Q2 2021 Ecopetrol SA Earnings Call
Again, it is important to mention that the comments in this call by Ecopetrol 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. Philippe <unk> CEO of Ecopetrol.
Alberto Consuegra, COO and Jaime Caballero CFO.
You for your attention Mister.
Mr. <unk> you may begin your conference.
Good morning, everyone and welcome to our second quarter 2021 results Conference call. We hope you and your families are well and are continuing to stay safe as the world needs to recover from the effects of the COVID-19 pandemic. The result of the second quarter and the first half of the year reiterate our ability to cash.
True value in a favorable fundamentals scenario and despite challenging environment conditions, we keep our commitment to cost optimization efficiencies and improvement in our commercial strategy social unrest during may and June caused a complex situation locally, resulting in mobility restrictions and some operational.
Disruptions Ecopetrol activated our contingency plan to guarantee the security and continuity of its operations and mitigate the impacts across our value chain during the quarter. We generated a consolidated revenue of $19.4 trillion pesos in EBITDA of $9.4 trillion pesos or 40.
9% EBITDA margin on a net income of $3.7 trillion pesos. These financial results are historically high on a quarterly basis for Ecopetrol. These outstanding results ratify the resilience that the company has consistently demonstrated amidst challenging environment conditions 2 weeks.
The following milestones can be added we joined the program of the associates Youll National Day, Impresarios, Andy that allowed the acquisition of vaccine by the private sector ratifying our commitment to the protection of life and care of our workers their families and our allies under this program, we acquired nearly 26000 doses of Syn <unk>.
<unk> vaccine with which to date more than 30, 401st doses have been administered with this program along with the government's national vaccination and plan around 40% of our employees have completed their immunization program, we announced the creation of a new trading company based in Singapore. This.
To consolidate the position of our crude and refined products in the Asian market capitalizing on our diversification strategy, we announced to the market. The extension until the end of August of the exclusivity agreement with the Ministry of Finance and public credit for the potential acquisition of 51, 4% of the shares in east.
In addition on July 30th pursuant to an authorization from our board of directors, we submitted a binding offer to the ministry if conditions are subject to reserves due to the non disclosure agreement that governs the process will resume normal operations in the Castilla field with an increase in production of 9000 bear.
At the end of June compared to their production of the field at the end of May net I'll now turn to the next slide to see some aspects of the market context in line with the progress of the vaccination plants and the progressive reactivation of the economic activity at a global level, we observed a significant recovery of the market during the second quarter.
Domestic demand for natural gas average 945 gigawatt Btu per day in June there was an 8% recovery in demand compared to me a month in which demand was most affected by the public order situation in country as for LPG demand reached an average of 22300.
<unk> barrels per day during the quarter and in June an increase of 30% compared to the previous month in terms of our product sales in the domestic market. There was a reduction of around 5% during the second quarter versus the 1 observed in the first quarter of 2021 in general we have observed a recovery in demand to a round.
Pre pandemic levels, except in jet fuel, where there is still room for recovery. It is worth highlighting the improvement in the realization prices of our crude oil basket, which have recovered significantly against the Brent price after having reduced our levels close to $30 per barrel. During the first half of 2020, our crudes were sold to close.
$62 per barrel for the same period in year 2021, Please let's move on to the next slide there are different actions that allowed us to generate a counterweight to the effects of the operative disruptions and deliver positive results in this quarter, our commercial strategy contributed with more than $120 million.
The group's EBITDA during the quarter, mainly as a result of the purchase of new crude for the refineries increased asphalt sales and energy cost savings also we observe a strengthening of around $45 per barrel and absolute prices of crude oil experts as compared to the second quarter of 2020 stable flow of experts to the U S Gulf Coast.
And greater share of market volume in the Asian continent, as an integrated company Ecopetrol materialized synergies between its different segments in the different business, giving us the flexibility to face volatile context. An example of this is a strategy to maximize Cartagena refinery throughput with their own domestic crude.
At oil versus imported crude oil these allowed us to capture benefits of Iran is $5.5 million in EBITDA. During the first half of year 2021, a diversification of our production and reserves portfolio through the consolidation of business lines, such as gas and the unconventional reservoirs in the.
It states in the case of other Permian Basin in Texas, we cannot share its outstanding results. We registered an average net production for Ecopetrol of 21200 barrels per day during this quarter, our gas and LPG business showed an EBITDA growth of 32% compared to the same period of the previous year and reach an EBITDA margin.
Margin of 54%. It also represented 21% of our total production.
Our cost efficiency plan aligned with strict capital discipline standard has allowed us to incorporate efficiencies for approximately 1 trillion pesos. During the first semester of this year to date, we have captured 197 billion peso is derived from the implementation of the cereal based budgeting pilots applied and Deere.
Current subsidiaries of the group I will now pass on the word to Alberto Consuegra, who will elaborate on the main operating milestones for the quarter.
Thank you Philippe.
On exploration 3 exploratory wells were drilled and completed with a total of 8 wells year to date.
By the end of the year, we estimate a total of 14 wells.
5 additional wells compared to the plans set for 2021.
Commodity production and initial tests extensive tests and exploratory wells in post commercialization reached 908535 barrels of oil equivalent an increase of 15% as compared to the first half of 2020 rigs.
Regarding gas the RSV phase 3 well appraisal of the RSC for first sidetrack discovery confirmed the presence of gas.
Initial testing yielded gas production between 2.5 and $9.5 million cubic feet per day extensive test will be carried out to determine its commercially drilling campaign for the remainder of the year will be focused mainly on gas exploration in northern Colombia MPLA Monday.
On the other hand, we highlight the strengthening of the partnership between Ecopetrol and <unk> resources through the assignment of 50% of the Ecopetrol stake in that outcome channels 38 blocks promote in the reactivation of exploration in unimportant oil area of the country.
In the Euro Cup block it is expected to resume production of light crude between 38 and 41 degrees API by drilling 2 development wells. Meanwhile, initial activity in the <unk> 38 block will be focused on drilling exploratory well in 2022 and acquiring 3 day.
