Q4 2019 Earnings Call

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We get momentarily. Thank you for your patience once again your company well begin momentarily. Thank you for your patience.

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Conference operator today.

At this time I would like to welcome everyone to the.

Fourth quarter 2019 results conference call.

All lines have been placed on mute to prevent background noise.

After the speaker's remarks, I'll be a question and answer session. Thank.

Thank you for your attention so I'm not quite well be can the conference today Mr. Craig you may begin your conference.

Good morning, everyone and welcome Coca Cola earnings Conference call and webcast, which we will discuss the main operational and financial results I'll pick up at all for the fourth quarter for your worked well. Thank you.

Well with again and it's important to measure the comments in this call. It by nickel because you know management and the success of the company's future performance.

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We will begin this presentation with the may not sure if that's how the year to help in 19, followed by the business highlights, but I was always Hawks under international financial reporting standards.

That those with the main targets of the within a 22 without going into plan and actually when a session.

I will now had a window presentation to accompany north sea already pelagia.

Oh, Pablo many times and welcome everyone to this conference call for their 2019 fourth quarter and full year results I.

I am pleased to share with you the outstanding operational and financial results for the equity group.

In the reserves on production site, we highlight our entry into the Midland and the Permian Basin in Texas to a joint venture with Occidental in order to participate in the exploitation and production of unconventional reservoirs.

These JV allowed us to incorporate 164 million barrels so reserves into 2019 numbers.

Another important milestone was the acquisition of 30% to shelf staking got below market lease coverage in the Santos basin in their brasilia pre salt.

Where we expect to drill an appraisal well in 2020.

Likewise, we highlight the successful drilling of the East Fox one well in the Gulf of Mexico. There's currently in production and the progress or the viability of their research pilot projects of Unconventionals in Colombia also known as projected to be local domestic I see on data.

We continue positioning ecopetrol towards energy transition into major fronts. The first one.

By strengthening our presence in gas difference you should feel we had two major achievements the preliminary agreement between our subsidiary how quoted on children, who acquired stake in the two Dupont, but you're not feel subject to approval of Colombian superintendents industry and commerce.

On the commercial agreements signed between equity thrown on show in the Colombian offshore gas province.

We recently announced the creation of a vice presidency of gas that by petroleum engineer woman with more than 20 years of experience in our industry.

The second front you SAR de Carbonization plan, having stated our target overdosing, 20% of Cotwo emissions by 2030 inline with our commitment to reduce the operations vulnerability to climate change and contribute towards protecting the environment.

Furthermore, in January 2020, we endorse the World Bank sure routing flaring initiative seeking to reduce routine gas flaring.

As part of our renewable energy plan the company set a target of incorporating around 300 megawatts. So renewables like 2022.

To achieve its target we commissioned our first solar field of 21 megawatts in Prestea in the departmental admit that.

In 2019, and we were awarded.

30 megawatts, so in the unconventional renewable energy sources auction by the Ministry of energy.

Also in 2020.

We have scheduled the construction of a San Fernando solar field with 50 megawatts of installed capacity.

We continue to contribute to improved air quality in the Cds in Colombia.

By offering cleaner fuels.

We harvest time understand those ones required by law.

Let's move onto the next slide to review, the Companys financial and operational results.

We continue to deliver strong results along with a sustainable growth despite a volatile environment.

Financial results were the highest in the last six years. These outstanding results were obtained amongst other things due to the positive operational performance across all of our segments.

On the positioning of our protein markets, where they are more body.

This remarkable performance also allowed the higher dividend distribution for the company's history 314 passes per share in terms of reserves I'm pleased to announce that we replaced 169% of our production the highest replacement ratio in the last nine years.

We also exceeded our target.

Of replacing 100% of our production.

This achievement is the result of proper performance and discipline in the booking of both organic and inorganic reserves.

In production, we reached 725000 barrels oil equivalent per day.

This allowed us to be in the middle of the range of 720000 to 730000 barrels per day equivalent that we set at the beginning of the year.

And this result was achieved despite facing operational security events during the year.

Production levels were supported also by the positive results of our drilling campaigns and an increase in the commercialization of gas.

With respect to the midstream passporting volumes increased by 4% when compared to 2018, reaching 1.153 million barrels per day meeting the segments target.

As part of the commitment to capital discipline and cost efficiency by the end of 2018, our group achieved communities efficiencies for the year of 3.33 Neo pets is exceeding that target for the 2019 2021 plan.

Let's move onto the next slide to discuss the market environment.

Okay.

During 2019, we faced a highly volatile market environment.

Price fell 7.5 dollars per barrel when compared to 2018.

The exchange rate and depreciation partially mitigated this impact on the lower price.

Regarding the performance of our crude oil basket, we saw a strengthening of heavy crudes, mainly due to lower supply in the region, reaching a record high discount of minus 5.6 dollars per barrel in 2019.

Our sales and marketing strategy enables us to establish an even stronger relationship with refiners, making us a reliable heavy crude supply for customers with high quality standards and competitive delivery services, although our refined products experienced weaker margins are basket spreads remain stable when compared to 2018.

Moving forward our business plan is assigned at Brent prices of $57 per barrel with flexibility to face a challenging market barmy.

Now, let me hand, the floor to a better consuela, who will tell us about the main operational achievements in 2019.

Thank you Philippe I.

I would like to begin by presenting our local and international exploration activity results, where we participated in 14, new areas consolidating our strategy focused on the inclusion of passage through acquisitions far means our participation in the exploratory rounds.

Through the deployment of exploration activities nearly 100 on 50 million barrels of oil equivalent were incorporated by discovered resources.

Tribute into the future increase of the group's reserves.

The successful results over the exploration strategy in the near field exploration areas allowed us to add total production and extend the test over 1 million of a cumulative equivalent oil to ecopetrols production.

We are currently assessing the commercial viability on the just be Andina oncocyte job discovery wells. Likewise, we didn't get three flamingos one on board on the wells Irene appraisal phase with the drilling a four appraisal wells foreseen for 2020.

It is important to mention that the national hydrocarbon agency assigned to that patrol group through its subsidiary Hilco seven exploratory blocks.

As part of the permanent process of a reallocation.

Furthermore, Ecopetrol was awarded with one offshore blocks and two onshore blocks located in that give them on day idea.

