[Politics] Ecopetrol: the jewel in the crown loses its shine / Analysis by Ricardo Ávila

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a loss of close to $20 billion is conspicuous anywhere, even on paper. And that is, in gross figures, the devaluation that Ecopetrol has had since the end of last March, according to the company's share price on the stock market.

(Also read: Tax would hit Ecopetrol by up to $12 billion per year from 2026)

As of Friday's close, the market capitalization of the country's largest company totaled about $18.9 billion. When the impact of the exchange rate is excluded, the decline is close to 40 percent, since what amounted to more than 145 billion pesos is now 89 billion.

Although the comparisons are odious, a look at the peers that the conglomerate has both in the region and in the rest of the world shows a huge lag, since the others are doing much better. Beyond the fact that crude oil prices have dropped somewhat compared to what was seen six months ago and are around 90 dollars per barrel, the sector continues to be viewed favorably.

All things considered, the profitability of the activity is high and the prospects are positive. Even if the world economy is in trouble, OPEC's recent decision to restrict oil supply provides a safety margin that a drop in prices will not come soon.

(Also: The new bet of Ecopetrol and El Dorado: asphalt with plastic bags)

Some unsuspecting observer might think that Ecopetrol is doing less well than the others at the earnings party, but this is not the case. According to a projection by Corficolombiana, profits will reach 34.5 billion pesos this year, a figure that would more than double the 16.7 billion pesos corresponding to 2021.

In fact, when the fundamental points of the business are observed – whose main owner is the Nation, with close to 90 percent of the capital – there are strengths that are obvious. The profit margin, before interest, taxes and depreciation, far exceeds that of the industry thanks –among others– to an effective control of expenses and costs.

However, what is the jewel in the crown of public heritage has been punished by the markets. Apart from the poor performance of the stock, there is the loss of ground of the bonds issued by the company that show an 8 percent drop in value in the last couple of months.

How to understand this apparent contradiction of outstanding numbers in the financial statements and loss of confidence on the part of investors? The reason given by analysts is the signals given by the Petro administration regarding the exploration and exploitation of oil resources.

(You may be interested: Fall in Ecopetrol bonds is 8% since August)

That the will to wither the segment is maintained was something reiterated by the Minister of Mines last Thursday. According to the official, the commitment to "decarbonize the economy", which is one of the campaign promises, is still valid.

Although she clarified that there are still more than a hundred signed contracts that could be developed, the question that observers ask themselves is whether there will be interest and funds to do so. Said concern is even greater in light of what the tax reform that makes its way through Congress says.

the broken dishes
Lower income from the sector will aggravate the imbalance in external accounts, make the exchange rate much more expensive and attract less investment
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As is known, the new version of the project changed the idea of a tax on exports for that of a temporary surtax on the rental rate, which would start at 10 percent – in addition to the 35 percent paid by all legal entities – in 2023. The purpose is to capture part of the extraordinary benefit caused by Russia's invasion of Ukraine and its impact on the value of hydrocarbons.

Fifteen countries in Europe have introduced or announced this type of tax with the primary purpose of financing the subsidies given to households that must pay a higher cost for the energy they consume. And those affected are not only the oil companies, but some dedicated to the generation or distribution of electricity.

Although that is a difficult pill to swallow, the real poison in the case of Colombia is in the prohibition of deducting the royalties paid to the regions from the income tax, which are equivalent to 15 percent of what is produced. For the Colombian Petroleum Association (ACP), the combined effect of both charges would lead to a jump of 81 percent in what is paid to the State. This would lead to making the country even less competitive, which, according to an ECLAC study on the matter, is in the three worst places in Latin America.

(Also read: The move of the Petro Government to control the board of Ecopetrol)

The new rules of the game will most likely lead to a drop in investment plans, for the simple reason that the cut-off line for a project's profitability will have to be drawn much higher. Both the drilling of exploratory and development wells in existing fields would be affected, in the face of which it will be impossible to avoid a drop in domestic production, which today oscillates around 750,000 barrels per day.

As a consequence, what seems to be a big problem for a handful of companies becomes a real economic and social headache. As far as the first is concerned, what is today the most important line of exports may disappear faster than it seems, in case the remainder to sell abroad collapses.

Lower revenues from the sector will aggravate the imbalance in external accounts, make the exchange rate much more expensive and attract less investment, which will increase the risk of a crisis of confidence. And on the domestic front, as the months go by, tax and royalty collections will begin to drop, apart from the generation of quality employment in remote parts of the national geography.

This is not a hypothetical long-term scenario. As things stand, the consequences will be felt starting next year and the vicious circle will turn incrementally from then on, to the point where the probability that it will become mandatory to import gas and oil to meet domestic consumption increases. .

Ironically, none of that will do anything to contain global warming. It is enough to remember that Colombia contributes 0.6 percent of greenhouse gas emissions in the world and the majority share of that figure corresponds to deforestation. As experts have pointed out, as long as China, India, the European Union and North America do not do more, the rest of humanity will not be able to contain climate change.

written warning
Those who believe that Ecopetrol will be able to get out of the crossroads thanks to its current financial figures are risking a mistake. As stated by the president of the company in a letter addressed to the heads of the Senate and the House that was published in the Congress Gazette, the elimination of the deductibility of royalties, the surcharge on income tax and the change in the free zones regime, which are three cornerstones of the tax reform, will have a huge impact.

Starting with the third, losing the present advantages would force to nationalize assets for 1.8 billion pesos owned by Reficar, in addition to raising the rental rate from 20 to 35 percent. It would be even worse to try to allocate to the foreign market what today supplies the national consumption of refined products such as gasoline, since 44 million barrels of fuel would have to be imported.

In the case of the first two points, Corficolombiana projects that due to lower expected prices and falling production, the oil company's revenues would fall 25 percent, to about 120 billion pesos in 2023. Even more notorious is that the profits would plummet 57 percent, due to higher taxes.

However, the great challenge is managing the cash position, since apart from paying the treasury, dividends will have to be drawn on the record profits for the current year. The

The matter would be manageable were it not for the fact that the Fuel Price Stabilization Fund, managed by Ecopetrol, will show a red balance of some 31 billion pesos at the end of December, despite the scheduled readjustments in the price of gasoline.

(Also: Ecopetrol is already looking to develop gas discoveries in the sea)

Unless the government decides to turn over this shortfall to the company, it will be necessary to press here and there, starting with the investment plans. The cited communication states that by 2026 oil and gas production would fall by the equivalent of 100,000 barrels per day.

Given these circumstances, it is worth asking who is going to associate with Ecopetrol to develop the promising gas fields identified in the depths of the Colombian Caribbean, whose extraction cost is high and demands state-of-the-art technology. In an area where risk is shared, the first thing anyone looking to break into new territory does is how things stand.

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If that happened these days, the part issued would be far from the best. The worsening of the current conditions triggered the alarm among private companies, which today are responsible for 48 percent of the barrels that are removed daily and who affirm that their production would drop by 70,000 barrels per day in a short time.

Beyond the fact that claims against the Colombian State are being studied due to what is described as a unilateral change in the rules of the game of the signed contracts, the damage caused threatens to be very deep. Not only will foreign investors be more reticent, but the cost of borrowing will tend to rise.

And at that point the problem will stop being one of taxes and will become one of credibility. Ultimately, everything points to a lower growth path, with which Colombia will take much longer to overcome its difficulties in terms of poverty and social exclusion.

https://www.eltiempo.com/economia/empresas/la-joya-de-la-corona-pierde-su-brillo-analisis-de-ricardo-avila-710158