Ecopetrol SA (EC) 2019 Q2 法說會逐字稿

Good morning. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ecopetrol 2019 Results Conference Call. (Operator Instructions) Thank you for your attention. Maria Catalina Escobar, Manager of Corporate Finance and Investor Relations, will begin the conference today. Mrs. Escobar, you may begin your conference.

It's 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 Alberto Consuegra, Executive Vice President; Jaime Caballero, CFO; Jorge Calvache, Exploration Vice President; Jorge Osorio, Vice President of Development and Production; Milena Lopez, CFO of Cenit; and Tomas Hernandez, Vice President of Refining and Industrial Processes.

We will begin the presentation with the main achievements of the second quarter of 2019 followed by the highlights by business segment and financial results under international finance 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 second quarter 2019 results conference call. I'm very pleased with the results we delivered yesterday to the market. Despite a challenging environment, the numbers for the second quarter reflect the sustainability of our results. Thanks, amongst other things, to the operational and financial strength of the Ecopetrol group. Net profit was COP 3.5 trillion and EBITDA was COP 8.3 trillion. Again, this in spite of the decline of international prices for most of our valuable products and the scheduled maintenance in some of our fields and the refineries.

We continue to deliver against our strategy, especially with the entry into the Permian basin, the most prolific in the U.S. through our strategic JV with Occidental. This is a transformational and high-value deal for Ecopetrol. It enables us to improve our reserves position, increase production in the mid- to long-term and continue to deepen our knowledge in the development of unconventional hydrocarbons. Our expectation is to book around 160 million barrels of oil equivalent of proven reserves by deal close, which we anticipate before the end of the current year. And gradually, we also envisage increasing our production until around 2027 when we expect to have some 95,000 barrels of oil equivalent per day of Ecopetrol's production share.

Let me now move on to the next slide to see some aspects of the market environment. During the first half of 2019, we experienced a high volatility environment, with a continued weakness trend of refining margins; however, our price basket continued to perform well. In particular, Brent prices fell by 7% compared to the first semester of 2018, yet we saw strengthening in heavy crudes due to their tighter supply in the region amongst other reasons. Our commercial strategy allowed us to take advantage of this market environment and achieve a spread of $6.40 per barrel on our crude basket versus Brent in the first 6 months of the year. Moreover, the crack spreads for gasoline and naphtha declined significantly. This was combined with rising prices of intermediate and heavy crude feedstock, which reduced global refining margins.

Devaluation of 12%, on average, for the exchange rate of the Colombian peso versus the U.S. dollar vis-à-vis the first half of 2018 helped us mitigate somehow the impact of a lower Brent in the first half of 2019.

I will now hand over the floor to Alberto Consuegra, who will discuss our main operating milestones during the semester.

Thank you, Felipe. In the first half of 2019, operating results were positive and strengthened our position against the 2019 targets in spite of a challenging price environment, the impact of scheduled maintenance and public order situations faced throughout the period.

The average production of the group for the second quarter 2019 was 723,000 barrels of oil equivalent per day, 2,000 barrels more compared to the second quarter of 2018 despite having successfully executed the maintenance plan scheduled for the period. During the quarter, there were an average of 37 rigs in operation, 6 rigs more than the number used in second quarter 2018. The operation of these rigs led to the drilling and completion of 147 development wells. As of the first half of 2019, 311 development wells have been drilled, 17.4% more than in the first semester 2018.

On the exploratory front, during the second quarter, the presence of hydrocarbons was confirmed in the Andina Norte-1 light crude and gas and Boranda-2 sidetrack medium crude wells. The cumulative total during the first semester is 10 wells drilled in the Colombian onshore, expecting that by year-end we will have exceeded the target of 12 wells set in the plan. On another note, I am pleased to mention that the Ecopetrol Group obtained 5 of the 11 exploratory blocks awarded in Colombia by the ANH during the Permanent Area Assignment Process 2019.

On the international front, the MC 904 block located in the Gulf of Mexico of the United States was awarded to Ecopetrol in consortium with Fieldwood Energy as operator and Talos Energy.

In the midstream, there was a good performance and contribution to the business group cash due to the production increase, the commercial strategy to transport higher volumes by pipelines and more days of operation at Caño Limón-Coveñas pipeline. During the quarter, there were 16 attacks on the pipeline infrastructure, 48% less than in 2Q 2018, resulting in a lower number of reversion cycles compared to the same period in 2018. It is important to mention that during the second quarter, the Ministry of Mines established the new crude transportation tariffs, which will be in effect from the second half of 2019 until June 30, 2023.

In the downstream segment, the Barrancabermeja refinery achieved good operational performance as a result of the maintenance plans executed during the first quarter of the year. The increasing load compared to the second quarter of 2018 was 7,700 barrels per day and 33,000 barrels per day compared to the 1Q of 2019, as a result of greater availability of light crudes.

The Cartagena Refinery reached an average load of 150,000 barrels per day, with [82%] of national crudes in the load composition, mainly because of the efforts in optimizing the crude oil diet and the strong focus on asset integrity management.

The total load of the refineries for the quarter reached 379,000 barrels of oil per day in line with the target included in the business plan.

In the petrochemical sector, Esenttia was awarded the Emerald Cross Merit Medal in the highest excellent category as the Colombian company with the best results in health, safety and environment.