Which will strengthen ecopetrols presence in that they re up the country.

I also wanted to highlight the acquisition of 2000 square kilometres of three D deepwater marine seismic in the coal five block.

This information will allow ecopetrols to expand Onyx trentham exploration portfolio of the southern Columbia Caribbean.

Additionally, as part of the exploratory area licensee rounds in the United States. The M.C. nine all four block located in the Mississippi Canyon area was allocated to Ecopetrols America.

Let's move on with the next slide to this cost production results.

The growth in the annual production is attributable to the positive results seen in the ACA see us Getty key Canyon soon and teach him in a fields as well as two an increase in the commercialization of gas mainly from copiague via they want to fields.

The entry into operation of the could be outweigh LPG plant and increasing water injection capacity and rubiales idle so was mentioning.

By 2020 with respect to reach a production within the range of 752 760000 barrels of oil equivalent per day, mainly supported by the execution of drilling and recovery projects in our current fields. The reversal of the flooring and filed to fields on the.

The entry into production of the acquired fields during 2019.

Which are in line with this segment's investment plan.

Let's move on to the next slide to this closeups balance.

By the end of 2019.

Oil and gas reserves have an average life of 7.8 years, which improved by 8.3% compared to 7.2 years for 2018.

Organic growth was inline with our targets of replacing up lease at 100% of the production.

Within this component I would like to highlight on one hand, the incorporation via primary recovery projects, which contributed with a 103 Canadian barrels oil equivalent mostly due to the contribution of that Rubiales Copia when canyon soon fields on the other hand, the secondary and tertiary Rick.

Covering program, which had an additional 94 million barrels oil equivalent mostly due to their performance of the teaching many gusty, yes, I'd fields due to the that bounces relate to two inorganic growth.

164 million barrels of oil equivalent, whereas it coming from the joint venture with Wuxi in the Permian Basin.

Let's move on within next slide to disclose this successful results of the enhanced recovery program.

The recovery program continues to support our growth and value generation strategy. The program represented 22% of the incorporation of will be reserves during 2019.

Within this strategy it is worth highlighting the beginning of tertiary recovery with polymer injection in the Dina field and four new pilots three with water injection in previous years. These key dauman threea and one injection in Chichimene.

Let's continue with the next slide to discuss the results of the midstream segment.

During 2019, we increased the crude oil on product volumes transported by 4% as compared to 2018.

Crude ROI across both the volume increased 5% due to higher domestic production.

The capture of barrels that previously we're now they've equate that through our pipelines such as the injection of crude from the Acordionero field in Iraq, which.

Also.

Additional volumes coming from increasing demand for crude from the bottom uncovered and we had refinance.

Refined product stability was supported by an increase demand in the border areas that allowed to compensate the decreasing transferred due to scheduled maintenance at the bottom line go at it may have refinery our efforts remain focused on ensuring the systems operation that are affected by third parties.

Particularly in order to guarantee live equation of their I've got fields, 46, reversion cycles, where curry Donald we the volume of 11.5 million barrels with no impact on production.

Please let's move on to the results of that downstream segments.

Due to challenging market the environment during 2019 that spreads in international pro the prices with respect to Brent decreased mainly NAFTA on gasoline.

The last quarter of 2019, the higher fuel oil spread had a negative impact on their waterline go at it may have refinery.

This behavior on products prices together with a strengthening in the spreads versus brand of the cruise using our refineries diet implied weaker refining gross margins, resulting in a joined refining margin of $10 per barrel in 2019.

Despite the impact on margins due to the continuous optimization of the crude oil feedstock and activities related to asset integrity. The refineries join throughput reached a historical yearly high of 300 on 74000 barrels per day.

Additionally, the refineries reached record levels in yields of middle distillates, or 37% embedded oncomine, 57% Encarta Hanna.

During the fourth quarter of 2019, the Cartagena refinery reached at throughput of 156000 barrels per day marketing of record share of domestic crude in the feedstock, which increased to 92% compared to 77% in the same quarter of 2018.

This increase in the domestic crudes share significantly pay would the cost of the feed stock partially mitigating the impact of stronger heavy and medium crude prices in the international market.

They will encoder may have refinery kept stable through closed on operational performance with 222000 barrels per day for the last quarter of 2019.

Let's move on to the next slide to talk about deficiencies progress.

During 2019, we continue that immunization path of diluent consumption, reducing our dilution factor from 14.8% to 14.2% due to the capacity of the Olo look to those janos to transport Rubiales crude oil at a high viscosity alone.

And with the reduction in the diluent if operation in assets. So it just 'cause TNT too many due to the implementation of the change in the Diluents specifications.

The aforementioned has allowed to continue with the reduction of its volumes.

On the older hand, the lifting costs was 8.7 dollars per barrel stable levels due to the implementation of efficiency strategies on the exchange rate it picked.

Which mitigated the increase associated with increased well maintenance activity and subsoil services necessary to maintain production on the increase of 12% in the energy rates.

Our target is to continue to improve cost efficiencies and capital discipline.

I now pass the floor to high makeup idle, we'll disclose the main financial achievements for their corporate towards group.

Thanks.

During the fourth quarter 2019, Ecopetrol delivered stable financial results compared to 2018, mainly due to improvement in the crude and products basket spread higher sales of crude oil and a greater devaluation of the exchange rate. This even with a lower Brent price at $7 per barrel.

It did the margin stood at 38.6% at the same level of the last quarter of 2018, mainly explained by increasing revenues, which reached 18.6 trillion vessels the highest bigger in the last eight quarters.

It is important to highlight that this quarter typically exhibits a high costs and expenses seasonality, which negatively impacts the EBITDA margin.

Net income increased by 54% and closed at 14 vessels in line with a better EBITDA savings in terms of financial expenses and a lower effective tax rate.

Likewise, there are three nonrecurring events, reflecting net income, which I will explain shortly in detail, let's move onto the next slide to discuss 2019 full year results.

During 2019 Ecopetrols delivered the best results for the last six years and reach historic EBITDA record of 31.1 trillion vessels. The result was obtained with a 7.5 dollars per barrel decrease in the Brent price as compared to 2018 as well have more timing products price environment for the.

Downstream during 2019 due to high products price volatility.

