Ecopetrol SA (EC) 2018 Q1 法說會逐字稿

Welcome to Ecopetrol's First Quarter 2018 Operational and Financial Results Conference Call.

My name is Hilda, and I will 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 Ms. 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 first quarter of 2018.

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 and 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, CFO; Max Torres, Exploration Vice President; Pedro Manrique, Acting Executive Vice President; Alberto Consuegra, Acting CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; and Rafael Guzman, Technical Vice President.

We will begin the presentation with the main achievements of the quarter followed by the highlights by business segments and financial results under International Financial Reporting Standards.

We will close with the Q&A session.

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

Thank you, Maria Catalina, and welcome everyone to our first quarter 2018 results conference call.

I am pleased to share with you the best quarterly financial results of the past 4 years.

These reflect amongst other things, greater efficiency and cost reductions through the transformation plan; our commitment to capital discipline; stabilization of the new Cartagena Refinery; and better oil prices and margins.

Our commercial strategy continues to yield good results.

The export basket spread for the quarter was $7.3 against the Brent.

This is 12% better than the first quarter of the previous year.

It is important to note that this result was reached in the midst of an uptrend in price of Brent crude.

For the quarter, EBITDA and EBITDA margin reached levels of COP 7.1 trillion and 49% respectively.

The average production for the quarter was 701,000 barrels equivalent of oil per day.

The average production for the quarter was 701,000 barrels of oil equivalent per day, affected by public unrest that cause a temporary closure of the Castilla, Chichimene and CPO9 fields in Meta Department.

This had an estimated impact of 12,000 barrels of oil equivalent per day for the quarter, which equates to 3,000 barrels of oil equivalent per day for the year.

During March, we recovered the production path.

And we reached $712,000 barrels of oil equivalent per day average monthly rate.

In the production, that was 715,000 barrels per day at the end of the month.

In the midstream segment, the San Fernando-Monterrey system entered into operation of January 1, 2018.

This system is very important in the evacuation and transportation of extra-heavy crudes from our main fields.

As for the downstream segment, we had a stable operation in our refinery system, with a total throughput of approximately 360,000 barrels per day.

During March, we reached a milestone in the country's refining industry.

The maximum historical throughput of the new Cartagena refinery was achieved, reaching an average of 160,000 barrels per day.

And actually between March 14 and the 22nd refined over 165,000 barrels per day.

With these results, we now have additional elements to continue in our optimization process.

During the quarter, we had an environmental emergency that adheres to manage it.

The Lisama 158 well incident near Barrancabermeja in which between the period March 12 and 15, we estimate 550 barrels of crude mixed with mud and water reached the creeks of La Lizama and Caño Muerto.

Ecopetrol promptly activated its contingency plan to deal with this situation.

We have contained this field and were working to resolve all the environmental issues and working with the community to ensure that we minimize any impacts.

On March 30, at 6:30 p.m, both the outcrop and the Lisama well stopped flowing.

We're currently working with the snubbing unit to ensure that we can technically seal the well and abandon it definitely.

We have strengthened due to this challenging environment both in publican rest and some unforeseen operational issues.

We're demonstrating our effectiveness in our Emergency Response and Protocols and our ability to react to these unforeseen events.

I'll now pass on the floor to Max Torres, our VP of Exploration, who will talk to you about the exploration results for the quarter.

Thank you, Felipe, good morning.

During the first quarter 2018, we completed the agreement with wells, Búfalo-1 and Jaspe6D.

This one with our partner Frontera.

The former is located in the Middle Magdalena Valley and is under evaluation.

The later located in the Eastern Llanos Basin was declared successful.

Meanwhile, wells drilled in 2017 like Bonifacio-1 and Godric Norte-1 in Llanos Basin and Pollera-1 in (inaudible) basin are still under evaluation.

The wells Lorito-1 and Infantas Oriente-1 are currently under long-term testing.

Continuing with our exploration campaign 2018, two operational wells are currently being drilled with our partner Parex: Coyote-2, which is located in the Middle Magdalena Valley in the De Mares block; and Capachos Sur-2 located in the Piedemonte basin in the Capachos block.

Concerning our 2D seismic activity, our subsidiary, Hocol S.A. is progressing with the acquisition of 294 kilometers in block SN-15.

Currently in [sovereign] activity with 60% progress.

Internationally and with the objective of strengthening our exploration activity to achieve our strategic roles of growth and sustainability, we participated in Mexico Bid Round 3.1, bidded on blocks shallow water #28 and #31.

We continue in the preparation process to participate in Brazil's Bid Round in the presalt Round 4. Now Rafael will comment on our production results.

Thank you, Max.

In the first part of 2018, the average production of Ecopetrol Group is 701,000 barrels of oil equivalent per day.

That is 1.5% below the same period in the previous year.

The results were affected by challenging community issues that caused the temporary closure of the Castilla, Chichimene and CPO9 fields and the temporary reduction in water disposal capacity in Rubiales.

In spite of the events that occurred in February, in March, it was positive to recover the production to 712,000 barrels of oil equivalent per day and 715,000 barrels of oil equivalent per day at the end of March.

This lead us on the path to comply with the goal established for the year.

To compensate for the events of the first quarter, the company has taken a series of measures among which we have: First, creating well work and the importance of drilling campaign in Castilla with an additional rate; second, anticipation of the development of the project of the Apiay field from 2019 to 2018 (sic) [from 2018 to 2019]; and anticipation and acceleration in doing 40-acre water injection for the Chichimene field; and finally, increasing workover activity in the Castilla field, among others.

In 2018, we have increased drilling activity.

In addition to drilling in Castilla, Rubiales, Quifa and the Cira Infantas fields, we have reactivated the campaign in 7 fields, that is: Dina, Arrayan, Tibú, Llanito, Yarigui, Akacias and Chichimene.

We currently have 18 rigs in direct operation, which has doubled the number of rigs used in 2017.

In the second semester, we expect the simultaneous operation of 27 rigs in our direct operation.

In addition to this 27 rigs breaks during 2018, we will have an additional 25 rigs to our operations with partners.

All these activities will allow us to reach our production goal between 715,000 and 725,000 barrels of oil equivalent per day in 2018.

Our increase in Recovery Factor Program continues with full strength.

In total, and since the start of the problem, we have undertaken 42 pilots.

In total, since the start of the program, we have undertaken 42 pilots.

Selling these pilots were entered to the program this year.

Of the 42 pilots, 21 are currently in operation and 21 have ended the plan period.

For the 21 pilots that have been completed 10 are being structured for field expansion.

6 are in evaluation for possible expansion and 5 were documented for future expansion considerations.

In total, we have 16 pilots in process of expansion.

There are different technologies that are being applied in the fields to these pilots will allow us to increase the recovery factor.

In the process of secondary recovery, by water injection, we estimate an incremental volume recovery between 3% and 11%.

The tertiary recovery by injection of improved water and gas, we estimate an incremental recovery factor between 5% and 11%.

With tertiary recovery by vapor injection, we estimate an incremental recovery factor greater than 20%.

The graph illustrates improving efficiency of our program that comes from better understanding given by the pilots.

We continue increasing oil recovery and equally important, we currently recorded more oil for each barrel of water injected.

In the following slide, we would like to share with you the execution of the improved water injection project of the Dina K field.

7 wells out of the 16 planned wells have been drilled and completed.

The graphs illustrate the up-to-date results and the expected recovery of the pilot and full-field expansion.

(inaudible) , 1.6% incremental in Recovery Factor in 4 injection patterns gives confidence to the expected incremental Recovery Factory between 5% to 7%; for the full-field applications, it is 11 injection patterns.

Now I'll pass on to Alberto, who will comment on the results of the transport segment.

Thank you, Rafael.

Good morning, during the first quarter of 2018, we continued achieving positive financial results in the midstream segment.

Our EBITDA for the quarter reached COP 2.2 trillion, mainly as a result of higher income across the segment.

The COP 2.2 trillion EBITDA surpassed last year's first quarter results by COP 255 billion, representing an increase of 13%.

Operational results for the first quarter included transportation of 1,078,000 barrels of oil and refined products per day, which represents a 0.7% increase compared to the same period of 2017.

The total volume of crude oil transported during the first quarter of 2018 was 796,000 barrels per day, which represents a reduction of 1.2% when compared to the same period of 2017, due primarily to lower production from Chichimene and Castilla fields related to public order problems during the beginning of the year.

In the first quarter of 2018, approximately 70% of crude oil transported belong to Ecopetrol and its subsidiaries.

It is worth highlighting that the contingent operation of the Bicentenario pipeline allow the evacuation of 33,000 barrels per day during the first quarter of 2018 as the Caño Limón-Coveñas pipeline was operational just over 9 days of 2018.

During the first quarter of 2018, 12 reversion cycles have been made.

The total volume of refined products transported during the first quarter of 2018 increased 6.3% in comparison with the same period of 2017, reaching 282,000 barrels per day.

These are due mainly to the fact that during the first quarter of 2017, the Cartagena-Barranquilla line was out of operation for 21 days to address mechanical integrity problems.

Approximately 28% of refined products transported belong to Ecopetrol.

Finally, on January 1, 2018, the San Fernando-Apiay system began operations, transporting 206,000 barrels per day during the first quarter 2018.

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

Thanks, Alberto.

In the first quarter of 2018, the Cartagena Refinery increased its gross margin to $11.50 per barrel, which represents a 69% increase compared to the same period in 2017.

It is relevant to highlight that the Cartagena refinery has maintained double-digit gross margin for 7 consecutive months since September 2017 demonstrating steady consolidation of its operations.

