Ecopetrol SA (EC) 2016 Q4 法說會逐字稿

Good morning, my name is Hilda and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2016 and full-year 2016 Ecopetrol earnings conference call. (Operator Instructions). Thank you for your attention. Mrs. Maria Catalina Escobar, Head of Corporate Finance and Investor Relations will begin the conference today. Mrs. Escobar, you may begin your conference.

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 and full-year 2016. Before we begin, it is important to mention that the comments in this call by Ecopetrol 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, COO; Maria Fernanda Suarez, CFO; 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 - Midstream; Tomas Hernandez, Vice President of Downstream; Rafael Guzman, Technical Vice President; and Carlos Alberto Vargas, Vice President of Transformation.

We will begin the presentation with the main achievements of 2016 followed by highlights by business segments and financial results under International Finance Reporting Standards. We will close with the outlook for 2017 and a Q&A session. I now turn the call to Mr. Juan Carlos Echeverry, CEO of Ecopetrol.

Welcome to everyone joining us in this conference call. The Ecopetrol business groups 2016 results demonstrate the Company's timely and effective response to the challenges raised by the pricing environment and other events. We ended the year with a company that is transformed, operationally sustainable and financially robust. During the year, Brent reached the lowest levels in the past 12 years with an average of $45 per barrel, 16% below the 2015 price. Although US crude inventories remain high, the OPEC agreement to limit oil production uplifted prices in the final quarter of the year.

Ecopetrol improved its sales spread from around $12 per barrel to approximately $9 per barrel as a result of its commercial strategy of capturing greater value and the reopening of US market. The volatile price scenario was compounded by significant challenges such as the peace negotiation process, the border difficulties with Venezuela, El Nino climate phenomenon, the completion of Reficar and Bioenergy projects, and the tax reform.

Let's move on to the next slide to review details of our operational and financial performance during this year. In 2016, EBITDA and EBITDA margin reached solid levels of COP18 trillion and 38% respectively. The margin was 3 percentage points higher than in 2015 and one of the highest in the oil and gas industry worldwide. Despite experiencing 43,000 barrels less production and lower Brent prices than in 2015, EBITDA remained stable. The Group's average production for the year, 718,000 barrels of oil equivalent per day, exceeded 3,000 barrels the 2016 target. This confirms Ecopetrol's resilience to events such as the closure of the Cano Limon Covenas oil pipeline, which reduced production in 25,000 barrels per day for 45 days. It also reflects the Company's rapid response for adding production in the second half of 2016.

The upstream EBITDA per barrel was $10.5 versus a target of $7 per barrel. The consolidated EBITDA per barrel of all segments surpassed $22 per barrel. We discovered oil in the Gulf of Mexico in the Warrior well with Anadarko and this is the fifth discovery of the Group in deepwaters. The 34 Reficar units started up. Refining margins and loads showed positive performance in the second half of the year and will continue the restabilization and optimization process.

The Company launched a corporate stakeholders management model aiming for shared prosperity in the regions where we operate and for reaping the benefits of the peace agreement. Our HSE standards are close to the best in the industry. Efficiency gains were present in all business lines. Total savings during the year reached COP2.2 trillion, exceeding the 2016 target of COP1.6 trillion. These efficiencies offset the negative impact of lower crude prices on the Company's reserves, which were reported at 1,598 million barrels in 2016. Finally, sound operating performance was reflected in a robust cash position of COP14 trillion, lower leverage, and a sustained investment-grade rating; net profit of COP1.6 trillion versus a loss posted in 2015. These achievements reflect a transformation of Ecopetrol processes and discipline and of nearly 9,000 people working for the Company, also, our commitment to operational and financial excellence. I now pass the floor to Carlos Vargas, who will talk to you about the main levers of this transformation plan.

Thank you, Juan Carlos. During the fourth quarter of the year, we have kept a strict follow-up to the efficiency strategy implemented by the Company, incorporating in this period a structural optimization by [COP0.65 trillion] for a total of COP2.24 trillion during 2016. In this way, the accumulated structural efficiencies between 2015 and 2016 has been COP4.3 trillion. From this, we may highlight the heavy oil dilution strategy, which has contributed by 24% of the total efficiencies. The result of these efficiencies has had a positive effect on the performance of the operational indicators of the greatest impact in each business area of the Company, which together with process improvement is converted into structural efficiencies.

