterly results that confirm the Company's strong operating performance and the success with austerity, efficiency and capital discipline measures, despite in also a scenario that remains challenging.

Throughout the second half of the year, we were facing a certain loss on international environment. The potential OPEC agreement to limit lower oil production has boosted prices. However, the trend is not just solid as United States crude inventories remain high. In Colombia, the results of a peace from [ELN] and the proposed tax reform have added uncertainty. Over the past quarter, Brent prices (inaudible) can see a global activity but on average remained stable compared to the second-quarter 2016 at $47 per barrel.

Ecopetrol maintains its spread of $9 per barrel, the same as the previous quarter thanks to commercial strategy of capturing greater value from the United States market.

Now let's look at the following slides to review in detail the quarter's excellent operating performance.

EBITDA and EBITDA margin reached the highest level for the past five quarters at COP4.9 trillion and 40% respectively, once again proving Ecopetrol's ability to maintain solid operating performance and a flexible response to then (inaudible). The Group's average production during the quarter reached 723,000 equivalent barrels of oil per day, a 4% increase versus the second quarter of the year. These results reflects the successful reversion to the control of the Rubiales field operation.

And they started production at Gunflint field in the Gulf of Mexico. It is in line with our total annual production goal of 715,000 barrels of oil equivalent per day. This production at Gunflint field for Ecopetrol totaled 11,800 equivalent barrels per day in the third quarter.

The Gulf of Mexico is a promising part for exploration and production strategy for coming years. The revision of Rubiales was accompanied by outstanding efficiency results. We achieved a record of 6 days of drilling per well in the field versus 8 days prior to its reversion. We currently have 17 active recovered pilot as well in testing stage, a 11 of which showed favorable production results.

Our commitment to efficiency in all these segments remains firm. Cumulative savings totaled COP1.9 trillion, exceeding 2016 initial target of COP1.6 trillion.

Finally, quarter end operating results reflected solid cash position of COP7.7 trillion. These achievements reflect the entire Company's commitment to the operational and financial excellence is for Ecopetrol's sustained growth.

I will now turn over to Carlos Vargas who will speak to you about the principal results of the business transformation plan.

Thank you very much, Juan Carlos. As we have already explained in the previous report, in 2015 Ecopetrol set a goal to structural, optimize its cost by the end of 2020 COP4.5 trillion over the base cost of 2014. This traffic implemented have allowed Ecopetrol to incorporate the third quarter of 2016 COP1.9 trillion, which all became the goal of COP1.6 trillion respective this year. It is worth mentioning that Ecopetrol has incorporate in the period of 2015 to September 2016, accumulated structural efficiencies for COP3.4 trillion, led by six large groups of lever which amount for 80% of efficiency, among which (inaudible) in upstream dilution, transportation and operation and maintenance, in midstream operation and maintenance, and supply chain efficiency.

With this result, we expect to see by the end of the year the initial structural saving goal set for 2015. And we will continue consolidating efficiencies in the cost structure of our operations.

Now Rafael Guzman would talk about production.

Thank you Carlos. In terms of production during the third quarter of this year, the grow in production of the Business Group grew by 4% compared to the previous quarter reaching a total of 723,000 barrels of oil equivalent per day. This behavior is mainly explained by the increase in our participation in the Rubiales and Cusiana fields, the sustained production in Castilla and the beginning of production in the Gunflint field in the US Gulf of Mexico.

The behavior of the oil price allowed us to continue the field in Castilla. We activate the investments in Rubiales and La Cira-Infantas and we had started production in the Cano Sur field which has been temporary suspended due to lower prices observed during the beginning of the year. These activities are part of our plan called 25K that seeks to increase production level to December ensuring a better starting point for 2017. This shows the trend of our investment portfolio and Ecopetrol's ability to restart activities in a short time.

Starting in July, the Company successfully received the Rubiales and Cusiana fields ensuring an efficient operation and with no HSE incident. Considering that the investments in the Rubiales field concentrate on in-field drilling campaign, Ecopetrol has focused its efforts in obtaining time and cost efficiencies in drilling under its operations.

Taking this into account, we are pleased to inform you that to date we have obtained a reduction in drilling time close to 25% from 8 days in 2015 to 6 days in the current campaign. In cost, the reduction achieved is approximately 20% compared to the drilling campaign of 2015.