Seismic data to assess the areas of potential.
Let's move on to the next slide please during.
During the second quarter at capital group's production was 661000 barrels equivalent per day, reaching 668000 barrels equivalent per day year to date when compared to the same period of the previous year production decreased 5.3% due to the lower production of the <unk>.
<unk> field and the public order issues mentioned by Philippe.
The operating restrictions related to water management in the gas the field were resolved in June, allowing a production increase of 9700 barrels per day at the end of the second quarter production has reached toward its growth path with levels at both 680000 barrels equivalent per day by day.
Keening off July maintaining our estimated production range between 690000.700000 barrels equivalent per day for 2021 gas.
Gas and LPG production increased 8% compared to the same quarter of the previous year leveraged mainly on higher production from PNM on debt Permian and cold calls fields at 7% decrease versus the previous quarter due to the effects on the evacuation of LPG in the mall.
<unk> cost by the social unrest, which led to the maximum levels of storage of this product as of today. There is a recovery in production due to higher demand, let's move on to the next slide please.
On the Colombian unconventional reservoirs front on June 17th the National Hydrocarbons Agency a P.
The alliance with Exxon moving for them.
Element of research filings the assignment of cross participation interest with Exxonmobil in the gallium Plateau Special Research project contracts was also approved resulting in net capital as operator with a 62.
Price participation interest in Cali, and 37, 5% employ payroll rigor.
Regarding <unk>, we continue to make progress on the environmental impact studies as full plateau. The first territorial dialogue was held and the monitoring and environmental impact studies began as for the Permian Basin. During the second quarter 26 wells were drilled for a total of 47.
Wells drilled so far this year, reaching a net production after royalties for Ecopetrol of 16100 barrels of oil equivalent per day in line with our T. ESG commitment rose oil has adapted both drilling and completion equipment aiming to reduce diesel consumption.
By up to 20%. In addition, we are continuing with our zero routing and flaring initiative with the production levels and efficiencies obtained during the first half of the year Ecopetrol Permian generated a cumulative EBITDA of $74 million and EBITDA margin of 79%.
And our capex execution of $371 million in accordance with the plan, let's move on to the next slide please.
The volume of transported refined products increased by 86000 barrels of oil equivalent per day as compared to the second quarter of 2020 due to the recovery of local demand.
On the other hand, the volume of crude transported decreased by 52000 barrels of oil equivalent per day.
As a result of operating restrictions caused by the public order situation in the country. It was necessary to suspend pumping in some refining systems in response to the aforementioned a contingency plan was executed in order to mitigate the impact of fuel supply to the different regions of Colombia in.
This period no reversal cycles of the decent scenario pipeline were conducted completing 19 consecutive months in which the contingent alternative is not used on April 27, the new <unk> platform for loading crude oil it was inaugurated a decorating gas terminal the country.
<unk> main crude export port these new infrastructure allowed to almost double the monthly cargo capacity of ships from 18 to 34, thus transferring heavier crude oils and incorporating the highest technology to serve 2 million barrel tankers for the next 20 years in harmony with EMS.
Current next.
Next slide please.
Integrated gross margin other refiners remain the pre pandemic levels as a result of the strengthening of the product basket. Despite them more expensive feedstock the lower availability of domestic crude and the execution of their first cycle of scheduled major maintenance at the Cartagena refinery the highest.
Quarterly EBITDA in the last 7 years was achieved supported by the capture of good margins stable throughput strict operating cost control outstanding performance of the Barrancabermeja refinery and Cynthia margins and good performance of embark oil sand the Cartagena refinery manner.
Moving to mitigate potential effects derived from the public order situation SA.
MTI achieved a historical quarterly EBITDA of 210 billion pesos quarterly polypropylene margin of $437 per ton results underpinned by leveraging market conditions sales volume and cost and expense control, let's move on to the next slide please.
During the first half of the year, we achieved efficiencies close to 1 trillion pesos. The total unit cost increased $7.4 per barrel as compared to the same period in 2020 of this increased 84% is explained by a higher <unk> cost due.
The recovery of the Brent price.
11% is associated with production impacts during the first half of the year and the remaining 5% by the recovery of operational activity in fields refineries and transport systems sales.
Lifting cost increased versus the same period in 2020, mainly explained by the increase in subsoil maintenance and higher energy costs.
We highlight the execution of efficiency measures such as continuity of the dilution of strategy fee optimization and contract renegotiation the cost per barrel transported was $2.9 per barrel remaining stable compared to the previous period, thanks to the control of fixed and variable costs.
Given the lower transported volumes by the end of the year. This cost is expected to be around $3.3 per barrel.
Refining cash cost decreased by 13% compared to the first half of 2020, mainly explained by the increase in throughput and the control of fixed and variable costs of operational activities.
Chancey levers include savings in energy management, and industrial services operations logistics and maintenance costs for the second half of the year, we foresee an increasing cost associated with greater activity and within the ranges established in the business plan for the year I will open the <unk>.
Floor to Jaime Caballero, who will talk to you about the main financial results of the Ecopetrol group.
Alberto during the first half of 2021 Ecopetrol net income was $6.8 trillion pesos exceeding the result for the entire 2020 of $1.69 trillion versus this increase relative to the first semester of 2020 is mainly due to a higher generation of EBITDA of $10.4 trillion pesos prime.
<unk> explained by first a contribution of 7.7 trillion pesos associated to the commercial strategy to capture higher price differentials with respect to volume is worth to highlight the contribution of the premium business and a recovery of domestic and foreign demand, which helped to offset the decrease in crude oil sales from the FDA.
<unk> and the effects of the public order situation in the country.
A positive inventory valuation of $2.9 trillion petals and as a result of higher prices in crude oil and products.
An increase of 123 billion in operating cost mainly due to increased maintenance activities deferred from 2020 and the corresponding raw material consumption. In addition, the semester includes the impact of 3 non operational factors Firstly, a nonrecurring positive item of 362 billion peso.
Recognized from January 2021 associated with exchange rate adjustments due to the divestment of savvy that they do.
Second an increase of <unk> 9 trillion pesos in items, such as depreciation financial expense and exchange difference and third higher income tax for $2.9 billion pesos associated with improved results. During 2021, no impairment recognition have been made and in the absence.
With new disrupted market scenario, the corresponding analysis would be carried out by the end of the year relative to the first quarter of 2021 second quarter continues to consolidate the company's financial strength with an increase in net income mainly explained by the generation of $1.2 trillion peso seen EBITDA due to improved price realizations and increased.
Valuation of inventories as mentioned above this positive result helped to offset the effects of protest and social unrest in Columbia valued at 403 billion peso in terms of EBITDA and 279 billion peso with respect to net income the following points stand out on this particular matter the upstream.
<unk> experienced a lower level of production of crude oil gas and white products, along with deferred operational activities and higher expenses associated with the control of the emergency. These elements are valued at 264 billion pesos in terms of EBITDA <unk> segment recorded lower refined product sales in the local market.
Affecting the ivanka late in May how refinery a decrease in polypropylene deliveries by S&P and lower revenues from LPG and natural gas by EBIT of course from these items resulted in an impact of 78 billion pesos for the EBITDA of that segment. Finally, the midstream segment experienced a decrease in transported.
Oil and refined products valued at 61 billion in EBITDA. Please turn to the next slide to see the main financial indicators. The financial results achieved during the first half of the year confirmed that the company has resumed its successful growth path aligned with the objectives of the 2021.2023 business flat by the end.
The first semester EBITDA margin reached 48, 1% among the highest levels recorded historically. This is the result of better price realizations, along with an annual variation in costs and expenses and a smaller proportion the factors raised the EBITDA per barrel to $42 per barrel exceeding the <unk>.
<unk> registered prior to the pandemic the evolution of unitary cost is also noteworthy as they remain below pre COVID-19 levels and are expected to continue in line with those stablish and the business plan. Despite activity displacement from the second half of the year and seasonal opex cycles. The leverage ratio is currently below the year end.
<unk> targets established within the business plan, providing a favorable position to leverage 100% of the ECR transaction through debt resources. Please turn to the next slide to review the main investment figures Capex execution historically high despite the operating restrictions linked with the pandemic and the public order situation as.
June the deployed investments were $1.4 billion, representing the second highest level in the last 5 years upstream investments accounted for 77% of total capex, mainly in growth opportunities with a focus on increasing production and research, even though challenging operating conditions remain.
We expect a significant rise in the execution pace throughout the second half of the year and for the year and capex level to be near the bottom of the investment range announced to the market. In this regard a larger share of investment outside Colombia is also expected compared to what was initially forecasted driven by a higher execution at the Permian. Please turn.
To the next slide to review 2021 first half cash flow the cash balance for the first half of the year closed at $6.4 trillion pesos and our main source was the operating cash flow that contributed with 6.2 trillion pesos, that's without considering the account receivable from the fuel price stabilization fund setback for its.
Spanish acronym, which to date totals $3.8 trillion pixels per inch part the investment component had an outflow of $5.2 trillion pesos related to capex driven by the good pace of execution outside Colombia on a higher FX effect ask for the financing component an outflow of 2 trillion peso square capital.
Repayments and interest payments was registered no additional leverage was required during the course of the year due to better price realizations and the evolution of the company's cash flow from the other hand as of today dividends for $1.2 trillion peso.
Those had been paid to ecopetrol shareholders and Noncontrolling shareholders. Just a subsidiary companies. The final cash flow consists of cash resources and equivalents 4.5 trillion pesos and short term investment portfolios for 1.4 trillion patch of the total liquid resources, 45% is denominated in dollars and 50.
5% interest.
The free cash flow as of June stands at $1, 1 trillion tests to the extent that less tax and dividend payments are foreseeing for the second half of the year, we expect the free cash flow to continue moving to a solid path. Finally, it is relevant to highlight the recent authorization to sign a contingent of loan agreement for $1.2 billion as of <unk>.
Innovation of the strategy used in the past to obtain certainty of funds for the company to finance its operations and organic growth as well as to mitigate the risks associated with unforeseen unexpected fluctuations in the market environment now I hand over to the CEO for closing remarks. Thank you Jaime the structural performance drivers are supported by the <unk>.
Company's sustainability vision I want to share some details with you on the technological front, we have implemented digital transformation projects, we have allowed us to capture uncertainty 5 benefits of around $25 million in their first semester regarding our environmental initiatives, we highlight the progress in renewable and.
Projects, such as the <unk> solar farm in the meta Department, which to date has achieved a reduction of cotwo equivalent emissions of more than 60000 tonnes on saving in terms of operational cost more than $1.6 million also the expansion of the generation capacity of the center.
On the solar farm that through technology, and engineering allowed us to move from 59 megawatts to 61 megawatts capacity. We've also made good progress in terms of measurement of wind generation capacity in some of our areas of operations regarding our total investment. In addition to the continuity of our social investment program called upon.
<unk> East, we have implemented initiatives to generate employment, such as the 51% increasing local purchases of goods and services versus <unk> 2020, while hiring of 180 young trainees in our teams on the Somos Columbia rounds, Thanks to which we have now closed deals with micro small and medium enterprises.
More than $16.7 billion peasants finally in terms of governance and some of its milestones. We once again made official our interest in participating in the Dow Jones Sustainability Index. We published our first report that response to the stakeholder capitalism metrics of the World Economic Forum, and we updated and disclosed.
The succession policies for both the board of directors and the precedent of Ecopetrol, we announced that Ecopetrol voluntarily adopted and recommendations issued by the Tcf P. The task force on climate related financial disclosures as part of our effort to provide a better disclosure of information on issues related to climate change.
On percentage for the first time, a specialized report aligning the company's disclosure under these guidelines.
Now I'll move onto the next slide to share the progress on the potential transaction with the attention of the exclusivity agreement and the submission of a binding offer to the ministry of finance and public credit I would like to highlight the following developments in order to ensure the payment of a potential acquisition through our 100% debt structure.
