AlwaysFree: Ecopetrol Group Reported Solid Operating And Financial Results For 3Q22

According to the company’s website press release on November 4, 2022, Ecopetrol S.A. (BVC: ECOPETROL; NYSE: EC) announced the Ecopetrol Group’s financial results for the third quarter of 2022, prepared under International Financial Reporting Standards applicable in Colombia.

The Ecopetrol Group reported solid operating and financial results for 3Q22, with an EBITDA and net income of COP 21.1 trillion and COP 9.5 trillion, respectively. Such positive results were mainly driven by i) a favorable pricing environment; ii) increased production in both Permian and domestic Ecopetrol operations; iii) record throughputs at the refineries; iv) higher sales levels; and v) strong results at ISA. The foregoing made it possible to offset: i) the effects of inflation and exchange on our operating costs and expenses and ii) the effects of the foreign exchange rate due to the increase in the average exchange rate of the Colombian peso to the US dollar. Importantly, in 3Q22, the payment of the outstanding FEPC balance as of the first quarter of 2022, for a total of COP 6.5 trillion, benefitted our cash position. 

Financial and Operating Results

Sales Revenue

Revenues during 3Q22 increased 86.2% or COP +20.1 trillion as compared to 3Q21, for a total of COP 43.4 trillion, primarily as a result of:

• An increase of +28.3 USD/Bl (COP +10.0 trillion) in the weighted average sales price of crude oil, products, and natural gas, primarily due to a higher Brent reference price and the strengthening of the middle distillates spread compared to the Brent. 
• A positive impact on revenues (COP +4.7 trillion), due to a higher average exchange rate. 
• An increase in sales volumes (COP +2.7 trillion, +113.7 mboed), mainly due to: i) an increase in production in the Permian; ii) higher realization and evacuation of crude oil vessels abroad; and iii) increase in domestic demand for medium distillates, gasoline, and gas. 
• An increase in service revenues (COP +2.7 trillion), mainly due to the consolidation of the ISA’s financial results throughout 3Q22 compared to only one month in 3Q21.

Total volume sold during the quarter amounted to 984.2 mboed, registering an increase of 13.1% compared to the volume sold in the same quarter of 2021, primarily as a result of both an increase in local sales volumes, mainly in gasoline and middle distillates, and an increase in crude oil and gas exports. 

Sales in Colombia, which account for 47% of the total, increased by 8.9% or 38.2 mboed compared to 3Q21, mainly due to: 

• An increase in diesel sales (+12.3 mbod), gasoline (+14.2 mbod) and jet fuel (+6.6k bpd), primarily due to the strengthening of domestic fuel demand as a result of higher economic activity and the continued decrease in COVID-19 related restrictions. For the nine-month period ending September 30, 2022, gasoline and diesel consumption in land borders have increased by 5% and 11%, respectively, compared to 9M21. 
• An increase in the sale of natural gas (+6.0 mboed), also mainly due to the recovery of domestic demand.

International sales, which account for 53% of the total, increased by 17.1% or 75.5 mboed, compared to 3Q21, mainly due to the effect of.

• Higher crude oil exports (+77.3 mboed) due to higher production. 
• Ecopetrol Trading Asia (ECPTA), which started operations in April, sold 25 million barrels as of September, contributing to the deepening of the Asian market. 
• Ecopetrol deliveries reported in transit which have yet to reach their final destination by the end of 2Q22 (+51 mbod cargoes to be delivered in destination port in 3Q22), an increase in production in the Permian (+8 mbod) due to the entry into operation of new wells, and increased activity in Ecopetrol America (+0.5 mboed). 
• Increases in sales to markets such as the United States and Europe as part of Ecopetrol’s market diversification strategy and to offset limited demand from the Asian market during 3Q22 as a result of increased Russian crude flows to Asia (~400 mbd above the 2021 average). 

Crudes: Crude oil basket prices increased 24.5 USD/Bl, from 68.0 USD/Bl to 92.52 USD/Bl in 3Q22 as compared to 3Q21, primarily as a result of the increase in the average Brent price and supported by a market diversification strategy in terms of clients and destinations, that mitigated the effect of a more competitive market due to the increased presence of Russian and Iranian crudes, which traded at significant discounts.

Refined Products: The product sales basket increased 37.9 USD/Bl from 81.8 USD/Bl to 119.7 USD/Bl in 3Q22 as compared to 3Q21, mainly as a result of the recovery of international indicators and higher global demand for gasoline and diesel.

Natural Gas: Gas sales price increased 3.8 USD/Bl (0.6 USD/MBTU)5 in 3Q22 as compared to 3Q21, primarily due to the indexation of domestic contracts to US PPI (Producer Price Index) starting December 2021.

