Fitch Affirms Ecopetrol's FC & LC IDRs at 'BBB'/'BBB+'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Ecopetrol's ratings as follows:
--Local currency Issuer Default Rating (IDR) at 'BBB+'; Outlook Stable;
--Foreign currency IDR at 'BBB'; Outlook Stable;
--Senior unsecured debt consisting of approximately US$4 billion of notes outstanding at 'BBB';
--National short-term rating at 'F1+(col)';
--National long-term rating at 'AAA(col)'; Outlook Stable;
--COP1 trillion issuance program at 'AAA(col)';
--COP3 trillion commercial paper program at 'F1+(col)'.
KEY RATING DRIVERS
Ecopetrol's ratings reflect the close linkage with the Republic of Colombia (FC and LC IDRs of 'BBB' and 'BBB+', respectively), which currently owns 88.5% of the company. Ecopetrol's ratings also reflect its strong financial profile and improving production levels. Ecopetrol's growth strategy and associated capital investment are considered aggressive and could be challenging to achieve. Ecopetrol is expected to maintain a financial and credit profile consistent with the assigned rating.
Linkage to Sovereign
Ecopetrol's ratings are linked to the credit profile of the Republic of Colombia, which owns 88.5% of the company's total capital. The company generates approximately 10% to 15% of government revenues and is strategically important to the country given that it supplies virtually all liquids fuel demand in Colombia. The company also owns 100% of the country's refining capacity and is linked closely with the Colombian government through its reliance upon the receipt of the price subsidies at the pump; the difference from selling fuel in the local market instead of the export market. During 2013, the company received approximately COP1,010 billion from the government established gasoline stabilization fund.
Aggressive Growth Strategy
Ecopetrol's growth strategy is aggressive and could be challenging for the company. The company plans to increase consolidated production to 1.3 million barrels of oil equivalent per day (boepd) by 2020, from 788 mboed of consolidated production during 2013. It also intends to increase refining capacity to 420,000 barrels per day (bpd) from 335,000 bpd. These aggressive goals increase both business and event risk. Fitch believes that Ecopetrol will face challenges in meeting these goals within the planned timeframe.
Improving Operating Metrics
The company's operating metrics have been improving during recent years and are now considered in line with the assigned rating category. Ecopetrol's reserve life stood at 8.1 as of year-end 2013. The company will need to maintain its average Reserve Replacement Ratio (RRR) at or above 164% in order to maintain or increase its reserve life profile while still reaching its 2020 production target. Failure to maintain this level of RRR while increasing production to the company's stated target will reduce Ecopetrol's reserve life, which will imply a need for higher investments in the future and holds the potential to negatively affect the company's stand-alone credit quality. As of Dec. 31, 2013 Ecopetrol's average RRR was 139%.
During the first half of 2014, Ecopetrol's consolidated gross production average approximately 750 thousand barrels of oil equivalent per day (mboe/d). Although down from 2013 average production of 788 mboe/d, Ecopetrol's production has been growing over the past five years from 521 mboe/d during 2009. The company's reserves continue to grow and as of Dec. 31, 2013 proved reserves (1P), net of royalties, stood at 1,972 million boe. The company's lifting cost increased by USD0.78 per barrel to USD11.07 per barrel during the first half of 2014 when compared to USD10.29 per barrel in the first half of 2013; three year average finding, and development (F&D) cost were approximately USD13 per barrel. Transportation costs were approximately USD7.14 per barrel during first half of 2014.
Strong Financial Profile
Ecopetrol maintains a strong financial profile with USD14.2 billion of EBITDA and USD8.6 billion of debt as of the latest 12 months (LTM) ended June 2014. This translates into a financial leverage ratio of approximately 0.6 times (x). The company reported moderate leverage when measured by total proven reserves to total debt, of approximately USD5.8 per barrel, sizable reserves, and increasing production levels. These factors, plus its dominant domestic market share, allow the company to generate consistently strong cash flows from operations and meet its obligations in a timely manner. Liquidity is adequate with USD4.2 billion of consolidated cash and equivalents as of June 30, 2014.
Aggressive Capex Plan
Ecopetrol plans to finance its USD68.5 billion capital expenditure program for 2014-2020 using internal cash flow generation and debt issuances, as well as, possibly, additional primary-equity offerings. These could increase Ecopetrol's total floating capital to as much as 20%. Due to the high dividend policy and aggressive capital expenditure plan, free cash flow (FCF) is expected to be under pressure in the foreseeable future. In addition, debt could continue rising, while leverage is expected to remain within the assigned rating category.
A rating downgrade could occur following a downgrade of Colombia's sovereign ratings, an increase in leverage beyond Fitch's expectations (e.g. above 3.0x), weak operating performance resulting in a sustained production-to-reserves level below five years, and/or a sharp and extended commodity price downturn.
An upgrade could result from an upgrade of Colombia's ratings coupled with continued financial and strong operating performance; namely, maintaining or increasing the reserve life ratio as production grows.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage