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Company Update: Ecopetrol - UNDERPERFORM - A trade on oil price

Price: COP 1,775 / USD 11.74 (ADR); Target Price: COP 1,720 / USD 11.43 (ADR)

 

December 11, 2017 (Investorideas.com Newswire) We are updating our 2018E T.P to COP 1,720/share from COP 1,337/share in our previous valuation exercise. However, we are maintaining our UNDERPERFORM recommendation given that the share is currently trading at premium. Although the resiliency the company has showed in terms of operating and financial performance is clearly worth of consideration and explains part of the upside we introduced in our new target price, ground for extra efficiencies seem tight. Therefore, we consider that most of ECO’s additional upside rests in oil price perspectives. The company is currently trading at a 2018E 7.8x P/E, below its peers median (15.1x) and at 3.7x EV/EBITDA relative to sector average of 4.7x. The discount is in our view related to short reserves life, risk of declination of mature fields and persistent interruptions to operations.

Ecopetrol is now a trade on oil price: After a period of proven operating and financial resiliency during the oil glut, it seems that there is no much ground for extra efficiencies ahead. Therefore, Ecopetrol’s upside rests mostly on oil price performance. In this update we adjusted our short term (2018) oil price estimates to the upside (from USD 55 per bbl. to USD 60 per bbl.). Our mid to long term estimates are already anticipating oil prices above the spot at USD 70 per bbl for 2019 and USD80 per bbl from 2020 onwards, roughly aligned with the estimates of the main energy agencies. 2018’s gross production was increased to 715kboed from our earlier 675 kboed.

Declining oil inventories lead us to be optimistic on the consolidation of oil prices above USD60 per barrel, in the short term. Improved demand performance and sticky fracking supply has helped to balance the oil market. Consequently oil prices above USD60 per bbl looks likely to remain, at least in the short term. In a longer intertemporal perspective, our view is that fracking has set a new frontier of production that, beyond short term rigidities, has changed the industry in the long term, making OPEC cuts necessary and prices to keep a continuous bias to the downside.

We continue to see big challenges ahead for the company. Despite we see the resiliency of production ~715 kboed as a remarkable achievement, production declination remains a challenge and developments at key fields are necessary. On the reserves side, although oil price recovery could improve 2017 certification, what continues to be necessary is getting addition trough exploration, something yet to be seen. There are exploration initiatives that could become game changers (Caribbean Offshore and non conventionals) but that are not mature enough to be priced, in our view. New exploration targets in the Gulf of Mexico could become important but remain as big uncertainty.

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

Juan Camilo Dauder
+(574) 204 2525 Ext. 4155
jdauder@credicorpcapital.com

Este mensaje y sus anexos pueden contener información confidencial o legalmente protegida y no puede ser utilizada ni divulgada por personas diferentes a su destinatario. Si por error recibe este mensaje, por favor avise inmediatamente a su remitente y destruya el correo y sus adjuntos. Cualquier uso, divulgación, copia, distribución, impresión o acto derivado del conocimiento total o parcial de este mensaje sin autorización de Credicorp Capital Ltd. y/o cualquiera de sus afiliadas o subsidiarias será sancionado de acuerdo con las normas legales vigentes. El presente correo electrónico sólo refleja la opinión de su remitente y no representa necesariamente la opinión oficial de Credicorp Capital Ltd. y/o de sus afiliadas y/o subsidiarias. Los correos electrónicos son susceptibles de alteración. Ni Credicorp Capital Ltd., ni ninguna de sus afiliadas o subsidiarias serán responsables por el contenido del mensaje. Gracias por su cooperación. This message and its attachments may contain confidential or legally privileged information and may not be used or disclosed by anyone other than the intended recipient. If by mistake, you receive this message, please notify the sender immediately and destroy the message and its attachment. Any use, disclosure, copying, distribution, printing or action arising from the total or partial knowledge of this message without the authorization of Credicorp Capital Ltd. and/or its affiliates or subsidiaries will be punished in accordance with legal regulations. This email only reflects the opinion of the sender and do not necessarily represents the official views of Credicorp Capital Ltd. and/or its affiliates or subsidiaries. E-mails are susceptible to alteration. Neither Credicorp Capital Ltd nor any of its affiliates or subsidiaries is liable for the content of the message. Thank you for your cooperation.

Este mensaje y sus anexos pueden contener información confidencial o legalmente protegida y no puede ser utilizada ni divulgada por personas diferentes a su destinatario. Si por error recibe este mensaje, por favor avise inmediatamente a su remitente y destruya el correo y sus adjuntos. Cualquier uso, divulgación, copia, distribución, impresión o acto derivado del conocimiento total o parcial de este mensaje sin autorización de Credicorp Capital Ltd. y/o cualquiera de sus afiliadas o subsidiarias será sancionado de acuerdo con las normas legales vigentes. El presente correo electrónico sólo refleja la opinión de su remitente y no representa necesariamente la opinión oficial de Credicorp Capital Ltd. y/o de sus afiliadas y/o subsidiarias. Los correos electrónicos son susceptibles de alteración. Ni Credicorp Capital Ltd., ni ninguna de sus afiliadas o subsidiarias serán responsables por el contenido del mensaje. Gracias por su cooperación. This message and its attachments may contain confidential or legally privileged information and may not be used or disclosed by anyone other than the intended recipient. If by mistake, you receive this message, please notify the sender immediately and destroy the message and its attachment. Any use, disclosure, copying, distribution, printing or action arising from the total or partial knowledge of this message without the authorization of Credicorp Capital Ltd. and/or its affiliates or subsidiaries will be punished in accordance with legal regulations. This email only reflects the opinion of the sender and do not necessarily represents the official views of Credicorp Capital Ltd. and/or its affiliates or subsidiaries. E-mails are susceptible to alteration. Neither Credicorp Capital Ltd nor any of its affiliates or subsidiaries is liable for the content of the message. Thank you for your cooperation.


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