Ecopetrol is advancing the required approval procedures before authorities force our purpose. The due diligence process was carried out exhaustively by expert advisors in each area more than 30 sessions were held with executive of Isa and all of its main subsidiaries regarding this potential transaction.
Since the middle of 2019 Ecopetrol Board of director has reviewed topics related to these opportunity in 30 of its main sessions and in 32 of its committees sessions are signed to our firm commitment to a strong corporate governance practices onto our cultural principle of being always ethical.
The non independent board member did not participate in state board meetings, and likewise was not involved in the pricing profit, let's now move on to our conclusions. This quarter, we're able to demonstrate that the measures adopted last year to overcome the crisis were the right ones, we have to face new environmental shocks with.
And their consequent effects throughout our value chain. Despite the above we achieved outstanding quarterly results in parallel in the company's history. This positions us very well for the remainder of 2021, we will continue to focus on resuming the path of the operating activity recovery with the aim of.
Reaching the objectives established for 2021 always complying with the strict capital discipline efficiency captures cash protection and investment sustainability. We continue to work decisively on the potential transaction for the stake acquisition in Isa, which we firmly believe is a unique opportunity for <unk>.
Withdrawals energy transition its diversification and its medium and long term sustainability. Finally, we reiterate our commitment for the social economic reactivation of the country ratifying our strength as a fundamental pillar of the national energy security on our capacity to continue to supply.
The country with the energy necessary for its development. Once again, we thank you all for participating today in this call and with this I will open up the Q&A session.
Thank you.
We will now begin the question and answer session.
Have a question. Please press star and then 1 on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or Husky. If you are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press star and then 1 on your Touchtone phone.
And we have a question from <unk> Levy from Morgan Stanley.
Yeah.
Hi, good morning, everyone congrats from the renewal.
As reported taking my questions.
I have 2 questions. The first 1 relates to the call.
So I just wanted to understand what should we expect in terms of other evolution for a decline in Q at the end of the year.
Considering that 1 hand.
Have growing production.
But on the other hand, you might have additional costs due to some.
From some activity that got delayed from the first half.
The social unrest in the country.
And then the second question is the Lounge Street.
Art.
The strength that we have seen the quieter was driven by very healthy petrochemical figures. So.
I was just wondering if you can tell us.
What youre seeing there.
Coming months from quarters.
Regarding the 9 polypropylene.
Inventory levels and what should we expect in terms of spread mobilization for the east.
Going forward. Thank you.
<unk>.
19, Jeremy Thanks for being here today with us on the call and I'll ask Alberto.
Alberto to tell us a bit more around expectations and.
Our view going forward on lifting cost and in terms of what we're seeing also in term.
Downstream in terms of operations and then I can ask Walter to talk about.
Specifically, what do we see in terms of inventory levels and we can talk about spreads. So Alberto. Please go ahead.
Yeah, Matt.
Good morning.
In terms of lifting costs, what we have.
<unk> said is that our lifting cost by the end of the year should be in the.
Right in the range of 8.
<unk> per barrel that means that we're going to see a slight jump from where we are other second quarter 2.
Through the end of the year and this is because of.
The ramp up in activity as you mentioned.
Definitely we're going to see more activities subsequent price activities, especially especially specifically related to.
Workovers.
Well interventions as well as more maintenance work in our facilities all of these in order to manage our production decline and income impact production that should be coming in the next months.
Thank you I'll, let her Walter.
In terms of what's coming up where the downstream and then what are we seeing.
In terms of spreads on the lakes.
Yes, Thank you Philippe and thank you again with our we're asking the question. The other thing Theyre not being as you have seen we have.
Very good said gone second quarter, Florida for this year and I will say.
We achieved an average <unk>.
So <unk> been most refineries.
We are projecting for the rest of the EBITDA to be around 352.360.
Of course, we are considering that we are seeing a.
Need to have a few.
Our Dvds.
Cartagena refinery on oil Sands barranca.
Regarding the <unk>.
The inventory levels I think that we are our.
Our refinery production is aligned.
The local demand, mainly especially at the amount of non camera maker.
We are basically running the group.
Barranca as per the local demand, which we expect total second half flow of DCF to be strong.
Zone before.
I mean the spread.
We are we foresee a spread around and for the margin refining refinery margin around the on the high side.
1 defeat.
The combined board comprehend maraca.
And regarding the petrochemical we did have a very strong second quarter.
<unk> for the following month is too.
To go down.
A lethal.
So we see we see that the broadly the third quarter and fourth quarter will not be as strong or as Cynthia.
Second quarter non DCM.
So this is an overall how we see the following month for the downstream I Hope I answer your question, yes. Thank.
Thank you very much.
Okay. Thank you.
Thank you.
Have another question from day, calling Hamlin from Santander.
Hello, everyone and thank you for the call just a quick question on your commentary around.
Credit lines of bank loans to 2 from the potential acquisition of visa.
Should we read that as a conventional.
Long term 3 to 5 year syndicated loan or is this more likely to be something of the bridge loan category. So are banks have a little bit more time to anticipate how to place. This in the public market via bonds, how should we understand that the.
The plans around this.
Yeah.
As a current for the question Hi man.
Thanks, Philippe a high decline.
With regards to how we're thinking about E zone, you know that.
We're thinking about.
A specific purpose credit line with a duration of 2 to 2 to 3 years.
That's gonna be a altera really replaced by some form of a longer term.
A bond that's how we're thinking about it okay.
<unk>.
And we are well advanced in that conversation. So we are quite a.
A certain if you will about the sort of 8 times debt, we would be obtaining product.
And.
That's what I can reveal at this time.
Thank you Luca.
Thank you very much appreciate it.
Thank you. Our next question comes from Frank Mcgann from Bank of America.
Hi, good good.
Good morning, or good day, just to follow up on other comments you had made on east earlier.
Just in terms of timing.
Do you think we might get more information on the structure of the deal or the the <unk>.
