Ecopetrol SA (EC) 2018 Q2 法說會逐字稿

Welcome to Ecopetrol's Second Quarter 2018 Results Conference Call.

My name is Sylvia, and I will be your operator for today's call.

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

I would now turn the call over to Ms. Maria Catalina Escobar.

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 second 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 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 Jaime Caballero, CFO; Alberto Consuegra, acting CEO of Cenit; Jorge Calvache, acting Exploration Vice President; Rafael Guzman, Technical Vice President; and Tomas Hernandez, Vice President of Refining and Industrial Processes.

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

We will close with a Q&A session.

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

Thank you, Maria Catalina.

Welcome, everyone, to our second quarter 2018 results conference call.

I am pleased to share with you the results of a quarter with considerable operational and financial achievements for Ecopetrol.

During the quarter, we achieved an EBITDA margin of 51%, the highest in the history of the group.

Likewise, we had the highest production of the last 7 quarters, reaching 721,000 barrels of oil equivalent per day.

Our commercial strategy continues to yield good results.

Realizations from our export baskets were $7.7 per barrel lower than Brent, at a similar level of that obtained in the first half of 2017 despite a 35% increase in the price of Brent crude.

In exploration, I would like to highlight the success of our Búfalo-1 well, located in the Middle Magdalena Basin, where we found presence of dry gas and light crude.

As part of the Near Field Exploration strategy, we're able to declare commerciality on the Infantas Oriente field located in Barrancabermeja.

This allowed us to incorporate, in record time, the reserves associated with the discovery of Infantas Oriente-1, whose evaluation was conducted at the beginning of the year.

In the midstream segment, I would like to highlight the restart of operations of the Caño Limón pipeline in June as well as the stability of the heavy crude transport system with a viscosity of 600 centistokes, achieving a structural decrease in dilution requirements.

In downstream, we reached a historical record throughput in our refinery system of 374,000 barrels per day.

I am pleased to share that during the first half of the year, we continued our efforts to reduce the sulfur content of the fuels delivered to the country, mainly in the city of Medellin.

This, with our objectives of leveraging improvements in the air quality.

Diesel volumes with sulfur content of less than 25 parts per million are currently being delivered, in line with our commitment with the environment.

Please go to the next slide, so we can talk about the financial performance of the group.

I would like to highlight that during the first semester of 2018, with an average Brent price of $71 per barrel, we achieved a similar EBITDA to that of 2012, when the Brent price was $114 per barrel -- that is, 60% higher.

This all reflects an efficient company, which continually seeks profitable growth and maximizes the value of all its segments.

These good results were achieved, thanks to the commitment and dedication of all the employees in the company and all of our business partners always complying with high standards, discipline of operations, care for life and the environment.

I will now pass the floor to Jorge Calvache, who will comment about the exploration results.

Thank you, Felipe.

After the discovery of Jaspe-6D made during the Q1, situated in the eastern Llanos basin, and which is operated by Frontera in association with Ecopetrol, we continued in Cundinamarca during Q2 with the discovery of Búfalo-1.

This well, situated in the Middle Magdalena Valley and operated by Ecopetrol in association with CPVEN, proved presence of dry gas and light oil.

It has furthered the advantage of being located near Ecopetrol transportation infrastructure, which will facilitate its production.

Furthermore, we finalized drilling of appraisal wells Coyote-2 and Coyote-3, operated by Parex in association with Ecopetrol and which are situated in the Middle Magdalena Valley.

The first well reached total depth on the 2nd of April and is currently undergoing initial testing, whereas the second well, Coyote-3, reached total depth on the 3rd of May and is currently temporarily suspended, awaiting test results in Coyote-2.

In addition, on April 18, we finalized drilling of the appraisal well Capachos Sur-2, operated by Parex in association with Ecopetrol.

The well is situated in the Capachos block, which is currently under evaluation.

At the same time, we continue evaluating wells drilled by Hocol during this 2017, in particular, Godric Norte-1, Pollera-1 and Bonifacio-1.

On the other hand, at the end of May, we declared commerciality of the Infantas Oriente field, which is situated in Barrancabermeja area, Santander.

This allows to incorporate, in record time, the reserves associated with the discovery of the well Infantas Oriente-1, and which was evaluated at the beginning of this year.

