Ecopetrol SA (EC) 2017 Q4 法說會逐字稿

Welcome to the Fourth Quarter and Full Year 2017 Ecopetrol Earnings Conference Call.

My name is Sophia, and I'll be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Maria Catalina Escobar, Head of Capital Markets.

Ms. Escobar, you may begin.

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 2017.

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. Felipe Bayón, CEO of Ecopetrol.

Other participants include Maria Fernanda Suárez, Vice President of Strategy and Finance; Max Torres, Exploration Vice President; Héctor Manosalva, Acting Executive Vice President; Pedro Manrique, Commercialization and Marketing Vice President; Alberto Consuegra, Acting CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; Rafael Guzmán, Technical Vice President; and Carlos Alberto Vargas, Vice President of Transformation.

We will begin the presentation with the main achievements of the year 2017 followed by the highlights by business segments and financial results under international finance reporting standards.

We will close with the outlook for 2018 and a Q&A session.

I will now hand over the presentation to Ecopetrol's CEO, Felipe Bayón.

Thank you very much, Maria Catalina.

Welcome, everyone, to our 2017 results conference call.

2017 was a year of solid results that confirm our financial and operational strength.

It was a year of great achievements for Ecopetrol.

We are a more efficient and disciplined company that has demonstrated technical capability and resilience to emerge (inaudible) from the crisis of low oil prices.

Let's look at the next slide to review some of the highlights for the year.

In 2017, Ecopetrol reported operating and financial results that are higher than those reported in 2016.

During the year, we continued to focus on excellence and safety in all of our operations achieving our production targets and the increasing reserves, both fundamental pillars for the company's growth.

We recover the growth path with reserves.

At the end of 2017, our reserves stand at 1.6 billion barrels.

The average reserves life increased from 6.8 years to 7.1 years, and the reserve replacement ratio was 126%, the highest of the last 3 years.

This result was largely leveraged by the success of our enhanced oil recovery programs and the constant development of our field.

The new Cartagena Refinery in its second year of operation generated both, positive net profit and EBITDA, marking an important change of trend in the financial figures.

During December, we finalized the Global Performance Test, reaching a sustained load of 144,000 barrels per day, which equates to 96% of the refining capacity.

The refining margin was $12.5 per barrel during the fourth quarter.

This milestone leads to the beginning of the optimization phase.

We are successfully going to a profitable growth period in Ecopetrol.

Net profits for 2017 were COP 6.6 trillion, the highest of the last 4 years and 16% higher than the 2014 figure even with a 45% lower Brent price in 2017.

EBITDA and EBITDA margins reached levels of COP 23 trillion and 42%, respectively.

The EBITDA margin increased by 4 percentage points compared to 2016, ranking amongst the highest in the industry.

We end up the year with a very solid cash position of COP 14.5 trillion.

This will allow us to continue to work the inorganic growth opportunities in the future.

The cash position of the year allowed us to prepay our debt by $2.4 billion, which reflects a 17% reduction of Ecopetrol's Group nominal debt, strengthening our capital structure.

Our gross debt to EBITDA ratio in 2017 was 1.9x versus 2.9x at the end of 2016.

Let's look at the next slide.

Our cash breakeven was $40 per barrel.

As a result of the proactive commercial strategy, the global shortage of heavy crudes on the market appetite for our crudes, the export basket spread was reduced by $2.5 per barrel, standing at $6.9 per barrel, which is 26% better than the one registered in 2016.

We are prepared to take advantage of the opportunities that we have in front of us.

The discipline that we have consolidated along with a more favorable pricing environment will give us the foundations to expand a profitable and safe operation throughout our segments.

We have achieved stable and safe operations in all of our segments.

It is responsible through the operational discipline and compliance with our HSE policies and procedures.

In December, Ecopetrol obtained the OHSAS 18001 certification in Occupational Health & Safety as well as the ISO 14001 certification in Environmental Management.

This actually allows us to continue to rectify our high standards in health, safety and the environment.

It expands our competitiveness as we continue to align ourself with the best practices around the world.

I will now pass the floor to Héctor Manosalva, who will comment about the operational results for the year.

Héctor Manosalva's remarks in English are free translation of the original Spanish version.

Thank you, Felipe.

(inaudible) full year results maintaining an alignment with the company objectives over 2017 and continuing with the growth path along (inaudible).

Before we start with each of the segments, it is important to highlight the stable and secure operations in upfront that the Ecopetrol Group has had confirming the commitment and compliance to our HSE goal.

Now in terms of production, we consider that the most important thing to point out is fulfillment of the annual production goal of 715,000 barrels of oil equivalent per day.

This acquires an additional relevance if I considers the public order situations and operational events that occurred during the year.

Moving to exploration segment, it is worth highlighting the achievement of the exploration activity goal with the drilling of all the wells planned for 2017.

We drill in both, in onshore and offshore.

Among these new wells is the Molusco project.

A milestone for the company as it is the first deep-water well directly operated by Ecopetrol.