Growth continues to be profitable evidenced in a variety of 14.3% higher than that 2019, 2021 target of our roce greater than 11%.

The main leverage ratio at two added that remain unchanged when compared to 2018, reaching 1.2 times within the lower range of the target for 2019 2021.

A rollover of that 2020 debt maturities is expected in the amount of $434 million.

And if the company growth strategy requires the execution of financing transactions they will be done within the announced range.

Net income breakeven went from 37.4 dollars per barrel in 2018 to 29.9 dollars per barrel in 2019, mainly due to the lower crude spread the onetime gain in but of course.

Lower effective tax rate and lower financial expenses, the EBITDA margin stood at 43.9% in the upper range of the last six years and had a slight decrease when compared to 2018, mainly related to the increase in enhanced recovery processes that involve additional extraction activities.

And is scheduled maintenance.

Refineries, which involve an import products in order to supply local demand.

Finally ended that per barrel went from $39006 per barrel in 2018 to 35.8 dollars per barrel in 2019.

Due to the lower crude and product basket price.

Please move on to the following slide to see the details of the investment any bright color its implications on the clean 19 result, and the expectations for 2020.

Index, you wanted to dig asset the Columbia embedded course is a business group with interest in energy companies with presence in 19 departments of Columbia.

In the course that currently has six controlled companies in its portfolio and nine companies with a non controlling interests.

This company was founded with the coal gas asset spinoff and currently directly and indirectly has a 34% share of the Colombian gas market.

Oh petrol gain control I think that color size, increasing its stake from 43 point, 35% to 51.8%.

This change of control generate three main impacts in our financial statements.

Firstly the dividend recognition for that 2006 through June 2009 period.

Equivalent to 8.3% of the stake in dispute.

For a total of 147 billion barrels.

With the ruling this amount was recognized cash on a non operating financial income was recognized as well.

Second a change in the accounting classification of the investment from an associate to our subsidiary investment, which implies under international accounting norms designed to line consolidation nothing brickell assessed assets and liabilities and its controlled companies.

Third a market valuation of the investment was carried out in compliance with international financial reporting standards applied to business combinations. This required a fair value exercise and the recognition of the difference with the book value similar to that carried out in the impairment proceeds.

This valuation proceeds generated the recognition of a onetime gain of one trillion passes with an offsetting account in each of the consolidated assets.

From now on in that Botox financials will be incorporated within the downstream segment given in but it cost us economic activity, which consist of transporting products and services the final consumers.

Let's move onto the next slide exceed the group's net income performance.

Net income for 2019 increased by 14% and closed at 13.3 trillion pests.

I would like to highlight the following.

First an increase in EBITDA of 23 trillion vessels the savings on financial expenses, resulting from debt prepayments made in 2018, 4.7 trillion and a lower tax rate of 0.8 trillion pests.

Secondly, a greater foreign exchange difference 0.4 trillion. This is a lower exchange exposure generated in the valuation of the group's net dollar position.

Certainly higher depreciation of 0.9 trillion related to the drilling campaign result, an improvement in the asset recovery factor that increase of six assets.

The 2019 net income before nonrecurring effects would have been 12 trillion petrus higher than the one reported in 2018 of 11.6 trillion.

Additional material nonrecurring effects that positively impact net income.

Were first as a result, an increase of staking, but of course I mention about a contribution of one treatment pass us to net income was generated.

That income did not generate and associated packs I'd is a non fiscal gain.

Second as a result of the agreement with Oxy Permian Michael Patrol USA Inc. is expected that this company will generate sufficient taxable income to deduct the historical tax losses of Ecopetrols America associated tweak historical expiration.

Since the United States tax regulations contemplate that tax losses can be applied in future tax returns under accounting standards. It is appropriate to register I receivable tax credits equivalent to 1.5 trillion vessels, which recognizes the right that ecopetrols, we'll have to recover the aforementioned.

Tax losses.

Finally during 2019, we recognized a net impairment of long term assets of 1.4 trillion panels before taxes, which includes two important market factors.

The first corresponds to the changing the outlook for short term hydrocarbon prices, which decreased considerably compared to the previous year impacting the upstream segment.

The second relates to evolution of market rates throughout 2019, we have looked serve a global economic slowdown, which has been reflected in lower discount rates.

This benefited the recoverable value the assets in the downstream segment.

Let us now move onto the next slide to see the business groups cash flow.

At the end of 2019, Ecopetrols maintained a solid cash position of 12.1 trillion passage.

Cash flow from operations, including working capital was robust totaling 27.7 trillion pests.

Relevant milestone working capital benefited from the 5.4 trillion income receipt asked balancing favor from the fuel price stabilization fund.

Cash flow from investment activity showed disbursement of 14 trillion pests, which includes the greater execution of organic capex as well as the outflow of resources for inorganic activity carrying out during the year.

Cash flow from financing activities had outflows of 17.2 trillion vessels, where we highlight first diverse moments of 13.9 trillion distributed as dividends to our shareholders on minority shareholders in the subsidiaries.

And secondly, outflows for 3.3 trillion for periodic amortization principal and interest payments.

2019, capex execution amounted to $4.4 billion of which 80%.

Where organic and 20% where inorganic investments 92% of investments were executing in Colombia and the remaining.

In the group's positioning within high Prospectivity basins in the United States on Brazil.

It is worth highlighting the out of that total 2019 organic investments, 79%. We're focused on the upstream segment and 67% where focus on an increase of hydrocarbon reserves and production.

Regarding expectations for 2020.

Investment plan considers between 4.5 and $5.5 billion aimed at underpinning our growth plans the plan will be finance with cash generation.

80% of investments will be directed towards the upstream segment to contribute to the target organic production.

In the downstream and midstream segments. The investments are mainly focus and ensuring that reliability and sustained profitability of the operation of the refineries.

The entire pipeline and Pollock network.

Likewise as part of the group's sustainability and competitive strategy more than $150 million will be invested in energy transition and de carbonization.

Around $129 million in the development of digital transformation and innovation projects and more than 1.7 trillion vessels in strengthening social environmental investment programs, which are intended to close social gaps in our areas of operation and promotes sustainable development and committed.

Elsewhere I.

I now give the floor to the precedent for his closing remarks.

Thank you Jaime correct petrol is a top priority to continue advancing our ears GE agenda.

