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Nueva York/Bogotá.- Ecopetrol S.A.’s new issuance will be up to USD1.85 billion of senior unsecured bonds with a 12-year maturity. The proceeds of the bonds will be used to repay USD1.2 billion of the 2025 bonds and other non-investment related expenses.
This was revealed by Fitch Ratings, which assigned the securities a ‘BB+’ rating reflecting the close linkage with the Republic of Colombia (BB+/Stable), which owns 88.5% of the company. Ecopetrol’s ratings also reflect the company’s strategic importance to the country, as well as its ability to maintain a solid financial profile.
KEY RATING DRIVERS
Sovereign Linkage: Ecopetrol’s ratings reflect the strong linkage to the credit profile of the Republic of Colombia, which owns 88.5% of the company’s total equity. The ratings also reflect the Colombian government’s strong incentive to support Ecopetrol in the event of financial difficulties, given the company’s strategic importance to the country as a supplier of virtually all liquid fuel demand in Colombia and owner of 100% of the country’s liquid fuels. refining capacity.
Ecopetrol depends on receiving funds from the Colombian government, through its stabilization fund Fondo de Estabilización de Precios de los Combustibles (Fepc), to offset the difference generated by the sale of gasoline and diesel in the country.
As of September 2023, the amount increased in the Fepc was COP25.7 trillion (USD5.7 billion). Fitch expects the Fepc account balance to decrease with several price adjustments implemented by the government. During 2022, gasoline prices were adjusted by COP600/gallon, and by an additional COP4,220/gallon during the nine months of 2023.
Strong Financial Profile: Ecopetrol’s ‘bbb’ Standalone Credit Profile (SCP) reflects the company’s strong financial profile. Fitch-calculated gross leverage, measured as total debt to Ebitda, is expected to average 2.5x over the rating horizon, which is moderate for the industry, as Brent prices continue to support Ebitda generation and debt is not expected to change dramatically.
Fitch expects Ecopetrol’s interest coverage, measured as Ebitda to interest expense coverage, to exceed 6x consistently over the rating horizon.
Expected positive FCF: Fitch expects Ecopetrol’s FCF to be positive going forward, subject to revisions to investment and dividend plans. Fitch’s base assumption includes the company having an average annual capital expenditure budget of approximately USD5.5 billion over the next three years, and paying out 60% of the previous year’s net income in line with its 40% to 60% dividend policy.
Stable operating metrics: Fitch assumes total hydrocarbon production will be 730 thousand barrels of oil equivalent per day (boe/d) in 2023, showing a trend or recovery that is expected to continue over the next three years. The company’s 2022 proved reserves (1P) of 1.969 million boe gave it a reserve life of 8.7 years as of 3Q23.
Fitch assumes a reserve replacement rate of 105%. The after-tax full-cycle cost calculated by Fitch for Ecopetrol has remained relatively stable over the past three years at approximately USD 47/boe.
DERIVATIVE SUMMARY
Ecopetrol’s rating linkage to Colombia’s sovereign rating is in line with the linkage of most national oil and gas companies (NOCs) in the region, including Petróleos Mexicanos (Pemex; B+/Rating Watch Negative), Petróleo Brasileiro S.A. (Petrobras; BB/Stable ), Petróleos del Perú – Petroperú S.A. (BB+/Negative), and Empresa Nacional del Petróleo (ENAP; A-/Stable).
In most cases in the region, NOCs have significant strategic importance for the supply of energy to their countries, including Mexico, Colombia and Brazil. NOCs can also serve as proxies for federal government financing as in Mexico, and have strong legal ties to governments through their majority ownership, strong control, and government budgetary approvals.
Ecopetrol’s SCP is commensurate with a ‘bbb’ rating, which is in line with Petrobras’ ‘bbb’ rating, given Petrobras’ recent significant debt reduction. Excluding Ifrs16 leases, Ecopetrol’s leverage at year-end 2021 was 3.1x. Ecopetrol’s credit profile is materially higher than Pemex’s ‘ccc-‘ SCP as a result of Ecopetrol’s deleveraging capital structure versus Pemex’s increasing leverage trajectory.
Ecopetrol will continue to report stable production, which Fitch expects to stabilize at around 700,000 boed. This production trajectory further supports the notch differential between the two companies’ SCP.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Ecopetrol’s strong liquidity profile is supported by cash on hand, which amounted to USD3.46 billion as of September 30, 2023, strong access to capital markets, and an adequate debt maturity profile. By November 2023, the company had refinanced all of its 2023 maturities. Based on market appetite, Fitch does not expect Ecopetrol to have difficulty refinancing, partially or fully, its 2024 maturities.
ISA’s contribution: Fitch expects most of Ecopetrol’s consolidated Ebitda to continue to be generated from its oil and gas business. Fitch estimates that ISA’s ebitda of USD1.7 billion is expected in 2023, adjusted to USD1.7 billion in 2023.
ECOPETROL’S PROFILE
Ecopetrol is a leading integrated energy and infrastructure company in the Latin and Central America region. The company is the largest in Colombia in relation to its Upstream, Midstream and Downstream business segments. Interconexión Eléctrica S.A. is 51% owned by Ecopetrol and is the largest energy transmission company acquisition in the region.