Price that you're paying and any other issues and then secondly, you've indicated that it's not contingent on an equity offering and I'm wondering how you are seeing in equity offering right now is that something that could be part of the financing here either directly as part of the east refinancing or done at a separate time oil or is that something that.
Put on hold for now.
Thanks, Frank and thanks for being here today in terms of the deal itself. We're currently.
After having presented the binding offer.
Waiting for the Ministry to do it.
Assessment and analysis and.
Hopefully we will be getting.
Our sponsored.
2.
We remind ourselves that we are currently under a exclusivity period until the end of August.
That.
Gives us.
Hum.
Guidelines on how to treat the information in terms of confidentiality and the likes so in that sense.
We'll wait for them to.
Particular analysis and hopefully there is announced.
Announced here and hopefully it's an answer.
With an affirmative in terms of accepting the offer.
If that happens there should be.
The signing of an agreement between the parties.
And that will be further on followed by.
Closing other transaction, so that's sort of the timing is.
It's still.
Not precise in terms of days, but I think we are at.
After I mean on our side 2 years of having studied this.
We're not rushing anything we want to make sure that.
Both parties and both sides are comfortable and at the end of the day.
Feel that this is day, 1 and offer that has been.
Bill that has been sort of strengthened.
By the due diligence process that we've done over the last few months.
And again, we're convinced this is a very competitive offers so we should wait to hear from from the counterpart in terms of.
Where we are and in terms of the.
And the additional equity offering.
We continue to work in that front, so it's something that the teams are.
Continuing to pursue.
We're moving ahead at a very good pace and.
We are not conditioning.
Closing on the east transaction on the equity offering so that's point number 1 and highway has.
Very explicitly mentioned what are we thinking in terms of.
How to fund the transaction itself.
And in addition to that I could say that we believe that the equity offering is a good option that we have is it would be good for additional shareholders under.
It will ultimately depend on the right marketing conditions and if we find that we are.
We see the right windows in the market.
We'll go ahead with that but where we're working on that in parallel with everything else that we're doing around that.
For the question.
Yeah. Thank you.
Thank you. The next question comes from Al <unk> from Bank of America.
Good morning, Thank you very much for the call today and congratulations on the good results.
Question, partly was asked by 1 of the P. P. S College, which was on the funding for the East Africa from.
But I guess 1 related question is do you have a maximum leverage that you think you'll go to you.
And then the second question is slightly different but it's on the recent credit downgrade.
Which was of course are triggered by the sovereign downgrade of Colombia.
James anything for Ecopetrol in terms of your strategic plan, whether it's your Capex budget funding, New York better language levels production or anything else on that thought.
Yeah.
Thanks, Dan and thanks for being here and I'll start by saying that we.
We don't foresee any changes in terms of the plan that we've shared with the market.
In terms of our activity levels, where we're focusing our activities.
Our agenda around energy transition, our 3.5 to 4 billion capex for the year, so that hasn't changed that hasn't changed at all and we've I think demonstrated today that we are very resilient and we can win.
Stand changes, I mean bit demand destruction or prices or even things like the social unrest that we have to go through into Q.
So that Hasnt changed.
I'd like to ask Jaime you know in terms of if he wants to add anything else in terms of the credit downgrade and a P.
Once too to give you.
His views around the funding high net please go ahead.
Thank you Philippe Hello N.
A couple of notes on the matter of the credit downgrades.
I think 3 very specific.
And kind of proof points I guess to what the leap day, just mentioned and first knees.
We've had conversations about our standalone credit rating and it remains unchanged.
It's important.
Secondly.
We are as you can imagine in in light of that.
Committed credit facility.
In light of the ongoing conversations about east of funding we've been closely in touch with the market around.
And the sort of credit conditions that we will get on we we'd seen that they are very very competitive and they are unchanged I'd say with regards to where they were prior to that too.
And sovereign rating update on and thirdly, we've also been monitoring our.
Behavior of our of our bonds in the market.
A.
After kind of that short term market reactions, we've seen a clear trend towards its stability.
Kind of investor confidence. So so all of these to say that we.
We don't have any reason to believe that our plans to change in any way.
Because of the recent a sovereign credit downgrades.
With regards to your question around East funding.
We.
As you know on when when we shared our business plan and late last year. Early this year, we made reference to an updated target of it keeping our leverage.
Below 2.5 times.
Gross debt to EBITDA.
And at the time.
Yeah fundamentally an organic plan and he was linked to our organic activities and on a while we've seen is that with.
Robust performance of the company and then group respected with regards to marketing environment.
We actually believe that we can.
Stay within that limit, including significant inorganic activity such as E zone. That's that's why we believe on week share at auction in the presentation today that a win with a 100%.
Finance a transaction we would be.
In a range of perhaps $2.1 to 2.8 times a day.
Debt to EBITDA on Daddy's, well within well within that ceiling of 2.5 times that we mentioned in the past.
We have been benchmarking that.
With regards to our industry.
Comparable.
We've also seen that bad debt.
Level of leverage East East E substantiated on more importantly, when we stress test that we feel we feel that we're in a good place.
I hope this helps on thank you.
Thank you very much yes, it helps very much.
Thank you. Our next question comes from Luis Carvalho from UBS.
Hi, Thanks for taking the question.
Felipe behind me Alberto.
Basically 2 questions from my end here. The first 1 is from.
I'm trying to understand too I don't know the rationale between.
Patrol.
Trying to attempt to maintain the integrity through these approaches is acquisition Princess East.
Net of the government having for example in an open negotiation with several players for <unk>, which could be more attractive for the country in a certain extent.
There'll be more competitive process and a bit more transparent as well could.
Could you general investments community.
What is the reason that.
You guys had for example, what kind of exclusivity.
It's a priority to negotiate.
Yes, it does.
Second question.
It's more on the fiscal situation of the country and I would like to have.
2 follow ups here. The first 1 is that did.
Did you guys have any nishu assessment and how the government projects.
The company or the industry the oil industry in general and the second 1 is if you have any sense on how.
The company might fit into the controlling shareholders.
Funding Glen or other than these acquisition could you happen to know a bit more higher dividends or.
