Ecopetrol S.A. (NYSE:EC) Q1 2024 Earnings Call Transcript

Ecopetrol S.A. (NYSE:EC) Q1 2024 Earnings Call Transcript May 9, 2024

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Operator: Good morning. My name is Natalia, and I will be your operator today. Welcome to Ecopetrol’s Earnings Conference Call in which we will discuss the main financial and operational results for the first quarter 2024. There will be a questions-and-answer session at the end of the presentation. Before we begin, it is important to mention that the comments in this call by Ecopetrol’s senior management include projections of the company’s future performance. These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections shared in this conference call. The call will be led by Mr. Ricardo Roa, CEO of Ecopetrol; Alberto Consuegra, COO, and Maria Catalina Escobar, acting CFO. Thank you for your attention. Mr. Roa, you may begin your conference.

Ricardo Roa Barragan: Good morning, everyone. Welcome to the first quarter of 2024 earnings call, a quarter in which we are moving forward on the path of growth. Thanks to the collected work and a part of all our employees and partners. The results show that we are still maximizing the opportunities in our traditional business. We continued to achieve excellent operational figures. We closed the first quarter with a production of 741,000 barrels of oil equivalent per day, a transported volume of 1,118,000 million barrels per day and refining loads of 428,000 barrels per day with an high operational availability of our refineries in 96%, reaching levels comparable with the best refineries in Latin America. During the quarter, we announced the commercial viability of the Arrecife gas field in the Cordoba department adding approximately 6.7 million cubic feet of gas and the signing of a gas exploration agreement in Piedmont Norte with Paris.

This milestone is trading our commitment to the country’s energy security. These achievements are complemented by the outstanding commercial strategy highlighting our subsidiary in Houston, Ecopetrol U.S. trading, which started operations in October 2023 with a commercialization of 16.7 million barrels of crude and products generating an EBITDA of $37.1 million and a net profit of $28.5 million in the first quarter of 2024, 185% above the plan for the period. We are able to face that El Nino phenomenon with resilience implementing, planning, optimization and saving strategies throughout the operations and the processes. Examples include the accelerated maintenance at Cupiagua diesel timely delivery to the power plants and an 80% water reuse rate in our operations.

Moving to the next slide. Our growing production translate into solid financial figures with competitive profitability showing an EBITDA margins in line with the average of the last eight years. In this way, revenues of COP 31.3 trillion, EBITDA of COP 14.2 trillion, net profit of COP 4.0 trillion, and ROCE of 11% in line with our annual target. The main impacts on the results compared to the first quarter of 2023 are mainly due to exogenous variables. Over the past year, the exchange rate dropped by COP 845 affecting the respiration of variables in pesos explaining 80% of the variation in EBITDA. When analyzing the figures in dollars for the quarter, we observed financial results at similar levels compared to the first quarter of 2023. Other variables affecting the results are increased costs due to the El Nino phenomenon, inflationary pressures and the fall in product differentials as a result of the market oversupply.

Efficient management of the accounts receivable with the Fuel Price Stabilization Fund accompanied by adjustment to gasoline prices allowed us to reduce the accumulation by 72% compared to the first quarter of 2023, ensuring lower working capital pressures for the company. Additional, on April 1st, we received the transfer of COP 7.80 trillion corresponding to the account for the first quarter of 2023 highlighting the nation’s commitment to FEPC payments. I want to highlight the successful closure of the legal process of the arbitration award of the Cartagena Refinery after seven years of work and effort in which we protect the interest and reputation of the company for which we have already received the corresponding compensation. I want to give a special recognition to the Cartagena Refinery and its entire team for their constant work and commitment to successfully completing this process.