On the environmental front de Carbonization is one of our priorities between 2010 and 2018, we reduce cotwo emissions in more than 6.6 million tons and endorse the climate and King Air Coalition, which has provided a strategy for reducing switch active emissions and faring aligned to international standard.

Thanks.

With regards to the social front, we increased our investments to 245 billion passes in 2018 and now.

For the period of the Twentytwenty 2022 years, we have increased our social and environmental investments to 1.7 trillion passes.

On the governance front, we completed an orderly transition in our board of directors.

We also created the innovation and Technology Committee that reports to the board.

This will help us further promote the progress towards digital transformation.

As in prior years, we're ratified the anti corruption and transparency packed.

Which reaffirms our commitment to strict compliance with the code of ethics and business conduct.

The company at the core principles sewer tolerance for corruption on the total willingness to support government initiatives on this matter.

Please move onto the next slide 2% the main objectives of our Twentytwenty 2022 business plan.

The Twentytwenty 2022 business plan six for the company to continue its path of profitable and sustainable growth.

Focusing on activities in Colombia, and highly perspective international basins.

Organic investments are estimated to reach between 13 and $17 billion.

This plan maintains the focus on capital discipline cash flow protection and cost efficiencies, which will generate a solid operation cash flow estimated to be between 21 $22 billion and their roce greater than 11%. All these with Brent prices of $57 per Boe.

The gross debt to EBITDA ratio remained below 1.5.

The carbon footprint reduction and incorporation of renewable energies play an important role in this plan by 20 to 22, we expect to reach a total cumulative reduction of between 1.8 and 2 million tons of sealed to equivalent and have 300 megawatts of renewable energy sources available for our operator.

Yes.

And this period.

We'll be investing 1.7 trillion passes to improve the quality of life and support business and rural development of those communities, where the company operates.

All this in addition to the contributions made by the company in terms of direct taxes indirect taxes royalties and dividends.

This plan for 2020, 2022 period reinforces equitrust commitment to a safe and environmentally sustainable operation protecting biodiversity and the communities in the areas where we operate.

And also generating value for its shareholders.

Let's move onto the next like 2% for closing remarks.

2019 was a positive year in terms of financial and operational results.

We met our goals and we set some new records.

The first one.

The highest financial results.

For the last six years.

Reaching a net income of 13.3 trillion passes on EBITDA of 31.1 treatment paces and an EBITDA margin of 44%.

Second.

Their highest reserve replacement ratio in the last nine years, despite a 15% drop in oil prices when compared to 2018.

Third the distribution of dividends. So 314 passes per share the highest in the company's history.

Fourth.

The crude oil versus Brent price discount record of minus 5.6 dollars per barrel on an average for the year.

In 2020, we will continue to pursue opportunities for profitable growth on moving forward, the SG agenda to technological innovation and digital transformation agendas.

Finally by yearend, we expect to share with our stakeholders. The group 2030 strategy offering a long term vision of the company.

In the face of the challenges and opportunities offered by the energy transition.

Thanks again for participating on with this I will now open the floor for questions and answers.

At this time I would like to remind everyone in Arkansas asking question simply press Star then the number one and your telephone keypad.

I would like to withdraw your question press the pound key well pause for just a moment to compile thank you Wendy roster.

And our first question comes from Daniel what are the overlap from BTG Pactual.

Hi, Good morning, guys and thank you for taking my questions.

So based on my questions are basically focused on better understanding the 2020 2022 business plan.

My first questions regarding the expected production I would like Tonight, if you could share with us more details on what are the expected sources of growth.

That would allow the company to bring production up to 780 to two to 800000 barrels per day by 2022 will be very good you could provide some details on that affected growth. My second question is regarding also the business plan, where you basically mentioned they were planning to dial 300 Meg.

Watts of generation capacity based did we knew about energy and I would like to now what is the expected Abby die or cost efficiencies related to these investments.

Also regarding the same plan I would like to know what portion of the expected Capex you suspect it to be allocated into inorganic growth.

And if you could provide more details on the M&A strategy of the company and last question, Joe It's very brief.

Regarding the on take into consideration under this plan you have to your plan and I would like to naive you have consider eve have you ever consider to eventually mitigate deval that TBT of results my hedging a portion of you expect to production of future. Thank you.

Thanks, Neil Philippa here. So in terms of the 2022 business plan as you saw from the from the material.

We've signaled.

A few things in terms of production growth in Alaska.

To to comment a bit more in terms with the detail, but basically what we're seeing is.

We want to see our production it basically moving from where we are today, if you think about.

Where we ended up last year 725000 barrels to a range between 750, an 800000 barrels so there's a significant.

Increasing production levels and it's a combination of things so it's a combination of.

Some of the the fields that are coming back to echo, but rather are coming to work with Ron. So for example, we have it this weekend.

We will be receiving the operation of floating yen out to what we call the via their Monte assets. So thats the unimportant source of additional it production.

That's that's coming in.

We also see in particular, some new projects coming on stream.

Not only in the commentary everybody kind of food Fscs, Minnesota.

I will be coming in some additional production coming on from it will be Alice.

And remember that we don't give specific guidance the guidance on a field basis, but I do want to.

Provide a bit of color additional color around it some of these levels.

Secondary and tertiary recovery continued to be fundamentals to what we're doing so part of investment going into that.

There say.

An addition, which is great and we've given some guidance on that if we choose the.

The Permian, a JV rodeo, JV, which will give us this year. Some seven to nine 7000 to 9000 barrels and will be increasing increasing over the course of the next few years you saw that.

Or basically I'll share with you we will be seeing some 90 wells nine fewer wells drilled in that JV. These year 50 of them online for rigs running so that's going very well, that's going very well and we see an ever increasing sort of.

Production. So there's there's quite a few.

Different sources.

Production that we see coming in we want to increase our presence in gas as well. So there will be some efforts to bring more gas as part of that you saw in the presentation. We're talking about two to begin other will be some volumes coming from that acquisition. So I know I've listed eight to 10 different things will continue with a.

The large investment in production wells that we will be drilling so all of that will contribute to the to the growth in production.

In terms of.

Renewables and I'll go swiftly into that so we've signaled a that we're going to be growing for.

From.