In terms of optimization and efficiency, the following slide shows that the value of the lifting cost for the last 12 months is 14% lower than the one obtained during 2015. These results are based mainly in the oil service, tariff with maintenance, energy and fluid treatment front which accumulated savings close to 100 million in years 2015 and 2016.

In the same way, the components of heavy oil dilution in transport have concentrated the largest contribution in terms of savings. Ecopetrol achieved a 20% reduction in the percentage of diluent required in heavy oil crude operations compared to year 2014. This reduction represents savings of around $400 million. In total, operating cost savings come around $500 million in year 2015 and 2016.

In terms of development costs, Ecopetrol continues reducing the cost and time of drilling activities. For the year 2016, we have reached record levels in drilling days in our assets Castilla and Chichimene, but the reduction is close to 40% compared to the levels of 2014. A newly incorporated Rubiales asset as a direct operation has also been benefited from the application of new technology and the improved drilling process that has been implemented in Ecopetrol as mentioned above.

As far as our increased recovery program is concerned, the following slide shows the progress achieved in two of the most important assets for our business plan, mainly Castilla and Chichimene. In Chichimene field, the five existing water injection patterns showed a positive pressure increase response and two of them have already shown an increase in production. In the pattern, where there is an increase in production, the growth has been 82% over the natural decline baseline of the pilot area which is equivalent to close to 2,400 barrels of oil.

The water injection pilot in the Castilla field started after Chichimene and continues to provides a valuable information for the consolidation of this technology in the field. To date, this pilot has presented an increase in production of 60% close to 800 barrels of oil per day. Ecopetrol continues building the business cases for the expansion of the recovery technology in its fields. The positive results of this pilot and the efficiencies achieved in the execution of investment will allow us to make viable expansion with their respective research incorporation at the prices established in Ecopetrol's business line.

Now I pass onto Max Torres who will comment on the results of exploration.

Thanks Rafael. Currently the [four known wells] and its operation. Payero 1 located in Niscota block where Ecopetrol affiliates Hocol holds a 20% participation, we total a 50% and Talisman 30% where the operator is Equion. Boranda 1 located in the Playon block where Ecopetrol holds a 50% working interest and Parex holds a 50% working interest and is the operator of the block. The well Warrior 1 located in Gulf of Mexico operated by Anadarko who holds a 60% working interest with NCX 15% and Ecopetrol America with the remaining 20%.

On the seismic campaign, the acquisition of 88 kilometers of 2D seismic in Nogal Block operated by Emerald was completed. Also 213 kilometers of 2D seismic in the Cardon block operated by Ecopetrol was also completed. Both global blocks are situated in the Caguan-Putumayo Basin.

In the YDSN 1 block, seismic survey is underway operated by Hocol and is expected to be completed by the end of December. The processing of the 3D campaign of 854 square kilometers of 3D in block POT-M-567 in the Brazil offshore in the Potiguar Basin is ongoing. Also in progress the operational evolution of mature fields with diverse operational opportunities and to be included in the equation portfolio by year end.

The outlook over the fourth quarter is to finalize the drilling of the well 501 (inaudible) on Warrior, Gulf of Mexico. We initiate the drilling of the Chimu well located in the (inaudible) block operated by Ecopetrol, the Pegaso well located in LA, 26 block operated by Hocol and the (inaudible) 2 well operated by Hocol located in the SSJN 1 block.

Also to start the Purple Angel 1 block in the Purple Angel block which is the appraisal well for the Kronos discovery and is operated by our partner Anadarko who holds a 50% working interest and Ecopetrol holds the remainder 50%. We are also preparing our 2017 exploration drilling campaign.

Now Luisa Lafaurie will comment on the midstream results.

Thank you Mark. Good morning. First I would like to refer to the changes that are currently taking place in the midstream. For the past few years, the segment has developed a successful optimization process which led us to increase our cash generation in a significant way. In September of this year, Cenit and Ecopetrol took further steps and decide to integrate its midstream operations with an objective of improving even more our operations and our maintenance planning activities. This integration fixed for new efficiencies in order to keep delivering the same good operational resource despite a lower volume environment.