An example of this in the upstream operating costs indicator whose improvements are between 10% and 25%. Regarding the segment CapEx, the cost per perforated foot has been improved by 44% compared to 2014. Finally in 2017, the [capital] will focus on ensuring the sustainability of the efficiencies achieved by 2016 as well as incorporate additional structural efficiencies. With this, I pass over to Rafael Guzman, who will comment on the result of production.

Thank you, Carlos. In terms of production, 2016 was a challenging year in which we managed to surpass our annual goal with a production of 718,000 barrels of oil equivalent per day. That is 3,000 barrels per day above the target. Another important milestone was the successful takeover of the operation of both Rubiales and Cusiana fields during the [second semester]. With this asset, Ecopetrol now directly operates more than 500,000 barrels of oil per day. Even with a drop in prices of close to 20% between 2015 and 2016, the production was only affected by 6% versus the previous year. This reduction is mainly explained by the effect of the reduced investments during the first half of the year. With improvement of prices during the second semester, new investments were approved and executed and allowed Ecopetrol to mitigate the declined rate of some of our fields. This improved the production during the last two quarters in close to 20,000 barrels of oil equivalent per day in comparison with the second quarter of the year.

Also, starting the second half of the year, Ecopetrol America commenced the production of the Gunflint field which increased the production of this subsidiary from [3.5 to more than 11,000 barrels of oil equivalent per day]. Important fields like Castilla and Chichimene managed to maintain the production even with a limited investment. In terms of optimization and efficiency, 2016 was a very positive year where we continued with the materialization of savings with our transformation program as Carlos just mentioned. As support of this achievement, we would like to highlight that reduction in our lifting costs of about 12% in comparison with 2015 leveraged mainly on the cost reduction of well services, surface maintenance, energy, and fluid treatment. Likewise, the components of heavy oil dilution and transport have concentrated the largest contribution in terms of savings within our operation costs.

At the end of the year, a [20% reduction] in our dilution cost was achieved in relation to the cost of 2014. 9% of this decline was achieved in 2016 through a 2% cut in our dilution factor, representing savings of more than $215 million for the period. In total operating cost, savings [sums around $380 million for 2016]. In terms of development costs, Ecopetrol continues reducing the cost and time of its drilling activities. For the year 2016, we have reached record levels in drilling days in our assets Castilla and Chichimene where the reduction exceeded 40% compared to 2014 levels. The newly incorporated Rubiales asset as a direct operations has benefited from the application of new technology and improved drilling processes that we have been implementing in Ecopetrol and recorded a reduction in drilling days close to 23%.

Now it's time to talk about our progress in the recovery program. Summarizing the results for the period 2014 to 2016, the Company managed the addition of more than 1.2 billion barrels of contingent resources. These pilots have allowed us to develop important technological skills in different types of recovery methods mainly waterflooding, polymer, and steam injection. Efforts in savings have also been important in this project where we have managed to reduce the breakeven price of the plant expansion by about 10% through the addition of efficiencies in operational and development costs. The year 2017 will be important for the program due to the start of the initial expansion phase of the waterflood project in Chichimene. Also, by the end of 2017, we will be starting the tertiary recovery expansion project in the Dina K field.

To conclude, I would like to talk about the reserves balance for 2016. At the end of the year, Ecopetrol's proven reserves were 1,598 million barrels of oil equivalent, a 14% reduction compared to the 1,849 million barrels of oil equivalent registered at the end of 2015. In 2016, the SEC price used for the valuation had a 20% decrease compared to 2015, going from $55 per barrel Brent to $44 per barrel Brent. The drop in prices accounted to an estimated negative impact on reserves of 202 million barrels of oil equivalent. This effect was partially offset by the addition of 186 million barrels of oil equivalent attributable to continued optimization of cost, new drilling projects like the one structure for the Palagua-Caipal fields, and the extensions of the proven areas in field such as Castilla, Rubiales, and Chichimene amongst others.

Fields like Rubiales and Chichimene presented positive reviews of reserves mainly due to the good performance of production and cost optimization. The reserve replacement ratio, excluding price effect, was 79%. By including the price factor, the reserves replacement ratio stands at minus 7%. With this result, the reserves production ratio is 6.8 years. 95% of proven reserves are owned by Ecopetrol S.A., while Hocol, Ecopetrol America and Equion and Savia Peru contributed to the remaining 5%. Now, I pass on to Max Torres, who will comment on the results of exploration.