Please go to the next slide. During the first semester, our lifting cost grew 7.9% compared to the first half of 2018 due to the increase in well maintenance activity as well as the higher cost of subsurface services. There was an increasing energy cost particularly associated with the enhanced oil recovery program due to the greater volume of injected water and higher energy prices.

Ecopetrol has launched its new efficiency plan. These efficiencies are focused in reducing the cost per foot drilled, reversing the trend of growing lifting cost and continuing the effort to reduce the dilution factor in the evacuation of heavy crudes.

I will now pass to Jorge, who will tell you about the results of explorations.

Thank you, Alberto. In the second quarter, the exploration campaign continues achieving good results. Along with our partners, we completed the drilling of 6 exploratory wells, totaling 10 during the year. With these results, we are very close to achieving our target of 12 exploration wells for 2019.

During the quarter, we confirmed the presence of hydrocarbons in the Andina Norte-1 well, operated by Parex with a 50% stake and Ecopetrol with the remaining 50%, finding oil in the Guadalupe and Une formations. Initial test in the Guadalupe formation confirmed a light oil crude of 40º API and gas. Additionally, the Une formation proved the presence of oil of 37º API and gas. Likewise, the drilling of the Boranda-2 ST well was completed in May where initial production tests confirmed the presence of oil of 23º API in the Emerald formation of Eocene beach.

These discoveries benefit from being located close to existing infrastructure, allowing us to leverage our strategic target of increasing reserves and production through exploration in a short period of time.

On the other hand, I am pleased to inform that the Ecopetrol group obtained 5 out of the 11 exploration blocks awarded in Colombia by the National Hydrocarbons Agency during the 2019 bidding round process. Of those sites, the Gua-Off 10 block on the Colombian Caribbean offshore corresponds to Ecopetrol and the other 4 to our subsidiary, Hocol.

Internationally, we have strengthened our portfolio in areas of high potential. Ecopetrol Americas, with a working interest of 31.5% in consortium with Talos Energy with 9.56% and Fieldwood Energy as an operator with a 58.94% working interest, won the MC 904 block located in the Gulf of Mexico of the United States during the 252 Gulf of Mexico lease sale round process.

On the other hand, Ecopetrol Brasil purchased an additional 341 km² of 3D seismic, which will allow us to evaluate the prospectivity of Pau Brasil and 1,600 km² of 3D high resolution seismic to evaluate the participation in the [decision onerosa] during the second semester. Additionally, Ecopetrol Hidrocarburos México acquired the license of [88,050] km² of 3D seismic from the Campeche program for a period of 24 months.

Finally, I would like to highlight that on July 17, the Brazilian Ministry of Mines and Energy approved Ecopetrol's participation with 10% working interest in the Saturno block, located in the Santos basin. In the new partnership, Ecopetrol keeps 10% of working interest while Shell, as an operator, has 45% and Chevron the other 45%.

I will now pass the floor to Jorge Osorio, who will talk about the production achievement during the quarter.

Thanks, Jorge. During 2019, we have been in line with our plan to achieve production between 720,000 barrels equivalent per day and 730,000 barrels equivalent per day. Our production in the second quarter was 723,000 barrels equivalent per day, 2,000 barrels more than the second quarter of the previous year. Of the total production, Ecopetrol's fields with recovery programs contributed 30% and the subsidiaries 8.3%, reaching 60,200 barrels per day.

Compared with the first quarter of the year, the oil and gas production decreased in line with the planned maintenance activities for the period.

This quarter highlights the good results of the drilling campaign of the Rubiales field, compensating for the decline of the field and the drilling in the Akacias field block CPO09, where production was tripled, reaching 2,000 barrels per day average for the quarter. This slide also illustrates the production of the Castilla, Cupiagua and Yarigui fields, which show an increase from the second quarter of the previous year.

Now I turn to Milena Lopez, who will tell you about the results of the transport segment.

Thank you, Jorge. During the second quarter of 2019, the midstream segment continued achieving positive financial results, with an EBITDA reaching COP 2.5 trillion. This represented an increase of 10.8% compared to the EBITDA for last year's second quarter and achieving a 78% EBITDA margin. During the second quarter of 2019, this segment transported higher volumes of crude and refined products, achieving 1,158,000 barrels per day, which represented 3.8% growth compared to last year's second quarter figures.

The volume of crude transported increased 4.3%, mainly due to additional barrels captured from alternative transportation system and the injection of crude at Ayacucho from the Acordionero oil field.

The transported volume of refined products increased 2.5% compared to the second quarter of 2018, mainly due to the inventory replenishment process that took place after the maintenance of the HDT unit at the Barrancabermeja Refinery which took place during the first quarter of 2019.

During the second quarter of 2019, the number of attacks on our pipeline infrastructure decreased by 48%. As a result, there were 12 reversion cycles in the Bicentenario Pipeline compared to the 18 cycles that took place during the same period of last year, resulting in more operational days for the Caño Limón-Coveñas pipeline.

Lastly, it is important to highlight that during the second quarter the Ministry of Mines and Energy published tariffs that have been in place since July 2019 and will be valid through June 30, 2023. This year, the Ministry set a negotiation process between producers and transporters, who had a chance to negotiate directly. In some cases, agreements were reached and endorsed by the Ministry of Mines and Energy. In cases where an agreement was not reached, the Ministry set tariffs according to the existing regulatory framework. The new tariffs will result in a moderate increase in revenues for the midstream segment and tariff stability for the next 4 years.