In continuation with the 2018 exploration campaign in the Colombian onshore, in June, we began drilling of the exploration well Andina-1, operated by Parex; and Pulpo-1, operated by OXY, both in association with Ecopetrol and situated in the eastern Llanos Basin.

The National Hydrocarbons Agency approved and [guaranteed] the contractual model for exploration and exploitation of oil and gas for Colombian offshore and which will facilitate conversion of current TEA areas into E&P contracts and, hence, allowing materialization of our exploration strategy in the Colombian offshore.

As for seismic activity, during May, our Hocol affiliates finalized its seismic survey SN15-17 with the acquisition of 337 kilometers of 2D seismic.

On the international front, we bought 2D seismic and 3D seismic, with the purpose of evaluating the pre-salt in the Campos and Santos basins in Brazil.

Equally, in Mexico, we bought 60,075 kilometers of 2D seismic as well as the structural interpretation project [client], with the aim of evaluating the Salina basin.

Preparations continue to participate in bid round 5 in Brazil and in Mexico.

We continue with the evaluation of areas opened up by the National Hydrocarbons Commission for bid rounds 3.2 onshore and 3.4 offshore in Mexico.

The exploration strategy for 2018 will focus in drilling of onshore wells Colombia, mainly on near-field exploration sites, with the aim to incorporate reserves in the shortest possible time frame by taking advantage of the current crude oil price scenario.

In this context and in view of the exploration success during the past year, we will continue with the maturation of those discoveries by drilling appraisal wells and corresponding evaluations.

In particular, to determine commerciality of wells Coyote-1, Cosecha V-01, Boranda-1, Lorito-1 and Bullerengue-1.

In the same spirit, as for the recent gas discoveries in Colombia Caribbean offshore, Kronos and Gorgon, we are planning activities within the forthcoming 5 years in order to delineate the total area expanse of these fields through drilling of appraisal wells and related formation testing.

Similarly, for the Orca discovery, we are evaluating, in conjunction with Repsol and Petrobras, a strategy to developing this field.

These activities will allow us to define the materiality of this discovery and to consolidate the development of the gas market in the Colombian Caribbean offshore.

Now Rafael Guzman will present our production results.

Thank you, Jorge.

In the second quarter of 2018, the average production of Ecopetrol's group reached 721,000 barrels of oil equivalent per day.

This is 0.6% above the second quarter 2017 production.

The production results are aligned with the 2018 target of 715,000 to 725,000 barrels of oil equivalent per day.

The results are supported by the drilling campaign in La Cira, Rubiales, Caño Sur, Dina, Quifa and Castilla fields.

The affiliates contributed with 57,000 barrels of oil equivalent per day, which represents 8% of the total volume.

During the second quarter, we reached 33 drilling rigs in operation.

For the end of the year, we are planning to have up to 41 rigs.

Aside from the drilling campaigns already mentioned, activities in 6 fields were restarted, namely Arrayan, Tibú, Yarigui, Akacias, Area Sur in Putumayo and Chichimene.

The contribution to production derived from secondary and tertiary recovery is estimated to be above 20%.

The consolidated activity, direct and partner operation, will ensure the year-end production.

The contributions to production from fields which production mechanism is mainly secondary and tertiary recovery is close to 23% or 164,000 barrels of oil equivalent per day.

Amongst the main fields that contribute are La Cira Infantas, Casabe, Yarigui with water injection and Cusiana, Cupiagua and Piedemonte with gas injection.

Additionally, the pilots under execution contribute 16,000 barrels of oil equivalent per day, mostly from water injection in Chichimene and Castilla.

The recovery pilots and their execution have shown positive results, both in injection efficiency and reservoir performance as well as recovery factor increase.

The graphs illustrate the efficiency of water injection pilot in Castilla, polymer injection in Chichimene and steam injection in Teca.

The graphs show that during the last year, we have increased crude production substantially.

Additionally, the possibility of increasing the recovery factor between 5% and 11% has been ratified for water and polymer injection and 20% for steam injection.

In the following slide, we can see how, year-to-date, we have materialized near-field exploration opportunities and the extension of producing fields.

In October 2017, in La Cira Infantas block, we drilled the well Infantas Oriente-1, which was declared an exploratory discovery in March 2018.

