News Column

Fitch Expects to Rate Ecopetrol's USD2B Proposed Issuance 'BBB'

May 20, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign a rating of 'BBB' to Ecopetrol S.A.'s (Ecopetrol) proposed USD2 billion senior unsecured issuance. The company expects to use the proceeds from the issuance to finance its investment program as well as for general corporate purposes.

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, in Fitch's view, 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 is also linked closely with the Colombian government through its reliance upon the receipt of the price difference from selling fuel in the local market instead of the export market. The company generates approximately 20% of government revenues and is of great strategic importance 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.

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 788,200 boepd 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.

Improving Operating Metrics

The company's operating metrics have been improving during recent years and are now considered somewhat 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 the need for higher investments in the future.

Strong Financial Profile

Ecopetrol maintains a strong financial profile with USD14.6 billion of EBITDA and USD11.6 billion of debt as of the latest 12 months (LTM) ended March 2014. This translates into a financial leverage ratio of approximately 0.8 times (x). The company reported moderate leverage (measured as total proven reserves to total debt, of approximately USD4.2 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 USD5.5 billion of consolidated cash and equivalents as of March 31, 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.

RATING SENSITIVITY

An upgrade could result from an upgrade of Colombia's ratings coupled with continued financial and performance strong operating; namely, maintaining or increasing the reserve life ratio as production grows.

A 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.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830896

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Lucas Aristizabal

Director

+1 312-368-3260

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Jose Luis Rivas

Associate Director

+57-1-3269999 ext. 1016

or

Committee Chairperson

Glaucia Calp

Senior Director

+57-1-3269999 ext. 1110

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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