The throughput also showed growth reaching an average of 144,000 barrels per day in the first quarter versus an average of 123,000 barrels per day during the same in 2017.

In March, the refinery established a record average throughput of 160,000 barrels per day.

the Barrancabermeja refinery continue its stable operation.

The refining margin during the first quarter reached $11.80 per barrel compared to $14.60 per barrel in the first quarter of 2017.

This decrease is mainly explained by lower gasoline and fuel oil price differentials in line with the behavior of international markets and the increase in the domestic crude oil price.

The throughput remained stable in respect to the same period in the previous year.

On the biofuels front, Bioenergy continues in the stabilization phase of its operation.

It's worth mentioning in March 2018, Bioenergy completed its first European harvest and lessons learned have been included in the next operating line.

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

Thank you, Tomas.

During the first quarter of 2018, Ecopetrol Business Group posted its best quarterly financial results over the past 4 years.

Earnings of COP 2.6 trillion, EBITDA of COP 7.1 trillion, and an EBITDA margin of 49%.

These results were actually in the midst of public security problems that affected production during the quarter.

The results continue to demonstrate our solid operational performance and ability to convert better prices into better returns for our shareholders.

The EBITDA margin of 49% is the highest since 2014, when prices were close to $100 per barrel.

This was due to our operating performance.

Structural efficiencies achieved since 2015 and better prices recording during the quarter.

The value creation of all segments are reflected in better results and better margins, demonstrating the benefits of being an integrated company.

The largest contribution to EBITDA for the quarter came from exploration and production, reaching COP 4.3 trillion compared to COP 3.3 trillion in the same period of 2017.

These results were achieved despite 93,000 barrels of equivalent per day of lower sales volume.

The downstream segment had a slight increase in its contribution to EBITDA due to Reficar's operating performance offsetting the lower results obtained by the Barrancabermeja refinery, which is saving a less favorable pricing environment for fuel oil.

The midstream segment's EBITDA increased 13% compared to the results achieved in the same period of 2017.

This is why initiatives implemented in the transformation plan and even with a lower volume and lower exchange rate.

Let's move on to our next slide to see the evolution of net income.

Net income for the first quarter of 2018 totaled COP 2.6 trillion compared to COP 886 billion reached during the same period of 2017.

Net income increased 195%, which places us in the industry's first quartile in terms of net results growth.

Business group revenue grows COP 1.3 trillion, which results in a 10% growth compared to the first quarter of 2017.

As a combined result of the increasing Brent crude benchmark prices from $55 per barrel in the first quarter of 2017 to $67 per barrel in the first quarter of 2018.

Our better spread on the export crude basket of $1 per barrel offset by lower sales volume due to higher domestic use of Reficar products and lower production of 15,000 barrels per day equivalent due to public security and operational problems.

Cost of sales dropped COP 300 billion, mainly due to a decline in purchases of diesel and gasoline due to substitution for products from the Cartagena refinery.

Increase of domestic crudes in the Cartagena refinery's diet.

From 39% of all crudes in the first quarter of 2017 to 71% in the first quarter of 2018.

Our lower diluent consumption going from our dilution factor of 16.6% in the first quarter of 2017 to 14.8% in the first quarter of 2018.

The successful heavy crude transportation strategy resulted in a decrease of the dilution cost per barrel from $4.5 in first quarter of 2017 to $3.88 per barrel in this quarter.

These results reflect the synergies among segments and the consolidation of the operations of the Cartagena Refinery.

On the other hand, depreciation and amortization decreasing the first quarter of 2018 compare to the same period of 2017, mainly due to a high incorporation of reserves in 2017 compared to 2016.

And in fact, it was slightly offset by the higher shares in the K2 field.

Operating expenses dropped more than COP 300 billion, primarily due to the elimination of the wealth tax, which was recognized for the last time in the first quarter of 2017.

These items is compensated by a greater seismic and exploratory activity at Ecopetrol Brasil and Hocol.

Foreign exchange gains reflected the decline in exposure to exchange rate tends to optimization of the net dollar position.

From a loss of COP 449 billion in the first quarter of 2017 to a gain of COP 22 billion in the first quarter of 2018.

Interest expenses have savings of COP 51 billion due to the strategy of retaining COP 2.4 billion in 2017 on the lowest exchange rate.

The effective income rate for the first quarter of 2018 was 40%, this decline versus the previous year was due to the better results obtained at a Cartagena Refinery in Ecopetrol América and the drop of 300 basis points in the nominal tax rate.

Now let's go to our next slide to examine the business group's cash flow.

During the first quarter of 2018, the company's liquidity remains solid with the cash position of COP 16.6 trillion, which includes a cash balance of some COP 8 trillion and short- and medium-term investment of COP 8.6 trillion.

Operating cash flow totaled COP 4.7 trillion during the quarter.

The investment flow during the first quarter of 2018 totaled COP 3.6 trillion, driven by higher investments in CapEx and investments in portfolio security.

