After a strong 2022, the benefits for the oil industry have weakened in the first half of this year. The results of Ecopetrol, Colombia’s largest company and a key source of government funding, clearly reflect the impact of the fall in crude oil prices. According to a report released this Tuesday by the state-owned company, profits fell 61% and sales 22% in the second quarter compared to the same period in 2022. Two seemingly critical numbers, but overall unacceptable Health of the business.
Everything seems to indicate that the economic cycle in the industry has changed and the good days have faded. Recall that in 2022, the price per barrel of Brent, the world’s benchmark crude, hit highs of $122 mid-year. Throughout 2023, it was around $77. So it’s about a 30% drop in the price of oil.
But Daniel Guardiola, head of variable sales analysis at investment bank BTG Pactual, warns of prudence in view of the oil company’s results: “You can’t be great.” The international price is lower, that’s a reality. In addition, we must consider that the new tax reform has imposed an additional tax of almost 15 percentage points on oil companies.”
This is an amalgamation of factors beyond the control of the company run by Ricardo Roa Barragán, President Petro’s former campaign manager. For Banco Itaú’s senior private banking structurer, Valeria Álvarez, the simple year-to-year comparison is fuzzy for the analysis. All the more so, considering that the data disregards key macroeconomic indicators such as high interest rates and inflation in order to understand the bigger picture, he asserts: “All of this had an impact on the increase in fixed costs and labor costs.” This worked also negatively impact earnings in an environment of higher financial expenses.”
Furthermore, analysts, reviewing the diverse data in the earnings report for the second quarter of this year, highlight that crude oil imports increased by 4% yoy. Production, in turn, exceeded the average for the past three years, reaching 728,000 barrels per day (projected targets were capped at 720,000). Add to that the 12.3 trillion pesos made in capital investments in the first half of the year.
These symptoms reinforce the belief that the pillars of the Iguana company remain well established despite the setback in international trends. “If you look at the larger context, with an EBITDA of 14 billion pesos per quarter or 4 billion in profits, you realize that things are pretty good. What happens is that you have to understand that last year has been exceptionally good,” concludes Daniel Guardiola.
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Regarding Ecopetrol’s debts, it has been repeatedly emphasized that despite the fact that they reach $25.866 million, they do not pose any risk as the company’s solvency to pay them is solid. In fact, Valeria Álvarez recalls that spending has increased this year, but the debt ratio has not changed and remains at 1.6 times gross operating profit (EBITDA), a classic ratio to evaluate a company’s ability to meet its obligations. Ecopetrol’s debt is healthy, the analysts repeat and summarize.
However, the much-vaunted global economic recession, the depth of which is assessed as moderate or shallow, seems imminent. That’s why Valeria Álvarez loses sight of the volatility of crude oil prices: “The slowdown is a risk. It is not unlikely that demand for crude oil and other products will weaken in the last quarter of this year, which in turn would cause prices to fall.
Ecopetrol shares fell around 3% on the New York Stock Exchange this Wednesday after the results were announced. A market reaction that also coincides with the uncertain future in the signing of new contracts for exploration and exploitation of hydrocarbons. A cumbersome affair for the government of the progressive Gustavo Petro, which included the suspension of new projects as part of its announced energy transition plan.
The outcome of this election proposal, one of his campaign issues, is unsettling for investors and other players in the industry. After his ownership, countless debates and the resignation of the mining minister, Petro has decided to postpone the decision and put the future of the tenders on hold. A sensitive nerve for Ecopetrol and for an entire economy that concentrates a little less than half of its exports on this sector.
Another issue of local concern is the debt the government has taken on with the oil company on behalf of the so-called Fuel Price Stabilization Fund, a type of subsidy designed by previous governments to cover internal prices. . The government’s default of up to 30 billion pesos has created an imbalance in the oil company’s larger cash holdings. Furthermore, the government’s plan to mitigate this by gradually increasing the price of a gallon was of little use.
The case has become a matter of urgency. “Today the government could cover 13 trillion in dividend payments,” warns analyst Daniel Guardiola, alluding to the possibility that the government will not transfer resources but will not receive a distribution of the oil company’s profits either. “But there are still 17 billion that we have no idea how to pay. If the monthly debt ratio continues to rise, we will end the year with a deficit of 27 trillion pesos.” A transparent affair for the finances of Latin America’s fifth-largest company. According to former Finance Minister José Antonio Ocampo, the situation could “put Ecopetrol in a state of illiquidity”.
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