Commerciality was achieved in record time of 6 months.

This asset will have an estimated production towards year-end close to 6,000 barrels per day, with the approved initial development plan of 20 wells and the required facilities to manage the produced oil.

In block CPO-9, we confirmed presence of crude in well Lorito-1 located in the Meta department.

The block produces currently more than 6,000 barrels of oil per day after the announced discovery in 2010 of the Akacias field.

The proximity of the wells to Chichimene's production and transportation infrastructure will allow a faster commercial production stage and will add to the Akacias expected final results from its first incremental development module.

Finally, in Apiay-Suria field, we drilled appraisal well Saurio-2, with the result that opens up opportunities for an additional development plan in the asset that could contemplate the drilling of up to 20 development wells plus recoveries by water injection.

Now Alberto will comment on the results of the midstream segment.

Thank you, Rafael.

By the end of the first half of 2018, the segment continued achieving positive financial results with an EBITDA close to COP 4.4 trillion and an increase of 14% compared to last year.

This variation is explained by higher revenues associated with the beginning of operations at San Fernando-Apiay system and reversals of the Bicentenario pipeline.

During the first half of 2018, the midstream segment transported a total of 1,092,000 barrels of oil and refined products per day.

This volume is very similar to the one transported in the first half of 2017.

The damage caused by third parties to the Caño Limón-Coveñas pipeline did not have a material impact on the volume of crude transported during the first half of 2018.

The contingent operation of Oleoducto Bicentenario, which included a total of 30 reversal cycles during this period, allowed the segment to maintain a volume similar to the one transported during the first half of 2017.

Approximately 70% of the crude oil transported was property of Ecopetrol and its subsidiaries.

On the 29th of June, we began the process of putting the line field back into the Caño Limón-Coveñas pipeline, beginning with the Banadía-Samoré segment.

The Caño Limón-Coveñas pipeline is now operating normally.

During July, we received a notification from Frontera, Canacol and Vetra alleging the termination of their ship-or-pay contracts associated with the Bicentenario and Caño Limón-Coveñas pipelines.

We do not agree with the circumstances behind the allegation to terminate these contracts.

Therefore, we consider that they are still valid and will evaluate the actions required to safeguard Cenit's rights under these contracts.

Regarding the transportation of refined products, there was an increasing volume of 1.1% compared to last year.

This positive evolution reflects the impact of the operating scheme improvements, namely availability of tanks that allowed higher product availability in high-consumption areas.

On top of that, during this period, the Cartagena-Baranoa system operated continuously, whereas last year, the system was out of service for maintenance during 21 days in the first semester.

Approximately 32% of refined products transported belonged to Ecopetrol.

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

Thanks, Alberto.

In the second quarter of 2018, the Cartagena refinery increased its gross margin to $11.1 per barrel, which represents a 44% increase compared to the same period in 2017.

The refinery has continued to perform well during this optimization process with an increase in domestic crudes in the feed slate and has maintained a double-digit gross margin for 10 consecutive months starting in September 2017.

The throughput also increased, reaching an average of 153,000 barrels per day in the second quarter versus an average of 136,000 barrels in the same period in 2017.

The Barrancabermeja refinery continues its stable operation.

The throughput increased, reaching an average of 221,000 barrels per day in the second quarter compared to 203,000 barrels per day in the first quarter of 2017 (sic) [second quarter of 2017] as a result of the effective implementation of light crude segregation initiatives that increased their availability.

The margin for the second quarter weakened, reaching $10.5 per barrel versus $13.1 per barrel in the second quarter of the previous year.

This reduction was mainly due to lower gasoline and fuel oil price differentials, in line with the behavior of international markets, and an increase in local crude slate prices.

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

Currently, general maintenance of the entire industrial plant is being executed while we prepare for the 2018-2019 harvest season, which begins in mid- to late September 2018.

Now I turn the presentation over to Jaime Caballero, who will comment on the financial results for the period.

Thank you, Tomas.

The solid financial results we present today reflect the quarter-to-quarter growth in production, the operational consolidation of the refineries and the commercial strategy to maximize revenues, all in the midst of a more favorable price environment.

The EBITDA margin of 50% in the first half of 2018 represents a new record for the business group and is one of the highest in the oil and gas industry.

This result reflects the growing competitiveness of the portfolio, the strict capital discipline, the commitment to our reliable, efficient and profitable operation.

We generated an EBITDA of COP 15.8 trillion, 38% more than in the first half of 2017, thanks to the good operational performance of all the segments.

When comparing the first semester of 2017 to the same period of 2018, the upstream segment increased its EBITDA by 53%, going from COP 6.7 trillion to COP 10.3 trillion, equivalent to an EBITDA per barrel of $43; downstream by 23%, from COP 849 billion to COP 1 trillion; and midstream by 14%, from COP 3.9 trillion to COP 4.4 trillion.

We achieved a net profit of COP 6.1 trillion in the first half of 2018, a higher net result for the year when compared to the results without the effect of impairments reported in 2017.

Let's move on to the next slide to talk about the evolution of net profit.

Ecopetrol's net profit in the first half of 2018 amounted to COP 6.1 trillion, almost 3x the profit recorded in the first half of 2017.

The income of the business group increased COP 5.1 trillion mainly due to the increase of $18.3 per barrel in the average price of the crude basket.

This is despite a reduction of 62,000 barrels per day in sales volume mainly due to the destination of own crudes as feedstock for the Cartagena refinery.

This strategy represented a positive impact for the business group's EBITDA of COP 400 billion during the first half of 2018.

The operational stabilization of the refinery has allowed a sustained increase in throughput.

The use of local crudes that compete favorably against imports has brought about the cost optimization of the feedstock and an increase in the margin of products.

Likewise, we have optimized the use of refinery products instead of imported products to supply the local demand, which generates higher margin for Ecopetrol.

In turn, the cost of sales not including depreciation and amortization rose some COP 700 billion primarily due to, first, the increase of $17 per barrel in the purchase price of refined products, offset by a lower purchase volume of 64,000 barrels per day due to the use of own crudes for throughput at the Cartagena refinery and fewer diesel and gasoline imports; second, greater activity in all segments, especially subsoil maintenance, higher energy consumption, use of materials due to the commissioning of transport projects and Bioenergy and variable costs associated with higher throughput at the Cartagena refinery.

This increase was partially offset by a cost reduction due to variation in inventories primarily because of the valuation of our inventory of crudes and refined products with higher purchase prices.

Operating expenses fell COP 211 billion largely due to elimination of the wealth tax, offset by greater exploratory spending amongst the group's affiliates.

On the other hand, DD&A fell some COP 500 billion, due to the effect of the greater incorporation of reserves in 2017 versus 2016 and the adjustment in the variables for calculating depreciation in Ecopetrol America fields.

Thanks to the group's optimized net position and adoption of the hedge accounting policy, we have minimized exposure to the risk of fluctuations in the exchange rate.

Net financial income reflects our loan prepayment strategy, which generated savings of COP 155 billion, offset by an adjustment in the debt valuation, which generated our revenue in 2017.

Since early 2017 up to end 2Q 2018, Ecopetrol prepaid COP 2.75 billion in debt.

Finally, the provision for income tax fell by COP 1.1 trillion.

The effective tax rate declined from 54% in the first half of 2017 to 38% in the first half of 2018.

This reduction was due to better results at the Cartagena refinery and Ecopetrol America, which are taxed at nominal rates of 15% and 0%, respectively; the lower nominal income tax rate in Colombia, which fell from 40% in 2017 to 37% in 2018; and elimination of the wealth tax, an expense that was nondeductible from income.

We, thus, closed out the first semester with a net profit of COP 6.1 trillion.

Now let's move on to the next slide to examine the CapEx.

In line with the strategy of profitable growth of production and reserves, in the first half of 2018, we executed 15% more CapEx than in the same period of 2017.

This investment has been mainly focused on the development of key projects in exploration and production, with a 23% increase in activity compared to 2017.

As part of the greater activity set, we have seen the number of rigs in operation grow by 32%, from 25 at the end of 2017 to 33 in June 2018.

During the first half of 2018, we have drilled 264 wells, and by the end of the year, we plan to exceed 620, which represents at least 25% more activity compared to 2017.

For the full year, we anticipate a level of investment in a range between $3 billion and $3.5 billion.

