CHICAGO--(BUSINESS WIRE)--Fitch Ratings rates the USD500 million reopening of Ecopetrol S.A.'s 5.875% notes due in 2023 'BBB'. The company expects to use the proceeds from the proposed reopening for general corporate purposes, including capital expenditures.
Fitch's Foreign and Local Currency Issuer Default Ratings (IDRs) for Ecopetrol are 'BBB' and 'BBB+', respectively, with a Stable Outlook. The company's ratings reflect the close linkage with the Republic of Colombia (FC/LC IDRs 'BBB'/'BBB+'), which currently owns 88.5% of the company. Ecopetrol's ratings also reflect its strong financial profile and improving production levels. Ecopetrol's recently revised growth strategy and associated capex plan are considered adequate for the company's credit quality and cash flow generation ability. Ecopetrol is expected to maintain a financial and credit profile consistent with the assigned rating.
KEY RATING DRIVERS
Linkage to Sovereign:
Ecopetrol is of great strategic importance to Colombia given that it supplies virtually all liquids fuel demand in the country and it owns 100% of the country's refining capacity. In the past, the company relied on the receipt of funds from the Colombian government to offset the price difference from selling fuel in the local market instead of the export market. The receipts from the government stabilization fund, however, have declined significantly and in 2015 only amounted to approximately USD30 to USD40 million, down from approximately USD500 million in 2013. Historically, Ecopetrol has generated 10% to 15% of central government revenues and a significant portion of Colombia's Exports.
Strong Financial Profile:
Ecopetrol maintains a strong financial profile with USD5.4 billion of EBITDA and approximately USD17.6 billion of debt as of the latest 12 months (LTM) ended March 2016. This translates into a financial leverage ratio of approximately 3.2x, representing an increase of more than one full turn year-on-year. The company reported moderately high leverage when measured by total proven reserves-to-total debt, of approximately USD9.5 per barrel. Ecopetrol's relatively sizable reserves, stable production levels, competitive cost structure and 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 USD2.5 billion of consolidated cash and equivalents as of March 31, 2016.
Operating Metrics Deteriorated due to Price Decrease:
The company's operating metrics have weakened as a result of the decrease in oil prices after they had been improving during recent years. Ecopetrol's reserve life stood at approximately 7.4 years as of year-end 2015, down from 8.6 years in 2014. The company's reserve life is considered moderately low for the rating category and highlights the company's needs to maintain its investment levels to replenish production and increase reserves. The company's growth strategy of reaching 870 thousand oil equivalent per day (mboe/d) by 2020, which is down from the previous growth target of 1.3 million barrels of boe/d, is expected to put less pressure on the Reserve Replacement Ratio (RRR) required to maintain or improve reserve life.
The company's production has been relatively stable over the past few years, and it averaged approximately 737 mboe/d during the first quarter of 2016, moderately down from the reported 2015 average production of 761 mboe/d. Ecopetrol's lifting cost decreased to USD7.39 per barrel in 2015 from USD11.23 per barrel in 2014 due to Colombian peso depreciation and negotiations with suppliers. Fitch estimates the company's three-year average finding and development (F&D) cost at approximately USD13 per barrel as of year-end 2015.
Manageable Capex Plan:
Ecopetrol has been revising its business plan in light of current hydrocarbon prices and for 2016 it has lowered the previously announced CAPEX of USD4.8 billion to a range between USD3.0 to USD3.4 billion. The company plans to finance its capital expenditure program using internal cash flow generation for the most part, divestitures and debt issuances to a lesser extent. Although not currently envisioned by the company, a possible additional primary-equity offering might contribute modest additional funds to cover investments. These could increase Ecopetrol's total floating capital to as much as 20%. Due to the decrease of oil prices, the possibility to reinstate high dividend policy and projected capital expenditure, free cash flow is expected to be under pressure in the foreseeable future. In addition, debt could continue rising moderately, while leverage is expected to remain within the assigned rating category.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case include:
--WTI/Brent oil prices of USD35/bbl in 2016, USD45/bbl in 2017, USD55 in 2018, and USD65/bbl in the long term;
--Stable to moderate production growth;
--Strong government support should the company need it.
RATING SENSITIVITIES
A downgrade could occur following a downgrade of Colombia's sovereign ratings and/or Fitch's perception of weakening linkage with the sovereign.
An upgrade could result from an upgrade of Colombia's ratings.
LIQUIDITY
Ecopetrol's historically sound balance sheet is currently under pressure from the effect lower international oil prices on its cash flow generation. Liquidity is considered adequate for the assigned rating and is supported by its internal cash flow generation, cash on hand and manageable maturity schedule. As of March 31, 2016, the company's consolidated cash and marketable securities amounted to USD2.5 billion, while its short-term debt was USD1.7 billion and its consolidated financial debt amounted to approximately USD17.6 billion.
FULL LIST OF RATING ACTIONS
Fitch currently rates Ecopetrol as follows:
--Foreign Currency IDR 'BBB'; Outlook Stable;
--Local Currency IDR 'BBB+'; Outlook Stable;
--Senior unsecured debt consisting of approximately US$8.7 billion of notes outstanding 'BBB';
--National short-term rating 'F1+(col)';
--National long-term rating 'AAA(col)'; Outlook Stable;
--COP1 trillion issuance program 'AAA(col)';
--COP3 trillion commercial paper program 'F1+(col)'.
Date of Relevant Rating Committee: Dec. 16, 2015
Additional information is available at 'www.fitchratings.com'.
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