Thank you, Rafael. During the fourth quarter, Ecopetrol drilled the wells Boranda and [Chimu 1]. Boranda is located in the block Playon and was drilled in association with Parex as operator and with 50% participation of Ecopetrol. At the end of the fourth quarter, the well was under completion operations. The well Chimu 1 in the block Cano Sur and operated 100% by Ecopetrol reached total depth just prior of the end of the year and was [blocked] and abandoned. The Ecopetrol affiliate, Hocol, drills well Bullerengue Sur in the block SSJN1 operated by a company Lewis with a participation of 50% Hocol. The well was successful and the well Pegaso, located in Block CPO 16, which is 100% Hocol reached a total depth during December; by the end of the fourth quarter was under evaluation. The well Payero 1 operated by Equion in the block Niscota in the Piedemonte Llanero where the participations are Hocol 20%, Total 50%, and Repsol 30% was declared blocked and abandoned.

In the Gulf of Mexico, Ecopetrol America drilled the well Warrior, situated in the Grand Canyon area of the Gulf of Mexico. Drilling commenced in August and ended during November. Working interest in this project is Ecopetrol America with 20%, JX Nippon Oil and Gas Exploration 15%, and the operator Anadarko Petroleum Corporation with 65%. The well proved the presence of hydrocarbons in several basins and the well was temporarily blocked and abandon until development facilities are put in place. By the end of 2016, two projects we've been drilling in the Colombian Caribbean offshore, the wells Purple Angel-1, which is an appraisal well of the Kronos discovery in 2015 and the Gorgon-1, an exploration well. Both wells are operated by Anadarko 50% and Ecopetrol as a partner with 50%. These two projects will allow assessing the potential of the Colombian offshore with more certainty.

Seismic acquisition during the fourth quarter was restricted to the block YDSN 1 which is a 3D seismic program operated by Hocol that acquired 82 square kilometers of seismic. Now, Luisa Lafaurie will comment on the Midstream results.

Thank you, Vargas. Good morning, during 2016, we successfully moved forward into two fronts on the midstream business. On one hand, we continue with our cost optimization process thereby maintaining our cash generation for the Group. On the other hand, particularly in the fourth quarter, we focused on promoting the midstream integration process to achieve a more efficient planning process of our operation and maintenance of our infrastructure. Both fronts continue to be our top priority during 2017.

On the operating side, the total volume transported during 2016 decreased in 102,000 barrels per day, equivalent to 8.3% less versus 2015 reaching 1,130,000 barrels per day. Crude oil volumes transported during 2016 decreased in 11.3% as compared to 2015 mainly due to the lower volumes produced and delivered by our shippers. Out of the total volume of crude transported, (technical difficulty) mainly as a result of a higher rate of use of the Galan-Sebastopol system to fulfill the demand of product in the Central region. Approximately 20% of the total volume transported through the refined product pipelines belong to Ecopetrol.

Regarding our investment portfolio, I would like to highlight that we continue performing the activities that will allow us to transport crude oil with higher viscosity to the Covenas Port. In these sense, during 2016, we accomplished our objective to transport crude oil with viscosity over 300 centiStokes.

In addition, we advanced the adjustment to our infrastructure in order to transport crude oil of 600 centiStokes from the [Janos] field to the Covenas port in a continuous manner and we also advanced with an investment to put into operation the first blending facilities in Covenas which allowed us to deliver crude oil in specific and homogenous qualities adding value to [an extra basket onto our refineries]. We expect both initiatives to enter into operation in the second quarter of 2017. Regarding San Fernando - Monterrey project, we complete the construction of the San Fernando pumping station and the pipelines that connect the Castilla, Chichimene, San Fernando, and Apiay stations.

During the first quarter of 2017, we expect to begin the filling of tanks and lines, also the main activity of the Ocensa P135 project were completed. We are currently working with the Ministry of Mines and Energy to obtain the formal authorization in order to begin with the operation of the project. Finally, I would like to refer to the midstream financial results, which were very positive mainly to the important reductions in our operating and maintenance costs, which allowed us to optimize approximately COP410 billion in 2016 as compared to 2015. With this, I hand over to the Tomas Hernandez, who will comment on the downstream result.