This represents a decrease compared to the initial guidance.

The decrease in the level of investment required is mainly due to 3 factors: first, approximately $260 million in efficiencies, thanks to effective project risk management and lower cost of drilling and facilities, both of which are aligned with strict capital discipline; second, $240 million due to phasing of some activities to 2019, among which stands exploratory study wells to allow a longer maturation time and the prioritization of activities such as near-field exploration that would add resources in the short term.

Additionally, some maintenance work was rescheduled based on the results of preventive inspections carried out this year without affecting the integrity and reliability of operations.

Finally, the new range of investment considers the potential impact of some environmental situations, such as those that occurred in Castilla and Chichimene in the first quarter, and the temporary suspension of licenses granted by ANLA for new activity in the La Lizama area as a result of the environmental contingency in the Lisama 158 well.

Let's now go to the next slide to see the cash flow of the business group.

At the close of the first half of 2018, Ecopetrol reported a solid cash position of COP 15.8 trillion, supported by improved prices and operational efficiencies gained in all segments through the transformation plan.

Cash flow from operations rose to COP 9.3 trillion, in line with EBITDA generation.

The investment flow showed expenditures of COP 5.5 trillion, largely driven by CapEx investment of COP 3 trillion and investment of surplus cash totaling COP 2.9 trillion.

Financing activities generated a cash outflow of COP 5.2 trillion in debt prepayments and COP 2.7 trillion in ordinary debt payments as well as dividend payments of COP 2.5 trillion to shareholders of Ecopetrol and minority shareholders from our transport companies.

The strong EBITDA generation and debt prepayments yielded a 32% improvement in the gross debt and net debt to EBITDA ratios.

Between June 2017 and June 2018, our debt fell by 10%, while EBITDA, over the past 12 months, has risen 32%.

The company's financial strength has been recognized by the risk rating agencies S&P and Moody's, which have confirmed Ecopetrol's investment-grade rating.

Moody's also upgraded our baseline credit assessment.

In summary, during the first half of 2018, we achieved higher production numbers, stable operations at our refineries and a robust cash position, which will allow us to progress our growth options without leaving aside our focus on efficiency, cost control and capital discipline.

I will now pass the floor over to our CEO for his final remarks.

Thank you, Jaime.

I am pleased with our financial and operational results, and we continue to show operational stability, growth in production and solid financial strength.

We're going in the right direction to meet our objectives.

The production target that we set for 2018 is maintained in the range between 715,000 and 725,000 barrels of oil equivalent per day, in line with our strategy.

We continue to accomplish milestones in our financial figures, marked by a solid performance of our 3 business segments.

We are proving the strengths and benefits for being an integrated company.

We continue to make progress towards our goal of profitable growth of production and reserves to deliver results that benefit the company while maintaining energy security for the country.

I will now open the floor to questions and answers.

Thank you very much.

(Operator Instructions) And our first question comes from Andrés Duarte.

Congratulations for the results.

I have 2 questions, one related to debt and the other one related to the refinery segment.

So the first question is, as you've been prepaying debt during the year, and this shows an excellent cash generating position for the company, I want to know if you have a target capital structure for Ecopetrol and given the fact that you're -- that there's a possibility of growing inorganically as well.

That's the first question.

And the question related to the refinery segment is that -- I want to understand what explains the financial expense for the period of the refinery segment.

And finally, if possible, I also want to understand why is this EBITDA like diminishing from quarter to quarter.

That's it.

Thank you, Andrés, and thanks for the questions.

And this is Jaime.

So let me start with where we are on debt.

As you've seen in -- over the last years, we've been executing our strategy.

That actually has strengthened our balance sheet substantially.

When you look at the KPIs that we have, we believe that we have reached a stage where we're in a position that we can have a lot of flexibility to support the growth agenda that the company has.

And when you look at our comparables, we probably have some legroom, I think, now where we can actually expand our debt position in the future to a point of maybe a multiple of 2 to 2.5 if it's needed.

It doesn't mean that we're going to go out ahead and do that at this stage.

We are -- we're in a good place right now, and the debt position that we have actually allows the financial performance that we're seeing.

But in line with the growth strategy, which has also an element of inorganic, we want to be in a position where we can expand if we need to.

So in terms of guidance, what I would say is we're in a place where we feel that we reached a point where we are -- where we're mean and lean.

And if we need to acquire some debt, we can do that, and we're going to be moving in the range of 2 to 2.5, those sort of multiples.

And if we move to the refining segment, I think the broader comment on refining is that we are seeing some, actually, excellent operational performance in the refinery and financial performance when you look at the EBITDA generation, which is growing.

And year-to-year, the contribution of Cartagena is very much in line with the guidance that we provide -- actually is exceeding the guidance that we provided earlier this year, and we're very happy about that.

And the issue -- well, the issue -- actually, I would -- I will state in those terms.

The issue that we have in the downstream is really a function of DD&A and financial expenses that we have associated to the construction of the Cartagena refinery.

And I think we need to consider 2 things in there.

First, year-to-year, that's improving.

As you know, we made some changes in the debt structure last year that softened the impact that, that had on the segment.

And secondly, and it's probably an important point that we need to make visible, there's an element of bad debt that is actually -- that appears in the downstream segment, but it's actually -- it's debt that is within the own group.

It's intercompany debt.

If you net out for that effect, probably, the downstream segment, right now, is borderline, I'd say, breakeven.

And that -- and I mean, from a net income standpoint.

So the perspective going forward is positive.

To the extent that margins remain healthy and operational performance remains as it's been, we should see a net positive contribution from the downstream to the group.

And lastly and just to be very specific about the EBITDA diminishing from quarter to quarter, that's very specifically a Barrancabermeja issue, and it's really a function of the increasing cost of the diet, essentially, which has affected its refinery margin.

It's not a function of increased operating costs.

It's not a function of underlying cash costs.

If, actually, you see them, our cash costs, quarter to quarter and year to year, they're actually improving.

So I think it's really a market-driven issue.

That explains 80% of that uptick on costs.

(Operator Instructions) And we have a question from Lily Yang from HSBC.

It's Lily here.

And sorry if I make this question -- if somebody else already did it.

But my question is on midstream.

How do you believe -- or what do you expect from the regulatory work and the rate review, which is set for next year?

Lily, thank you for your question.

At this stage, we don't expect major changes in terms of tariffs for next year.

So we expect to see the tariffs remaining flat.

(Operator Instructions) Our following question comes from Christian Audi from Santander.

I had 3 questions.

The first, can you comment a little bit on your expectations of your -- of the spreads between your basket and Brent?

You've been able to maintain, as you pointed out in your comments, good levels, in the $7 to $8 from last year into this year.

But given business conditions right now, as we look to the second half of the year, what's your outlook?

Do you think it's conceivable to maintain these levels, to increase them?

Or could they come under pressure?

The second is if you could just provide us a quick update on your cash breakeven, which was around 40, if anything has changed there.

And lastly, on the refining front, you continue to generate these impressive high margins, and again, I had similar question about the outlook given what you see from a maintenance business condition dynamic.

Do you see you having reached maybe a ceiling on these very high margins or there's more upside or downside to them as we go into the second half of the year and into next year?

This is Felipe.

In terms of the spread between our basket and Brent, rightly so, as you're mentioning, we've managed to stay in the $7 to $8 range, which is -- which I think is very, very good.

There is volatility in terms of ability -- or potential volatility in market in terms of ability of some of the producers to basically deliver on production volumes.

So from that point of view, I think what we've done at Ecopetrol is very proactively be in tune with the market, understand our clients, change some of the relationships and just building stronger long-term relationships with our clients and, to that extent, I'd say, position Ecopetrol as a reliable source of crudes, both in Asia and in the continent, mainly in the U.S.

So we can build on that reputation as being somebody that can deliver within scope, on time and within quality of what we've actually agreed with our customers.

But there will be some -- or potentially, there may be some volatility.

I'll ask Pedro to just complement a bit on that.

Thank you, Felipe, and thank you, Christian, for your question.

As Felipe mentioned, our first half of the year has been very strong compared to our competitors, which are basically Mexican heavy, [Australia] and also [Canadian Towers].

And also given the level of Brent, this is a very good spread for our Colombian basket.

Now going forward, given that we keep and remain at the same levels, we see that we're going to basically be in the same range between $7, $7.5 and $8, no more than that.