As for the operating resource for the third quarter, during these periods we transported 10,76,000 barrels per day representing a decrease in 119,000 barrels per day which is 9.9% less versus the same period of 2015. Crude oil transported decrease 14.4% as compared to the third quarter of 2015 mainly due to the lower volumes produced by our shippers. Out of the total volume transported, approximately 65% belong to Ecopetrol.

On the other side, the total volume of refined products transported increased 7.3% mainly as a result of a higher use of Cartagena-Barranquilla system to fulfill the demand on the northern region. Approximately, 20% of the total volume transported through refined product pipelines belong to Ecopetrol.

Regarding our investment portfolio, the main projects continued the execution. In this sense, I would like to highlight that we start the activity to implement the adjustment needed in our system to be able to transport higher viscosity crude oil to Covenas port for its further dilution and export. We also continue executing San Fernando-Monterrey project as planned. In general terms, the outlook for the midstream remains positive and we expect to continue adding value to the Group's resource.

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

Thanks Luisa. During the third quarter of 2016, the Cartagena refinery stabilization process and unit performance test continued. During this period, five units had their process design capacities tested, operational limits verified, and operations stabilized. The refinery stabilization process will continue into the fourth-quarter 2016 and first-quarter 2017. And following completion of all unit performance test, the entire refinery operation will be stabilized and begin the optimization process to maximize its economic return.

In August, the Cartagena refinery reached an average throughput of 130,000 barrels per day and throughputs between 140,000 barrels per day and 150,000 barrels per day during the last two weeks in September. The gross margin of the Barrancabermeja refinery is $13.4 per barrel, $3.3 lower than the third-quarter 2015, mainly as a result of lower product price differentials against crude oil prices and alignment with international market trend. This negative impact on prices was partially offset by higher middle distillate yields due to the implementation of operational and process improvements which increased refinery conversion. The throughput of the Barrancabermeja refinery during the third quarter of 2016 increased by 5,200 barrels per day compared to the third quarter of 2015 due to the scheduled maintenance turnaround of a crude unit in 2015.

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

Thank you Tomas. Good morning everyone. Ecopetrol's quick reaction to a low price environment, there is also the transformation plan and its big capital basically allow us to report outstanding financial and operating results in the third quarter of this year. In these quarters, the Group reported an EBITDA of COP4.9 trillion which in turn results in an EBITDA margin of 40%, the highest in the past five quarters. The upstream and the midstream segments remain the Company's main tax generators, contributing over 90% of the Group's EBITDA during the quarter. These results reflect unexpected reduction in cost and expenses as well as higher oil production levels.

Please turn to the next slide for a summary of the Group's income statement.

With a stable Brent price, third quarter operating income totaled COP12.2 trillion, a 4% increase over the second quarter of 2016 largely due to a 2.8% increase in sales volume. The spread versus Brent remained at $9 per barrel thanks to the strategy of exporting to high value markets as the US.

Cost of sales totaled COP8.7 trillion, down COP324 billion from the third quarter of 2016. This net decrease is explained by, first, lower cost due to the reduction of 50,000 barrels per day in volumes of imported fuel giving the commissioning of the Cartagena refinery, less frequent use of tanker truck and cost reductions achieved through the Company's austerity and a structural savings plan.

Second, depreciation charges totaling COP2 trillion, 25% more than third-quarter 2015, the increase derived from the incorporation of additional production from the Rubiales and Cusiana fields. The commissioning of the Cartagena refinery unit and the capitalizations of major maintenance expenses at Barrancabermeja refinery.

Third, other cost assumed as a result of the reversion of the Rubiales field. Operating expenses totaled COP905 billion, 17% less than in the third-quarter 2015, primarily due to lowest seismic activity and a smaller number of dry wells versus the same quarter of 2015.

Gradually, we see the seasonal trend in costs and expenses that we had anticipated increase this quarter. During the quarter, the Company reported the highest operating profit of the entire year, COP2.5 trillion.

Moving on to net financial income, the Company posted expenses of COP857 billion. Of that amount, losses due to exchange rate fluctuations totaled COP170 billion as a result of the impact of the peso appreciation on the net positioning dollar.