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

Thanks, Milena. In the first half of 2019, our refineries were impacted by challenging market conditions with international product price differentials versus Brent, reaching historical minimums for naphtha and gasoline not seen in the last 20 years. In addition, the refineries experienced higher crude price differentials versus Brent as domestic crudes prices strengthened. These conditions have resulted in weaker refining margins consistently seen in benchmark refineries in the U.S. Gulf Coast. Despite this difficult market environment, the Barrancabermeja Refinery's stable operation allowed the second quarter gross margin to reach a similar level of that obtained in the same period last year, reaching $10.30 per barrel versus $10.50 per barrel in the second quarter of 2018, despite higher crude price differentials for the refinery feed slate.

The gross margin of the Cartagena Refinery in the second quarter of 2019 decreased by 41% compared to 2018, reaching $6.60 per barrel, mainly due to international market behavior and the high-level of turnaround activity during this quarter.

Please go to the next slide to highlight the plant maintenance activity executed at Cartagena Refinery in the quarter and crude throughput performance for the refining segment. This turnaround activity at the Cartagena Refinery consisted of the execution of the first major turnaround of our hydrocracking unit since a startup of the refinery and a planned furnace decoking shutdown at our delayed coking unit. The hydrocracking unit catalyst was replaced as well as key pieces of equipment cleaned and inspected, ensuring availability of key assets for a new 4-year operating cycle of the plant. Even with the execution of this planned turnaround activity at the Cartagena Refinery, crude throughput reached an average of 150,000 barrels per day, near the 153,000 barrels per day during the same period the year before while increasing the percentage of domestic crudes in the feed slate to 82%, up from 79% in the second quarter of 2018. The aforementioned was achieved thanks to the implementation of process optimization initiatives focused on crude slate improvements and plant reliability.

During the second quarter 2019, the Barrancabermeja Refinery returned to stable and reliable operations, after the heavy turnaround activity executed during the first quarter of 2019. The throughput in the second quarter of 2019 increased 33,000 barrels per day as compared to the previous quarter. The higher availability of light crude oil during the second quarter of 2019 versus the same quarter of 2018 allowed a throughput increase of 4%.

In our petrochemicals area, during the second quarter of 2019, Esenttia demonstrated excellent safety performance and stable operations, capturing better margins with a more stable behavior of its raw material price.

On the biofuels front, Bioenergy's advances in activities related to industrial maintenance during the sugarcane growing season.

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

Thank you, Tomas. In the first half of 2019, we continued to deliver solid financial results. We achieved an EBITDA of COP 15.7 trillion and a net profit of COP 6.2 trillion. The group's EBITDA margin has shown a rising trend since 2016 and is now at 45.7%.

Our main gearing metrics remain sound and are in line with many industry peers. The gross debt-to-EBITDA and net debt-to-EBITDA ratios were at 1.2x and 1x, respectively. EBITDA per barrel was down slightly compared to 2018, largely due to lower international prices for crude oil and refined products and the impact of scheduled maintenance especially at the refineries.

While Brent has fallen $5.50 per barrel in the first semester of the year, our EBITDA per barrel fell only $2.20 which in net terms leaves us being $3.30 per barrel more profitable.

The net profit breakeven closed at $31.90 per barrel, showing a favorable trend versus previous periods, also with a larger spread against Brent.

We highlight the results below the operation line due to a lower effective tax rate and a reduction in our financial expenses. Likewise, we also kept our ROACE above 13%, reflecting the efficiency and operational profitability of the capital allocated by the company. The group's total EBITDA remains stable. It is worth to highlight the rise of the midstream segment EBITDA to COP 5.1 trillion, mainly as a result of the increase in volumes carried by pipeline that were previously carried by tanker trucks. This increase helped mitigate the impacts of lower international prices of Brent, naphtha and gasoline, and the effect of scheduled major maintenance at both refineries as well as in some producing fields during the first half of the year.

Now let's move on to the next slide to see the business group's cash flow. In the second quarter, cash flow funded the payment of the first and second installments of dividends to shareholders declared over 2018 profits, totaling COP 6.5 trillion. In the first half, free cash flow was positive at COP 6.7 trillion driven by operating cash flow generation of COP 16.3 trillion and a variation working capital, highlighted by the transfer made by the fuel price stabilization fund to both Ecopetrol and Reficar for COP 1.9 trillion, corresponding to the outstanding balance of the first half of 2018. Operating cash flow also covered the COP 3.8 trillion income tax payment and CapEx totaling COP 4.1 trillion. The financing flow of COP 8.8 trillion included the aforementioned payment of dividends to Ecopetrol S.A.'s shareholders and the payment of dividends to noncontrolling shareholders in the midstream segment totaling COP 0.5 trillion. The 6-month period ended with a cash balance of COP 12.7 trillion.

Let's now move on to the next slide to review the business group's investment plan.

During the first half of the year, CapEx execution increased 38% versus the same period the previous year, reaching a total of $1.4 billion. 81% of investments were deployed into the upstream segment. Growth investments accounted for 73% of the semester's execution. $0.5 billion were allocated to drilling and well completions that support short and medium-term production goals, $0.2 billion to build facilities, and $0.1 billion for studies required to progress opportunities that support long-term development plans. Investments in continuity were primarily related to the major maintenances undertaken in some downstream, upstream and midstream assets.

This year, we expect to initiate payments related to the joint venture with Occidental in the Permian announced earlier this month.

Ecopetrol's participation in the future joint venture development investments is estimated at $6.4 billion plus $750 million of carry to be deployed mainly between 2022 and 2027. From 2024 onwards, the project is self sufficient in terms of cash.

In 2019, expected payments amount to around $900 million, out of which $750 million are allocated to the initial payment, between $50 million and $60 million to the carry with Occidental, and between $65 million and $75 million to Ecopetrol's share in the development CapEx.

We reiterate our organic investment guidance between $3.5 billion and $4 billion that, added to the inorganic investment planned for this year, would bring our 2019 CapEx to a range of $4.4 billion to $4.9 billion.

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

Thank you very much, Jaime. We believe that a long-term growth demands a clear commitment to sustainability. And it is for this reason that I would like to share with you some -- just a few of the many initiatives we are working around, specifically sustainability.

First of all, we're contributing to improve the air quality in the cities in Colombia. This by supplying natural gas and low-sulfur diesel to the massive transportation systems. We are supplying to the new fleet of Bogotá TransMilenio ultra-low-sulfur diesel with less than 10 parts per million of sulfur. Secondly, we have achieved the independent verification of a reduction of over 1 million tons of CO2 equivalent in our production processes between 2013 and 2017. Finally, in the first half of 2019, we recycled over 44 million cubic meters of water. This is 4% more than what we did in the same period of 2018, thereby reducing disposal into water streams.

Now let's go to the next slide to see the progress on our business plan. To conclude, I would like to mention some of the most prominent results of our business plan. In the international arena, we achieved 2 very important milestones that point out to the growth of reserves and production. First, our entry into the Midland, in the prolific Permian basin, in a JV with Occidental. With this JV, we will further deepen our knowledge in the development of unconventional hydrocarbons. Secondly, the recent approval by the Ministry of Mines and Energy, in Brazil, for the transfer of 10% stake in the Saturno block to Ecopetrol. This is located in the central region of the Santos basin in the Pre-salt in Brazil.

In the midstream segment, recently the new transportation tariffs were set and these provide a key signal of stability for the next 4 years. We continue to meet the operational goals of our plan and remain committed to improve structural efficiencies across our operations to accomplish sustainable and profitable growth.

Finally, I want to highlight the solid financial results achieved amidst a highly uncertain market and the multiple challenges imposed by the environment in which we operate.

With this, I want to thank you again and open it for Q&A.

(Operator Instructions) And we have a question from Carlos Rodriguez from Ultraserfinco.

I have 2 questions. The first one is related to cost. If we should see this behavior for the rest of the year, what is the rationale behind that cost, that I believe are mostly in pesos, are rising faster than revenues, that are in dollars and actually are boosted by the weakness of the currency? And my second question is another topic. It's regarding the Saturno block that you currently have 10% stake. I want to know, what are the terms of intellectual property with all the engineering develop there, and if it's similar as the agreement reached in the Permian in order to bring this know-how to Colombia when you start operating the offshore?

Thanks for the questions, Carlos. With regard to the first question around cost, I think the framework for thinking about cost and its link to currency is that around 60% to 65% of our revenues are straight dollars based and around 40% of our cost structure is peso based. So that gives you -- and obviously there's some kind of natural balances between them, but it does create a overall effect whereby a peso devaluation actually benefits the group. So broadly speaking, a change of COP 100 in the representative exchange rate has an effect of around COP 400 million to COP 600 million in EBITDA -- COP 600 billion in EBITDA, sorry. So that's the way to think about it. Now when you think about the outlook for the remainder of the year, I think you need to go back to the fundamentals of the guidance that we have provided. Generally when you see our integral cost structure, there's only 2 places where you're actually seeing increase in cost. One, you're seeing cost related to the product imports that we've made associated to the maintenance in refineries over the second quarter of the year. That's very episodic. That's something that we don't see as a sustained effect over the coming 6 months. And secondly, when you see the lifting cost structure in [EMP], Alberto has spoken about the increase that we've seen going from $8.50 per barrel to $9.10 per barrel, we see that as a result of the increased activity levels associated to maintenance. But we believe that that's not going to fundamentally change over the coming months. We believe that our year-end position around this is going to be anywhere between $8.50 to $9.50 per barrel, which is in line with the guidance that we have provided in the business plan. I think exchange rate is going to be a factor on this. To the extent that the exchange rate remains where it is right now, it's actually going to leverage overall group results. And that's something that we need to kind of monitor through the coming months.

Thanks, Carlos. This is Felipe, and I'm going to talk about the Saturno and probably more broadly around the offshore. If you think about the 2 businesses, the joint venture we announced recently with Occidental for the Permian and the confirmation from the Ministry of Mines and Energy in Brazil of our 10% stake in Saturno, the nature of the 2 businesses is a little bit different. The Permian, we announced precisely a joint venture. So we -- both with Occidental, we'll be forming a company, and we'll have some of our staff seconded into the operation. If you think of Saturno, it would be the equivalent of an unincorporated joint venture. We have 3 partners. We have Chevron, we have Shell and we have Ecopetrol. And we'll be working within the limits and the frame of a JOA, so a joint operating agreement, which has very specific clauses around the usage of information and how we share things, how we discuss things and, more importantly, how we actually take decisions. Having said that, our objective is to strengthen our knowledge in the offshore. We've recently opened up or inaugurated a new office in Brazil, with the latest in terms of technology, in terms of having everything in the cloud. We brought some more expertise, so people with a lot of experience in the offshore, some veterans from industry from Petrobras and other companies. So clearly, our intent is to deepen our knowledge in the offshore and the work we're doing in Brazil, not only in Saturno but also Pau Brasil, combined with the work we've done in Colombia and the work we're doing in Houston, also our presence in Mexico, it's all with the aim -- the longer-term aim of improving our capabilities around the offshore, and we've discussed in prior conversations that, ultimately, we would like to merge or evolve at some stage into an offshore operator. And clearly, as you rightly point out, one of the bigger goals is to bring all that expertise back into the country, into Colombia.

So I think it's working very closely with partners. In Brazil, there's very clear rules in terms of information and technology transfer and how we deal within the JOA, with the end objective of bringing that expertise back into the country. Thanks, Carlos.

And we have a question from Luiz Carvalho from UBS.

It's Luiz Carvalho from UBS here. I have basically 3 questions, if I may. The first one, we acknowledged the due to the recent movements you've made on the upstream part of the business which, I mean, was part of our concern in terms of the reserve life and so on. So how can we see these movements looking forward in terms of reserve level? I mean is there any target, an internal target, that you can share with us that you would be more comfortable in terms of reserve life or in terms of production growth, sustainability in the long term? So that's the first one.

The second one is more on the downstream part of the business. Recently the government announced some changes or some plans on the stabilization fund because of the deficit. And by the way, I have to thank the IR team that provided a great help for us here trying to descend. But how the company sees this looking forward because in my own understanding, there's not an easy solution in terms of reducing the deficit. Someone has to pay for that, either the population or the government or, say, the companies included in the process?

And the third one -- the third question is about, you say, potential for acquisitions. I mean when you look at the balance sheet of the company, you're still in very comfortable situation with onetime net-debt-to EBITDA. So I was wondering if you are looking to acquire potentially some companies or even more assets looking forward?

Thanks, Luiz. I'll take the first one and the third one, and then I'll ask Jaime to talk about FEPC, this stabilization fund. So if you think about the recent announcements we made, particularly with the JV in the Permian, a few things that I think is worth just putting again in the context of the conversation. So the first thing, we estimate that we will be able to add around 160 million barrels of reserves before year-end. So this is -- in line with closing of the transaction, we will be able to book those reserves. If you think about how much we produce in a year, and I'm giving you sort of ballpark numbers, but we produce around 240 million barrels. So 160 million barrels that we would add through the JV is equivalent to 0.7 years of reserves. So I think that's very good news. Historically, we've said that we want to be able to book in the order of 100% of our production every year. So from an organic point of view, we want to replace every single barrel that we produce. If you look at 2015 and '16, those were not good years. We basically netting out 1 year with the other. We added nothing. '17 and '18, 126% and 129%. So I think the trend is being reverted. The announcement that we made recently with the JV with Occi clearly is very accretive. It's substantially accretive in terms of reserves. It gives me 0.7 more years. And this will be in addition to our objective of adding 100% reserves organically.

So again, the trend is something we will not be able to change in one quarter, but, I think, directionally we're showing that we're delivering on what you've told the market. You ask us, if we're comfortable? We've said, look, we would love to be in the 8 years to production range -- or reserve to production range, 8 years or 8.5 or 9 years. Clearly, this year, 2019, will move us in the right direction. Remember that this is only 80%, 85% of the JV in the Permian is liquids, where we have a lower reserve life. So clearly, we are making very good moves in terms of creating a better reserve life. So I think that's how we actually view it. And I link this to number 3. Rightly, again, you have signaled, we have a very strong balance sheet. We have managed to reduce our leverage. We've reduced the overall level of our debt. We're generating good cash. We are very resilient in terms of prices. We continue to have a very strong transformation program. So all that -- having said all of that, we are assessing quite a few number of opportunities. But as I've said before, when these opportunities are a reality, we will announce them to the market, which is exactly what we did 2 weeks ago with the JV in the Permian, which again, we think is extremely accretive. It's good not only in terms of production and reserves, but it is extremely important terms of EBITDA and the impact that it will have on our financials mid- to long term. Jaime?

Luiz, thanks for your question. And with regards to FPEC, the stabilization fund for fuels, I think there has been a number of announcement lately, but I think it's important that we start with the facts. I think what the government has stated and our understanding from conversations with the government is that what the government seeks is the sustainability of this system, right? It's not about eliminating necessarily the system. It's about how do you make it sustainable and, in particular, how do you lower the fiscal burden associated to the system. I think when it was designed, it had contemplated some compensation mechanisms that, due to recent market dynamics, and by recent I mean over the last couple of years, it has actually created an increasing burden for the government. The way that we look at it at Ecopetrol is, I think, there's kind of 3 or 4 key principles in the way that we engage with that conversation. Firstly, when you look at the market outlook, that deficit that the government is in a way taking care of, should reduce over time. It should not become more ample. It should actually reduce. I think that's going to help. That's one consideration. The second consideration is that the government already has taken some steps in that regard, such as the change that we discussed in the previous call with regards to the treatment of VAT associated to the value chain -- to the fuels value chain. In particular, you might recall that we spoke about that change, of the 19% to 5%, which is actually reducing the burden that the government needs to carry. As we look forward, I think there are 2 or 3 principles that the government is taking into account in this conversation or at least, as we plan ahead, we think are key planning principles. The first one is that the formulas associated to recognition of fuels will remain tied to international prices.