And that's basically due to our strategy that was commented by Felipe, which is maintaining the quality of our crudes, stability over time.

That's key for us.

And also, we want to continue positioning our crudes as the most reliable source of heavy crudes in the market from the Latin American perspective.

Thank you.

So with regards to the cash position, I think the headline statement is that our cash position continues to strengthen over time.

I think what you're seeing with regards to the breakeven, which moved -- and I think we disclosed that.

It moved from $49 to about $55 per barrel.

It's really a function of 3 things.

The first -- well, first, on positive side, clearly, we're having increased cash generation from operations, and that's -- what's happening is that it's offset by 3 things.

The first thing is we've released a number of TDs, a substantial TD position that we have last year, which changed -- has an impact in terms of the breakeven position.

Secondly, we also had some specific investments that we got rid of in our portfolio.

And thirdly, we paid dividends.

If you look at the effect of those 3 things, it accounts for about -- some $16 per barrel, which explains the difference that we're seeing in that breakeven position.

Having said that, we're very comfortable with where we are.

When you look at the fundamentals of the cash position, we have nearly COP 16 billion in kind of short-term positions that we can use.

We are managing that in a very disciplined way.

If you look at the fundamentals of cash management, everything is underpinned by kind of technical points.

So we feel comfortable with where we are and with the flexibility that we have to respond to any requirement that the business has in terms of growth, whether it's organic or inorganic.

Yes, Andrés (sic) [Christian] and this is Tomas Hernandez from refining.

And to answer the question on refining margins for the second half, I just want to mention that we see them in line with the international margins for coking refinery in the Gulf Coast and cracking refinery in the Gulf Coast for Barranca and Cartagena, which are much in line.

We have no major turnarounds in the second half of the year, and we expect continued operational -- good operational performance in the second half.

No major turnarounds, and we see an uptick -- depressed price in -- excuse me, an increase in diesel prices due to the [Marple] effect.

And in gasoline, we do typically see a depressed price for gasoline in the second half.

But the net effect, we see them in line with the margins for Gulf Coast refineries.

(Operator Instructions) And we have a question from Lily Yang from HSBC.

Just a follow-up on the refinery margins.

They are actually good on the gross side at above $10 per barrel.

But your OpEx, in my view, was actually too high.

It was higher than what I had in my model.

So your EBITDA came out to be only $4 per barrel.

So what can you actually do with this OpEx going forward?

Or was there any nonrecurring expense this quarter?

And another question, if I may follow up, is now that the cash flow generation is very strong, above budget, and looks like it's going to exceed the expectations in the second half as well, so how is your appetite now for acquisitions?

Lily, this is Felipe.

And I'll take the second question first, and then I'll ask Tomas and probably Jaime to comment on your first one.

So I mean, clearly, we continue to have a very, very healthy cash flow generation, which is good.

We -- regardless of where prices go, if they go up, but there's still a lot of uncertainty.

We want to make sure that we stay robust, we stay focused, and we stay very disciplined.

We continue to assess quite a few opportunities.

We've said before that we want to stay operating in the continent.

We want to, clearly, remain focused in Colombia.

We're looking at some opportunities in Colombia, but clearly, we're looking outside.

So we have already operations in the U.S. or equity in offshore operations in the U.S. We have a presence in Mexico, in Brazil and a smaller presence in Peru.

So we'll continue to look at the continent with a focus of inorganics.

And clearly, we now have a much more stronger financial position, especially balance sheet strength.

And Jaime was talking about this, about optionality and flexibility, being able to, if we need to, leverage, or we can generate a lot of cash, so that's good.

But clearly, something -- if we acquire something and when we acquire something, it's going to be a matter of how do we actually see a fit, a very good fit with strategy.

So in due course, we'll be talking about those things when they actually materialize, when we actually go across the finish line on any of those opportunities that we're looking.

So now I'm going to pass on to Tomas to talk about refining margins.

Yes.

Specifically -- thank you, Lily.

Specifically with your question on OpEx, we see cash OpEx in control in both refineries.

We've had an impact on raw material costs.

As we mentioned earlier, the diet has increased, so the raw material costs have increased, and that's the effect that you see.

We continue to focus on optimization of our costs and efficiency in both refineries.