Thanks, Luisa. During the fourth quarter of 2016, the Cartagena refinery stabilization process and unit performance test continued. 21 out of 34 units completed their tests reaching a 62% progress. The refinery stabilization process will continue [until] the third quarter 2017 with the completion of the full refinery performance test. Throughout 2016, the Cartagena refinery was gradually increasing its throughput reaching an average of 109,000 barrels per day during the start-up phase between January and July. During the 2016 stabilization process between August and December, the refinery reached an average of 128,000 barrels per day with 144,000 barrels per day in December, the highest monthly average since start-up. Upon completion of stabilization and performance tests, the refinery will have an operation at the optimum throughput level.

In terms of production, the Cartagena refinery has gradually increased its high value product yields, going from an average of 36% during the start-up process to 45% during the stabilization process in middle distillates. In addition, the refinery gross margin has grown from an average of around $3 per barrel to an average of between $8 and $9 per barrel and a peak of $10.5 per barrel during the stabilization phase, maintaining the expectation that the refinery in 2017 will achieve margins in line with market trends for high-complexity refineries.

The gross margin of the Barrancabermeja refinery in the fourth quarter of 2016 was $14.8 per barrel versus $15 per barrel during the same quarter of 2015. This decrease was mainly due to a more expensive crude slate as a result of higher international crude oil prices. For the full-year 2016, the gross margin reached $14 per barrel, $2.8 lower than 2015. This decrease was due to lower product price differentials against crude oil prices partially offset by higher middle distillate yields due to the implementation of innovative, operational, and process improvements such as the upgrading of a [gas ore hydrotreating] unit to a mild hydrocracker unit, which increased refinery conversion.

In addition, we had the highest production of polyethylene in the history of the refinery,[556,000 tons] per year. The throughput of the Barrancabermeja refinery in 2016 was 213,000 barrels per day, decreasing by almost 8,800 barrels per day compared to 2015 due to a heavier crude slate and the scheduled maintenance turnaround of a crude unit in the last quarter of 2016. Now I'll turn the presentation over to Maria Fernanda Suarez who will comment on the financial results for the period.

Thank you, Tomas. Good morning everyone. The solid financial figures we shared today are the result of efforts to strengthen liquidity, achieve structural efficiencies, and maintain capital discipline. On average, the Brent crude price was 16% lower compared to 2015 and our investments had to be reduced over 60% that led to a reduction of 43,000 barrels per day in production. Even with a reduction of 8% in revenues, the Group was able to reverse the losses posted in 2015 and count itself among the select group of companies that have earned net profits for the year 2016.

The Company posted net profit of COP1.6 trillion, kept its EBITDA at COP18 trillion, and ended the year with more than COP14 trillion in available cash. The EBITDA margin increased 3% reaching 38% for 2016, being one of the higher among the industry. Our commitment to lower leverage was reflected in debt metrics that exceeded initial expectations, achieving a gross debt-to-EBITDA of 3 times. The net debt-to-EBITDA performed significantly better, declining from 2.6 on 2015 to 2.2 on 2016.

Let's move on to the next slide to look at changes in net profit between 2015 and 2016. In 2015, the Company reported a net loss of approximately COP4 trillion caused largely by the effect of oil prices forecast over impairments and the negative effect of the peso devaluation. At the end of 2016, Ecopetrol succeeded in reversing that loss and posted a net profit of COP1.6 trillion. This positive change was made possible due to, first, while revenues decreased COP4.4 trillion, the costs and expenses decreased COP4.6 trillion. Our ability to compensate the revenues decline with a cost reduction demonstrates the effective cost control management, austerity measures, and higher efficiencies across all business segments. Not counting the depreciation, fixed and variable cost fell 12%. The fixed one is a result mainly of optimization of contracted services and maintenance, the variable is due to our lower value of hydrocarbon purchases and less use of tanker trucks.

The second lever was a 18% reduction in operating expenses primarily as a result of lower dry well expenses and decreased seismic activity, consistent with the lower investment in 2016. Depreciation rose 12%, an increase of around COP800 billion primarily due to the beginning of operations of Reficar and Gunflint field. In general, we note a seasonal effect in costs and expenses over the fourth quarter as we had anticipated in previous quarters. With cash flow hedge accounting implemented in 2015 and hedging of net investment in 2016, we succeeded in reducing the impact of exchange rate fluctuations on the income statement, yielding a gain of COP968 billion in 2016 versus a loss of COP1.9 trillion in 2015. Although the Group showed higher financial standing due to an increase in its staff during the year and the recognition as an expense of interest on the Reficar loans, net financial income remained stable. In addition during the quarter, we recorded an extraordinary gain coming from a ruling in favor of Ecopetrol in a legal dispute. The recovery amounts COP689 billion [was impacting] the financial statements and the cash balance. The income tax provision totaled COP4.7 trillion, equivalent to an effective income tax rate of 66% primarily due to, first, the higher income before income tax and impairment versus 2015, taking into account the increase of the income tax rate from 39% to 40% in 2016. On the other hand, the effect of a lower asset deferred tax as a result of a reduction in impairment expense and the effect over the asset deferred tax of the exchange rate gain reported in 2016 versus the exchange rate loss in 2015. Finally, net profit attributable to the Company shareholders totaled COP1.6 trillion, [COP5.6 trillion more than in 2015 and COP2.4 trillion] before impairments.