It is worth noting that with the preliminary results of this company, in 2017, we were able to surpass the goal of the new exploratory contingent resources with more than 250 million barrels of oil equivalent.

In the Transport segment, another key milestone in 2017 was the start-up of the San Fernando-Monterrey system, which became the main infrastructure of the Orinoquia and is strengthening our capacity to transport heavy crude oil.

This result allowed us to consolidate a more comprehensive transfer spend, which together with the biggest achievement such as increase in viscosity handling capacity, a 600 centistoke and the implementation of (inaudible) rationality in the Bicentenario pipeline allowed us to have a more cost-efficient transfer scheme along with (inaudible) production.

Finally, we have our Refining segment.

During December, we achieved a historical record of crude oil loading of 346,000 barrels a day, including a daily record within the same month of 393,000 barrels per day.

I will leave you now with Carlos Vargas, who will comment about the results of the Transformation initiatives.

Thank you very much.

We continue with our growth transformations program, including efficient strategies in the business group.

These strategies are (inaudible) incorporate in the fourth quarter of 2017 COP 1.2 trillion for accumulated efficiencies of mid-year of COP 2.59 trillion.

Results have been achieved in both pillars.

Income and margins with a contribution of COP 882 billion of commercial strategies and increased (inaudible) budgets.

Excellent CapEx with a result of COP 724 billion mainly in strategies group, operational performance and optimized drilling and completion costs.

Efficiencies in Ecopetrol profit and loss sustaining with the contribution of COP 559 billion, mainly revenues for dilution (inaudible) oil, maintenance and management (inaudible) strategies with subsidiaries.

This contributed efficiencies of COP 423 billion led by the optimization of operation and maintenance (inaudible) as well as the (inaudible) in raw material cost and increase in revenues and margins.

With these results, the efficiencies accumulated by the business group during the last 3 years, 2015 to 2017 reached a total of COP 7 trillion (inaudible) energy management of the business group executed in 2017 made it possible synergies between Refining and Transportation business in order to supply energy using the system infrastructure in growth and margins and savings in the purchase of unregulated energy and sale of energy circles.

We also continue the operational activities for the direct (inaudible) of energy through Ecopetrol this year (inaudible) that we'll start operation in fourth quarter of 2018.

All of the above is reflected in the improvement of the indicators of our key operational metrics.

Now Max Torres is going to talk about exploration.

During the year, 21 wells were drilled, including 19 exploratory and 2 appraisal wells.

So far, 9 discoveries have been announced while 3 other wells are under evaluations.

The average technical success rate for year will be in excess of 50% depending on the results of the evaluation operations.

Expanding our frontiers through Ecopetrol Americas result of Lease Sale 249 during November.

We succeeded in having blocks in Garden Banks both for Mexico, U.S., 77, 78, 121 and 122 throughout portfolio with our partner Repsol.

Our subsidiary Ecopetrol Brazil acquired 446 square kilometers of 3D Seismic in the offshore block, FZAM320 in the Foz de Amazonas basin.

Ecopetrol equity in this block is 70% with our partner JX Nippon 30%.

Currently, Ecopetrol is evaluating blocks offered in Brazil (inaudible) grounds 15 and 4. 2017 was a year of intense exploratory activity, which allowed to consolidate us as a leading oil company and establish a base for future growth of the company.

In summary, the following were the main milestones for the year: highlights were the [world's] Purple Angel-1 and Gorgon-1 in the block Purple Angel.

Both wells operated by Anadarko 50% with Ecopetrol as partner in the block of 50%.

These wells confirm the assistance of a large gas province in the Colombian Caribbean.

Well Gorgon-1 is one of the most important discoveries in the country over the past years, and apart from that, it established an historical record in (inaudible) operated in offshore Colombia of 2316 meters.

We also drilling the world Molusco-1, the first offshore operated well by Ecopetrol through our affiliate Ecopetrol Costa Afuera with 50% working interest on a partnership with the ONGC of 50%.

The well was operationally successful and proved the presence of noncommercial quantities of gas.

In offshore Colombia, drilling of the wells Trogon-1 and Lorito-1 in the block CPO-09 almost completed.

The well Trogon-1 was (inaudible) and Lorito-1 is currently under evaluation with production test ongoing.

Through Hocol, we completed the acquisition of 518 kilometers 2D Seismic in the Sinú-San Jacinto basin.

Also, we surpassed our goal of incorporating 250 million barrels of oil equivalent in contingent resources, allowing to leverage our increase in reserves for the group.

With a view of extending our relation and establishing ourselves as a Pan-American company, we were awarded new exploration blocks in Mexico and in the U.S. Gulf of Mexico with new challenges and opportunities for the company.

Through cost savings and greater efficiency, we managed to lower our funding cost to USD 2.27 per barrel equivalent during 2017.

All our activities through the year that we finalized without any incidents, technical, incremental or operational.

For 2018, the group is planning to drill 12 wells in onshore Colombia, of which Hocol will drill 3 exploration wells and 1 appraisal.