CapEx execution at the end of March amounted to COP 1.2 trillion, during the first quarter, public security problems forced us to shift activity of close to COP 150 billion towards the second quarter of 2018.

In financing activities, capital and interest payments totaled COP 900 billion.

These results in net debt-to-EBITDA ratio of 1.7x in comparison to 2.6x in the same period of 2017.

In turn, the net debt-to-EBITDA ratio reached a level of 1x compared to 1.7x as the close of March of the previous year.

The financial results obtained reflect an integrated company focused on growth and value creation.

Our financial strength and efficiency yielded a solid cash position, which allow us to continue focusing on seeking growth alternatives, preserving the achieved efficiencies and maintaining capital discipline.

I will now pass the floor to the CEO for his final conclusion.

Maria Fernanda, thank you very much.

Both our financial and operational results for the quarter were good.

We continue to demonstrate tenacity, resilience and responsiveness in our operations.

We are set to meet our objectives, the production target for 2018 is maintained in the range between 715,000 and 725,000 barrels of oil equivalent per day.

Our priority is to continue with our operational excellence, care for the environment, safety in everything that we do and continue to strengthen the solid financial metrics that we have achieved to date.

I will now open up the floor for questions and answers.

Thank you very much.

(Operator Instructions) We have a question from Frank McGann with Bank of America.

Just two questions if I could.

One, just in terms of the cost pressures that you may be seeing in the E&P business.

I'm just wondering, if you're seeing any and what specific types of pressures you might be seeing from some suppliers or elsewhere?

And then secondly, with the stronger results in the various strong oil prices environment that we're seeing right now.

I was wondering, if you had thought of potentially expanding your CapEx program and moving a little bit more quickly in some of the developments that you have in some of your areas?

Thanks, Frank.

Well in terms of any potential cost pressure in the E&P business, what we are seeing is that as we are ramping up on the activity, particularly around drilling development wells and all the services related to drilling those wells and putting them into production, we have clearly caught up with the offer in the market in terms of equipment, in terms of rigs.

So it's something that we indeed are watching quite closely.

We haven't seen any dramatic increase in terms of any potential cost pressure.

But it's, I think, relevant to say that the level of activity that we are actually conducting this year is indeed ensuring that most of the equipment, if not, all of the equipment in country is being put at use; which is to some extent is actually very good news, but your point is very well taken.

It's something that we watched very closely.

In terms of your second question and I was having the ability or desire to expand the CapEx, I think that all the time we're looking at opportunities particularly around ILX, the near field exploration, things that we can do more quickly and we can take some developments quickly from them being prospects into them being actually resources and reserves and production and we've done some of those recently.

We can talk in more detail, but I think it's important to stress that we want to remain very, very disciplined in terms of both maturing our projects and ensuring that we abide by our capital discipline.

Those are very, very important in terms of assuring that we stay focused.

And to some extent, even though prices have actually been higher in the 1Q of this year versus a year ago, we want to be very focused in terms of the long term and ensuring that we can have flexibility as you point out, but we want to stay very disciplined in terms of our investments going forward.

Okay, if I could just follow up just in terms of how you're looking at the opportunity you have in Brazil, Mexico I mean the U.S. Gulf of Mexico, what are your activities right now?

And what are you seeing for the next 1 to 2 years there?

In terms of Mexico and I'll start there.

We've recently won a couple of contracts, those are exploration contracts.

We have one with Petronas and one with Pemex.

We're working on all of the design and planning stages of the activity that we need to conduct in both of those contracts.

And we're very, very pleased.

It's our first entry, formal entry into Mexico.

We have very good relationships with Pemex.

And it's something that we're very much looking forward in terms of ensuring that we can build our capability around the offshore in terms of not only prospectively but potential operations should we be successful.

In terms of Brazil, we had a very long standing presence in Brazil.

We have some exploration blocks.

We've been trying to participate in some of the rounds.

It's a market that's very, very hot in terms of people wanting to be in Brazil.

Some of the bids have been on the higher end of the scale, if you will, but it's something that we are looking very closely.

It's important to remind ourselves that we have very good value relationships with Petrobras.

We have common interests here in Columbia, so we actually have a quite a good strategic relationship with them and I think that's worth also mentioning.

In terms of the Gulf of Mexico, we've grown our production over the last couple of years.

We've conducted some additional exploration activities.

We have some other opportunities last year and we won a few license in the Gulf of Mexico.

So we're actually quite keen in terms of the operations, themselves, in the Gulf of Mexico but also in terms of capability and expertise because actually our Houston office supports a lot of the activity that we have around offshore operations from drilling, also from all the geosciences side of the business but also in terms of potential development.

So we're very, very pleased in terms of what it brings to the overall group in terms of not only operations but capability as well.

Your next question comes from Muhammed Ghulam from Raymond James.

So the attorney general is investigating the Lisama still, what can you tell us about this investigation?