The third quarter provision for income tax was COP1.2 trillion, equivalent to an effective income tax rate for the quarter of 73%. This percentage is a one-time adjustment derived from updating the tax rate estimated for the year end flow as required by International Accounting Standard 34.

The third quarter tax recognizes the retroactive effects of the year to yield the projected annual income tax rate reflecting the improved performance of international oil price. Finally, net profit attributable to shareholders for the third quarter of 2016 totaled COP229 billion, 65% lower from the COP654 billion result of the same period of 2015, due to the adjustment in the effective income tax rate and high depreciation expense. Both of them, non-monetary items that will not affect cash flow generation.

Ecopetrol was one of the few companies amongst the oil and gas industry that reported positive results year-to-date with a cumulative net income of COP1.4 trillion and an EBITDA of COP13.6 trillion.

Please turn to next slide for the description of the Group's cash flow. Cash generation in the third quarter continued to improve thanks to solid operating results and tax reform from the Colombian tax authority, totaling COP2.7 trillion. COP350 billion of these refunds were offset by withholding tax payments and the reminder received in tax securities [continue]. The Group generated cash from operations totaling COP6.5 trillion before taxes, 41% more than in the third quarter of 2015 and 57% more than in the second quarter of this year.

Capital investments this quarter totaled COP1.1 trillion. Financing activities generated by cash outlets of COP1.9 trillion as a result of (inaudible) offshore interim financing obligations, financial interest and the payment of dividends by our companies in the midstream sectors to the minority shareholders. The balance of cash and cash equivalent at the close of third quarter was COP7.7 trillion.

The solid cash position allowed the Company to prepay an entire bilateral loan with Bancolombia for COP990 billion. Ecopetrol's resilience and ability to react quickly have allowed us to navigate the complex price environment and uncertainties of their financial market closing out the third quarter with better prospective. We remain committed to seeking a structural efficiency. Our strong cash position reflects a solid financial capacity to carry out our investment projects.

I will now turn this meeting over to the CEO who will close our presentation with prospects for the close of 2016.

Thank you Maria Fernanda. In the first week of October, we updated the market on our 2020 business plan. We are firm in our commitment to efficiency, cost reduction and capital discipline. Having overcome the challenging crude price environment in the first half of the year, we will focus on the third pillar of the plan, namely operational excellence and profitable business growth. Projected average production for the year remains stable at 715,000 barrels of oil equivalent per day.

In the fourth quarter, we expect to complete the drilling of the Warrior, Payero and Buyerengue exploratory wells. A solid and more efficient Company has successfully navigated the oil price crisis. Our commitment to profitable growth and the creation of shareholder value remains determined.

With this, we will open the Q&A session and thank you very much for participating in today's conference.

(Operator Instructions). Frank McGann, Bank of America, Merrill Lynch.

Just kind of a big picture question. The world is in a difficult situation right now. Oil prices have been quite volatile and uncertain. The Company, of course, has a done an aggressive job in cutting cost to try to deal with that situation. I'm just wondering how you are thinking right now in terms of priorities when you're looking at, say, perhaps paying down a little bit more debt or investing in longer term projects that will use cash and may take some time to pay out in an uncertain return scenario. How do you evaluate the decision whether to essentially take on a little bit more risk with the new projects or to reduce the company's risk profile and pay down debt?

Thank you for question. You ask quite philosophical question and these are philosophical times because if you go to [Cira] week or to any meeting of oil and gas industry people, they are basically in a soul searching mode. I mean, all nowadays this year especially has been a year in which we all have been asking how much money can we make, where are we really profitable, what are the things we shouldn't do. And then asking ourselves what are the things we should do.

The way I put it is the first half of the year was we were all in hell because the price went to 27 and the situation was really uncertain. After July and August, we, like passed the page of the crisis, the price crisis situation and we went back to a stability and growth mode. We produced a 2017-2020 plan, financial plan, we presented it to the market with a quite conservative price view with flat $50 per barrel so that we can withstand -- we can weather any difficult situation in price namely the one which I believe two weeks ago or last week oil prices went to 42.

With these type of plan which is robust to price fluctuations so to speak although we all know that some prices could be too challenging, but let's say, $50 flat in terms of 2020, we focused on the things we think are have been weaker for us, things that you all have mentioned, especially adding reserves to our reserve base, improving our portfolio of exploration, improving our operational capacity introduction and focusing on EMP instead of the focus on the mid and the downstream which has been very strong in the last 10 year.

