Ecopetrol and the ‘Oil Wealth Effect’

The biggest IPO ever in Colombia took place last year, when Ecopetrol, the state-owned oil company, issued 10% of its shares, for US$2.5 billion. This amount was absorbed entirely by local investors, and close to 482.000 Colombians are now new shareholders of Ecopetrol. Since November 27th, when Ecopetrol stocks were first traded in the Colombian Stock Exchange, their price has increased by 80% and, including dividends, the return of this investment is more than 90%. This has created a positive “wealth effect” for Ecopetrol´s new shareholders, mainly Pension Funds and retail investors. image002_44.gif

Before 2007, Ecopetrol was a state-owned company, and the Colombian government owned 100% of its shares. As a result, until last year, all dividends paid by Ecopetrol went to the Ministry of Finance to fund current expenses, which implied that the oil windfall was perceived entirely by the Colombian government, who also received oil taxes and royalties. But beginning 2008, this windfall will be distributed among Colombians, not only retail investors, who bought 62% of the shares, but indirectly among all Colombian workers, since 37% of Ecopetrol shares are now in the hands of local Pension Funds.

In 2007, Ecopetrol had profits of for US$11 billion, 21% higher than in the previous year. The company’s EBITDA went up 28%, reaching US$5.1 billion. As a result, the company announced it would pay US$2.6 billion in dividends to its shareholders in 2008, which represents an 8% yield, well above the average for Colombian companies.

These are very good news for retail investors as 90% of them bought shares for less than U$2.800 (the minimum investment was around U$800). This means that 482.000 Colombians will receive a minimum dividend of US$64 per share in four equal payments between now and January 2009; 20% of the stocks were bought by individuals through supermarkets and retail stores, who are now offering a 10% discount to people who spend their dividends there. This is an incentive for people to consume rather than reinvest their gains, and is going to have a positive effect on demand this year.

On the other hand, Pension Funds will receive US$84 million in dividends for their 3.7% stake in Ecopetrol. This, in addition to the increase in market value of their stocks, adds a positive return in their portfolios, which have been deeply affected in the last year by the negative behavior of local assets, the volatility in international markets, and the appreciation of the peso against the dollar.

The question here is if the rally in Ecopetrol´s stock is sustainable. I think the answer is yes. Even if we do not see again an 80% increase in its price in the next 6 months, there are some facts that anticipate an additional return of the stock price at the end of 2008 from its current level. First, the company’s budget was based on a WTI price of U$72/barrel for 2008, well below current levels and even lower than the less optimistic analyst scenarios right now, which means that there will be a positive surprise in earnings at the end of this year. Second, given the increase in exploratory activity, new oil and gas wells are probably going to be discovered, like the one that was just announced by the Company (Tempranillo 1), increasing the stock price by 4.5% on April 29th. Third, a the listing of an ADR before the end of 2008 is very good news for international investors interested in buying Ecopetrol, but who are currently restricted by capital controls. This will give more liquidity to the stock and increase its transparency in terms of information disclosure and corporate governance.

With all this in mind, it is highly probable that Ecopetrol will continue to have a positive wealth effect on Colombians consumption for the rest of this year, and will have a very good impact on those companies planning to list their shares for the first time in the Colombian Stock Exchange.

2 Responses to "Ecopetrol and the ‘Oil Wealth Effect’"

  1. Vitoria Saddi   May 5, 2008 at 4:37 pm

    Camila,I found very interesting your piece. My question is if you agree with the isssuance of stocks by Ecopetrol or not. It seems you do. Do you think that Ecopetrol will increase the issuance of shares or not? Does the government intends to privatize the company?ThanksVitoria

  2. Camila Perez   May 6, 2008 at 12:08 pm

    Vitoria,As a matter of fact, I do agree with the Ecopetrol issuance. I think it was very positive both for the Company and for the Colombian Stock Exchange. To answer your question, Ecopetrol is not going to be privatized, but there is permission from the Congress to issue an additional 10% in stocks in the following 2 years. However, this does not seem possible for a couple of reasons.First, Ecopetrol has now a lot of cash (from last year issuance), that should be invested in exploration and production, before getting new financial resources. But even if the Company needs money, it would be more efficient from the financial point of view to get some debt, since Ecopetrol has now zero financial debt. As a matter of fact, this was one of the reasons to issue the stocks last year: to eliminate the restrictions that Ecopetrol had to invest and get debt because of belonging 100% to the Colombian Government.However, the President of Ecopetrol has announced that the stock is going to be listed before year end in the NYSE, through an ADR, which is good news for international investors.