Do you expect that the company will face any penalties?

Okay, Muhammad, this is Felipe again.

So it's fair worth mentioning that in terms of contacts, the Lisama 158 well event something that's been described as unforeseen.

Talking to some of the experts that visited the area, this is a group of experts from the United Nations, they said looking 25, 30 years of experience we had not seen something like this.

Remember that the actual outcrop for the spill was located some almost 700 feet or 220 meters away from the wellhead itself.

We've had not only the Attorney General, we've had Fiscalía, Contraloria, the ANLA, which is the environmental authority.

We've had (inaudible).

So all the organizations and government that have to control activity have looked into this.

And we're collaborating with them in terms of their site visits, in terms of information, in terms of ensuring that they have access to, not only everything that we're doing that's part of the response but all the activity.

Two additional points: One, we're conducting our own internal investigation.

This is head up by people that are not related to the operation directly so they are independent in that sense.

We're going to bring some people from the outside as well of the company and we're advancing in that sense.

Second thing I was going to mention is that the UN preliminary report, the group of experts from the UN have actually said, not only that this was unforeseen, it was not something that you could actually see happening, but they've actually stressed that the response was timely, has been good, and they described, although there was crude that made it to the water bodies, they described this event as a sort of mid impact event and something that they estimate that with the response that we've had but also with the nature itself doing its work, something that could be resolved in something like a year or so.

So I think that's all very beneficial.

Again, we'll see where the organization's, the Attorney General and the others will go.

But as a company, we're very, very comfortable with the level of response, the commitment that we've shown to the communities themselves, in terms of schooling, in terms of support for housing, in terms of providing jobs, in terms of working with the fishermen but also in terms of the long-term commitment of our presence in the area.

We've been there for many, many years and we plan to be there for the long term.

And we've created ourselves to restoring the ecosystems and the environment to the state where it was.

So we'll see where it goes but again good news, the well is not flowing.

We have the snubbing unit in place.

We're actually -- we have started the abandonment of the well, which is good news.

And we'll update the markets on this in due course.

So we're actually making some very good progress.

Okay, so like you mentioned abandoning the well and cleaning up any ecological impact.

Can you put a certain dollar amount on that?

Or place some amount on that, how much did it cost in 1Q?

And what the full cost is estimated to be?

Muhammad, I think it is still very early stages.

We are committed to ensure that we have a very comprehensive response to the event.

We'll have the -- I mean obviously, we're tracking cost very diligently in terms of ensuring that everything that we're doing goes into the books in terms of ensuring that we have line of sight of every single dollar or peso that is being spend.

We'll update the market recently, but we don't for see that it will have a significant impact in our numbers.

And the other thing that we're looking at as well is that we do have insurance.

So in due course, we'll update the markets not only in the extent and scope of the recovery and the response, the extent of the cost but also all the relevant insurance aspects as well.

(Operator Instructions) Our next question comes from Luiz Carvalho from UBS.

Felipe and Maria, I basically have 3 questions if I may here.

First one, you mentioned about the long-term approach for Ecopetrol and so on.

And the company has close to 7 years of reserve life and from many years has been able to actually to keep this level from several -- I don't know, several actions that have been performed.

But it's a little level when you compare to your main -- how can I say it, your peers.

So I would like to understand it a bit better, how can we expect return on investments in order to try to increased the reserve life?

And how comfortable you are with the current reserve life of the company looking out, say, to the next 5 years?

And what could be done in order to accelerate the increase of the reserve life, that's the first one.

The second, it's basically, how can I say, kind of a point where we discussed it a while ago on the potential sale of the (inaudible) year the government stake, which was approved by the congress already, if I'm not wrong, by [80%].

I mean the stock has been performing quite well at the back of the (inaudible) and also all the actions that you were able to command.

How do you see that as the CEO of the company, of the momentum of the government potentially -- how can say, perform in order to potentially even capitalize the company to go after some opportunities?

Luis, so the first question in terms of reserves.

And I think it's important to sit back for a minute.

So on 1/1/17, we had 6.8 years of reserves, this is combined oil and gas.

At the end of 2017, so that's December 31, we had 7.1 years.

So actually we replaced each and every single barrel that we produced and we added 26% more to our reserves.

So I think that's good news.

Please bear in mind that during '15 and '16, if you look at those 2 years combined, we did not replace our service.

So I think it's important that we can see a change in the downward trend of reserves that we had seen over the last 2 or 3 years.

So '17 I think was a good year in that sense, again if we hadn't done anything, we would have been up 5.8 years right now, we're up 7.1.

Fully agree with you, it's not good, and it's clearly on the lower end of the range when we compare ourselves with some of our peers.

I think in terms of our view of the future, we're comfortable with the level of investment that we doing, we're very comfortable with the fact that through our organic activities, and that's the primary recovery and infill drilling.