What we called outdoor hit US you on which is the power generation capacity that we use for our own operations.

Where we it last year started the year, we'd 43 megawatts that was biomass so the sugarcane back gas.

We.

We added last year 21 megawatts a from the solar to our first solar farm income idea in America.

We've announced that this year, we will bring 50 megawatts from spending that's something that non though the something on the station so that will take us well over 100 megawatts.

In addition to that we bought 30 megawatts from a recent auction on renewables from the.

From the Ministry of mines and energy.

We have line of sight between solar between May be wind and solar we have line of sight of projects that can take us to the 300 megawatts.

So in terms so.

What this brings so clearly it brings a substantial reduction in emissions. So thats a very key driver of why why we're doing what we're doing but I think the other thing and we'll be able as we move forward provide more more data on this.

I remind that the operation from the the solar plant or the solar parking Castillo has only.

I didn't know October, but we're seeing a substantial reduction in the energy prices that we use for own operation. So it brings it to very good things reduction in emissions and it's already providing us with.

Some very good efficiencies.

That directly hit lifting cost, which is one of the issues that we are dealing with and back to your first question as we see ourselves increasing the level of production, we will eventually need more power to move the fluids that we produce so I think.

In this sense, we've seen that our renewable strategy is very very good in addressing.

Both things you know emissions on in terms of Capex. So in terms of the third one capex. So you saw that last year, we have a we had a very large effort in terms of doing the inorganic acquisitions, both in the U.S. and I've talked about.

The rodeo JV and that's the.

Thats the official name of the joint venture we did some.

Big Big acquisitions, as well in but I see both in terms of our exploration footprint into pre salt and then got two a month and actually these things that were inorganic last year are now part of the organic portfolio. So thats. The first thing we need to think right. We incorporate them, but if you if you look.

At the forward plan, it's probably we've talked to from 14 to 17 billion in the next few years.

I think you can you can sort to think about this is there's going to be 10 to 13 billion in country.

And some three to 4 billion internationally most of that in the U.S. and him, but I feel and I think that provides you a bit of a color or frame around.

Where we are.

In terms of hedging and Alaska high mid to provide a bit more detail, but we.

We've done some tactical hedging at transactional level, so very specific on on very specific transactions and trade deals that we've done on some specific volumes.

We've looked at.

Having the opportunity to your.

The tools, if you will to do additional hedging if required but Alaska havent to go into a bit more detail in terms of how we're viewing these from the the overall sort of.

Farmington context point of view.

Hi, Daniel so starting with the hedging point aim in India business plan, we don't incorporate any specific assumption around hedge volumes. That's the first thing that I would say and so our business Spanish ease a produce under an assumption that we are capturing a.

A mark market prices and having said that a we are prepared aid to perform ahead. This is where we think there's a business case athlete bed discussed we've done a number of a tactical a hedges over the last year that have work.

Very well and we continue to monitor Cana a fundamentals if you will receive there's a case for business case, a case for hedging strategic hedging what I would say in that regard east add that are being less exposure of course is Brian.

Followed by detail, that's where we are focusing our attention and probably thirdly, I'd say double you tie given our increased exposure to Permian volumes, that's what we're focusing our attention right now.

A currently we don't see a robust business case to perform any material hedging on any of the three a to give you an indicative a amount and hedging 50% off our brand exposure what.

Cost us around 350 $280 million currently and a we believe that a with our current plan a I need to be Cdns and 50 to 60 dollar kind of price range. A there is not appear business case to do that.

We continue to monitor this it could change in time, and but Thats, where we are right now.

Lastly, I would like to refer briefly to that to your question around Capex and I would just like to confirm that in the 13 to 17 billion dollar range that we provide a for a capex execution.

Going to 2022 Dare East no inorganic capex assumption, so that the pilot deal that range East East organic right. It's underpinned by a our existing plans that way that we think about inorganic and from a financial standpoint is that.

Hey, we have extra capacity, given our cash generation and given our.

Current gearing ratio two and a transactions that could go a anywhere between two to 4 billion. If there was a solid case to do so a bodies not included in the business plan at this stage and simply because we are now.

Committing to specific M&A transactions, a we look at those on a case by case basis, and always with a view of ensuring value accretion as we did last year.

I. Following question comes from Pablo Mcanuff from Raymond James.

Hey, guys. This is mohamad glow on behalf of Elmo China. Thank you for taking the question.

So you guys have mentioned that there is regulatory approval from the council state to begin sort of small scale shale activity.

Are you concerned that this.

Are you concerned about the risks that this activity or create more tension with the public and perhaps more social disruption.

Even beyond what you guys have experienced in recent years.

That fit Mohammed do you have any other questions do you want to put them to us and then we'll take them or yes, sure and another one.

The offshore partnership with shell.

What would you need to see before approving development of any of the offshore discoveries that a matter of this higher prices or is there something else.

Okay. Good so mohammed thanks, and thanks for being here thanks for being in the call. So I think it's good to provide a bit of context around the unconventional development in Colombia. So the first thing is that a efforts to develop the unconventional resources.

Or potential.

We.

We think we're in our view existing country have been going on for more than 10 years. So there's a lot of in this sense.

Work that has been done lots of discussion that that have happened in support of doing a potential development for unconventionals in country.

So the second thing of context is that the government issued.

A strategy in which there is something cold, but again those below filling this do you guys running ticket on so these are pilot projects of comprehensive investigation knowing them.

For two of LIBOR early translating a bit.

The remaining in Spanish.

And this recommendation to the initial approach to.

The assessment on the potential on the visibility you from a social environmental point to view is the result of commission of experts that was appointed by by government.

A lot of them from a social sciences from environmental Sciences.

Did some work the almost a year ago. So this this group of experts 13, some of them international experts.

Basically came out with a recommendation that said.

The right way to do these and to assess from a scientific point to view the feasibility of doing Unconventionals in Colombia is through these pilot projects. So that's where we are and following that there were some a demands legal defense against.

A unconventional development in Colombia on the council of state or conceptual Estado, which is the highest administrative court in country.

Ruled out that said.

Yes, we cannot do it full scale or full blown unconventional development in country, but you know what we can do the pilot projects. So that's where we are right and I think it's important to put that context in place. So in terms of tension Where'd you mentioned intention.

