CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Ecopetrol S.A.'s foreign currency (FC) and local currency (LC) Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB', respectively. The rating action affects approximately US$1.5 billion of notes outstanding. Fitch has also affirmed Ecopetrol's national long-term (LT) IDR at 'AAA(col)', which affects the company's COP1,000,000 million issuance program. The Rating Outlook is Stable.
In addition, Fitch has assigned a short-term national scale rating of 'F1+(col)' to Ecopetrol.
Ecopetrol's ratings reflect the close linkage with the Republic of Colombia, 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 (LC and FC IDRs of 'BBB' and 'BBB-', respectively), which owns 88.5% of the company's total capital. The company is also linked closely with the Colombian government through its exposure to changes in regulation and its receipt of subsidies for retail fuel consumers from the central government in the past and potentially in the future. During 2011, Ecopetrol accrued a total of approximately USD1,161 million of fuel subsidies payable from the central government. The company generates approximately 10% to 15% of the central government's revenues and is of great strategic importance to the country.
AGGRESSIVE GROWTH STRATEGY
Ecopetrol's growth strategy is aggressive and could be challenging for the company. The company plans to increase production to 1.3 million barrels of oil equivalent per day (boepd) by 2020, from 724 thousand boepd of consolidated productions during 2011. It also intends to increase refining capacity to 425 thousand barrels per day (bpd) from 330 thousand bpd. These aggressive goals increase both business and event risk. Fitch believes that Ecopetrol will face challenges in meeting these goals and improving reserve life in the aforementioned time frame while maintaining all its stated credit metric targets. These include leverage below 2.0x, EBITDA interest coverage above 5.0x, debt to capitalization below 45%, and debt to proven reserves of USD4.5 per barrel.
The company's operating metrics have been improving during recent years and are now considered to be somewhat in line with the assigned rating category. Nonetheless, Ecopetrol's reserve life has been declining during recent years, and as of 2011, the company crude reserve life was estimated at approximately seven years, while the life of its reserves including gas stood at 8.4 years. During 2011, the company's reserve replacement ratio (RRR) of approximately 164% continued to be strong, yet below the 193% reported during 2010. The company's three-year average RRR was approximately 154% as of year-end 2011. Going forward, the company needs to maintain its average RRR at or above 164% in order to maintain or increase its reserve life profile while reaching its 2020 production target.
STRONG FINANCIAL PROFILE
Ecopetrol maintains a strong financial profile with USD18.4 billion of EBITDA and USD6.1 billion of debt as of the last 12 months (LTM) ended June 2012. The company reported moderate leverage measured as total proven reserves to total debt of approximately USD3.3 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 strong with USD3.3 billion of cash and equivalent as of June 30, 2012.
Ecopetrol plans to finance its US$80 billion capital expenditure program for 2012-2020 using internal cash flow generation, debt issuances, as well as possible additional primary-equity offerings. These could increase Ecopetrol's total floating capital to up to 20%. Due to the high dividend policy and aggressive capital expenditure plan, free cash flow is expected to be under pressure in the foreseeable future. In addition, debt could continue rising, yet leverage is expected to remain within the assigned rating category.
RATING TRIGGERS
An upgrade or Positive Outlook could result from an upgrade of Colombia's ratings coupled with continued strong operating and financial performance. 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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