We have had some very good cases if you look at CPO-9 and (inaudible) and some other things, we're actually developing those fields that were discoveries in the not too distant future, so that's good.

We're comfortable with some of the secondary and tertiary recovery pilots that we've now expanded particularly Chichimene is working very well, Castilla as well.

So a combination of primary development, secondary development I think gives us optionality in terms of how we can actually respond to ensuring that through organic activity, we can maintain our basis for reserves.

In addition to that, we do acknowledge it's not going to be enough.

And that's why I think the fact that we currently have COP 16.6 billion -- or COP 16.6 trillion in cash, gives us the ability to actually not only support everything that we're doing in terms of investment, but continue to look at inorganic opportunities.

So again that is something that we will continue to look at.

There is another 2 things that we worked on.

So it's recovery factors and sort of primary development, important, inorganic activity, very, very, very important.

The unconventionals is something that we do think the country and in particular Ecopetrol have a very good opportunity set going forward.

It's still going to take some time.

There is apprehension in terms of potential impacts of all the development of unconventionals.

So were taking that 1 step at a time, but we're making some progress.

And again long term, we're committed with exploration.

You saw in the report that last year we had some very, very good news in terms of the offshore, we're pushing some of those things into ensuring that we can have an appropriate appraise on development but we're focusing also on the onshore.

So it's a combination of things.

We want to make sure that we don't lose our focus and discipline, particularly, around these capital.

So there may be opportunities.

We'll need to make sure that those are a good fit in terms of the strategy and that we remain very disciplined.

In terms of your second question, and currently government holds 88.5% of the company.

And actually many, many years ago, Congress approved for this level to go all the way down from 88.5% to 80%.

And this is a decision that the owners, the government will take in due course.

We're comfortable with the current sort of ownership of the company.

And I want to expand on that a bit.

You know that from the context of Columbia trying to go into the OECD, there's been a lot of work around corporate governance and that starts with for our case the Board of Ecopetrol.

3 years ago, we had 3 Minister Cabinet or Minister-level members on the Board, they've left, Minister Cárdenas of finance left earlier this year before the AGM in March.

So we have 9 members most of them independent, that are not ministerial level officials of the government.

So I think that's very good.

And if you step back and look at '15 when we had a loss and the government actually had no distribution in terms of dividends, that I think demonstrates that the government is committed on the long-term sustainability and good health of the company.

So we're comfortable with the current level and again it's a decision that the owners may or may not decide to take as some stage in the future.

If I may just follow up on the first question.

Is there any internal target or -- that you can share with us in terms of the reserve life for the next, let's say kind of 5 years that you would like to achieve or something like this?

Of course in line with the capital discipline and so on?

Yes, I think the way that we think about it is in principle we want to make sure that we at least replace 100% of our production every year.

And I think that's a very important principle.

So you've seen that we've gone up from 6.8 to 7.1, most of that is organic, there was very, very small inorganic activity last year.

I mean actually, you'd like to be in the 8-year range, 8 to 9, and taking that north of 8. It's going to be a mid to long-term thing, we've been very clear that it's not something that you can fix in 1 quarter.

We are taking it 1 step at a time.

But we're doing a lot of work to ensure that we have optionality.

I think the fact that we have cash gives us a lot of room in terms of and should we decide to pursue some of those opportunities that we're actually assessing right now.

(Operator Instructions) The next question comes from Bruno Montanari from Morgan Stanley.

Just two quick ones.

One on capital allocation and the other one on social unrest.

On capital allocation, I assuming that we are at these level of oil prices for longer.

So once the company is comfortable that this is the new norm, what are the priorities if you could rank in between expediting your CapEx as already been discussed, doing M&A, or perhaps increasing shareholder distribution?

So I wanted to get your feeling on what is the course of action assuming the $75 oil price environment.

And the second question on social unrest, there seems to be a recurring thing in the country of course it's not something that the company can control by itself, but what are things that you can change for these issues, you have a lower or a smaller impact on Ecopetrol's production going forward?

Bruno, I think based on the strategy that we've laid out, some months ago, I would say that actually we have a very balanced view on the things that you've mentioned.

So going back in terms of where should we actually allocate the CapEx and which are our priorities, we want to remain very focused on discipline in terms of how we actually cover the CapEx into the activity.

We mentioned that 85% to 90% of the CapEx will go into exploration of production, that is the case, we've done over the last few years.

Most of the investment that we needed both in transportation and in the downstream, so we're very comfortable with that.

So it's clearly staying focused on exploration and production, and going back to the heart of the business.

So from that point of view, we may see some opportunities on the [French] to accelerate some activities, we have some better results in one of the other fields.

Remember that we're targeting between 620 and 640 development wells this year.

That may open some new areas in some of the fields, so not something big I would say, not something disruptive.

We want to stay very, very disciplined.

Remember that it was only a couple of years ago that we constituted our engineering and projects group.

So we want to make sure that we stay very focused.