So long discussed potential follow 1 for the government to sell the stake.
If there is any discussion of that from thank you.
Thank you Louisa and thanks for the opportunity to talk about <unk>.
Overall process in terms of the <unk>.
Aesop potential acquisition and what I'd like to share with you is that.
As I've mentioned before during the call and publicly statements.
We've been assessing these opportunities for more than 2 years. So there is a.
A lot of detailed work that has been going on in terms of.
1 understanding.
The merits of the strategic feat for Ecopetrol.
The.
Okay.
Positive impact that these.
Yes.
Pension or opportunity would have in terms of our.
Agenda around energy transition and we're convinced.
In that sense is extremely accretive.
And the fact that that transaction is good not only for ecopetrol shareholders, but it is good for Colombia.
<unk>.
Remember that through the transaction, which is.
Fully compliant with the legal framework.
We would or the country would retain the ownership of strategic assets that are apps.
Absolutely.
Critical relevance and importance.
Not only to energy transition, but so the country itself.
So in the context of having these mega trends that are currently occurring in the world that have been accelerated by COVID-19, when you think about decarbonization and electrification.
We see ourselves with the ability of doing in 1 transaction and not in several transactions and over a very extended period of time something that will be transformational not only for ecopetrol, but for Colombia.
That sense, we've done everything in terms of <unk>.
Communicating timely to the market, where we are when we presented.
The non binding offer when the exclusivity agreement was signed when it.
Finalizing in terms of the dates.
So we're quite comfortable and as I've mentioned before we hope that.
The Ministry continues to do its assessment and hopefully.
We can get to.
So a good place sometime soon so.
We do believe as Ive mentioned its extremely competitive in terms of the of the offer.
The details will be disclosed to the market in due course, when hopefully the transaction.
Closest and Jaime if you want to talk about the physical projects or the.
If I understand the tax reform, that's being presented to Congress on how are we viewing that please how you may go ahead.
Indeed, Philippe thank you.
And yes.
Or is this a is this a project and it has to go through and the different legislative steps.
But from a from a from an awareness non Glenn from a sensitivity angle. We've looked at the numbers I think D D D and interesting and component about this particular reform is that it's actually straightforward.
It's very straightforward in terms of how can we calculate the impact on the company on and generally speaking what I can tell you at this stage is is that essentially.
The reform precedes us plan as presented.
We would be looking at increased tax contributions in the order of I would say a.
A range between 406 hundred.
<unk> thousand million pesos, that's what we're looking at it.
Right now 80 large E M. A function of 3 components. The primary component is the corporate tax rate the headline tax rate that goes up to 35% that starting next year. There's a second component that is about <unk>.
But that that rate has on deferred tax calculations, which we use particularly for impairment purposes.
And there's a third a lesser component which is around the day.
<unk>, which is a smaller a punctual types that we have here in Colombia. So that's why we're seeing 400 to 608 east it is not a.
Fundamental a game changer in terms of our effective tax rate, but it does increase.
A D D kind of government take on debt and the transfers that we make to the net to the nation right. So so from that angle.
Good thing in terms of providing fiscal stability.
So I hope that helps and I would like to strength I think an important thing you know from EBIT spoke about about the broader picture of.
<unk>.
<unk>, 8 which remain unchanged and we don't have any knowledge whatsoever of any other plans. There are no changes to love that back there are no changes on any other matter that.
Opex April but those balance sheet. Thank you.
Okay. Thank you Felicia Thank you Jaime.
Thank you. Our next question comes from Christian Audi from Santander.
Thanks, Hello, Felipe Hello Jaime.
I had a few questions. The first 1 focus on production if you could give us a sense.
Given the positive results of the second quarter Ho.
Do you envision them, reaching or not your target for 2021 in terms of production and if you could speak more specifically about the evolution of production in the Permian and if you could provide an update of when you could potentially see.
First oil for Brazil.
The second question in terms of uses of cash was just to get a sense.
Of and Hermes touched a bit on the oil.
On the dividend front, given all that's happening you're pursuing is.
That's true.
Where do you see.
The dividend payout being in that 40% to 60% range that you've used in the past.
And also on the Capex front, where do you see given the whole thing is sort of evolving.
You have to fall in terms of Capex total capex for this year and then the third and final question.
<unk> always done.
It makes for a really good job in terms of generating high returns on capital employed. So I was just wondering how you see your raw see evolving.
The numbers that we saw in this first half of the year of around 91 per cent. Please. Thank you.
Okay.
Okay.
Alright, Thanks, Christian I was having issues with my microphone so.
Quite a few topics here, so I'll give you a broader context on Alaska Alberto to touch on some other production things. So we can go into a bit more detail.
And I'll ask Jaime to talk about.
ROA or ROTC and how do we see that evolving going forward. So in terms of production.
Just want to go back to some of the numbers that we've shared with you so <unk>.
661000 barrels to Q 680.
<unk> thousand barrels at the exit rate for <unk>. So those are 2 important numbers. We continue we continue to.
2.
Envision the range of 690000 to 700000 barrels.
As the average for the year and in a second I'll I'll hand over to a better so who can give us more detail.
In terms of the Permian itself.
I just want to provide a bit more color. So you've seen some other good results in terms of EBITDA margin and the like so we currently have 4 rigs running and we have 75 wells on production. So that's very good and.
Remember that we've only been operating there or we've been in that JV for 20 months. So in less than 2 years, we've reached a very good level.
With with.
A very extensive and deep crisis last year.
So we manage to.
And this is this is great about the assets in the Permian.
And kudos to our partner and operator oxy in terms of their ability to step on the brakes.
Safely manner, and then restart very quickly operations. So if you if you look at where we are today.
We had.
And took you just north of 21000 barrels of production in the Permian exit rate exit rate East North of 23000 barrel. This is net ecopetrol. So if you think about the broad numbers thats north of 48000 barrels of production for the J D.
And at the end of the month, which is very good and I can share with you that we've already gone over in about 50000 barrels. So it's actually working very well we have these 4 rigs are running and we see that.