The plan of Ecopetrol is to drill 5 exploration wells and 3 appraisal, all onshore.

The main goal for the year will be to drill in excess of 20 exploration wells.

As for Seismic programs (inaudible), we acquired record 294 kilometers of 2D Seismic in the Sinú-San Jacinto basin and Ecopetrol 162 kilometers 2D Seismic in the Putumayo basin.

Equally, Ecopetrol is planning to purchase Seismic data in Mexico, Gulf of Mexico U.S., Brazil and Colombia in excess of 100,000 kilometers between 2D and 3D programs.

Now Rafael Guzmán will discuss the production for (inaudible) full year.

Thank you, Max.

With the end of 2017, we can say with satisfaction that we have met our production goal by reaching 715,000 barrels per day in average.

As far as reserves is concerned, we incorporated 295 million barrels of oil equivalent.

We successfully continued our recovery program and added reserves for 73 million barrels.

We still endeavor in our commitment to ensure efficient performance in our operations.

(inaudible) allow me to start by dictating the information that you have heard from our CEO.

The figures you can see show the breakdown of the 295 million barrels of crude reserves additions in 2017, which, once again, represented a 126% replacement ratio and the extension of the reserves life to 7.1 years.

The figure displays the reserve based on SEC classifications.

There we can see that 94 million barrels out of the 175 million barrels reserves addition from revisions to previous estimates are explained by market price effect.

The remaining 81 million barrels correspond to new projects and improvements in field production with recovery amounts to 73 million barrels of new reserves.

This concerns the value of the recovery program of Ecopetrol.

In total, 201 million barrels of added reserves are the result of our clinical management and the financial optimization that we have implemented in our organization.

On the production side, Ecopetrol's group achieved on average 715,000 barrels per day, fulfilling our goal and representing production levels close to those of 2016.

In December, our production closed at about 720,000 barrels per day, which sets the pace for our production goal in 2018, that is production between 715,000 barrels per day and 725,000 barrels per day.

Something to highlight is the increase of production in the Rubiales Field.

The field increased its production by 15% compared to 2016.

We implemented several strategies to improve the operation, among which we can list the following: transport rerouting to mitigate pipeline attack effects; maintenance efficiency; improved electrical system stability; down hole dilution to increase production; and incremental activity in well work that we're having an effect on operating cost.

It has been affected in maintaining production.

2017 was also a year dedicated to improving our own capital discipline without sacrificing the plan target in production and reserves for the year.

This refocusing allowed us to review the uncertainty and to strengthen our portfolio to obtain projects with lower breakeven price.

We continue our efforts to increase our efficiencies in the operations.

We are pleased to report an additional reduction of 13% in the cost per foot drilled compared to 2016.

In 2017, about 500 development wells were drilled by Ecopetrol.

On the other hand, we continue to increase the number of developing fields, and today, in addition to La Cira-Infantas, Castilla and Rubiales, we are drilling in Janitzio, Peru, (inaudible).

Now I would like to add a few words on the recovery program, which is a fundamental component of our growth and value-generation strategy.

Approximately 13% of the current production comes from fields that use some type of secondary or tertiary recovery technology, and our objective is to expand technologies of improved recovery to most of the production.

Thanks to the efforts in efficiencies.

The results of the pilot and the restructuring of our project, that program now has close to 65% of the profitable opportunities with an incremental lifting cost close to $5 per barrel, while the developing cost are below $5 per barrel.

Some of the facts to highlight for the recovery program in 2017 are the additional 73 million barrels of new reserves, 139 million barrels of new contingent resources, 12 pilots in operation, 4 new projects in development that is Chichimene, Castillo, Llanito-Gala-Galán and Salina, all of them with water injection and the execution of the chemical EOR project, Dina K. The graph you have at side illustrates the current performance of the water injection project in Chichimene.

As can be seen, it is yielding better response in the recovery factor than initially expected.

This in turn translates into higher volumes, greater efficiencies and a much more competitive cost.

Now I would like to pass the word to Alberto, who will comment on the results of the midstream segment.

Thank you, Rafael.

During the fourth quarter of 2017, we continued achieving positive financial results in the midstream segment.

Our EBITDA for the quarter reached COP 1.9 trillion as result of continued implementation of our cost optimization and efficiency agenda across the segment.

For the full year 2017, EBITDA reached COP 7.9 trillion as well surpassing last year's results by COP 120 billion.

Operational results for the fourth quarter included transportation of 1,106,000 barrels of oil and refined products per day, which represents a 1.3% increase compared to the same period in 2016.

The total volume of crude oil transported during 2017 was 823,000 barrels per day, which represents a reduction of 5% when compared to 2016, due primarily to the disruption of operations at the Caño Limón-Coveñas pipeline, which was inoperative during 53% of the year.

During 2017, approximately 60% of crude oil transported belonged to Ecopetrol and its subsidiaries.

The total volume of refined products transported reached 268,000 barrels per day, increasing 1.9% in 2017 when compared to 2016 due to increased demand for refined products and elimination of restrictions in our Pozos Colorados-Galán system.