In terms of M&A, there is clearly I would say a good set of opportunities outside.

I wouldn't say we're focusing so much on the divestment side of things.

We don't need the cash, so strategically we're very comfortable with where we are and the assets that we have.

And as you know, we've said this now over a few quarters, we're looking at opportunities to ensure that inorganically, we can find something that's a good fit from strategy but also provides a good leverage to our R2P life, which I think is very important.

In terms of distributions, again stepping back, the board I think has been very responsible to ensure that we have the right level of distributions.

Just before this year, it was down to 40% distributions.

And this year it was raised from 40% to 60% and the level was 54.5% when distributions for '17 were done.

So I think the board is very cognizant and focused on the long-term sustainability of the company.

And that I was mentioning to the prior question from Muhammed, I think, was all the fact that from a corporate governance point of view, we're actually in a very, very good place.

In terms of operational disruptions, which is your second question, we actually have I think a very proactive strategy to deal with our relationships, with communities, and the different stakeholders in the areas where we operate.

And we had some issues in February that we've obviously publicly announced and we've talked about them.

We've managed to recover from them very, very quickly, but I think we've managed to actually be very, very clear and very transparent to our position as a company and we're seeing that should there be any violence or any violence-related activities around our operations, we will not sit on any negotiation table.

I think that was fully understood, and that led us to I think, at the other end of some of those issues of unrest on a more strength and position of the company.

So I'm quite comfortable that we have a good approach.

Again it's something that may or may not happen in terms of having operational disruptions.

And -- But I think, again, we see ourselves as a long-term neighbors and partners of those communities in which we operate, that's the commitment.

We need to ensure that we build those long-term relationships -- or continue to build those long-term relationships going forward.

The next question comes from [Juancho Paticula] from [Porvenir].

I have only one question.

It is -- which are your expectations for the rest of the year regarding any spreads for the crude and the product A baskets?

Yes, I think that -- and the way that we've talked about this is having a good set of results for 1Q gives us a couple of lenses that we want to use in how we look at the year.

One, it demonstrates that we've been successful in terms of the transformation of the company over the last 2 or 3 years, I think that's very important.

But I think it also highlights the fact that we need to stay very, very, very disciplined.

We want to ensure that we remain focused, discipline.

We ensure that we don't lose sight of that because prices have gone out.

And again where prices will go, we don't know.

We've followed that very, very quickly.

We've changed some of our marketing strategies in terms of how do we sell our crudes.

We are actually refining more local crudes in Reficar and Cartagena, which gives us a lot of leverage.

And we can take better -- yes, better leverage of the opportunity of the spreads.

But it's something that we're following very, very closely.

I'll ask Pedro, our Vice President for marketing, to comment a bit more on this.

Thank you, Juan and we look for your question.

Regarding the crude, we believe that the results that we had in the first quarter were very strong compared to the results that we had on the first quarter of last year.

On the crude side, if the level of prices remain pretty much the same as we have seen so far into the year, we believe that the spreads are going to be very similar to last year.

So that's what we're seeing on that side.

If the crude goes up, normally the spreads widened a little bit for the [Kappa] crudes that we export here and, which are on the heavier side.

Regardless of the products, we have seen this year that the low (inaudible) for diesel spreads, they have remain strong and the gasoline and the fuel oil from our exports, they have a lowered a little bit.

So we believe that this is also a seasonality in the years in the first quarter.

Normally, they weaken a little bit and going into the summer, we believe that we can update higher demand in the refinery systems, in the U.S. Gulf Coast.

They will start being stronger again.

And then towards the end of the year, going back to seasonality issue that we have on the products side, they will continue weaken a little bit, but on the average in the year, we believe that they're going to continue behaving pretty much the same.

Our next question comes from Lilyanna Yang from HSBC.

I guess I had a question, a follow-up on your CapEx plan.

First quarter was very low at that COP 400 million level, you had the guidance of -- well, more than COP 3 billion closer to COP 4 billion.

The question is, how much of this is stepping stone?

Or how much is flexible to be pushed for next year?

I think if you could just let me know how much of this will be for the enhanced recovery projects?

And I also wonder if there's anything within this number that would be unconventional?

How is the potential pilot project there for you guys?

We'll -- regarding CapEx execution on the first quarter, I will highlight that further.

There's a lot of seasonality in our capital expenditures.

So we keep our target of investing during 2018 between COP 3.5 billion in COP 4 billion, that's the target and we keep it.

The only problems that we have during the first quarter due to the Los Llanos social unrest that resulted in a lower execution of around COP 50 million.

Regarding your question for longer term.

What we expect is to be on the same range of CapEx as the ones that you're seeing this year.

So you can expect for the years 2019 and afterwards, more or less the same level of CapEx.

And regarding your question on unconventionals, we do not have any plans on unconventionals for 2018.

The next question comes from [Suzanne Yusolakov] from CrossRegional.