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Q&A Session

We maintain competitiveness in returns for our shareholders. At the General Shareholders Meeting, dividend distribution of 67% of the profits for 2023 was approved corresponding to COP 312 per share to be paid in two installments in 2024, one which has already been paid to minority shareholders in April. Additionally, I highlight the annual dividend yield of 14%, which continues to be highlight competitive in the industry. Moving to the next slide. The operational achievements shown go along with environmental, social and governance milestone that support the good performance of traditional business and the path towards a fair energy transition. In the environmental field and in line with our ambition to achieve net zero emissions by 2050 and decarbonize our operations in the first quarter of the year, we achieved a reduction of 50,000 tons of CO2 equivalent of direct emission Scopes 1 and 2, accumulating a reduction of 1.54 million tons of CO2 equivalent from our operation, which to give you an idea is equivalent to the annual electricity concession of 80 million Colombian households.

We also manage responsibly and efficiently the water that we use for our operations. In the quarter, we achieved a reuse of 39.6 million cubic meters. This value is equivalent to the quarterly domestic demand of 5.4 million Colombians. In line with the above, we highlight the launch of the new circular economy model, which we have a production and consumption system that promotes efficient and sustainable management throughout the product lifecycle in our value chain and we focus our effort on achieving climate change water biodiversity among other goals. On the renewable energy incorporation we announced the inauguration of the Cartagena solar firm making it for the first in a refinery in Latin America with a solar powered plant. In the social feed during the first quarter of the year COP 65.8 billion were executed in social, environmental and relationship investments and 50 projects were developed through the tax for works mechanisms for a value of COP 431.6 billion, since the beginning of the mechanisms.

Through the social gas line, we achieved the connection of 80,052 homes to gas fuel networks accumulating a total of 43,971 connection, since 2019 thus contributing to the expansion of access to essential public service for the people living in the communities where we operate. Additionally and in line with our commitment with these communities, we generate more than 73,000 jobs through our contractor companies hiding our own 85% of local labor and generating 23% inclusive jobs. The update of the bylaws reflect our commitment to gender diversity and the adequate preparation of our leaders, ensuring that at least 30% of the Board of Directors are women and requiring more than 12 years of experience for members of this governing body ensuring the presence of experts from diverse fields.

The recent change in the composition of Ecopetrol Boards of Directors do not imply modifications or change in the implementation of the Ecopetrol’s Group 2040 strategy by itself. Like a wiz, the corporate governance model remains valid and to date no chain proposals have been present by Ecopetrol administration. Finally, at the end of March, we observed normal change in senior management among, which I want to highlight that 73% of the new Vice Presidents come from internal talent in the Ecopetrol Group in the expected line of association reflecting our commitment to the development and recognition of talent and high performance within our organization. And finally, on the science, technology and innovation front, I highlight that within the framework of Ecopetrol Colombian Navy agreement, the participation in the 10th Antarctic expedition conclude where measurements of gases and sampling of particulate matter were carried out the data of which we serve in the reserves of offshore energy generation from renewable sources.

Now I give the floor to Alberto who will talk to us about the hydrocarbons line not without first thanking him for his valuable management during more than seven years in the Ecopetrol Group. His contribution to the achievements reached were fundamental for the consolidation of the strategy. Ecopetrol wishes him much success in his new challenges. Rafael Guzman, current President of Hocol will take cover as Executive Vice President of May 11, 2024. We welcome Rafael, has been President of the subsidiary for more than five years and has grown 14 years of experience in the Ecopetrol Group. Go ahead, Alberto.

Alberto Consuegra Granger: Thank you, Ricardo. We highlight the advances in the exploratory campaign allowing us to progress discovered resources into contingent resources and reserves. I would like to mention the following. The commerciality of the Arrecife gas field, 100% operated by Hocol, located in the Department of Cordoba, consisting of the producing wells Arrecife-1ST, Arrecife-3, Arrecife Norte-1, and Coralino-1. The field showed an initial production between 5 million to 10 million cubic feet per day already available in the local market and is expected to reach a production between 20 million and 30 million cubic feet per day by 2026. We continue pursuing the commerciality of the exploratory success of the Arauca-8 well drilled in 2023 in the Llanos Foothills by our partner Parex with a 50% participation.

