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Quarterly Results: Ecopetrol - HOLD

Revisions contributed to a positive reserves report; financials were lower than expected
Price: COP 3,440; Target Price: 4,260.

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February 28, 2014 ( newswire) Reserves addition, which was our main concern, surprised us on the positive side. However, financials were well below our and the market's expectations. The board proposed a dividend of COP 260/share, a still aggressive payout policy considering the high CAPEX plan and 2013's lower net income. We expect a neutral to negative reaction due to lower financials and uncertainty regarding new exploratory success. Nevertheless, we believe a significant portion of the risks is already priced in. Also, we highlight the management's firm announcement of no equity issuance in 2014 to fund the investment plan.

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Reserves (1P) increased 5.1% y/y, while the replacement ratio was 139%, which is positive as we were expecting a decrease. However, we highlight that revisions from previous estimates drove this growth. Recent commerciality declarations from Caño Sur and Akacías (and following reserves additions) are good signs, but we still wait for further proof of the company's ability to add reserves through exploration activities and/or higher recovery factors.

Revenues and oil & gas production were in line with our estimates, but we highlight that EBITDA and net income were 8.5% and 6.2%, respectively, below our expectations. It is worth mentioning that a 91.3% increase in OPEX (that we did not expect) during 4Q13 had a negative effect for the full year.

Despite a 10.7% decrease in the dividend, the payout is still high; given 2014's CAPEX we thought no extraordinary dividend would be proposed. That said, we believe this high yield (~7.6%) should act as a positive short-term catalyst.

Finally, we reiterate our HOLD rating and our T.P. of COP 4,260, which has an implicit 12.5x P/E 2014E and 5.68x EV/EBITDA 2014E compared to 10.4x P/E and 4.39x EV/EBITDA from peers.

For charts, tables and the full report, see the attached file.

Credicorp Capital

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