Approximately, 23% of refined products transported belonged to Ecopetrol.

It is worth highlighting that in order to comply with transportation commitments, a contingent operation to evaporate oil from fields near Caño Limó was established.

The contingency plan consists of reversing the flow direction of the Bicentenario pipeline, which has been operational in both directions since the end of the first quarter of last year.

During 2017, we begun transporting heavy crude oil from Apiay to Coveñas at 600 centistokes, thus achieving important efficiencies in dilution cost for the upstream segment.

Finally, during the fourth quarter of 2017, we accomplished the commissioning and final tests of the San Fernando-Monterrey system, which began operations on January 1 of this year.

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

Thanks, Alberto.

We're pleased to report that during the fourth quarter of 2017, the Cartagena Refinery successfully completed its global performance test, maintaining an average throughput of 144,000 barrels per day for 60 days.

Throughout 2017, the Cartagena Refinery steadily increased its gross margin obtaining a result of $12.5 per barrel in the fourth quarter, which represents a 21% increase compared to the previous quarter.

The throughput also showed a quarter-on-quarter increase, reaching an average of 147,000 barrels per day in the fourth quarter versus an average of 129,000 barrels per day in the same period of 2016.

With the completion of the stabilization phase, we have started the operations optimization phase in which we will continue looking for improvements in the crude slate and other operational efficiencies.

The Barrancabermeja refinery managed to sustain a higher yield of mid-distillates by decreasing its production of fuel oil, thanks to the implementation of initiatives to increase valuable products despite the lower availability of light crudes.

The refining margin during the fourth quarter reached $12 a barrel compared to $14.8 per barrel in the fourth quarter of 2016.

This decrease is mainly explained by the increase in the crude slate price that was not offset by the increase in product prices.

It is important to note that both the refinery throughput and utilization factor have been impacted by the effect of the heavier crude slate.

It's relevant to highlight that in 2017, Colombia achieved the highest average combined throughput in the history of refining, 345,500 barrels per day, thanks to the operational stability of the 2 refineries.

Of note, on December 20, a new combined throughput record of 393,300 barrels per day was established between the 2 refineries.

In our petrochemical area, Esenttia reported record sales of polypropylene that partially mitigated the impact of higher raw material cost.

On the biofuels front, in 2017, Bioenergy started commercial operations, and the ethanol plant is currently in the stabilization phase and is expected to finish at the end of 2018.

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

Thank you, Tomas.

The solid results of 2017 reflect the consolidation of our corporate strategy focused on cash protection, capital discipline and profitable growth, in line with an operations that managed to maximize the performance of each business segment.

Ecopetrol achieved a net profit of COP 6.6 trillion, the highest of the past 4 years, and 16% higher versus 2014, even with a Brent price that was 45% lower.

EBITDA reached COP 23.1 trillion.

It is important to highlight that we earned COP 5 trillion more in EBITDA when compared to 2015, a year that experienced the same price as 2017 and even lower production.

This was largely the result of the execution of efficiency strategies through the transformation program as well as better operating results.

Finally, operational margins, EBITDA and net margins also continued to improve.

Let's move on to the next slide.

The business group has achieved financial strength as reflected in its main indicators.

We achieved the best EBITDA margin of the past 4 years rising from 37% in 2014 to 42% in 2017, showing an increase of 4 points compared to 2016 and of 7 points compared to the one registered in 2015, with roughly the same price level observed in 2017.

The company's cash position remains solid and leverage dropped considerably versus previous years with significant improvement in the gross debt EBITDA indicator, which closed at 1.9x in 2017 versus 2.9x in 2016.

On the other hand, the net debt to EBITDA indicator reached 1.6x versus 2.4x at the close of 2016.

The cash breakeven for 2017 remained at $40 per barrel.

This indicator demonstrates the company's resilience to an environment of low prices and its financial flexibility for the growth stage.

Let's move on to the next slide to examine the business group's EBITDA performance.

Our efficiency and good operating performance along with better price performance allow us to achieve a margin of 42%.

With these results, Ecopetrol demonstrates that its operational performance consolidates the company as one of the most efficient among the oil and gas industry.

In 2017, the largest contribution to EBITDA came from the exploration and production segment, which reflects the recovery of prices and the discipline in the cost structure.

Likewise, it is important to mention that in the Refining segment, the new Cartagena Refinery reached a positive EBITDA of COP 9 billion, marking the beginning of positive cash generation only 6 months after the 34 units entered into a stable operation.

Transportation segment continues to be essential for the good financial performance of the business group.

Even with lower volumes transported in 2017 and a lower average exchange rate, its revenues remain stable and its EBITDA increased, as a result of our continued efficiency program that allowed optimization of operation and maintenance cost.

Please go to our next slide to see the evolution of net income.

Net profit for 2017 amounted to COP 6.6 trillion, the highest in the last 4 years and more than 4x that of 2016.