Hedging Program: During 3Q22, Ecopetrol executed four tactical price risk hedges for 5.2 million barrels. Tactical

hedging is part of the Asset-Backed Trading (ABT) commercial strategy, which seeks to maximize the value of products through the optimal use of assets and proactive price risk management. Furthermore, during 3Q22 a strategic hedging plan was executed for the second half of the year to protect cash in the event of prices falling below the budgeted base price.

Cost of Sales

Cost of sales increased by 68.4%, or COP +9.9 trillion in 3Q22 as compared to 3Q21. This increase in the cost of sales is primarily a result of the factors described below:

Variable Costs:

Variable costs, increased by 88.8%, or COP +8.0 trillion in 3Q22 as compared to 3Q21, primarily due to the

combined net effect of:

• Increased purchases of crude oil, gas and products (COP +4.2 trillion), primarily as a result of: i) an increase in the weighted average purchase price of domestic purchases and imports of +24.8 USD/Bl (COP +3.1 trillion); ii) an increase in the average exchange rate (COP +1.7 trillion); partially offset by iii) a decrease in volumes purchased (COP -0.6 trillion, -20.8 mboed) mainly from imports of products given the operational stability in both refineries that allowed the Company to better address domestic demand for fuel products supported by its own production. 
• Inventory consumption (COP +3.4 trillion), primarily due to i) higher crude oil evacuation and deliveries abroad; and ii) lower valuation of the average cost of crude oil and purchased products, resulting from the drop in international reference prices during 3Q22 compared to 2Q22. 
• Increase in other variable costs (COP +0.4 trillion), primarily due to increased operating activities in line with the increase in production, throughput and transported volume, increase in tariffs and the negative effect impact on costs in US dollar terms due to the increase in the average COP/USD exchange rate. 

Fixed Costs: Fixed costs increased by 52.5% or COP +1.5 trillion in 3Q22 compared to 3Q21, mainly due to: i) the consolidation of ISA's fixed costs throughout 3Q22, as compared to one only month in 3Q21; and ii) increases in maintenance and field operation services costs related to the reactivation of economic activity, increases in contract tariffs by inflation, and the negative effect of the higher average exchange rate. 

Depreciation and Amortization: In 3Q22 depreciation and amortization increased by 16.2% or COP +0.4 trillion as compared to 3Q21, primarily as a result of: i) the consolidation of ISA's results throughout 3Q22, as compared to only one month in 3Q21; ii) the negative effect of the exchange rate in the depreciation of the Group's subsidiaries that use the US dollar as their functional currency, given the devaluation of the Colombian peso against the US dollar; iii) higher CAPEX levels; and iv) an increase in Permian's production. The increase was partially offset by an increase in the incorporation of reserves in the previous year, which results in a lower depreciation rate. 

Operating Expenses, Net of Other Income

In 3Q22, operating expenses, net of other income increased 3.2%, or COP +56 trillion as compared to 3Q21, primarily due to:

• An increase associated with the incorporation of ISA's operating expenses throughout 3Q22, as compared to only one month in 3Q21 (COP +0.2 trillion). 
• An increase in customs operating expenses, mainly due to the increase in sales under the DAP (Delivery at Place) modality (COP +0.1 trillion). 
• An increase in expenses associated with agreements and social investment projects (COP +0.1 trillion). 
• Other minor expenses, including increases in labor expenses, industry and commerce tax expenses and the update for environmental provisions (COP +0.1 trillion).

This increase in operating expenses was partially offset by:

• Operating revenues from the sale of assets in the CEGOC area (Casanare, Estero, Garcero, Orocue and Corocora) in August 2022 which generated a profit (COP 0.3 trillion).
• A decrease in exploratory expenses due to lower recognition of dry wells (COP -0.2 trillion).

Financial Result (Non-Operating) 

Non-operating financial expenses increased by 165.7% or COP +1.2 trillion in 3Q22 as compared to 3Q21, primarily as a result of: 

• The incorporation of ISA's net financial result throughout 3Q22, compared to only one month of 3Q21 (COP +0.5 trillion), which includes: interest, foreign exchange difference, financial returns and others. 
• An increase in the exchange difference expense (COP +0.5 trillion), given the higher net liability position in US dollars of the Ecopetrol Group and the devaluation of the Colombian peso against the US dollar.
• Increase in financial expenses (COP +0.2 trillion), mainly due to debt acquired in 2H21 to finance the purchase of ISA. 

This increase in financial expenses was partially offset by higher returns and portfolio valuation such as financial assets, investments portfolio, and bank accounts. 