Let us now please move on to the next slide to examine the EBITDAs of the different segments. The success of the efficiencies and savings measures in the context of the transformation plan evidenced better segment results and a stable EBITDA levels. Upstream maintained EBITDA levels of COP8 trillion thanks to structural efficiencies in lifting cost, dilution, and optimal use of transportation facilities. EBITDA margin was 3.5% higher during 2016 despite lower production and lower prices. The downstream segment succeeded in holding EBITDA steady at approximately COP2 trillion, very close to 2015 levels, despite higher costs associated with Reficar's commissioning process and lower margins observed in refined products. The segment's EBITDA margin was above 7%.

Midstream remained a major cash generator for the business group holding EBITDA steady at almost COP8 trillion and improving EBITDA margin by over 2%. This was due to savings and cost optimizations which offset the impact of the lower volumes given the [country's] drop in production.

Let us now review the Group's cash flow. The Group ended the year with a solid cash position of more than COP14 trillion reflecting on one hand, the cost and expense reductions achieved and on the other hand, the lower levels of investment and debt. Through its operations, the Group generated COP17 trillion, highlighting an improvement in working capital. Capital investment was COP5.8 trillion, 62% less than in 2015, consistent with the investment cuts announced during 2016. Divestments and the recovery of a legal controversy had a one-time contribution of nearly COP1.7 trillion to the cash position.

Investment activities includes a cash outlay of COP5.5 trillion corresponding to short-term investments in liquid assets with maturity above 90 days. Financing activities reflects the lower leverage in the Group as a result of our commitment to Ecopetrol's financial sustainability. The balance of cash and cash equivalents at year-end amount to COP8.4 trillion, that when added to short-term investments of COP5.3 trillion provides a total of COP14 trillion of cash available. This strong cash position allows Ecopetrol to assess inorganic growth options that can improve the balance of Ecopetrol's reserves. The financial outcome is the result of a team committed with exceeding target, a business Group that is strengthened during a challenging year. We are prepared to seize opportunities for profitable growth. We will continue our commitment with efficiency, capital discipline, and focus on exploration and production. I will now give the floor to the CEO to close our presentation with a perspective for 2017.

Thank you, Maria Fernanda. Adding reserves and maintaining the pace of production are the Company's focus for 2017. Investment in exploration will more than double and will focus on high-perspective regions. [This year] reflected in a total 17 exploratory wells to be drilled vis-a-vis seven last year. Enhanced recovery technologies will continue adding reserves in mature fields. Our cash position opens up opportunities for inorganic growth.

We will sustain adequate levels of liquidity and will maintain gross debt-to-EBITDA between 2.5 and 3 times. We will complete Reficar's stabilization stage and execute the global performance test in the second half of 2017. The quality and consistency of crudes are important value levers for the business group in order to meet our client needs. We will have a new mixing facility at Covenas.

Ecopetrol has once again met the challenges raised by the environment and honored its commitment to operational and financial excellence. The future is encouraging. The 2020 business plan is our navigation map for ensuring profitable growth and adding value for our shareholders. We will now open the Q&A session and thank you very much.

(Operator instructions) Mr. Bruno Montanari, Morgan Stanley.

I have a few questions, first one is on the reserve breakdown. Given the different behavior of oil versus gas prices, I was wondering if you could give us the breakdown between oil and gas on the reserves for 2016? My next question is on the outlook for lifting costs in 2017. Although on a year-on-year basis, the performance has been very interesting, we did see an increasing trend of lifting cost throughout 2016. So I was wondering if that should continue to be the case as we enter this year? And last, you reported a very comfortable cash position on the balance sheet. So I was wondering if you could elaborate on the uses of cash either organic or inorganic in 2017. Thank you very much.