Net income excluding impairment recoveries amounted to approximately COP 5.3 trillion, which implies an increase of about COP 3 trillion when compared to the same profit before impairments of 2016.

In 2017, the business group increased its revenue by COP 7.5 trillion, 16% higher than the previous year.

These, as a result of the price increase and the positive margins, achieved in the Cartagena Refinery.

The cost of sales grew COP 1.9 trillion, largely due to the effect of higher price on imported purchases, including maintenance activities and contracted services.

It is worth mentioning a decline of volume purchase of crude and products explained by 3 main factors: first, substitution by-products produced by the Cartagena Refinery.

Second, lower interest of crudes for loading the Cartagena Refinery uses 2 substitutions by local group.

And third, lower consumptions of diluent due to a transformational strategy and commercialization of high-viscosity crudes.

Operating expenses were down from COP 100 billion due to a combined effect of: first, lower wealth tax for approximately COP 200 billion, and second, a profit of around COP 450 billion generated in the acquisition of 11.6% stake in the K2 sales in the Gulf of Mexico in 2017.

These expenses were partially offset by the recognition for unsuccessful Seismic activity in exploratory wells.

Depreciation was up COP 700 billion, primarily due to lower incorporation of reserve in 2016 versus 2015, the commissioning of Ecopetrol America's Gunflint Field in August of 2016 and the start of project P135 (inaudible) among other concepts.

The exchange rate differential result had a change of COP 1 trillion, given that the exchange rate impact in 2017 was neutral when compared to an income of COP 962 billion reported in the previous year.

The change in the net dollar position was reduced to almost 0 by December 2017 as a result of the application of hedge accounting and the efficient allocation of debt among the companies comprising the business group.

The provision for income tax increased by COP 9 billion as a result of the better financial performance of the year.

On the other hand, the effective tax rate dropped from 66% in 2016 to 43% in 2017.

The decrease mainly reflects the change from losses to profits in Reficar, which were in sum deploying a loss of COP 2.4 trillion in 2016 to a positive result in 2017.

Ecopetrol America also achieved a positive result in 2017.

The change in impairment net of taxes of long-term average is the result of having an impairment recovery of COP 1.3 trillion in 2017 when compared to an impairment expense in the previous year of COP 0.8 trillion.

Let's move on to the next slide.

CapEx execution versus the 2017 plan is mainly explained by: first, the renegotiation of $150 million of commitment with the National Hydrocarbons Agency.

Second, $245 million of CapEx savings and efficiency, mainly driven by strategies in drilling execution.

And third, a lower CapEx execution of roughly $310 million of activities shifted towards 2018 due to a higher time in maturing our project.

It is important to mention that despite the lower CapEx execution, we accomplished all the targets set for 2017.

Now let's move on the next slide to examine the business group's cash flow.

The business group closed at a significant cash position of COP 14.5 trillion.

Operating cash flow in 2017 was COP 17 trillion, reflecting the business efficient operations and the recovery in international crude prices.

The investment flow in 2017 totaled COP 4.4 trillion, driven primarily by the resumption of activity at the Castilla and Rubiales fields, the development of enhanced oil recovery projects in fields such as La Cira and Chichimene and higher exploration activity.

CapEx deployed amounted to COP 6.1 trillion.

As part of the investment activities, it is worth highlighting the inflow coming from the sale of our shares (inaudible) as well as the dividends received from Equion (inaudible) and the revenue from the sales of minor fields.

Cash flow from financing activities totaled COP 12.8 trillion, out of which COP 8.9 trillion were debt amortizations, COP 2.4 trillion interest payments and a COP 1.5 trillion dividend distribution to our shareholders and to our minority shareholders on our subsidiaries.

Throughout 2017, we prepaid $2.4 billion of our foreign currency debt, allowing a decline in the group's leverage to 37% in 2017 from 45% in 2016.

Those are strengthening the business group's capital structure.

The results achieved by the Ecopetrol group are a clear proof of the consolidation of our transformational strategy.

Once our old price collapse was overcome, Ecopetrol has become a more efficient player with a robust financial position to walk the path of growth.

I will now turn the floor to the CEO for his concluding remarks.

Thank you very much, Maria Fernanda.

As we enter 2018, we see all the important challenges that we have in front of us.

We aim to increase our production to reach the range of 715,000 barrels equivalent per day to 725,000 barrels equivalent per day.

We want to maintain our operational excellence and safety in all of our operations.

We want to continue to produce sound financial metrics.

All of these are priorities.

In 2018, we plan to invest between COP 3.5 billion and COP 4 billion with a marked focus on exploration and production.

Investments in these segments should amount to 85% of the overall CapEx.

Exploration and production, we're planning to drill more than 620 development wells, and to date, we already have 12 confirmed exploration wells.

Likewise, we expect to continue the developing activities in about 20 of our enhanced oil recovery projects.

In the Refining segment, efforts will be focused in optimizing the operation of the new Cartagena Refinery.

We expect an EBITDA of at least COP 500 billion and a 2-digit Refining margin.

