Ecopetrol S.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ecopetrol S.A. is a major oil and gas company based in Colombia, engaged in exploration, production, transportation, and refining, primarily operating in Colombia but also with a presence in other countries in Latin America and the US Gulf.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ecopetrol’s Moat: 2 / 5 Ecopetrol’s moat is narrow, primarily stemming from cost advantages in certain operations due to ownership of key Colombian production infrastructure and long-term contracts. However, its moat is susceptible to erosion due to commodity prices, a difficult regulatory and operating environment, and the lack of significant product differentiation.

Justification:

Cost Advantages: Ecopetrol benefits from having a low cost base. This cost advantage is built in due to its ownership of large Colombian reserves that tend to be high quality and low-cost to produce from, which has benefited its profit margins for years. Ecopetrol operates extensive midstream and downstream logistics assets that are fully integrated with its exploration and production operations. This integration gives a structural cost advantage through lower transportation costs, which helps in increasing the profit margins. While not a moat that guarantees success, cost-based economies like these can provide stability.
Market Share: Being the largest producer of oil and gas in Colombia offers a certain advantage, but it is not a guarantee of sustained profitability, as it has shown recently with increased competition in the market. This also shows the company’s vulnerability to the larger economy. They have a lot of domestic market share. However, as discussed, this isn’t a “guarantee” of success in the industry.
Regulatory Approval/Licenses: Although Ecopetrol does have regulatory approvals and licenses that can be difficult to obtain, these benefits are not specific enough or unique to be considered strong moats.
Lack of Differentiation: Ecopetrol’s product offerings are largely indistinguishable from those of its competitors- it produces largely undifferentiated commodities. This makes its products vulnerable to price competition.
Government Influence: While the Columbian government is a main shareholder in Ecopetrol, with their intentions being aligned with value creation, they are also focused on other things that may affect profitability. There are limits on certain things the government is obligated to do to ensure the citizens of Columbia are getting appropriate benefits, including things like paying more for the government’s share of oil. These interests may diverge from those of the minority shareholders.

Legitimate Risks to the Moat and Business Resilience:

Commodity Price Risk: The most significant risk is fluctuations in commodity prices. Ecopetrol’s profitability is highly correlated with oil and gas prices, and the company can do little to control that. Lower prices can decrease revenues, put pressure on profit margins, and also cause them to write-down the value of their assets.
Regulatory and Political Risks: Regulatory risks are fairly high as the government is both the owner of most of their assets, as well as the regulator. This may lead to the government instituting policies to take a larger amount of the company’s revenues, profits, and assets. Furthermore, they also have their policies often changed or shifted. They are also very sensitive to any political situations.
Geopolitical Instability: Exposure to geopolitical uncertainty is a major concern since many of their operations are located in Colombia and other areas with instability, which can disrupt operations and limit long-term growth.
Technological Disruptions: Although they spend a lot on innovation, there is always the chance that a new, disruptive technology can severely hurt its profits.
Environmental Risks: A major risk is the potential for environmental incidents, such as oil spills, which can lead to significant financial and reputational damage. Furthermore, they are beholden to environmental regulations, which also can be costly and may hinder growth.
Operational Disruption: Incidents can occur within operations that can hinder productivity and increase expenses. They have had instances of having to shut down a refinery due to weather damage and have had instances of oil spills. If there are any future incidents, it can directly influence profitability.
Competition: Since the company operates in the commodities sector, there is a lot of competition. They cannot rely on any brand loyalty to maintain prices, so they must have the lowest costs and highest efficiencies.

Business Overview:

Ecopetrol operates across the entire energy value chain. Its operations span across Colombia and other key regions.

Exploration and Production: This segment is where Ecopetrol’s financial engine lies, producing the crude oil and natural gas. They have a portfolio of assets across Colombia, and also international assets. There are long-term plans to expand production at more than 70 fields across Columbia with long-life production potential. They are also looking for a greater exploration footprint.
Refining and Petrochemicals: This segment refines crude oil into products, such as gasoline, diesel, jet fuel and various petrochemicals. They have two main refineries in Columbia, Barrancabermeja and Cartagena, and they are working towards increased efficiencies.
Transportation and Logistics: The company’s extensive infrastructure of pipelines and transport facilities are crucial for getting oil and gas to market and represent their midstream operations. This is also a significant value creator for them. It also provides service to other companies.
Electric Power Transmission & Road Toll Concessions: These divisions are far smaller but allow for a more diversified revenue stream.

Financials:

Ecopetrol’s financials, while showing generally positive performance, have shown a level of volatility due to fluctuating oil prices. However, they remain highly profitable when the prices are high.

Revenues: In 2022 revenues totaled 159.5 trillion Colombian pesos, 65% higher than 2021 which is primarily due to the oil price rally. Most of their revenue comes from sales of crude oil, gasoline and diesel. For 2023, there has been a drop in revenues which shows their extreme dependence on oil prices. They will also be affected by other issues, such as a new carbon tax implemented by the Columbian government in 2023.
Profitability: Their earnings have been greatly affected by the same swings in oil prices, which means it has been very strong in times of high oil prices, and weaker in times of lower prices. They had a net income of 33.4 trillion in 2022.
Expenses: Major operating expenses include the cost of exploration, extraction, processing, and transportation of oil and gas. This makes up around 60-70% of revenues in 2021-2022.
Capital Structure: They use debt but at conservative levels, since a large portion of debt and funding is provided by the Columbian government.
Dividends: They have a policy of paying around 40-60% of the adjusted net profit every year to shareholders. This dividend strategy is likely to be maintained in the future, as the government also expects to see significant returns from this ownership stake.

Understandability: 3 / 5 Ecopetrol’s business can be viewed in a straightforward manner as an oil and gas producer. Most people are familiar with those kinds of companies. However, when the specifics of their operations, financial strategies and government ownership enter the picture, understanding the company requires a bit more attention.

Balance Sheet Health: 4 / 5 Ecopetrol has a good but not perfect balance sheet. The total debt is only around 40% of total capitalization, giving them some wiggle room. The company does have a tendency to take on more debt to help fund large capital expenditures.

Recent Concerns/Controversies and Problems:

Political Uncertainties: They have seen a drop in stock prices recently because of fears that the Colombian government may take more revenue. There was also some uncertainty if the government would approve all the company’s expansion plans. The company has been working with the government to allay these fears.
Oil Price Volatility: Earnings have varied greatly due to the large movements in oil prices, which have caused great uncertainty among shareholders. The company has tried to mitigate these concerns by focusing on high quality, low-cost production and increasing efficiencies, but has limited control of the final prices.
Decreased demand and increase taxes: There has been some concern as demand has fallen while taxes will increase in 2023.

These points highlight that Ecopetrol, while a major player in Colombia’s oil and gas sector, is not without its share of risks and challenges. Although they have a strong position in Columbia and decent financials, and are likely to have a stable business, the company is very susceptible to movements in commodity prices and government action.

Disclaimer: This information is intended for informational purposes only and is not to be taken as financial or investment advice. Past performance is no guarantee of future results. Do your own due diligence and consult a financial professional before making any investment decisions.