Company update - Ecopetrol: Reserves Certification 2017
February 23, 2018 (Investorideas.com Newswire) We are updating our 2018E TP to 2,072 per share. However, we are maintaining our UNDERPERFORM recommendation given that the market is currently pricing it higher. This update is related to the 2017 reserves certification and the latest data on risk free rate and risk premium. The rest of the assumptions included in our model remain unmodified.
Ecopetrol released its 2017 reserves certification statement, reporting a 3.9% y/y expansion to 1,659 mmboe consistent with a RRR of 126%. This means the company was able to add 1.26 boe of reserves per every barrel produced during 2017 (296 mmboe / 234mmboe). As a consequence of the aforementioned, ECO’s reserves life expanded from 6.8 years to 7.1 years.
Overall, this is a good reserves certification report, the best in the company’s recent history. We highlight that the company was able get the first RRR above 100% since 2014 and that 25% of the replacement (73mmboe) was obtained through improved recovery, reaching the highest level since we started receiving records with this breakdown (2010). Improved recovery would continue having a positive impact in coming certifications as production capex (68% of ongoing initiatives) is very intense.
However, extensions and discoveries, representing just 15.1% (44mmboe) of the total replacement, are evidence of a lack of exploratory success. This, added to the fact that 7.1 years of reserves life continues to be a challenging situation in sustainability terms, calls attention to the need for getting addition through discoveries, something not yet seen, or at least not in material proportions. This said, it is worth considering the low capex levels the company is dedicating to exploration (17%); this leads us to think that it will not lead to material results soon. The clearer reserves boost for Ecopetrol seems to be the promising, but still early, exploratory developments of the Colombian Caribbean offshore (natural gas), which, in the best case scenario, are expected to be monetized in 2024, as the company has indicated.
Finally, it is worth keeping in mind that 59% (175mmboe) of the total replacement came from revisions and extensions and that 53% (94mmboe) of this amount is related to a ~USD10 improvement in the Brent oil price for certification purposes (expanded to USD 54.93 in 2017 vs USD 44.49 in 2016), a condition that will eventually play against in a future certification, making a good part of this replacement subject to volatility and not a sustainability milestone. However, we acknowledge that a good part of the revisions comes from cost efficiencies, which provides some sustainability to part of the replacement achievements.
For charts, tables and the full report, see the pdf file
Juan Camilo Dauder
+(574) 2042525 Ext. 4155
+(571) 3394400 Ext. 1025
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