The well confirmed the presence of light crude of 32 API degrees in the Gacheta formation and condensate gas in the Une formation with a gross production of approximately 4,573 barrels of oil per day and 7.5 million cubic feet per day of gas as of the end of April. Additionally, I would highlight the agreement with our partner Parex Resources to explore new sources of domestic gas and light crude in the Piedemonte Norte Foothills. The agreement includes the Llanos 4-1, Llanos 16-1, Llanos 121, and Siriri Blocks with a 50% participation for each party, as well as the option to jointly participate in two additional blocks. With this alliance, both companies expand their exploratory portfolio and work together to reactivate exploratory areas expecting to increase gas supply in the medium term.

Regarding offshore exploration activity, progress is being made in the maturation of the Uchuva-2 appraisal well, which is expected to start drilling by the end of this month in partnership with Petrobras as operator. We also continue to make progress in structuring the business case for the development of the Gorgon and Glaucus discoveries. Let’s move on to the next slide, please. During the first quarter of 2024, the Ecopetrol Group achieved a production of 741,000 barrels of oil equivalent per day, increasing by 22,000 barrels of oil equivalent per day compared to the same period of the previous year, maintaining outstanding results even under security issues and blockades in some territories, which impacted production by 7,500 barrels of oil equivalent per day.

These results were leveraged by the increase in production from our subsidiaries mainly in Permian as well as positive results in Cano Sur, CPO-09, and the contribution of secondary and tertiary recovery through water injection. We highlight the successful execution of the scheduled turnaround of the Cupiagua plant in January, which improved its reliability and integrity. The plant maintenance was executed in a shorter time with less production losses and more flaring reduction compared to the plant. Thanks to operational discipline and the use of equipment with the state-of-the-art technologies. The higher production level during the first quarter triggers that our projection for the year increases to a range between 730,000 and 735,000 barrels of oil equivalent per day.

In line with our TESG strategy, it is important to highlight that 93% of the water required to operate in the Upstream segment came from the reuse of production water, thus reducing dependence on water resources. Let’s go to the next slide, please. Regarding our activities in the Permian Basin, 25 new wells were drilled during the first quarter of 2024, reaching a production of 84,600 barrels of oil equivalent per day for Ecopetrol before royalties, which represent 11% of the group’s production. We also highlight the strong financial results of Ecopetrol Permian. In the first quarter of 2024, we achieved an EBITDA of $229 million and an EBITDA margin of 80%. Next slide, please. The Upstream segment contributed 54% of the group’s EBITDA being a profitable and sustainable segment that leverages the energy transition.

The EBITDA per barrel increased by 4%, reaching $29.2 per barrel mainly due to higher production levels, better crude basket prices, and cost efficiencies, which partially offset the exogenous effects such as inflation, higher exchange rate, and the El Nino phenomenon. On the other hand, the lifting cost was $12.1 per barrel. If normalized for exogenous factors, which represent about $3.45 per barrel, the lifting cost would be at levels similar to those of the first quarter of 2023. We also achieved efficiencies of $0.38 per barrel, driven by the execution of strategies focused on electrical power, reliability, and subsurface maintenance, which contributed to mitigating the impact on the lifting costs. Let’s go to the next slide, please. Transported volumes increased by approximately 28,000 barrels per day, mainly driven by the increasing crude oil production in the Llanos area and higher deliveries of Castilla Norte crude at the Barrancabermeja refinery.

During the first quarter, five reversal cycles were carried out through the Bicentenario pipeline with more than 1.2 million barrels transported in response to a preventive intervention at kilometer 153 of the Cano Limon Covenas pipeline which affected operations in the Ayacucho section in March. After successful completion of the repair work, the pipeline resumed operations on April 7th. As part of the strategy against crude oil theft beginning November 2023, the Ecopetrol Group implemented an operational adjustment to transport crude oil production from the Southern region of the country through Ecuador’s pipelines. During the first quarter, the Trasandino system has remained in contingency mode been available for use as needed. This measure will be reviewed over the year.