Remember that the the country has moved.

From a very long internal conflict.

The two something where we in most of our regions of operations in the country and remember we operate in 330 of the 1100 municipalities in country. So were everywhere in Colombia.

We've seen.

A substantial improvement in operation operating conditions, you know and it with the exceptions of a few areas.

Two of them, notably in the borders we the equity load on Venezuela, we've seen a dramatic improvement in terms of our operating condition. So from that point of view, we're quite comfortable so I think overall and this is probably not unfamiliar to some places.

Yeah, I mean in discounting intend in Europe and in other parts of the world.

Where there is a concern you know from.

The younger people in terms of opportunities the environment climate change and the likes and I think what we've said and I will just reinforce that here first we don't know to do the unconventional development quickly.

We need to do it well and we need to do it in a way in which were it transparently it interfaces with the communities with the government's with the unions with academia with everybody else.

And so that's what we'll do and we're committing to do those pilot projects. The when the regulation and the legislation is ready and governments working on that one that once that regulations published and subsequently there's going to be detail from.

Technical environmental social point of view, we'll be able to submit our request for environmental licenses and do the pilots. So I think we're quite.

Comfortable obviously, there's a lot of work in terms of specifically.

Working with those communities.

Remember.

The overall general area, where the pilots would be developed.

Is is the same area, where we've had oil and gas industry for the last 101 years. So we're quite comfortable is near but I could it may how where we have a strong presence. So we'll we'll basically move on in that direction I know of giving you a very long answer, but I think it's important to provide some of the context.

In terms of where we are and just finalizing without we're committed to the pilots and ensure that we can.

Assess and understand and the site.

As a country on the potential of Unconventionals, which we think it's important.

Remember two things.

The most costly energy is the one that you don't have an its fundamental that we continue to do everything that we need to do and that we can do to ensure there is.

Energy Securities not lost in country.

Oh sure partnership with shell, So we announced that recently, we're very very I'm extremely pleased with that.

World Class company that brings not only their expertise on ultra deepwater developments.

We have these nature, but also on around gas and they're clearly a leader around the world in terms of development and marketing of gas so what needs to happen.

The agreement that we signed with shell. It basically allows us to drill an additional appraisal will and DSD. The well. So we will have a dynamic production data from the will that will inform.

All the work that we need to do around the definition of the development concept for the area remember that discoveries were done in the last two to three years that the last wells, we're drilling 17.

Yes, Ecopetrol have said that we envisage a potential of.

Basically around the same us we have in reserves of gas for the year we have.

I see a.

3.8 that up your school because you know we have.

9.8.

Yes, Yes, 3.8, Tcf I'm translating in Screenvision, sorry about that Mohammed and we think that these area could have resources of some three tcf.

Again, as I said, we need to drill the appraisal well, we need to DSP, the will and that will provide a lot of data in turn so how do we actually approach the.

The development.

Thanks.

Our next question comes from Frank Mcgann from Bank of America.

Hello, Good morning, Thank you.

Two questions if I could one just in terms of Diluents I was just wondering how low you think.

The usage can get if you if substantial or material downside from where you are today and secondly in terms of the tax rate in the fourth quarter.

I know there was a lot going on in the quarter, but.

And a lot of adjustments related to the write off in the.

Acquisition and such.

But just what drove the the tax rate to be positive.

Good morning, Frank Thanks for the question in terms of diluent, what we're seeing.

Starting in 2019 is that reduction in terms of the dilution factor, we went from 4.8% to 4.2%.

And what were seen in the future.

Starting 2020, he set new projects being implemented in terms of called the motion using lpgs.

Instead of NAFTA on Dan also implementing some heating projects aimed at let's say in saw pipeline.

So the end by 2021, we where we're expecting to see a dilution effect or under 4%.

Hi, Hi, Frank Design me I'm not talk briefly about the tax effect the effective tax rate I think there's there's two angles on AD, there's that full year angle understaffed for Q angle.

When you look at it from a from a full acute perspective.

If you're trying to compare for Q2 thousand 18 versus Fourq 2019, you don't have a number of extraordinary items. A Q2 thousand 18, the tax effective about effective tax rate was 28.4, we actually ended up in Fourq, you 19, with a negative effective tax rate.

A minus 20% at the bulk of that East D deferred tax rate that we introduced at Florida us business on location of the Permian transaction and that's about now has an impact of about 41% and there is also another impact associated too.

But the nice thing the fair value of embedded parts.

Which is the distribution the gas distribution business that we're now treating assess subsidiary E. Within our financial statement. Those are the two a big items. When you look at it from a full year standpoint, we go from an effective tax rate.

Of 36.9% in 2018% to 24.1% for 29 keen on a full year basis.

The way to bridge at that.

Now meant not would have added.

Activation of the deferred tax in the us at representing about 9% of Delta.

Hey.

Absolutely right, Ed Ed to add their reduction in the nominal tax rate, a hearing Colombia and bad debt to the financing well yes.

2%.

A related to the recognition of in but of course, that's fair value.

And you have.

About 10% associated to stronger results in what I think that lets you may recall bad because it actually got has an advantage and tax structure.

Actually Amen.

Hey helps on contributes to the tax effective rate to the effective tax rate of the ground and extend that has better results. Those are kind of had the big four components of the bridge.

Okay Thats nothing really helpful. Thank you very clear.

I. Following question comes from drilling apart, let me be asked.

Hi, Thanks for taking my question I have to questions here sorry, it didn't carry much capital allocation, we see the company with a solid cash position that with a strong capex guidance for Tony training, 63% increase from 2019, how can I see dividends going forward also in terms.

Freezer growth going forward.

Estimates are placed in Colombia. However were wondering if we could expect significant increases coming for from inorganic growth. All so let me be able to replace 100%.

Diction through organic growth.

And the second question is in the downstream segment last year, we have seen use of the government trying to lowered the death in the stabilization fund why we havent seen any recent news on that we think this is a potential risk for the refining margins. How do you said this matter going forward I mean, how could that Gulf.

Government lowered the death of the fund without hurting per this is margins.

Changing the price policy from the expert parity.

Parity with the potential solution.

Yes.

Thanks Julia.

I'll take the first one and then I'll ask.

