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Ecopetrol Talks 3Q Results; Cost Savings

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   |    Thursday,November 19,2015

Ecopetrol S.A. reported Ecopetrol Group's financial results for the third quarter of 2015 and the nine first months of the year, prepared and filed in Colombian pesos (COP$) and under International Financial Reporting Standards (IFRS) applicable in Colombia.

CEO Juan Carlos Echeverry G. said: "The industry continued to operate in a complex environment given low crude prices and the consequent adjustments in investments, costs and expenses observed in oil and gas companies. Ecopetrol, additionally, has responded to the challenges posed by attacks on oil infrastructure, El Nino Phenomenon, closing of the border with Venezuela and devaluation of the exchange rate.  In order to face this new reality, the company has been reinventing itself by means of the transformation program contained in the 2015-2020 strategy. The implementation of the transformation program increases efficiency from a structural standpoint and strengthens an organizational culture based on the principles of: integrity, collaboration and creativity. 

"The transformation plan also includes a comprehensive program for improving oil recovery that seeks to maximize the potential of existing fields and aims to strengthen our position in the Americas as a reference for this type of activity. 

"Up to September, Ecopetrol achieved budgetary savings of COP$1.6 trillion pesos, exceeding the initial goal of COP$1.4 trillion pesos set for 2015. This figure reflects both structural savings, as well as the streamlining of certain activities. This effort can be observed in the reduction of the company's production/barrel costs: lifting cost per barrel in 3Q 2015 was US$6.89/barrel, compared to US$7.47/barrel in 2Q 2015 and US$10.70/barrel in 3Q 2014. During January and September 2015, lifting cost per barrel was US$7.29/barrel, compared to US$10.91/barrel in the same period of 2014, reflecting a US$1.03/barrel reduction attributable to efficiency and cost reduction strategies and -US$2.61 attributable to the exchange rate.

"The company has set a new challenge to achieve budgetary savings of COP$2.2 trillion pesos in 2015, in an effort to mitigate some of the effect of a lower international price of crude through efficiencies and lower cost of services, purchases, and oil and maintenance services, among others.

"In the third quarter, Ecopetrol also generated value for its shareholders through the rotation of its asset portfolio, completing the first stage of divestment of its share interest in Empresa de Energia de Bogota, from which it obtained COP$614 billion pesos. The company also opened the first round in the process of selling off Interconexion Electrica S.A.

"Other business opportunities have arisen in the Middle Magdalena region with Occidental Andina LLC (OXY) for the development of a pilot project. If successful, it could increase the company's reserves by up to 100 million barrels of crude at the field La Cira-Infantas. Another pilot will be developed with the Canadian company Parex Resources, at the field Aguas Blancas, designed to recover 55 million barrels of light crude.

"In the production segment, enhanced recovery was strengthened with 28 recovery pilot projects underway, of which 16 show positive results in increasing pressure and 14 in increasing the production of crude. Over the past 5 years, Ecopetrol has added 187 million barrels of proven reserves by means of enhanced recovery, in which it is a pioneer, and has yielded proven results such as the one in La Cira-Infantas field. Through steam injection, production increased from 5 thousand barrels/day in 2005 to 40 thousand barrels/day in 2015. Processes are becoming increasingly more efficient: between 2014 and 2015 the number of drilling days per well decreased from 34 to 26 at Castilla field and from 36 to 20 at Chichimene.

"In the first 9 months of 2015, the Corporate Group's year-to-date production was 761 mboed, 9 thousand barrels more than in the previous year. This result was achieved despite the nearly 2% drop in production in 3Q 2015 versus 3Q 2014 because of the attacks on the oil pipeline Cano Limon-Covenas, the decline of certain fields, and the lower price level affecting some fields with high price contract clauses. The increase in activity at the fields Castilla and Chichimene has mitigated the impact of these events. Currently, and with an improvement in the public order situation, production has recovered to reach the goal of 760 thousand barrels equivalent/day for 2015.

"In exploration, in the past year, Orca and Kronos were discovered offshore in the Colombian Caribbean. The exploratory campaign also included drilling of the well Calasu in the Caribbean and two wells onshore: Muergana Sur, located in the Llanos Orientales, and Champeta, located in the lower Magdalena valley. Furthermore, blocks were added in basins of interest such as those awarded to Ecopetrol (50%) and Anadarko (operator, 50%) and another one 100% Ecopetrol in Lease Sale 426 by the U.S. BOEM (Bureau of Ocean Energy Management) in the Gulf of Mexico.

"In refining, on October 21^st, the new Cartagena Refinery reached a key milestone in the start-up process and commissioning with the introduction of hydrocarbons in the Crude Unit. The first shipment of refined products will take place in November. This is the first step in the commissioning of 31 sequential plants making up the new Cartagena Refinery, capable of producing clean fuels that meet international markets' highest environmental standards. All of the plants will be operating by the second quarter of 2016. 

"The new refinery, considered the most modern in Latin America, will increase its capacity in 2016 from 80 thousand to 165 thousand barrels/day, and its conversion factor from 74% to 97%, with greater flexibility in processing heavier crudes. Ecopetrol concludes investments over a 9-year period in this refinery, which required significant infusion of cash, which now can be used to focus on the exploration and production segments.

"At the Barrancabermeja Refinery, gross margin was US$16.7/ barrel in 3Q 2015 versus US$15.5/barrel in 3Q 2014, due to the implementation of initiatives to transform streams such as LPG and vacuum bottoms into diluent for heavy crude, and the performance of international prices of refined products compared to crude.

"In transportation, infrastructure was strengthened to ensure Covenas' crude storage reliability, with the addition of two tanks with 420 thousand barrels of capacity each that will be available in 4Q 2015. In order to verify the performance of transport systems with crude of heavier viscosity, a test was conducted in September of oil pipelines that transport heavy crude for export (ODL and Ocensa). The results were successful; this will help reduce diluent consumption in 2016. This is an important step in efficiency, it is the realization of a strategy to reduce the cost of dilution, especially important for the production and profitability of heavy crudes.

"Despite the drop in production (-4%) and price of the crude basket (-26%) between 2Q and 3Q of 2015, the Corporate Group had an EBITDA margin of 36% and generated EBITDA of COP$4.7 trillion in the third quarter of 2015, compared to COP$5.5 trillion in the second quarter of 2015. This was made possible as a result of the continuous effort of all segments to obtain greater savings in their operations and to the strength derived from being an integrated company.

"The financial result of COP$654 billion pesos in third quarter 2015 reflects the adoption of the Hedge Accounting policy as established by the international accounting standard IAS 39. The adoption of this standard makes it possible for the effect of the "Exchange Difference" on part of the dollar-denominated debt portfolio to be reclassified in shareholder equity, taking into account the natural hedge that Ecopetrol's crude export revenues generate for it. Ecopetrol has thus made use of an instrument that allows it to show in its financial statements management of exchange rate risk based on the nature of its business.

"The company has responded to the important challenges posed by the low price environment, attacks on infrastructure, El Nino phenomenon and closing of the border with Venezuela. It has managed its performance based on financial discipline, operating efficiencies and investment management. It remains focused on generating value for stakeholders and ensuring profitable growth based on the guidelines of its new strategy and its sustainability and financial soundness in the long run."