The company will achieve a milestone in refined products with its 2 refineries, Barranca and Cartagena, processing between 350,000 barrels and 375,000 barrels per day.

Ecopetrol is a company focused on growth and development for the country, the care of its workers, the communities in which we operate, whilst we seek shared prosperity and operational safety at all levels.

I will now open the floor to questions and answers.

Thank you very much.

(Operator Instructions) And our first question comes from Pavel from Raymond James.

We have seen in January an acceleration in pipeline attacks by the ELN Group, and given the time that has passed since then, can you give some perspective on how those pipeline attacks have disrupted the company's production so far into 2018?

Absolutely, Pavel.

Thank you so much for your question.

In respect to the Caño Limón pipeline, which is the one you're referring to, we've seen this year 15 attacks compared to 62 attacks last year.

Clearly, if we look at the period from January 10, when the -- that bilateral troops fire was ceased, we actually have seen an increase in these terrorist attacks and the activity.

We're working very, very closely with the authorities, the armed forces, police, the local authorities to ensure that we can go into the different areas where we've seen the attacks to assess the situation and the condition on each and every one of these geographically pinpointed areas and ensure that we can repair the pipeline and bring it back to operation.

But I think it's also important to remind ourselves that we have not seen the need or we have not had to stop production or cease production at the Caño Limón field.

And the reason for that is that close to 12 to 14 months ago, we established the (inaudible) where we can now flow 2 ways using the Bicentenario Oleoducto, which allows us a lot of flexibility.

So bottom line, we've seen the pipeline hit and which tells the message that the biggest impact that we've seen is to those communities that live around the pipeline, to the environment which sometimes is a very big or could be a very big impact.

But from an operational point of view, we haven't seen the need to actually shutdown any production from Caño Limón.

So we have the flexibility, and in that sense, there is no impact in terms of volumes so far.

Okay.

And following up on that, you ended last year at 717 MBOE a day of production.

You're guiding to essentially the same in 2018.

Given that your capital budget is increasing by more than 30%, what explains the lack of production growth in your production guidance?

Thanks, Pavel.

And I think there are several things context wise.

Remember that some of our fields have very steep and sharp declines that we're fighting day in and day out.

So some of those fields will have declines that range from 15% to 25%.

Having said that, I'm just case in point, for example, Rubiales, which we took the operation less than 24 months ago, we've actually been able to increase production in Rubiales.

So there's things that we're doing that are working, but we need to sort of run very fast to stay still.

And in that sense, we've given a guidance of 715,000 barrels to 725,000 barrels per day for 2018.

We're in the range for that number, but we do need to acknowledge that, for example, during the last month of February, we did have some impacts in our production in Meta in our areas of operation around Castilla and Chichimene.

There was some social unrest.

There were some attacks to the infrastructure, mainly electrical switchgear and some of the other electrical facilities.

This was sort of 10 to 12 days ago.

We've now managed to reestablish all of the production from the field.

So we do see some challenges.

I just want to be very blunt in terms of saying that there's always challenges in and around the operation, but we feel very, very comfortable in terms of the guidance we've given of production.

To your point, clearly, the challenge that we have and what we'll need to demonstrate is our ability to deploy the CapEx in a way that's efficient that sounds and underpins production growth.

Our following question comes from [Leonardo Marcolis] from UBS.

I have 2 questions.

The first one is, what should we expect from Reficar in terms of margins and utilization rates this year?

And my second question is a follow-up from the Brazil's one.

Do you have any additional cost by using Bicentenario pipeline?

Is that using Caño Limón?

And how Meta's situation should affect your figures in the first quarter?

[Leonardo], thanks for your question.

This is Tomas Hernandez, Vice President, Refining.

Yes, your question on the throughput for 2018, we're looking at throughput between 135,000 barrels and 145,000 barrels a day for Reficar.

And just as a reminder, we just completed -- we completed the stabilization phase, which was a complete success.

We did the Global Performance Test, and we go into an optimization phase now.

And that includes looking at the diets of crudes that we have in the refinery.

We're looking at maintaining double-digit margins for 2018 as we did in the fourth quarter.

As you know, we had $12.5 a barrel in the fourth quarter of 2017, and we expect that to continue.

And as a reminder, Reficar, we completed the stabilization phase in 18 months.

Just a reminder, we started the plants -- all the plants in July of 2016.

In 18 months, we completed the complete stabilization process.

And when you look at the industry standard across Refining globally, that standard is more like 2 to 3 years.

So that was a great process we finished and was a result of great teamwork at the refinery, and also, Ecopetrol support groups coming together and making that a success.

We expect that to continue into 2018, obviously, and continue with the optimization phase.

Leonardo, our apologies, can you please repeat your second question to make sure that we understood correctly?

Sure.

Do you have any additional cost by using Bicentenario pipeline instead using Caño Limón?

And how Meta's situation should affect your production figures in your first quarter?

Leonardo, thank you for the question.

Regarding our operational situation on Bicentenario and Caño Limón, I think that the most important thing to highlight is that on previous times when we have those kind of issues, we needed to stop production.

And that has not been the case this time.

And in terms of production, that's what you can expect if things stay as they are right now.

In terms of cost, I'll have to say that for the upstream segment, it increases its cost because the upstream segment has a cheaper pay with Bicentenario, and when they have to use the other corridor and transport (inaudible), they have to pay both the people pay at Bicentenario and also the tariff at (inaudible).

However, this is highly compensated by the revenues that we get out of Ocensa.

So for the group, it does not account for an extra cost, but it does for the...

And regarding Meta's, that was the win situation?

Meta?

Yes.

Can you expand a bit in terms of Meta?

I mean, should it affect your production this quarter?

Yes, we should see an impact in the quarter.

I think the good news is we've managed to restore production fully.

We've actually seen an increase from our production.

We're doing some things around our operating field, but we may see a small impact in the first quarter because of that situation.

Our following question comes from Daniel Guardiola from BTG Pactual.

So I have a couple of questions here.

One related to hedging strategy.

The other to CapEx and potential inorganic growth.

So the first one basically, I mean, the -- in the last weeks, we saw the Finance Minister announcing that they were analyzing the possibility of developing an oil hedging strategy in order to move the volatility of the oil system.

And in that sense, I wanted to ask you guys if the company is considering to put in place a hedging strategy and take advantage of the current high oil price scenario and somehow locking profit right now?

So that's my first question.

And my second question is regarding to the already announced potential source of reserves growth coming through inorganic growth.

And I will like to know if you guys could share with us more color on what strategy that you're looking at right now in terms of metrics, countries and the main rationale behind the strategy to possibly add reserves inorganically?

Daniel, thank you for the question.

Well, regarding our hedging, let me tell you 2 things.

First of all, what the Minister of Finance announced in the last 2 weeks, it's different from the company's.

What the government has said is that they are interested in using or applying a program similar to the one that Mexico has, where they hedge part of the exposure of the national budget to the oil prices.

In terms of the company's hedging strategies, what we said is that we are in the process of making a full analysis regarding the type of hedging policy that we can use.

And that will be something that will be ended in the second quarter of 2018.

And we expect to have something by the third quarter of 2018.

It is important to mention that we, at Ecopetrol, have both the exposure to the Brent price but also to FX price.

So fully analyzing all the risk factors affecting our financial statements and also our cash flow, it's part of what we're working at currently.

However, I would also like to highlight that due to our access to that strategy and accounting hedging strategy by the end of 2017, we were able to have a neutral position in terms of FX exposure that was something that brought some noise in the previous years.

Daniel, with respect to your question on inorganic growth and reserves, what we've said -- and there's 2 or 3 things that are worth highlighting.

The first one, strategically, we've defined Ecopetrol as a Pan-American company.

So from that point of view, we'll be operating in the Americas.

We have already a well-established and very solid position in the U.S. that we've grown recently.

As a matter of fact, we did a deepening in our interest in the K2 field, which was extremely accretive to the value of our business in the U.S. in terms of production, in terms of reserves, in terms of lifting costs.

So clearly something that we value, and we will do a bit more of those when they come.

But these are opportunistic.

They would come on specific timings.

So in terms of countries, we have a very strong presence in the U.S. We are looking at the U.S. Last year, we were awarded a couple blocks in Mexico, and we have a very, very solid and deep relationship with Pemex.

So we'll be looking at Mexico as well.

We're looking intensely at Brazil, and we're looking at our neighbors as well.

So technically, we're conducting a very detailed assessment of opportunities in the continent.

And you can very well understand that we won't be able to give you specific details on the opportunities themselves.

But when they do come, we'll report them as soon as we can in terms of what we're thinking.

The good news, again, and I'll just ring for some of the messages that we gave there in the presentation, we have a very strong financial position.

We have a solid cash position.

We've actually reduced our leverage.

So I think we're very well placed to ensure that when we need to deploy the inorganic opportunities, we can do so.

Our next question comes from Frank McGann from Bank of America Merrill Lynch.

Just a quick question in terms of Rubiales, your production has increased a bit in the quarter, and obviously, I assume you're doing a lot of work there.

I was just wondering, how you're seeing that field as well as maybe the result of some of the other mature fields that you have?

(inaudible) you're seeing on cost, I mean, in order to get the positive results that you're getting?

Frank, thank you for your question.

The Rubiales field, I think, it's a success story for us.

We initiated direct operation just recently and embark on important investment in the field.

And we saw drilling of many wells last year and with those wells, with that investment, we are able to revert the trend of the field.

It was a declining field, and we were able to increase production.

And you have seen that in the last year.

Our goal for the field is to continue more or less the same investment that we have seen last year this year mostly to drilling wells, and also, increasing the capacity to inject water in the field.

Those are the 2 priorities we have the field, and our aim is to maintain the production of this high-potential field for the future.

Okay.

And in terms of cost, the unit cost -- do they rise significantly as you do this work?

Or do they stay the similar?

Or how...

No, we do not expect to have increasing cost.