Bruno, hello, this is Rafael Guzman and thank you for your questions. I will start answering the second question about the lifting cost while we look for the breakdown on gas and oil. And the short answer is no, we shouldn't see a continued increase in lifting costs. For the first quarter of 2017, we should see a decrease in costs. The increase you saw from the third quarter to the fourth quarter of 2016 is something that has traditionally happened in Ecopetrol. We do have more expenses at the end of the year. So it's something related with the season and not with the structural increases.

Other things that helped the increase was --and specifically in this year, is that the first two quarters, we had a very restricted cash flow, so we didn't spend much money on the beginning of the year and we actually with the improvement of the cash, we did the spend that at the end of the year. We also did initiatives to increase production like the 25K project that we had at the end of the year, that increased the CapEx, but it also increased also the OpEx, so that's why you saw an increase in those two.

Okay, the other thing we had -- Rubiales at the beginning of the year, we didn't have full share of Rubiales while at the end of the year, we had the full share of Rubiales and Rubiales comes with an increased OpEx related to the other fields, which also helped increase the average lifting costs for the quarter, but those things, like you see, they are only one-off or seasonal things. There should not be a continued increase in OpEx like the one we saw towards the end of the year.

Hi Bruno, this is Juan Carlos Echeverry. Regarding the use of cash, yes, as you saw in the results, we obtained COP18 trillion of EBITDA and also COP14 trillion of cash holdings. Both surpassed our expectations and our guidance and therefore, we feel that we have a very solid base of cash, since -- we are well aware that reserves addition is a critical issue for Ecopetrol. We will first increase the amount of money that we dedicate for exploration, will come from $250 million last year to $650 million for exploration. We'll be drilling 17 exploratory wells, six of which on the onshore, one of those on the Gulf of Mexico and 11 on the onshore in Colombia. And additionally, of course, we'll keep our projects and pilots of enhanced recovery and especially for this year and from now on, we will be more active in inorganic growth. So far, we have been conservative in inorganic growth, but from now on, we will be active in that market. We have no hurry in this is because, we have to be careful, but we have the approval of the Board of the Directors to seek opportunities in inorganic growth. We will keep being a Pan American company but we are open to opportunities in North America, in Mexico, Brazil and other regions and we have the cash, maintaining a very solid basis of cash for the Company, we have the resources for this strategy.

Bruno, this is Rafael again, going back to your first question of the breakdown of reserves. As of the end of 2016, 65% of the reserves were liquid oil and the remaining gas reserves.

All right, that's very helpful. If I can do one quick follow-up on the inorganic opportunities, does Ecopetrol have any preference for liquids, gas or which type of assets is your number one choice, if you will?

Yes Bruno, we have an exposure to heavy oil in onshore. We have growing results in gas in the offshore. Therefore probably we will be seeking for balancing in light oil and also, we could be interested in prospects of probably balancing more our gas holdings. It's true that what we are finding in the Colombian offshore so far is gas. So that presents a good prospect for that balancing, but definitely we will be interested in lighter oil that we have on the onshore.

Pavel Molchanov, Raymond James.

Traditionally, a very large portion of your crude exports goes to the US market and as you know, there is a lot of discussion in Washington about -- and a tax on imports, the so-called border adjustment which would presumably include crude oil. Have you considered what the potential impact of such a tax might be on your US sales business and has that been incorporated in any of your forecasts?

Thank you, Pavel. Okay, regarding your question, we are currently analyzing different scenarios and the potential impact of such a tax, not only in our exports, but also in our imports of crude oil and exports of crude oil and products. Basically, we have to have in mind that we have an important preference in other markets as Europe and Asia, besides the US and that we are very flexible in trying to reach the most -- the highest value markets in the [forex market].

Okay, understood. Can you also comment on what the degree of production disruptions and pipeline outages has been over the past, let's say, three to six months. I ask because the peace agreement was signed approximately six months ago, but we still see frequent headlines about various kinds of attacks against oil industry infrastructure?

Thank you, Pavel. You know that the government is now having peace conversations with ELN in Ecuador. These conversations we hope will lead ELN to a ceasefire, but so far, they have kept blowing up some parts of our pipeline. This is constrained to probably 100 kilometers of the pipeline. This is a pipeline of 800 kilometers. So it's constrained to an area of 100 kilometers, but nevertheless is a war zone development. We are very effective in repairing the pipeline, but for example, today, the pipeline is not operating and the oilfield, the Cano Limon is not pumping up oil. The impact actually has not been that large. Last year, we had 45 days in which that oilfield was not pumping. This year, we have had just recently, for less than a week, we have had the stoppage of this oilfield.