I think there are several mechanisms around this, but that fundamental view, that it's going to be tied to international prices, will remain. I think that's a commitment from the government. Secondly, we believe that there is not going to be any negative impact to the prices that are recognized to the producers. I think that's very important, too. In any scenario that you cover, whether you go to -- currently we are an export parity. Where we move to a flat pricing or import parity, in any of those scenarios, the prices that are recognized to producers will remain unharmed, right? So I think that gives us some -- a view that from a planning standpoint, well, there is some uncertainty around. Exactly what role the government is going to take on this, it actually does not represent downside to Ecopetrol. That's how we're looking at it. I think, lastly, a couple of developments that we think are particularly interesting and I just want to recognize what you mentioned about, there not being any easy solution for this. The government, as you know, in the national development plan, actually included an article that makes references specific to hedging to allow management of this. We believe and we have been in conversations with the government on that regard, that those sort of instruments could actually have a material impact in lowering the fiscal burden that the government has.

So all these is to say that we remain cautiously optimistic about how this is going to develop, but certainly in the near and medium term, we don't see any negative effects for the group.

A very, very clear explanation. If I just may come back to the first question -- the first and third questions that you just commented on, we acknowledge the great efforts that the company made over the past -- mainly the couple of months. And we believe that there is very -- in the right direction, we pretty much noted that. But despite the current liquidity of the stock, are there any plans that, I mean, from a capital market's perspective, that you might consider such as increase the free flow of the company?

Yes, Luiz. Well, let me take that one. In terms of what we've said before, and this hasn't changed in the last few quarters or so, we understand that there may be appetite for increased liquidity in the market which is good. It's an acknowledgment of what the company is doing, what it's done in terms of the value that it can provide. But rightly pointing out, at this stage we are in a very good position in terms of our leverage and how much debt we have, in terms of our ability to generate cash, in terms of us being able to continue to be self-funded, which is fundamental. So from that point of view, there is no immediate action that we would take in this arena or in this area. So yes, no changes to what we've said before. Thanks, Luis.

And we have a question from Pavel Molchanov from Raymond James.

My first one is about the shale pilot that I know you had in the Guane-A area that I believe was recently blocked by the court and by the environmental regulator. Can you give us an update on what exactly happened with the Guane-A? And what the next steps are for you to actually begin drilling operations there?

Yes. Pavel, this is Felipe, and let me take that one. And I'm assuming -- you probably said you wanted to have a couple of questions. First thing, and let me step back for a second, when we presented to the market, to yourselves, the 2019-2021 business plan, we highlighted that as part of our forward investment, we had included $500 million to do the pilots for the unconventionals. That has not changed. So we continue to view that as something that we will do. But you are rightly pointing out, there's a few things that have happened. So I'll spend just a few minutes trying to provide a bit more color and clarity around this.

Recently, there was a commission of experts, La Comisión de Expertos that's how it's called, that was put together by basically the Ministry of Mines and Energy and the Ministry of the Environment. So government created this group of 13 experts, both national and international, in many different fields and the experts provided a report. And the report basically is saying -- there's something called proyectos pilotos de investigación integral, so it's pilot projects for unconventionals, that would allow us to do research in a way that's holistic. That's basically the intent. And they said, yes, those can be done, but there are some caveats. And the caveats are basically around how the companies would -- how the relationships would be with the communities in those areas. How we would deal with things like water management, chemicals, microseismicity, emissions, noise. There's things likes inflation and potential inflation that would be an effect of us bringing that level of activity into the areas. So I think was the first thing, the Comisión de Expertos, which I think was very, very helpful, and it provided us a lot of light in terms of what we needed to do. Second point is that we've actually continued to develop, through the planning and design of the pilots, our work inside the company. So that hasn't stopped. We continue to do that. We've mentioned that we would eventually be doing pilots in middle Magdalena Valley and that's where Guane is. But Guane, and I want to point this out, is just one of the options that we're looking at. So there are several opportunities in terms of the pilots in middle Magdalena. We're also looking at Cesar-Ranchería, which is further north if you look at the maps, and that would be more gassy -- a gassier play. And remember, there's a lot of conversations in country around the need to bring more gas molecules into the system, into the market quickly. And there's actually conversations around the potential for unconventionals in [El Atlantico], which is further north. So from a geological point of view, there is more than one geography where we're looking at.

In terms of the 2 things that happened recently: one, the Consejo de Estado, which is like the highest administrative court in the country, said they would study in detail the exploration of unconventionals and the regulation -- and the technical regulation around doing unconventionals. So they're going to take some time to do that, and whilst they're actually doing their assessment, there shouldn't be any activity. So based on that, the ANLA, which is the [Agencia] Nacional de Licencias Ambientales, said given that the regulation is frozen, we don't have a regulation against which we can test the request for a permit by Ecopetrol. So it's not been canceled. It's just been put on hold. So until the Consejo de Estado decides around what's called -- maybe that's called [pilares], we cannot do anything in terms of activity. The ANLA will not study our request for a permit. So we've said -- and with this I'll close, but we've said a few things. One, we're extremely respectful of the work that the Consejo de Estado is doing. It's going to take some time, but we remain committed to do the unconventional pilots.