We already have finished most of our transportation and pipeline projects in 2016. We've basically finalized all of them. We are basically finishing this year Reficar, which is our big refinery project and Bioenergy, our big ethanol project. And we can then pass the page from year onwards. We will be focusing on finding more reserves, adding contingent reserves and giving a stronger portfolio to all production people, considering a new core area for the capital.

So, it's definitely in the vein of your question, is we have for example, jobs presently paid by one of our loans of almost COP1 trillion. That's more or less $330 million, we just paid it like one month ago to Bancolombia, showing that if we have the cash one of our priorities is to improve our debt ratio. The other priority is to stabilize production. Our drilling campaign was in a stale mate in the first half of this year. Nowadays, we reinitiated our drilling campaign in Castilla and Rubiales. We are drilling exploratory wells, five of them currently. We will be aggressive in drilling in the offshore in Colombia next year, et cetera.

So, we don't have that much appetite for very risky projects unless those which are having very high profit, namely those in the offshore Colombia. So we are balancing, as everybody is in this industry right now, we are balancing our act between stability, profitability and some higher stare, you can see in our results vis-a-vis knowing that we operate in a risky industry in which you have to bet on risky projects like, for example -- risky yet promising projects like for example the offshore Colombia.

So, thank you for your question. I hope that we have -- I have answered some of the issues you raised. Of course, as I said, they are quite philosophical. We keep our strive for operational excellence, rigorous engineering project cost in order to finish them in time and in budget. And doing that, we can cover, let's say, issues that in the past have been vulnerabilities for Ecopetrol and strive for having success in other exploration and production fronts.

Okay. Thank you very much, very helpful.

(Operator Instructions) Alexander Burgansky, Deutsche Bank.

I have two questions. First of all, now that you have taken the full ownership and proprietorship over the Rubiales field, I wonder if you can update us on your production plans for that field, specifically how much it is producing now, what do you think the production rate will be at the end of this year and in 2017.

And my second question refers to your slide 14. I was quite intrigued to find that you have circled the depreciation amortization item as a nonrecurring. So I was wondering what amortization and depreciation you expect going forward given the contribution from Rubiales? Thank you very much.

Regarding to Rubiales, next year we'll have the whole year impacting our production. This year we had only half of the year impacting our production. The second thing is that the Rubiales drilling campaign was in a stalemate in the first half because the Company was operating -- of course, you have the incentive to drill as much they can meet it, but we already -- we had started our drilling campaign. We're going to drill 35 wells until the end of the year, that's our target. And for next year, we have already the drill campaign for the whole year.

I will ask Rafael Guzman to complement on these and then Maria Fernanda for answering your second question.

Yes Alexander, it's Rafael Guzman, the Technical Vice President. We started drilling in Rubiales in October. We currently have four rigs and we plan to have them for the whole year next year. But if we don't drill, Rubiales of course has a natural decline. But with the drilling campaign that we're doing, we want to overcome that natural decline not to increase production. We expect that for next year the production for the fuel will be stable at around 125,000-130,000 barrels per day.

One another thing we're doing is, of course, getting efficiencies in the drilling, that is best costly wells have been -- and we're using also the time. In this presentation we talk about 6 days of drilling compared to 8 days of drilling in the previous campaign 2015. In fact just yesterday we drilled a record well in Rubiales which took us 5 days to drill. I think we're drilling them under $1 million cost for that well. So those two things together had great potential that the field has, the field has a very low recovery factor, plus low cost wells will allow us to drill many, many wells and maintain production in the field.

Thank you for your question. Well, regarding the depreciation amortizations that we show on our slide 14, I would like to mention that what we wanted to highlight is that the data that you are seeing from one Q to another is the delta that you will only be seeing during this quarter due to the entrance of the Cartagena refinery. The level of depreciation amortizations that you are seeing currently in this quarter is the level that you can expect to be maintained going forward.

Thank you very much.

Madalena Costa, Morgan Stanley.

Thanks for taking my question. It's quick one from me. If you can quantify how much the startup of the oil field in US explains the lifting cost increase on a quarterly basis? Thank you.