The Tomas Anaheim it to comment on that and the second one so so the first thing on I'll start with is that some of the things that we did last year or the things that we did last year that were inorganic so the rodeo JV in the Permian on some of the things that we did.

But I see to enter the pre salt.

We'll now be treated us organic so I think thats. The first thing so that some of those efforts that we did inorganically will become organic as we move forward. If you think about forward.

Picks and bear in mind.

We've done everything at $57 per barrel, it, but we need to be cognizant and acknowledge the.

Uncertainty I don't think it's still too.

A massive volatility, but clearly uncertainty that we're seeing in the last few days.

Around prizes and we'll see we're where we end up but at 57 it weve.

Weve forward into the plan the 2020 2022 plan.

Some 14 or $13 billion to $17 billion all of that's organic so I just want to highlight that.

On 10 to 13 billion will be invested in country in Colombia, and three to 4 billion will be in the U.S. So that's basically the split in terms of.

How we see how we see the capex in terms of the dividend going forward, which is the other bidders in your question.

We have a.

We have an existing dividend policy.

That is basically talks about it distributing.

40, and 60% of the adjusted net income of the company in a specific fiscal year, but but I'd like to out a bit of color here.

It to some of the questions that we've heard before even in the prior call. So.

In order for us to move.

Forward with a recommendation on the dividends this part of being at 40% to 60% range of the adjusted net income is fundamental.

But the board of directors also assesses things like the macroeconomic environment, which is why was talking about.

The price decks that we're using going forward for plan.

But we also need to consider things like the beyond going.

Uncertainty around it Corona virus in China, and how it's spreading and potential impacts on the demand and supply. So thats clearly something that will look on the other fundamental thing that we need to look at when we're looking at dividends is how do we see cash projections.

In terms of achieving our strategy goals on our growth plans and you saw that we've talked about growing production growing investment. So all of that is considered in death.

When we talk about the recommendations for for dividends on distributions and I'll end up saying a soon you'll hear about specific recommendation on the dividend plan. So thats going to happen soon and that will be put into consideration of the ATM that.

Happens at the end of March and it's the ATM that we'll have the accountability yields the approval of that dividend proposal.

Just wanted to provide a bit more color around specifically the dividend.

Second which is the up 100 reserves replacement going forward.

And I think you were mentioning the organic.

His side of the equation it I'd just like to step back for a bit and say in.

2000.

17, 18, 19, with 126 to 129% to 169%, we've been able to replace 100% of our reserves.

Without benefiting or being impacted or we've managed to offset the impact of prices and I think thats very important so internally as we think about it and we've talked about this publicly as well we want to be able to replace a 100% of our reserves going forward. We didn't do that in 15 and 16. So I think going forward, we need to to think that.

We've demonstrated we can move very quickly in the inorganic side of things on bring them on stream.

We were giving some guidance around our rodeo JV, where we have this year alone will have a ecopetrol net production of seven to 9000 barrels rest year, we booked a 164 million barroso reserves, so that's going very well and we see more and more coming from that as we move.

Forward as well some of the investment team, but I see you know got to them out, though may bring some 90 million barrels of contingent resources going forward. So I think it's a combination of both things in terms of organic inorganic and we've demonstrated we can move quickly and swiftly India inorganic incorporate that into the portfolio. So we'll be low.

Looking at older potential.

Opportunities and avenues to continue to ensure that we growth our reserves Andr I'll end up saying in the last few years.

We've moved from below seven in terms of R to P. Seven years to almost eight 7.8 years. So we're moving quickly on will continue to do so.

In terms of these stability patient fund and I'll ask Jaime and the team to to comment on that.

Currently.

We have a expert priority which is the.

If you look at the frame of how it prices are actually constructed in country.

Eventually things, we'll move on the government has been very vocal about the need to.

A basically limit the swings that the stabilization fund has.

Without impacting prices for the end user. So we see these we'll move on and as a company will be ready you know when prices were the price.

Linked to a an indicator began flat indicator or import parity a competition will will increase on will be ready to cope with that Jaime.

Hi, Juliet just to add a bit of color to to the frame that that Philippe has provided a purely any any any change a associated to formalize or at least that the changes that have been discussed with the government and that the government has shared with us that they are contemplating I change.

That have a positive impact a on our business a basically the that do they proposals are being discussed there's one a associated to moving to flat pricing in in products like diesel and jet and there is another proposal around.

Moving to import parity around a gasoline a in both cases at they actually improve D.A. remuneration that is recognized to the producer Hey, there are no scenarios contemplated at this stage that actually affect negatively.

Compensation that each per a provided to producers so a dish would be on upside add to our business plan directionally on I would like to emphasize a the word a directional D. The relative impact that this could have on our margins.

It could be between a dollar on $1.50 per barrel, depending on the product and depending on a formula.

And how that Formula is designed and so so obviously to the extent that this occurs in time, a dish will certainly aim.

Probably a enable further investments a in the downstream a segment and and a for sure and I think this is that moved up the primary motivation that the government has on this it would also stimulate a competition, particularly in sorry.

Then geographical areas, where they are supply and challenges.

Our next question comes from coming out on can sometimes the in accordance not.

A high Philippe unknown nickel take little team a half just one question.

Regarding the imports of oil products basically knowing that the into television and they can do it was up a typical gear.

Where we sold that an increase of DC imports due to the refineries maintain this.

For 2020 are we expecting to continue having the same behavior that we saw into third and fourth quarter or are we expecting to increase due to as you mentioning day Spanish conference that we are going to help us mold stope in one of their refineries.

Thank you.

Yes. Thank you. Thank you Camilo, yeah, as we mentioned I'll spend a little bit on where we talked about it in the Spanish.

Call, Yes, we were impacted in 2019 by two major turnarounds that we had in refining we had in each refinery had a major.

Turnaround in Hydrocracking, Encarta, Hannah and diesel Hydrotreater in Monaco now these are all diesel the major diesel producers in the country and obviously have would have an impact on the import balance.

Looking ahead to 2020.

As you know we have plans for first quarter and fourth quarter, turnarounds, which is normal and refining.

We have a as I mentioned in the Spanish call, we have the Hydrotreater diesel hydrotreater.

Turnaround going on in the first quarter, there will be going on the first quarter that we'll have another an impact slightly on that import balance, but it's all being done in preparation for the.