Second thing, we want to do this -- the description we've used is like operating inside a fish bowl. So everybody can look into communities: the unions, the regulators, the academia, NGOs. Everybody will look into -- in terms of how we are operating. And probably more important thing, this is mid- to long-term transformational opportunity. Not for Ecopetrol, for the country. We've said that currently the country has around 2 billion barrels of reserves. What we've assessed is that in liquids, there could be 4 billion barrels to 7 billion barrels or 4 billion barrels to 8 billion barrels. So instead of having 6 years of reserves, we could have 20, 25, 30 years. And in gas, where we currently hold as a country 10 years of reserves, if we look at Cesar-Ranchería alone, we could have 50, 60 or 70 years of reserves.

And lastly, we've said this is something we don't want to do quickly. This is something we want to do right. And we want to do as it has to be done precisely because it could be a transformational opportunity for the country. And Pavel, not sure if you had a follow-up question or a second question. I think you've mentioned something?

Yes, I do. Yes, thank you for that. On offshore exploration, so you've talked quite a bit about the Brazilian opportunity. But, of course, the domestic opportunity in Colombia on the Caribbean has -- it seems to have been sidelined or not as central for you as maybe 2 or 3 years ago. I'm curious, what the next steps are to kind of continue or revive offshore exploration along the Caribbean coast?

Thanks for the question, Pavel. Great question. And I think it's important to mention a few things. So we remain committed to Colombia. I think that's the first thing. We have made some very important discoveries next to the border with Panama, so Kronos, Purple Angel, Gorgon. And it's an area that we have now retained 100% of Ecopetrol. And recently, you may have followed this in the news, that we signed the transition from sort of study area to an E&P contract. So I think that all is in line with our continuous commitment to find the right way to develop those resources. So we're actually currently conducting a data room exercise around those discoveries. We want to bring 1 or 2 partners that can bring expertise. Remember these are large gas reservoirs that have water depths of between 1,500 and 2,500 meters of water. But it will require expertise, technical knowledge. Some of these could be at least complicated from a technical point of view, so we're finding, through this process, the right partner to bring those molecules to the market. So that hasn't changed. We recently signed another offshore contract, next to Guajira, so that's on the other side of the country, on the other side of the Caribbean. So that's something that we will pursue. And we continue to look at opportunities. So Caribbean and Colombia, clearly a focus area and very important for us in the future in terms of developing additional resources.

In parallel, we continue to do our activities in Brazil, and as you rightly pointed out, we've talked quite a bit about that. We continue with our presence in Mexico. We continue with a good presence in the Gulf of Mexico in the U.S. where we're producing roughly 1,400, 1,500 -- sorry, 14,000 barrels a day to 15,000 barrels a day. And also, very importantly, we continue to develop a lot of expertise around offshore exploration and development. Thanks, Pavel.

We have a question from Andres Cardona from Citigroup.

My first question has to do with the dilution factor. What drives it up in the second quarter to something around 50%? And the second question has to do with divestment of some non- core assets at the upstream segment. Are you still working on it? Are you targeting to sell the assets or are you pursuing some [other means]? That's it, guys.

Thanks, Andres. And I'll ask Alberto to talk a bit more about dilution. But if you look at our dilution factor, and I think we did include a graph in the material that we shared with you today, it's moved from 20% in 2015 to 14.6% in the first 6 months of the year. So dilution factor stays in line with what we've envisaged and, clearly, a fundamental area of focus in terms of what we want to do. It's allowed us to continue to transform the company. We're transporting heavier, much heavier crudes, and it's given us, I think an edge -- an expertise that it's valued outside of Colombia as well. So we're working with some NOCs outside Colombia to -- in all of our expertise on heavy crudes. And I'll ask Alberto to comment on that. But in terms -- and then the second thing -- I have the mic so I'll go on. In terms of divestments of non-core assets, we've said before that over the last 2 or 3 years, we have strengthened our muscle around acquisitions and divestments. A couple of weeks ago, we announced the JV with Occi, which I think demonstrates that we've managed to take across the finish line substantial, important and transformational opportunity from the acquisition point of view. And we continue, and I've just mentioned these Kronos, Purple Angel, Gorgon opportunity. That we're data rooming as we speak, where we have several companies interested in looking at the development of this gas discovery. That will continue.

In terms of divesting things from the upstream, we permanently, and on a continuous basis, review how competitive all of our assets are: in terms of their own merits, in terms of how they actually compare and stack up, or how they actually look in terms of portfolio. We did some exercise like this back in 2016, which was I think relatively successful. It was good, and it's something that we'll continue to look and assess. There is no announcement in this front in terms of something that we will be doing, very, very soon or quickly. But I think, important, we -- now that have been able to strengthen the company to the point where we are, we like to keep our options open in terms of looking at things going forward. And, in due course, should we decide to do something, we will communicate it properly to the market. Thanks, Andres. Alberto?

Thank you Andres, and thanks for your questions. Actually, what we are seeing is a reduction in the dilution factor, mainly attributed to we are transporting the crudes with higher viscosity throughout the pipelines. Secondly, we are substituting diluent with lighter crudes that we have available locally. And thirdly, we have cheaper cost of the naphtha imported. So in total, we are seeing actually a reduction, as I mentioned, in our dilution factor.

Alberto, if I may, I know the long-term trend is the one you described, but it seems, at least to me, that in the second quarter, in particular, there was an increase of this dilution factor. And I want to understand what is driving it and if it affects the long-term trend. I note the trend is very positive. But my question is more about the second quarter.

No. But in reality, we don't see any affectation of our long-term view on dilution factor. On the contrary, we are seeing a steady reduction through the implementation of the co-dilution strategy, which is actually substituting the naphtha with propane. We will see that effect probably '20 or '21.