Sorry, if I can ask you to please repeat your question, we couldn't hear correctly.

Yes, sure. So, if you can quantify how much the startup of the oil field in US explains the increase in the lifting cost on a quarterly basis? Thanks.

Madalena, this is Rafael Guzman. We had several impacts in our lifting cost going from second to third quarter. One of those is the Gunflint field, we are coming to production with a very good result in production, but with a slightly higher lifting cost on the average. The impact we had was, we're receiving 100% of the production of Rubiales again with a higher than average lifting cost and in addition to that in royalties of 32% as opposed to 20% that we had previously. Those three effects together with some seasonal effects of the suspending for the second half of the year explained the increase in lifting cost. However, we don't guide on specific lifting cost by field. So, you will not have the specific number for the increase in the Gunflint field.

Thank you.

[Philip Greg], SMP Global.

I have a question about your current divestment plan and specifically the sale of Essentia. Do you still see that taking place or making any progress toward the end of the year or can you give an update on the current state of the sale of Essentia?

Philip, thank you for the question. Well, the process that we have right now for selling Propilco is that we already went to the Council of Ministers and it has already been approved. However, there is an additional thing that needs to be done, it's a decree issued by the Minister of Finance and the Minister of Mines and Energy. And we expect that to happen before the end of the year. If that happens before the end of the year, we will be able to do the first round that it's going to Sector Solidario for two months at the beginning of 2017 and then sell all our stake to a strategic buyer during 2017.

Okay, thank you.

Pavel Molchanov, Raymond James.

Interest expense has increased quite sharply over the past year, no more than $200 million in the third quarter. Is that a function of just higher rates on your borrowings or is there something else that work?

Pavel, thank you for the question. Regarding interest expense, you see in this quarter also the effect of Reficar, on how Reficar -- since Reficar has an important level of debt in its balance sheet, those interest rate -- interest expenses were capitalized before the third quarter. So, now that we have all the units operating, we will see that as an expense. So, it doesn't have nothing to do with borrowing costs.

Okay, understood. More broadly on the political front, earlier this week of course there was a new peace agreement negotiated with FARC. As you think about the security landscape in the country, are there any particular areas where security remains a problem and is preventing normal operations for Ecopetrol?

We have seen a substantial reduction in attacks since July 20, 2015 when FARC instituted a ceasefire. So since then, we had two months last year between May and July which we had like 20 attacks. It was really difficult to handle that situation in the pipeline.

Since then ELN which is the other guerrilla Group in Colombia which also is now entering this process, ELN has been attacking us. This year they have made close to 30 attacks on our pipeline. So, we went from like 55 attacks last year 2015 to 34 this year in total so far until now.

However, ELN now, since like two or three weeks ago, started negotiations with the government which takes place in Ecuador and we hold that this negotiations will soon lead to a cease fire. We don't have a cease fire yet, as a matter of fact ELN hit our pipeline last week. And we have had -- these are things that as awkward as it sounds are normal for us. I mean, we know we are very efficient in repairing the pipeline. We are probably the best company in the world repairing pipelines. Because of this, we have experience in years and years of doing this. We used to have years of 170 attacks.

So, we expect to -- with these attacks we had just received from ELN, things that we are solving in 48 hours basically. So, it doesn't affect really our production in Cano Limon or our production in Putumayo. We have the capacity to accumulate those crudes produced in the field and then once the pipeline is working, we basically evacuate all of that oil. But, yes, the things we are seeing in the peace process we are part are in the negotiations with ELN are very positive event for Ecopetrol. They open for exploration for instance, they open new areas like (inaudible) which has been closed for decade for Ecopetrol.

We just run a seismic on (inaudible) in the last four months. Those are communities that are new to oil. So, we have to do a lot of upgrade work on ground with the people, with the community, socializing our work, but those are positive events that if you look at it in the long term, they open up provinces for Ecopetrol in exploration.

In our production areas, we basically know how to do or how to handle this types of threats and this type of challenges. So, we are not entirely worried. On the other hand, on the contrary we are hopeful about these negotiations.

Thank you very much.

(Operator Instruction). David Gamboa, CPH.