Lastly, we highlight the segment’s financial results, generating revenues of nearly COP 3.6 trillion and an EBITDA of COP 2.8 trillioncontributing with 20% of the group’s EBITDA. Next slide, please. In the first quarter of 2024, the combined refining throughput reached 428,000 barrels per day. Leveraged on more than 96% operational availability, the rigorous execution of scheduled major maintenance activities, and the maximization of domestic crude loads. The integrated refining gross margin was $14.8 per barrel, mainly affected by weaker diesel, jet, and gasoline spreads. This resulted in an EBITDA of COP 1.4 trillion for the quarter. In this quarter, we accomplished multiple milestones of which we highlight this. The commissioning of the mechanical recycling plant at Esenttia currently under stabilization with a production capacity of 12,000 tons per year, the start-up of the third chemical recycling reactor to increase the production of pyrolysis oil for processing at the Barrancabermeja refinery, the completion of the construction phase of the solar park at the Cartagena refinery inaugurated on April 12 with a self-generation capacity of up to 22.1 megawatts.

The commissioning of the new wastewater treatment plant at the Barrancabermeja refinery in February of this year. Lastly, the solid cash generation of the segment resulting from strong operational results and the repayment of the FEPEC to the Cartagena refinery on April 1, 2024, corresponding to the balance of the first quarter of 2023. Now I will turn it over to Ricardo, who will discuss the main milestones of the Low Emission Solution business line.

Ricardo Roa Barragan: Thank you, Alberto. In the first quarter of 2024, the gas and LPG raised 172,000 barrels equivalent per day, representing 23% of the group’s total production, 65% of Colombian’s market share and on EBITDA of COP 753 billion. Reinforcing our commitment to continue the path of the decarbonization and diversification of our energy metrics during the first quarter of 2024 in a scenario marked by the El Nino phenomenon, the Ecopetrol Group intensified its efforts in energy efficiency achieving accumulative optimization of its internal consumption of 0.4 petajoules for this quarter with an impact of approximately 36,000 tons of CO2 equivalent and saving up COP 11.6 billion. These efforts combined with timely efficient commercial action allowed us to decrease the energy cost per barrel from $3.03 per barrel with a 23% share in the overall production lifting costs in the last quarter of 2023, $2.5 per barrel and 21% in the first quarter of 2024.

In addition, the digitization energy security progress was made on two fronts. First in the planning of the supply chain in the maintenance of backup inventories to guarantee an eventual requirement of diesel for thermal generation, second in the optimization in times of major maintenance of Cupiagua to guarantee the reliability and availability of one of the main sources of gas in the country. In terms of renewable energies, we completed the construction of the solar plant at the Cartagena refinery, which has a capacity of 22 megawatts equivalent to the consumption of 18,200 Colombian homes. Being the solar farm built inside our refinery in Latin America with an expectation of reaching 524 megawatts in operation, construction and execution by the end of 2024, restating our goals in the short, medium and long-term within the framework of our strategy to incorporate 900 megawatts by 2025, growing with sustainability and generating value for our shareholders.

On the social front, we highlight two important initiatives with a positive impact on the sustainable development of the communities in which we operate in the social gas program, the completion of the pilot project in Manaure in the department of La Guajira. In alliance with Hocol, we shallowed the connection of more than 500 families to the natural gas service and the beginning of Phase 2 that will allow the extension of the benefit to 250 more families and the consolidation of energy communities in Puerto Para and Barrancabermeja, Santander, Clavinorte Arauca, and Puerto Carreno. In alliance with Wildlife Conservation Society leveraging the experience of the Wild Project. These projects not only allow us to improve population access to renewable energy, but also to guarantee the conservation of key ecosystems and species in the country.