However, this will be probably [this month, next month] will be more uncertain that the prospect if something is positive, we expect at some point that the government reaches a ceasefire with these guys. They have actually proposed a ceasefire. There are conditions from each part of the table and despite the [apart from the Cano Limon and Covenas the pipe length], we have produced right last year 3,000 barrels per day more than our target, and this year actually, we are also above our target. So we have been able to compensate what has happened in the Cano Limon Covenas, but nevertheless, it's a worrisome issue and we pay all of our attention to the development in Ecuador with these guys in that area.

(Operator instructions) David Gamboa, TPH.

I had two questions, please. On the production guidance for 2017, so we saw how you guys beat your target slightly this last year, you just mentioned that production has been above the target so far this year as well. I'm just wondering if you have seen any material improvements in the base decline for the company as a whole, how do you see this going forward, if you can provide us with an update on how the base decline is looking and what we kind of expect from it? That's the first one. The second one, just on your CapEx budget for the year, I wanted to clarify something, [so there is this $3.5 billion] budget for the year, I understand this number is only CapEx, but when we talk about 2016 at $2.5 billion, that is CapEx plus some OpEx of some developments that you have, so my question is what is the cash CapEx that we should expect in the cash flow for 2017? Is it the $3.5 billion and if this is the case, what would be the guidance for CapEx plus OpEx that we could compare year-on-year with the $2.5 billion that we saw in 2016? Thank you.

Hi, this is Felipe Bayon. Regarding your first question around production guidance for 2017, we are going to be maintaining production at around 715,000 barrels, that's both production that we have in-country and production that we have outside of Colombia and I think that one of the key things to remember here is that we are targeting a profitable production and production that's actually providing us with good margin. So in that sense, we will try to achieve the 715,000 barrels, that is our guidance.

In terms of base decline, I'd say that our main fields are actually producing very well and are actually behaving very well in terms of not only the results that we're seeing from infill drilling and we are being able to manage that decline, but also in terms of some of the enhanced oil recovery and the pilots that we were describing earlier in our presentation. So we are actually very comfortable with the performance of the fields in terms of base decline.

In terms of your second question, which is the level of CapEx and the cash CapEx as such, you need to compare the $2.5 billion that we actually spend in 2016 versus $3.5 billion that we have put in our budget as the CapEx for 2017. So all of this is actually investment CapEx. In terms of the OpEx, we are envisaging that we should be around an average of $7 per barrel in terms of lifting costs and that sort of the range where we see ourselves in 2017.

David, good morning, thank you for the question. Well, regarding CapEx budget, it's going to be $3.5 billion as you mentioned. In 2016, it was around $2.5 billion. I can do a follow-up call with you really on those numbers we are targeting on CapEx. What you see the effect on the cash flow is the effect of the real execution or the difference of working capital of the account receivables because one thing that we account for is how much we already have executed and the difference on the cash flow is just how much have we already paid.

That's the only difference that you see between what we target and what you see on the cash flow. For 2017, it will be $3.5 billion of CapEx and on the cash flow, you should see the total effect unless there are things are not executed on 2017 or that we will have accounts to be paid during 2018, but that is the movement of the working capital and if you want, we can do a follow-on question on that for more clarity.

Thank you very much. Thank you all for participating in this conference call. We want to emphasize the fact that the metric that we chose for 2016 performance were surpassed. We aim to surpass the expectations and that was the case of reduction in costs, an improvement in productivity and efficiencies. It was also the fact that being an integrated Group helped a lot. During the year, we saw the segments of the midstream and downstream coming up very timely to compensate the difficulties that were derived from the decline in price of oil in the upstream.

We also saw an over-performance in cash and an over-performance in EBITDA and that leads to a new interesting 2017 in which we see the addition of reserves as a key issue. Therefore, the exploration now is probably in the driving wheel. We have to add reserves by giving more resources to exploration, second, enhance recovery in our mature fields, and third, of course, the new activity in inorganic growth. So with this, we expect to have covered most of the issues. Thank you very much for participating in this conference call and for your follow-up -- your serious follow-up of our numbers of the evolution of our Group. Thank you to you all and have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.