Just a couple of questions please. When you think about your gas production fields in Guajira are declining and the gas discoveries offshore are kind of out of the business plan that you played out. So, when you think about the 760,000 barrel a day target for 2020, how much of that is oil and gas, just to think about the evolution of the portfolio mix for the following years to come?

And then the second one, as you have mentioned, one of the kind of benefits of a ceasefire is the opening up of exploration area. So when thinking about organic growth through exploration, I heard you said you are processing some seismic in the Caguan-Putumayo Basin. So I was just wondering how to think about that province, in particular any timing around it? If you have any plans in drilling there perhaps next year or if that's a bit more towards the future?

And just if I can squeeze a last one. Just a clarification if you could please comment around when Reficar might be, I mean, a plateau? I know you are ongoing some debottlenecking and starting up in stabilization, but just a guidance for us to model the performance of this refinery. Thank you.

Thanks for the question. As we see our production going forward from now until 2020, we believe that the split between oil and gas should remain basically constant. So in that sense, some of the reduction in volume that we are reducing from Guajira as its natural decline, we may be able to compensate or we will be able to compensate with some other sources of gas. So this fleet of around 15% to 20% of gas versus oil shall remain roughly in that same order.

And just I would like to stress that we continue to look aggressively for other sources of onshore gas that as you well explained can help us create the bridge between now and when those big discoveries in the offshore will come online. So very active and aggressively looking, trying to maintain that split between oil and gas.

In regard to the ceasefire opening opportunities for the exploration areas, as we have said basically in the Colombian onshore, we have opportunities, Ecuador -- south of our border, Ecuador for 500,000 barrels per day. North of our border, we produce as a country 40,000 barrels per day. So, this is the same reservoirs. Right?

So we can increase according to our geologist and our engineers, we could increase as a country and we as a Company we could increase by two or threefold the production in Putumayo and (inaudible). But for that we needed these, we need time, we need time for doing the seismic. We need time for doing our exploratory wells, et cetera, et cetera.

So I'm not saying that in the next two or three years we're going to produce a substantial increase, but what we are saying is that above there and in the border with Venezuela, in Aragua, in North Santander, in Catatumbo region, we have very interesting opportunities of exploratory endeavors.

In regarding with the timing opportunities in Caguan and Putumayo, we are now basically focusing on exploratory wells in Meta, in the foothills, in Casanare. And we are drilling from -- before year end, we are drilling Boranda, Chimu, Pegaso. All of them in the Meta region and in the (inaudible) region. And we are also drilling water (inaudible) drilled this year. All of these are exploratory wells of 2016. So maybe Max Torres can elaborate on that which is our focus on the reasons we already now, like Meta, regions are promising, like (inaudible), Putumayo, Aragua. And other exploratory areas that we are touching right now like our offshore Colombia and of course, Gulf of Mexico.

Thank you for the questions. Yes. So, as Carlos Echeverry was mentioning, we have sort of an increase in our activity. Next year, we are planning to drill about 15 wells in exploration. Right now, we are currently drilling three wells. We have planned two more wells this year. So, we'll probably end up the year with five wells. So, we're going to jump from five to 15 wells next year.

Out of the 15, five wells are in the offshore Caribbean, in Colombia. And as you know, the Caribbean frontier basin is attracting a lot of attention. So that is very important for us in our plan.

With regarding to the onshore, we are targeting our heavy oil province in the Meta, in the Llanos. We are targeting the middle Magdalena valley as well. And we are targeting the lower Magdalena valley with some gas activity there with our subsidiary Hocol. So, essentially next year we are going to focus on those areas. And as the peace process moves ahead, we are planning to target these more challenging areas like Caguan-Putumayo and the northern part of Aragua. We think there is potential there. We need to do seismic, do studies, that's longer term but we think we have opportunities in northern Aragua, Caguan-Putumayo and that is the future.

The present is as I said heavy oil and the middle Magdalena Valley. And then of course, the offshore. I think our big, the big bet, big promise is the offshore and we are going to be drilling in a matter of weeks. We are going to be drilling the appraisal well Purple Angel which is the Kronos discovery appraisal. Next year we are going to be drilling (inaudible) which is a sort of an appraisal of our discovery in Aragua. And two new prospects like Molusco and Siluro. So, as you see aggressive activity and big promises for the future.