During the first quarter, you made some changes to your bylaws.

Could you please expand and explain to us what the objectives were in doing so and maybe the major changes that were affected?

Susan, during the AGM, that took place at the end of March we updated the bylaws via (inaudible) for the company.

And a lot of those had to do with ensuring that we were up to speed with some of the changes in terms of regulation.

So there is nothing in terms of a big structural change.

There's a lot of ensuring that we were very clearly and orderly following some of the changes that we've seen in terms of updating, some of the decision-making and how the company is one.

So there is no one specific change.

There is actually a lot of -- many different minor things that were updated.

We can provide a bit of detail should you want that, sort of as a follow-on conversation or in terms of an offline.

And the other thing that was important is that the government restated its commitment to ensuring that the rights and how minority shareholders were going to be treated was explicitly reinforced, restated and included in these bylaws.

And I think that, that's a very important point.

So that's the one that I would highlight, and I was obviously very (technical difficulty) for all the minority shareholders and should you wish, so we can have a follow-on conversation with more detail.

We have a question from Daniel Guardiola with BTG.

I have a couple of ones.

One regarding the cost structure, and the other 2 regarding production.

So looking at the cost structure, you did a terrific job on controlling cost in the quarter.

Overall, oil prices went up,[24%], so I wanted to know, looking forward, how sustainable is this cost structure?

And what are you expecting out of your costs?

So that's my first question.

And my second question is regarding production.

And I wanted to know your thoughts on this.

And even for the production peaked somewhere around 100k barrels per barrel back in 2014.

And if you were to assume the oil prices remain at this current levels of $70 to $75, how likely it is for the Ecopetrol to actually become once again into growth store in terms of production?

So I think in terms of the cost structure, I would highlight that the job is still not done.

So it's something that we need to continue doing day in and day out 24/7.

We do think that a lot of the costs are sustainable and I'll take a couple of examples.

One, transportation, very, very large costs in terms of getting our production from the fields to the market.

And in that, the level of this cost that we transport is very important and the fact that we have lower dilution factors from 3 to 4 years ago, back than 22%, now 14% to 15%, demonstrates that we can continue to push the envelope from a technical and operational point of view and have a transportation of heavier crudes basically.

And that hits the bottom line.

So we do think that a lot of these are actually sustainable.

Same thing for energy, we're very large consumer of energy.

Last year, we created a dedicated group for energy inside the company and that's going to be dedicated to -- or it can dedicate itself to looking at how we generate, how do we actually purchase and how do we eventually sell some of the energy that we're generating.

So we do think that some of the costs are sustainable, made in long term.

But I would reinforce the fact that we're not done.

With the increasing activity and I was referring to these earlier questions, we need to be very mindful and we need to watch how some of the potential pressures and costs actually may crawl into some of the activities that were doing.

But we're very, very comfortable.

I think that we have a lifting cost that's competitive and we need to look at lifting dilution transportation costs as a whole and we think we're very, very competitive from that sense.

In terms of production going forward, I think it's important to remind ourselves that it's not sustainable to commit to growth at any cost.

We need to do growth of both production and resurfacing in a way that it's within our strategy, fits within financial trend that we have set for ourselves and ensure that we remain very focused and disciplined.

So I just want to make sure that even though we've signaled an increase in production for this year from 715,000 to -- the range of 715,000 to 725,000 barrel per day, we do see the ability to arrest some of the decline or that the decline that we have in some of our fields.

I think with the capital program that we're pouring into the operation provides us with -- I think the comfort that we can do that.

But I think your point is a good one.

If price stay in the range of $70 to $75 what are the other opportunities that we can bring into our activity set, again in a way that's very, very disciplined.

We don't want to run, the outer opportunities we want to remain very focused.

The next question comes from Andres Cardona from Citibank.

Just one quick question regarding the transport segment.

I want to understand if possible, how much EBITDA do you think San Fernando-Apiay system system add to the first quarter results?

This is Alberto Consuegra.

It is about COP 100 billion for the first quarter.

Thank you.

We have no further questions.

I will turn the call over to Felipe Bayón, CEO of Ecopetrol, for final remarks.

Well, thank you again.

Thank you very much for participating in this results call for the first quarter of 2018.

We appreciate the work that you do in ensuring that we have a comprehensive follow-up from yourselves, we valued that.

We appreciate the feedback and input and the questions.

I've said before at the call, we're very pleased with the results.

But I think we're very cognizant that we need to remain focused.

We need to stay very close to the operational discipline to ensure that we operate in a way that's responsible with the environment, the communities that are around -- in and around operations.

And we do see ourselves in the past to ensure that we can deliver our strategy and particularly around the growth on both production and reserves.

And again doing this in a way that's very disciplined and ensuring that we always have -- we abide by the financial frame that we have set for ourselves.

We thank you for participating in the call again.

And hope you have a very good rest of the day.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.