The synergies are going to continue to help us in that area as well, but we see them much in control as far as the cash OpEx.

It's really the effect of the increased raw material costs.

Our following question comes from René Burgos from CarVal.

Good job with the numbers.

I just have one question.

I understand that the Caño Limón pipeline continued to get attacked, and it's probably not working today.

So on your comments on the Bicentenario pipeline, then my question is -- I'm assuming that you will continue to operate on the reversal basis.

I don't know how long or sustainable that is.

I wanted to get your thoughts on the impact on your EBITDA because I understood that the EBITDA for the segment was maybe $200 million for this one pipeline, the Bicentenario and Caño Limón.

And lastly, how are you guys thinking about solutions?

Some of these contracts tended to be canceled, so now it becomes more of a legal discussion.

I just wanted to really understand how you're framing this discussion because I understood that this pipeline was somewhat important within the midstream business.

Absolutely, René.

So this is Felipe.

And I'll start, and then I'll pass it on to Alberto, so he can talk about some of the specifics.

But in terms of Caño Limón, the first thing I want to say is that there's the full commitment from Ecopetrol and the companies in the group to ensure that we can -- every time the pipeline, the Caño Limón pipeline goes down or is put out of service, to restart it as soon as we can.

It's a fundamental part of our operation, and that's the main driver: to ensure that we can keep it operational.

And the first 6 months of the year have been difficult.

They've been proved -- they've been proving some challenges in terms of operation.

We're very concerned about impact of those attacks, mainly on communities and the environment in which we operate.

From an operational point of view, clearly, we have the possibility, as we mentioned, to work the reversal on the Bicentenario, which has proved -- has proven to be a very, very good source of operational flexibility because we have not needed or we have not been forced to shut down production from Caño Limón, which is fundamental.

It feels, in terms of its volumes, it's fundamental in terms of keeping our pipelines as full as we can.

It's fundamental in terms of our refineries and their loads, and it's fundamental in terms of some of our export commitments.

In terms of the contracts with Frontera, before I pass on to Alberto, we have a very strong legal position in terms of the contracts.

Just to put it in context, from a revenue point of view, the contracts may represent around or close to 5% of revenues for this segment.

So even though it's important, it's not a big number.

It's not that material.

But we do have a very, very solid legal position that we're going to defend with everything that we have.

And I'll pass on to Alberto, so he can comment on the EBITDA.

Yes.

Again, we are not seeing any impact in this year in terms of EBITDA.

And we are analyzing, evaluating what will be the impact for next years.

But again, I reiterate that we have a strong legal position, and we will defend our case.

Our next question comes from Christian Audi from Santander.

Just a follow-up, please.

On a consolidated basis, could you just comment on how you see your evolution of return on capital employed looking at the first quarter and second quarter?

How have you seen that evolution?

And going into the second half of the year, do you expect an improvement in this return on capital employed or more kind of a flattening?

So any color on that front will be very helpful.

Christian, thanks for your question.

I think in terms of returns on capital employed, if we look at it from a broad -- from like 100,000 feet, we're coming from last year, where we probably were, in 2017, in the 8% to 9% range.

Given the performance that we're seeing this year, clearly, the trend that we're seeing is one of being well above last year's number.

I think our view is that we probably are going to fall somewhere between 12% and 14%, in line with everything that we've indicated in the results and in terms of the projections that we're seeing on both production, level of CapEx investment and the cost kind of projection that we're seeing.

So in summary, I'd say that somewhere between 12% and 14% is probably where we're going to fall.

We have no further questions at this time.

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

Thank you very much, and thanks to everyone who's participated in today's call for our 2Q 2018 results.

We appreciate following on the company, your interest in the company, what we're doing.

As we've mentioned, we're very pleased with what we've seen in the first half of the year, some very good operational results.

We continue to abide by standards and operational excellence.

There's still a lot of room to go in the year.

We continue to focus on increasing our activity, deploying more capital, ensuring that we can be in our guidance range for production.

We will continue to look at additional opportunities in exploration, and we will ensure that we can benefit from being an integrated company.

So once again, thanks, everyone, for participating in the call today, and we'll probably be talking to you in the next conference call.

Thank you very much, and have a great day.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.