The the view quality improvements that we're we're looking at for end of year in continuing without to him.

A few quality improvements in line with discussions with the government. So we were pretty much have a standard turnaround scheduled for 2020, we have a cluster turnaround in the fourth quarter. There is not related to diesel and we do have an impact in the first quarter. This year.

Due to some turnarounds that we have probably a good time dimension that that.

We have in the fourth quarter, we have had on an outage in one of our hydrogen plants has impacted.

Diesel production in the first quarter as well because we've had to have or hydrocracker down so basically hydrogen is.

A critical.

Input, obviously to hydrocracking, and we had to downtime and one so were mentioning that this will be an impact in the fruit in the first quarter that'll impact diesel, but it's not related to a major turnaround and car trains related to we lost another plant that went out and it's having an effect on the hydro cracker.

I probably question comes from pump out about the EPS company.

Hello, and thanks for the results of presentations I have two questions. My first question is regarding the differential in the crude basket.

The reduction in as shown in 2018, what do you expect the evolution of the differential to be roads here and what would be the strategy to maintain or reduce it.

And my second question is regarding the date EBITDA margin.

Which has been showing gritten into us three years and and last year. It presented a reduction how do you expect that to show growth again, if you do add with new strategies to implement new efficiencies.

Or improve existing ones and considering that enhanced recovery expenses.

Continued to be present.

Steve.

I think typically on them.

We are seeing.

Hi, this is melanoma.

Hello.

Yes, Okay. The first one on Alaska Himont to talk about the up the second one so I think it's always important to remember in last year as we reported we had the.

Record.

Of in terms of the lowest differential for our crude basket. So it's important to remember that.

We have positioned ourselves as a reliable a source of heavy crudes in terms of obviously the volumes the quality and the timing of.

Of how we actually provide these crudes to the to the market.

We have a adjusted in line with strategy, we have adjusted.

The.

Destinations of some of those crudes. So in average last year at the end was 48% of our crudes when to Asia and.

Over the last three months of the year. It was 50, 354%. So we've been very good at very quickly adjusting.

Having said all of that and especially in light of what's going on we have the corona virus.

There is a.

There's already a reduction in some of the runs of refineries in China, particularly it but again.

This is something we'll need to monitor it will need to understand where it's going to go potentially impacts.

I was mentioning earlier in one of the other question that.

As as I was just building on what was I was saying that we're a reliable source of crudes.

Our crudes have become a part of the the based runs in the refineries so even though refineries in China have reduced their runs we have not seen an impact in our exports.

We have direct relationship with those buyers with the refineries themselves and we will continue to strengthen and work.

Through that relationship, but I think it's early days.

I think the worlds just everyday and every hour sort of a getting a lot more information awareness of what's going on how these eventually will spread how deep.

Geographically and wear and what's the impact so we'll keep our radar sweeping it will ensure that we are.

A quick to react, but I just wanted to to say and that's why we're not providing any guidance.

Directionally I think the spreads will soften you know the differentials will grow a bit.

But we see ourselves a.

Advantage supplier of heavy crudes in particular to that part of the World Hi, maybe you can take the second one.

Hi, Juan Pablo and yes, the effectively EBITDA margin.

Dropped slightly probably year on year, a we did have a drop off of around 1.5%.

Hey, when you compare both years and there are five factors dot dot and explain that dropped in.

The percentage margin at the first factories that is actually doing you see a bit at the composition of the incremental production that we're bringing online as you know we are we are growing production in the SMB segment.

However.

The makeup of the fields east changing in time on and those fields.

Times have.

Hi, there different a royalty redeemed in some cases.

In other cases, they actually have a different a margins associated to the operation as that mix is changing in time, each having some effect a in the role that did margins of off of the incremental barrels that are added I'm going to go in EMEA.

But how do we see that going forward to 2022, a that the second point that affect debt EBITDA margin last year was indeed, a detail imports that we made a I think the mass has explained that in in a lot of detail today, it's down to.

A program maintenance. It says that we performed last year and that's something that we don't see ask a something that will sustain over time.

They're east to the extent that we're importing diesel as opposed to using hours E. D. Weekends, a relative a margins that we see around that and I need increases cost variable cost in particular that that component that I think that EBITDA margin was I would say generally D D.

Difficult environment experienced in the downstream as you know, particularly the second half of the year. So we can differentials on gasoline and NAFTA in particular I bet, a few loyal and that is reflected there too.

It does I think those three components.

I guess contributors to that.

Two other specific events I'd say and there were a number of extraordinary and operation expenses that that we reflect sitting in for Q, a bad had a beat up a contribution a on the general balance and last but not least annie and something that its.

Documented in.

In the full report that we provided a readied a make an adjustment.

In the way that we were recognizing revenues also stated add to that ship or pay that we have waste from data energy in the mid stream that issue related to a progress in.

In the legal case that we have with them as time progresses.

We have been reviewing our provisions on our accounting treatment in that matter and we believe that whilst our legal position east on change a good then that a dairy say an important than berlin's accumulating a week from data in that regard now believed that there there he shape.

Potential risks associated to their ability to pay and have therefore updated an hour a recognition of that revenue. According to those are the fee hi biggest components asked we look forward a from a a plan guidance.

We believe that that much of that a of those effects at normalizing over time, and we believe that in that plenty to anything and that in that 2020 to 2022 timeframe, we are going to be more being in that range of a 44% to 47%.

EBITDA margin.

This concludes today's Q any session I will now turn the call over to Mr. currently, but by and I know remarks.

Well again, thanks, everyone for participating today in this conference call for Fourq, you and 2019.

We're very pleased with the results that we've provided the market.

I'd like to take the opportunity to thank the 13000, the 13000 direct employees that work in the group us everybody that.

Helps us through the chronic contracting side of things.

In particular I want to thank you for being in the call for your questions for following on.

Equity and providing feedback that helps us.

Better communicate better improve how we actually relate to yourselves. The understanding what are the points of interest on some of things that we need to further it do deep dives and provide more color around so thanks again for being in the call.

We're very pleased with the the close of the year and we're also satisfied that we could provide guidance in a frame for the 2020 2022 business plan.

Thanks, and have a great day.

Thank you ladies and gentlemen does concludes today's conference. Thank you for participating you may now disconnect.