The Effective Tax Rate for 9M 2022 was 32.8% compared to 31.9% in 2021 and for 3Q22 was 32.8% as compared to 33.7% in 3Q21. The variation for both periods derives from the better results in subsidiaries operating under a special tax regime, as is the case of the Cartagena Refinery, ISA and companies in the United States and Brazil, partially offset by a higher nominal tax rate in the Colombian companies of 4 basis points compared to 2021. 

Cash Flow: 

At the end of 3Q22, the Ecopetrol Group closed with a cash balance of COP 15,881 billion (42% COP and 58% USD). During 3Q22, the main source of liquidity for the Ecopetrol Group was cash from operating activities totaling COP +14.9 trillion, primarily due to revenues from operations across all business segments and the payments received from the Ministry of Finance and Public Credit and allocated to the FEPC account receivable for an amount of COP +6.5 trillion. The improvement in the Ecopetrol Group’s liquidity position was partially offset by the continued accrual of the FEPC account during 3Q22 of COP +9.9 trillion, mainly due to the sustained difference between international and domestic prices of gasoline and diesel. As of September, the cumulative balance of the FEPC account receivable is COP 20.4 trillion. 

The main cash outflows for 3Q22 were allocated to capital investment needs (CAPEX) for COP -5.5 trillion and dividend payments for COP -5.2 trillion, which were primarily disbursed to the Nation by COP -4.8 trillion. 

Debt: 

At the closing of 3Q22, the debt on balance sheet was COP 107.8 trillion, equivalent to USD 23,470 million, +COP 8.9 trillion as compared to the closing of 2Q22. This increase is mainly due to the effect on our US dollar debt of the devaluation of the Colombian peso against the US dollar in 3Q22 (from a TRM of 4,151 COP/USD at the end of 2Q22 to 4,590 COP/USD at the end of 3Q22). The accounting counterparty of such increase is seen mainly in shareholder´s equity in the Other Comprehensive Income account due to the use of Ecopetrol's accounting hedges to mitigate exchange exposure.

As part of its comprehensive debt management strategy, during 3Q22, Ecopetrol S.A. disbursed an existing credit line for USD 1.2 billion originally contracted in August 2021. The proceeds from such disbursement were fully allocated to an early prepayment of the loan obtained to fund the ISA acquisition. As of the date of this earnings release, USD 3.2 billion have been paid to the respective lending financial institutions in connection with the ISA acquisition loan, resulting in an outstanding balance of USD 472 million expected to be refinanced at its maturity in August 2023. 

As a result of the strengthening of the Ecopetrol Group's EBITDA, the Gross Debt/EBITDA ratio for 3Q22 closed at 1.5x as compared to 1.6x at the end of 2Q22. 

Equity 

As of 3Q22, the Ecopetrol Group's total equity was COP 107.8 trillion. Shareholders' equity at the end of 3Q22 was COP 81.9 trillion, an increase of COP +11.3 billion as compared to 2Q22, mainly as a result of the effect of the profit generated in 3Q22. 

Efficiencies 

Throughout the year, the Ecopetrol Group has focused its efforts on the deployment of a comprehensive strategy aimed at mitigating the effects that international market conditions and the Russia-Ukraine conflict have on the cost structure of our operations and investments, as well as on the complexity of commercial strategies and international and domestic inflationary effects. 

Thus, at the end of September 2022, the Ecopetrol Group recognized cumulative efficiencies for COP 1.8 trillion (43.9% of the 2024 target), mainly as a result of the summarized below: 

1. Actions focused on mitigating impacts that may affect the Ecopetrol Group’s EBITDA margin, which have resulted in efficiencies amounting to COP 1.5 trillion, primarily in: 

• Strategies identified and implemented by the production segment focused on optimizing lifting costs, which have contributed COP 270.4 billion to date. 
• Dilution and evacuation strategy for heavy and extra-heavy crudes, as a result of the optimization of the crude dilution factor, which decreased from 13.5% (9M21) to 12.4% (9M22), due to the launch of the strategy to improve the operating parameters of the Chichimene Field treatment station, the development of the LPG co-dilution strategy, and the increase of viscosity in the transportation of heavy crudes in the OCENSA system, which has resulted in efficiencies of COP 230.9 billion. 
• Operational improvement strategies implemented in the Midstream companies, with resulting efficiencies in the period amounting to COP 44.2 billion. 
• Margin and revenue improvement strategies implemented by the Company’s commercial area, refining and petrochemical operations concentrated in the Barrancabermeja and Cartagena Refineries, and in Esenttia, as well as revenues from the energy surplus sales, among other actions, whose cumulative efficiencies in the first nine months of the year amounted to COP 867.0 billion. 
• Initiatives implemented by our corporate and support areas, which have contributed COP 48.1 billion.