Actually not only good performance good opportunity we have.
Our learning we are learning a lot in terms of the operations and hopefully we'll be able to bring some of that expertise back home.
So that in terms of the Permian.
In terms of got total motto.
Continue to work with our partners in the project.
We're very enthused about what we see and we're aiming to have.
E Commerce reality, hopefully next year.
There's a lot of activity that the operator shale is doing on behalf of the of the partnership.
Around the engineering design and contracting of the equipment on the kit that's required under GAAP, we envisage.
Initial operation in 2025 around 2025 so.
Very very good news very good progress and obviously, we'll update the market.
When things occur going forward and where to do if we want to provide a bit more color on support for production and how do we see that forward that then will hand over to heightened go ahead. Please.
Okay.
Interest in some other question regarding production and building on what Philippe said already how we see that rebound.
Gas demand.
Shooting feet, allowing additional gas sales, which will represent about 5000 barrel oil equivalent per day addition, then we have sub surface activities, mainly workovers and well interventions that will help manage <unk>.
<unk> production decline.
Then we have incremental production coming from facilities and drilling activity that will add 3 to 5000 barrel per day, and then we have exploration wells already.
Asia.
Our debt additional production.
During the second semester.
We have the reversion of the non repeating in November before and that will add additional barrels to ecopetrol.
We still have we have challenges to manage in terms of managing whether socially on loan growth and productivity work from <unk>.
Of the pandemic.
Thanks Alberto timing.
Yes, Thank you for leap day at Christiana Hello.
With regards to ROE cheat.
You you you've seen you've seen our second quarter kind of ending position.
At around 9%, which is which is actually quite healthy it's been it's been quite a recovery on.
And as you know we've been very disciplined with regards to our capital allocation.
Over over a number of years, but particularly over over the last year. As you know we made a number of a penchant interventions associated to to adjusting that capex due to changing.
A market circumstances on also and we've been very disciplined as well with regards to art.
Capital efficiency agenda.
And with.
With that in mind, you know what what we are seeing is that with the with the a a short term price outlook that Bob but we expect we will be back at double digit or we should be back at double digit royalties.
Very soon very soon on on and by the end of the year and of course the.
Pending on on on how a market environments evolve, we where we're gonna be in that sweet spot, where we were.
A couple of years ago, he's not he's not hired.
So so the perspectives on roti are are very positive.
<unk>.
Okay.
Thank you. Our next question comes from Bruno Imodium from Goldman Sachs.
Hi, Good morning, everyone and thank you for taking my question.
I'll share with you somehow related.
At the region, but more broadly.
There seems to be 1 step towards oil.
Long term via the other company should move towards <unk>.
The current demand.
And this type of transition sometimes.
Hi, Juan from additional uncertainty around the macro I'll refer them from the capital to be deployed going forward. So I don't want to cheat.
From your view on this flight.
Volume needs.
So yields argument maybe from English.
Arguments, which long term.
Well the right decision.
With fusion, we can into the lever more highly burns throughout this growth.
Yes.
Bruno This is Philippe and I, just I just want to make sure that I understood.
The question because the.
The volume wasn't great. So in terms of long term view around the east transaction and especially in terms of returns from that transaction can you just clarify.
Yeah.
I'm talking about these are flexible but.
I'm asking more broadly speaking I guess this transaction is that part of maybe a theory.
We're gonna make throughout the next several years right. So.
Well brother, 1 in terms of what do you expect in terms of retiring some day.
Margin on investments moving forward.
The refinery that you believe are now a month from operations.
Operations, even debt, you're probably gonna have to debt stack and that's why you do widen back to date.
Okay. Okay. Thanks for that that's very helpful. So in terms of if you step back from a probably more holistic view.
There is 4 things that we need to do as a group.
First 1 is.
In our core business.
Continue to be.
As competitive as we can and that means the use of technology processes transfer of good lessons learned everything else.
In terms of protecting and enhancing the value that's generated by the organic if you will.
Investments that we have on oil and gas with some of the color that Alberta was providing in terms of its further deepening our presence for example in gas.
And that's part of that first.
Then that I would.
I would actually use and high net was just referring in terms on the prior question on how do we see a return youre non purely.
We've seen that we can we can.
Come back with a rebound very quickly very very quickly and a combination of being very disciplined with our investments regardless of their being organic or inorganic but extremely disciplined with our investments.
All the work that we're doing on efficiencies and savings.
The work to support what I've just described so that's the first lens.
The second lens is around diversifying our business and that's where things like the east transaction come into play, but it also includes things like.
Our presence in hydrogen for example, or Cc U S. And we are currently the largest hydrogen producer in Colombia.
I think 90, 990% of the hydrogen that's producing country. It's produced by Ecopetrol, So were thinking and going into blue and green hydrogen both were analyzing the opportunities on the options on the merits and there is still a big question not only for us but worldwide in terms of scale and in terms of.
Okay.
Durability and the cost of.
Such investments and indeed diversification lenses, where we have ether.
And again, we could we will continue to explore opportunities going forward, but as a general or on a general basis.
We will inform.
Of any potential transaction when we have made a decision around those transactions as we did in Brazil. For example in total order got below motto.
Or as we did in the Permian or as we did with initially.
Non binding offer and then the binding offer last week.
I'd just like to say that in this space. If you look at the for example, the EBITDA margins and how do we view returns Ecopetrol has broadly 45% of EBITDA margin Isa has on average 65% over the last 5 years. So ensure that these things are accretive from day 1.
Fundamental thing so length number 3 is around de carbonization. So we will continue to look at things and there is nature based solutions. For example, there is equal reserves, there's things around.
Around our pledge to become carbon neutral by 2050, so a lot of work and then the last lens that we want to look at where we're looking at is the length of ESG technology, environmental social and governance and Theres lots of things that we're doing there.
Obviously around technology around how do we relate to the environment things around our water footprint for example, not only are.
C O 2 footprint.
Things around our social investment in the areas, where we operate and things up.
To continue to strengthen our corporate governance so.