David, in regard to Reficar, you asked for some guidance on how to model the performance of the refinery. We currently are dealing with the stabilization of refinery. We started up all the 34 plants by July. The first half of the year was a startup process. So this took from October 21st until July. And the next three quarters, probably the second half of 2016 and the first quarter at least of 2017, we are stabilizing all of these plants we had issues. In some of our plants, the good plant has some issue at the beginning, then (inaudible) has an issue right now, et cetera. But this is normal in terms of the startup process. Tomas Hernandez will elaborate in a second.

In terms of guidance for your modeling the performance of the refinery, I would say this, is we are going to be stabilizing it until the first quarter next year at least. And then the second half of next year we expect to have the refinery going, let's say, from 130 to 140, 150 an optimization process of our feedstock. The margins also will stabilize next year. So probably until the first quarter of next year, you have a ramp up and then optimization until the end of 2017.

So the actual results of already stabilized and optimized refinery will be seen really during 2018. But probably it's better that Tomas Hernandez, the Vice President of Refining, can take over.

Yes, to expand a little bit on the stabilization process, we define it as conducting all the unit performance test. So we started up all the units in July. We ended the stabilization process which means we have to work with the licensers and get the plants up to design. So we are 16 out of 34 plants into the stabilization process, working out all the debottlenecking issues that come up normal to startup. So like President said, we believe that we go into the first quarter, in first semester we will be past the acceptance test for the refinery and in a variable restable.

When we look at benchmarks in refining, a very, very typical of grassroots, high conversion refineries to go 9 to 12 months into a stabilization process. Very, very difficult, this is highly complex and we are working out some issues but we feel confident that the next year we'll be past the stabilization process in the second quarter of 2017.

Thanks everyone.

And ladies and gentlemen, this concludes our questions-and-answer session. I would like to turn the call to our CEO, Juan Carlos Echeverry, for final remarks.

Thank you to you all for participating in this conference call. As we said, 2016 has been very challenging year. The first half was practically infernal period because we went into prices of $27 per barrel. The second quarter was a real transition. By June, July, August we already, as a Company and probably as an industry, made the transition from the crisis, the price crisis period towards the stability and growth period.

We presented recently our financial plan 2017 to 2020. And we are now finalizing also our phase of peak investments in the mid and downstream segment. With the end of Reficar, the construction and the stabilization of Reficar, with the end of the construction and startup of pure energy, our ethanol project of a substantial investment in pipeline, we can now turn the page and go towards much more investment in CapEx devoted to exploration and production. We will tackle a more aggressive agenda in exploration.

We have been improving our portfolio of exploratory wells. We have very good partners in the Gulf of Mexico, very good partners in offshore Colombia. We have a very comprehensive portfolio for onshore Colombia as Max Torres explained. We have undertaken a very deep transformation strategy of the Group with control. We have reduced the cost of dilution, renegotiated more than 4000 contracts. We have made a transformation of our human capital. We are still in the process of completing that, it will take at least one or two more years, we are not yet in the -- we are in the middle of our process transformation, but we have demonstrated that we can reduce cost and be much more efficient in many metrics, we can be much more efficient.

Ecopetrol is among the few companies in the oil and gas industry with net profits in the first three quarters of 2016. This is a very nice group to be in the company of Exxon, of Shell, of Repsol and Total, Ecopetrol has during the first three quarters of this year produced positive profit. But especially because profits are very volatile in terms of accounting techniques and procedures, we are more proud of what we have achieved in terms of cash generation.

We have been through a process in which cash was king and we have been able to produce enough cash and to improve our debt ratios. We actually just paid debt along with Bancolombia of almost COP1 trillion, close to $330 million and that shows that we have had the generation of cash internally in a very satisfactory way. Finally, the way we have created this cash when at the beginning of this year 60% from the midstream, 25% from the upstream and right now the shares have moved a little bit.

We are almost 60% upstream, 35% midstream. This shows that the Company had the flexibility and the balance between being an integrated company, the balance to compensate difficult times between all the segments. So, we are glad, there is a lot of homework to do. We still have lots of things to improve, but we think that we have shown to the markets, to all of you that we are doing a satisfactory job. So, thank you to you all for participating in this conference call and have a good day.

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