1. CAPEX efficiencies COP 313.6 billion.

The strategies implemented in our investments have focused on improving the operating and technical performance of our investment projects which have contributed to efficiencies mainly through the following actions:

• Strategies implemented to leverage and use materials from other projects, to improve construction strategies and lean construction, among others, which together have contributed around COP 199 billion.
• Strategies for the optimization of the engineering and management of our hydrogen (H2) projects in the Barrancabermeja and Cartagena refineries, which have contributed COP 10.6 billion. 
• Continuous improvement in the drilling and completion of wells, which has contributed to efficiencies totaling COP 64.3 billion. 
• Strategies implemented by our Midstream companies focused on the optimization of pipeline maintenance projects, which have contributed COP 17.7 billion. 
• Optimization in equipment purchases related to the Moderate Hydrocracking plant (HCM) shutdown and lights for the Barrancabermeja refinery, whose cumulative contribution has been COP 15 billion. 
• Other CAPEX efficiencies for COP 7 billion. 

In 3Q22, the Ecopetrol Group's organic cumulative investments amounted to USD 3,675 million, of which the oil and gas business’s CAPEX amounted to USD 2,948 million, and investments made by ISA amounted to USD 727 million. Regarding projects associated with the energy transition, USD 150 million were deployed, including investments in decarbonization, management, treatment and use of water, energy efficiency and hydrogen. By the end of 2022, the total investment is projected to be in line with the Company’s investment plan.

Of total investments in the oil and gas business, 78% were in Colombia, and the remaining 22% were in the United States and Brazil. In the case of ISA, Brazil and Colombia accounted for 36% and 21% of total investments, respectively, and the remaining 43% corresponded to investments made mainly in Chile and Peru. Overall, investments made by the Ecopetrol Group in Colombia amounted to USD 2,463 million (67% of the total), while USD 1,212 million were mainly concentrated in Brazil and the United States. Investments focused on the expansion of the gas chain represented 10% of the investments made in 3Q22 and they were concentrated in offshore exploration projects in Colombia, production projects in Piedemonte, as well as in activities of the subsidiary Hocol.

During 9M22, Ecopetrol’s main investments were primarily allocated as detailed below:

Upstream: This segment accounted for 66% of the Ecopetrol Group's organic investments, with resources amounting to USD 2,409 million allocated mainly to the drilling and completion of 407 development wells and 373 workovers, activities that were primarily concentrated in the Rubiales, Caño Sur, Castilla, Chichimene and Casabe fields. In addition, 13 exploratory wells were drilled.

Midstream: Investments mainly focused on operational continuity activities to maintain the integrity and reliability of the various oil and multipurpose pipeline systems owned by CENIT and its subsidiaries.

Downstream: Activities focused on operational continuity and the execution of major maintenance at the Barrancabermeja and Cartagena refineries to maintain the efficiency, reliability, and integrity of the operation. 

SosTECnibilidad® - (TESG): During 3Q22, investments were made in water management, treatment, and use of water projects, mainly in operations related to assets in the Llanos Orientales, Piedemonte and Upper Magdalena Valley basins. Progress continues to be made in the development and execution of decarbonization and energy efficiency projects aimed at reducing CO2 emissions, including investments in renewable energy projects such as the La Cira solar farms and the Cartagena Refinery. Investments were also made in hydrogen production studies at the Barrancabermeja and Cartagena refineries.

Energy Transmission and Toll Roads:

• Transmission: During 3Q22, investments totaling USD 263.4 million were executed. In Colombia, progress was made mainly in the El Rio, La Loma and Copey-Cuestecitas-Fundación Mining and Energy Planning Unit projects (UPMES). In Peru, in the Coya-Yana and Chincha-Nazca projects in CTM. 6 In Brazil, in the reinforcement and improvement plan, the installation of a battery bank and investments in the Ivaí, Jacarandá, IE Taunas, Minuano, Riacho Grande and Triangulo Mineiro projects. Finally, in Chile, progress was made in the expansion of some of Interchile’s substations. For the nine-month period ending September 30, 2022, total investments amounted to USD 628.8 million. 
• Toll Toads: During 3Q22, investments totaling USD 42.5 million were allocated to regulatory safety works in the four concessions in operation in Chile, in Section III, and in some additional road works in Ruta del Maipo. For the nine-month period ending September 30, 2022, total investments, amounted to USD 81.8 million. 
• Telecommunications: During 3Q22, investments totaling USD 4.8 million were allocated, while the 9M amounted to USD 16.1 million. These investments were mainly concentrated in connectivity projects.