We do produce more water.

So with that water, we do see an incremental cost.

But through efficiencies that we have gained in the operation, we were able to offset that incremental cost.

So actually, if you see, we have seen a reduction in the cost in the field in the unit basis, and we expect to maintain that cost for the future.

Our next question comes from Andrés Duarte from Corficolombiana.

I have 2 questions.

The first one is -- has to do with reserves and the other one has to do with the refining activity.

So what's the midterm expectation or forecast of the company related to the certification of offshore, got to say, reserves?

That's the first question.

And the second question is, how long does the optimization stage that (inaudible) is undertaking -- takes?

And what's the target EBITDA and EBITDA margin for the company as well as for the activity of refining?

Yes, Andrés, thanks for your questions.

So in terms of reserves, if I may state back for a bit, if you look at 2015 and '16, the overall net reserve result was neutral.

Between '15 and '16, we did not advance in our reserves booking.

In terms of '17, as we announced last week, we brought our reserves to 1.659 billion barrels, which is 126% reserves replacement ratio.

In terms of offshore gas, we need 2 things that would have some very, very good results in terms of discoveries.

So 2014, we had Orca, and then '15, we had Kronos.

And then all the way to '17, when we confirmed the presence of a massive, very large gas province.

As you will know, these would be contingent resources that need to be moved into reserves once we have development plans in place and once we have sanction of the projects and gas contracts.

So there will be a bit of time or a lag between the discoveries and when these are actually booked as reserves.

What we're actually doing is pushing very, very hard to ensure that some of those discoveries, in particular, the ones in Wahida, the ones related to Orca, can be brought to the market quickly.

There is a declining production in some of the fields in Wahida.

We have the discoveries.

We have a very strong partnership in that area.

So that's something that we're working hard to ensure that we can bring those molecules to the market.

In terms of refining, and then I'll hand over to Tomas Hernandez, we've said that since we started the first unit in Reficar, which was October 2015, it took us between 24, 26 months before we had the Global Performance Test done on the refinery.

This was December 2017.

So 34 individual plans are working very well.

More importantly, the whole refinery working extremely well.

We've talked about not only the positive EBITDA and profit in Reficar, but also in terms of the margins that we close at $12.5 per barrel.

But I'll let Tomas to take the question in terms of how do we actually see things moving forward?

All right.

Thank you very much, Andrés.

Yes.

The first part of your question was on optimization, and we like to think of the optimization phase as continuous and never ending, right?

But having said that, we have defined about 150 to 200 initiatives that we prioritized, and we're focused on completing those.

In this year, we're focusing on diet initiatives, we're focusing on cost efficiencies, and we're looking at synergies between Barrancabermeja and Cartagena refineries.

That's the focus of the optimization phase in 2018.

We have many other initiatives that we'll continue on in other years, but that's the focus for 2018.

As far as the EBITDA target, we've talked about COP 500 billion, minimum COP 500 billion, as you know that depends on international margins for -- in the market and how they work through the year.

Both refineries expecting to run very well next year and both expect them to be in double-digit margins for 2018.

Our next question comes from [Carlos Rodriguez] from (inaudible).

I have one question.

Given your investment plan between $2.5 billion or $4 billion, do you have any guidance about the replacement reserve ratio for this year?

I mean, what number are you expecting for the next year in terms of this ratio?

Or if you have any target about the reserve life index for the near term that you will feel comfortable?

Okay.

So in terms of reserves replacement ratio for '18, the way we think about is that, as a minimum, we need to replace a 100% of our reserves each year.

Last year, we were successful in basically changing the declining trend in reserves replacement that we have seen over the last couple of years.

So our aim is to ensure that we currently stays at (inaudible) 100% reserves, as we did in '17 to replace each and every barrel that we produce.

But (inaudible) ratio of (inaudible).

So I think that's something that's achievable, and we need to look at different sources to replenish the hopper in terms of reserves.

There's existing fields and recovery, and we have had some very, very successful pilots in terms of EOR secondary and tertiary recoveries in terms of bringing exploration contingent resources quicker into reserves and production, but also in terms of our inorganic focus that we want to deepen in 2018.

Thank you.

We have no further questions at this time.

I'd like to turn the call over to Felipe Bayón for final remarks.

Thank you very much, and thanks for taking part in the conference call for 4Q and 2017 results.

I want to first acknowledge our workers, employees and everybody who day in and day out is committed to ensure that we produce safe, sustainable operational and financial results.

Today, we've actually presented what we think is a very solid set of results.

It demonstrates that we are actually deploying the strategy in a way that's successful.

We've talked about some of the challenges that we have in respect of the operational environment and how we're dealing with them.

But I would say that we're very, very comfortable in terms of the direction in which the group is going, and again, 4Q and 2017 demonstrates that the transformation, the adjustments, the focus on efficiency and continuous improvement plays out.

We have a very solid financial position, and we look forward to continue our discussions in the next quarterly results.

Thanks again for your participation, and have a great day.

Thank you.

You may now disconnect.