And Andres, if I may, this is Felipe, again. If you actually look at the report, our dilution cost is gone down. If you look at the second quarter 2018 to the second quarter 2019, there's a 4.9% reduction in the cost. And again, maybe if there is a follow-up, follow-on, you can reach out to the team, the IR team. I'm sure they will be able to provide more context around some more specifics. Thanks, Andres.

And we have a question from Christian Audi from Santander.

I have 3 questions. The first one, Felipe, if you could talk a little bit, given your continued growth in Brazil, we have this important upcoming auction in November related to the transfer of rights. How interesting is that opportunity for you? Or do you currently have just too much particularly with the Occi joint venture to be pursuing additional growth in that country? The second question, also Felipe, with regards to unconventional, given how attractive this JV with Occi has been and how time consuming and lengthy the development of unconventionals in Colombia is bound to be for the reasons you explained earlier, would it make more sense for you to just continue to grow your unconventionals presence in the U.S. rather than focusing on Colombia given that it may take so long and you have to overcome so many barriers there? And the third and final question has to do with refining margin. So I was just wondering, given what we saw in the second quarter, if in July and August have you seen already an improvement or a continually difficult refining margin situation, has that changed at all vis-a-vis what we saw in the second quarter?

Thanks for the question. Yes, I'll take the Brazil one first. If you step back for a second, our strategy has been that we will operate in the Americas, so we will operate in the continent. So that hasn't unchanged. And clearly, and I think we've demonstrated recently with our 2 entries into the Pre-salt in Brazil, that we are able to compete. That we are able to be part of very, very competitive consortiums with, I mean, top-notch and world-class partners which is great. I've mentioned earlier in the call that we've actually developed a lot of expertise in-house in Brazil. So we feel very comfortable in terms of -- from a technical point of view, our ability to assess opportunities.

So in terms of things going forward, there is -- as you mentioned, there's quite a few things in the next few months: round 16, round 6, [decision onerosas], and we're assessing. We're assessing things, and we'll hopefully be able to inform the market in due course. We don't want to get ahead of the game, so we'll be looking at that. We do have some other things that we have on the pipeline in terms of potential acquisitions. And I think we've shown the market that with the recent JV announcement, we're able, from a technical-operational-financial point of view, to incorporate these opportunities into the portfolio of Ecopetrol which is, I think, great news. And we've talked a little bit about transfer of knowledge, transfer of technologies, and second these into the operation in the JV.

In terms of unconventionals, and I'll follow up with that and I'll ask Tomas to talk about refining margins in a bit. But, yes, I fully agree with you. This is not only attractive, but it's value accretive, the business. And it also provides us with the opportunity to deepen our understanding around unconventionals. But, I think, the way we view this is that the opportunity in the Permian and the opportunities in Colombia are complementary to each other. We need to look at them as a set of things that we could do than can actually -- one can help leverage the other in terms of operational practices, in terms of expertise, in terms of developing the capabilities of our own staff. So again, we haven't -- I spent quite a bit, when Pavel was asking around this, on some of the things that have happened in Colombia. But we'll continue to do our work in the Permian, and we'll continue on that track. And we'll continue to pursue the opportunities in Colombia. So one doesn't exclude the other. We are fully convinced that unconventionals is something that would be transformational for the country. I mean, never mind Ecopetrol; it would be transformational for us. But for the country, it's one of these probably once-in-a-lifetime opportunities in terms of ensuring there's more potential to underpin, especially economic growth. So we don't see these 2 things are exclusive or one canceling the other. They are actually 2 things that complement each other very, very well. Tomas, refining margins?

Great. Thank you, Christian. Talking about margins, as we know and as we've been talking about the market environment and the challenging conditions, they have the largest effect in the first semester of 2019, both the impact on product prices and the strengthening of the crude prices to our refineries. What we see, going forward, is we see a lot of uncertainty in the prices in the second half continuing with crudes and products. We do see and expect an improvement in the environment in the second semester, especially in the fourth quarter, with the impact of MARPOL in refining, which is a positive impact. We don't have any major turnarounds planned for the second semester, which helps. Actually that's a strength that we took, the 2 large turnarounds and we took them in the first semester, so that we could take advantage in the second semester. And we do expect margins to be in the double digits in refining for the year. So basically, the other important thing is, if you look at the performance from an operating point of view, the charge the crude throughput to refining was third -- the third largest crude throughput in the quarter over other quarters. It's the third largest in the history. And our cost of [OpEx] continues to reduce. We think that has a positive impact in everything that we're doing around reducing the -- improving the margins in both Reficar and Barrancabermeja.

And we have no further questions at this time. I will now turn the call over to Felipe Bayón for final remarks.

Well, thank you. And thanks again to everyone who participated in today's call. It's always great to be able to understand some of the lenses and some of the things that you're interested in, some of the things that we need to further continue to assess and understand and deepen in terms of our, not only the assessments, but the way in which we actually communicate and some of the focus areas. So we value that. We value your insights and we value the questions and we value the reports as well. So thanks again for participating today. I think, as Ecopetrol, we continue to demonstrate that we are delivering against the plan that we've shared in the past. We continue to deliver very strongly against strategy. We've had some good news around our international operations and the opportunities in the past few weeks and months. And, hopefully, we'll be able to spend some more time in the next quarters or so. So thanks again and have a great day.

Thank you, ladies and gentleman. This concludes today's conference. Thank you for participating. You may now disconnect.