That's how we see ourselves going forward.
Obviously, we will look at each and every opportunity in its own merits.
And then make the corresponding recommendations to the board and decisions will be taking in that in that sense, but obviously.
As we've shared with you today, our view is that we need to continue to ensure that we provide value.
With operations that are safe.
That are responsible that are ethical and that are efficient. Thank you Bruno.
Thank you. The next question comes from Lidar allow me from Barclays.
Yes. Thank you so much from them for taking my question and congrats on on this <unk> earnings. So 2 quick questions on my end. The first 1 is can we get an update on the accounts receivables and especially the fuel price stability from so just wanted to understand how much do you guys expect in terms of cash out flow in the second part of the year.
The press release oil prices and also pump prices.
Where to go higher and when are you expecting potentially the government to pay you back on debt and my second question was partially answered before it's about bond issuance. So my understanding is that you guys have $1.4 billion approved by our agenda for potential issuance can you give us you know what.
Sense of when this approval is going to be.
Is going to expire.
And also how are you thinking about you know the the bond maturing in 2023, the Echostar 23 with $1.8 billion is the plan to replace.
The credit facility that you spoke about with ease up plus refinancing debt 20 threes at the same time over the next year or are you planning to first of all to refinance the credit facility with the potential bond then look at the 23. Thank you so much.
Thanks for the ARPA for other question in Alaska Highway Jaime if you want to provide some update on both fabric and the receivables and then potential.
Potential bond issuance. Please go ahead Jaime.
Thank you Philippe Hello, but are so so let's call. It the accounts receivable I think.
General background of this is that accounts receivable and have been growing or grew over the first half of this year, particularly I saw us as a function of of the growing set bank bonds right. That's a big bank loans.
<unk> has grown because of the increasing delta between international oil prices on the prices that are.
He cannot recognize at the pump if you will here locally.
And that balance is at $3.8 billion pesos.
We believe the balance will continue to grow over the coming months as we expect.
All things considered certain Diana <unk>.
A stability if you will in prices, whether it's because of the headline price of wage because of the exchange rate, but at the end of the day those 2 kind of balance each other therefore, we expect some some growth from that while we indicated is that.
No we wouldn't be surprised if the balance by the end of the year could be in the 6.5% to 7.5.
8 billion pesos range, that's where we think it could end up.
And that's the sort of conversation that we've been having a win with a debt governmental entities that manage this process right and when you think about about.
The account receivable on when can we expect mainland.
The first thing that you need to look into these debt track record and the track record on this matter East East Impeccable you know this is.
This is a fund that has.
As word consistently over a number of years on and on.
The balance is getting recognized.
The timing of that recognition does fluctuate a bit.
I think the best E Tron occur in our own 6 to 8 months time at its worst it could it has occurred say 18 months down the line right and so so we operate with that E. P.
And a window in mind as we plan, our cash flow and I would say that we operate on the conservative end of that window.
So with that in mind.
We are not expecting a amy any any cash inflows this year associated to the bonus.
We do expect that a an important component of the balance is going to be recognized this year and perhaps a.
Some remainder in 2023 and that's how we've been planning our cash in that regard we are working very closely with the ministry of mines and the Ministry of Finance on this matter and that gives us a lot of a lot of confidence around.
And when can we expect these these payments do occur and of course, we do have a.
E P.
In time, you know, we do have a <unk>.
Decisions to make with regards to dividends on <unk>.
And other matters.
We're gonna take into the consideration of these banners evolves.
With regards to the bond issuance right with regards to the bond issuance and a couple of things you know 2 or 3 things.
<unk> seen a number of kind of unused outflows in this regard on the 1 that you mentioned is the 1 for a kind of a resolution from from the Ministry of Finance I, just want to remind you all that bad.
Because of our regulation here in Colombia and we.
We do need to get like a preempted approval for financing from the Minister of Finance you know, it's always been that way and while we try to do is that every every 3 years linked to our business plans, we'd like to update our approvals.
It's kind of like a blanket approval with a view to to make sure that there is strong alignment and that we have the kind of the regulatory the regulatory approvals in place when we do want to reach the market right.
We got that first approval for $1.4 billion already in service of the organic plan back important. So this has nothing to do with visa. This is in service of our organic plan and the way we think about it is that that particular.
That particular.
Mount E P.
He would serve and we in our interest of refinancing.
Some other debt that we have right now right in terms of getting it.
Longer term.
Perhaps actually getting even better at times because of the of the market environment. We don't have any short term plans to do that right and of course as always we remain open and flexible to the top of the market, but we don't have any immediate plans to do that because we don't have any need to do it right now.
Our.
The second the second a news that you saw was around the committed credit line contingent facility east acid claim indicate a contingent facility.
It's something that's just there to be used a east.
He he east circumstances require us to do so we don't have plans to property, but it gives us it gives us some comfort that it's there should market conditions.
Change that's the purpose of that again that contingent line I wanted to be very specific about it east for organic purposes. It has nothing to do with Aesop.
So so so the 1.4 on the 1 point to our for our ongoing business, which continues and will continue to be kind of the heartland. If you will of our other operation on an on he has nothing to do with either way.
With regards to the timing of what do we intend to do first I think we're gonna be flexible around that but I would I would say that at this time.
And as you would expect our priority east east to close the from transaction to secure debt financing on and that's where our our E. I E at the moment.
You very much.
Thank you so much guys.
Okay.
Yeah.
And at this moment I would like to turn the call back to Mr. <unk> for final remarks.
Thank you and thanks again, everyone for participating in today's conference.
Conference call around our 2 second quarter 2021 results.
Thanks for your feedback thanks for your question and thanks for the interest in terms of.
Following ecopetrol as I've said, sometimes before the effects because you're your question to help us.
<unk> continued to improve in terms of how do we communicate then and some other specifics and clarity around some other issues that we have.
Hope that everybody stays safe I hope that.
Your loved ones and and everybody else around you your co workers stay safe as well and hopefully we'll be able to see you sometime soon.
1 of our next.
Conference call. So thanks, again and have a great day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.