Moody’s Affirms Ocensa’s Baa3 Ratings

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(Moody’s, 4.May.2016) – Moody’s affirmed Oleoducto Central, S.A.’s (Ocensa) Baa3 senior unsecured ratings. The rating outlook was changed to negative from positive.

Ratings Rationale

“The equalization of Ocensa’s ratings and outlook to those of Ecopetrol, S.A. (Ecopetrol, Baa3 negative) reflects Moody’s view that Ocensa is not insulated from the credit quality of its main shareholder and controlling entity,” said Nymia Almeida, a Senior Credit Officer in Moody’s. “The change in outlook to negative from positive also incorporates the negative oil production growth trend in Colombia, offset by our expectation that Ocensa will remain the transportation of choice in the country.”

Ocensa’s Baa3 rating reflects its leading industry position in Colombia and strategic importance to Ecopetrol as well as favorable industry dynamics in Colombia in terms of transportation demand for pipelines.

The company’s ratings also incorporate its tariff and contract structure that supports solid margins and predictable cash flow as well as a moderate financial leverage profile. These factors help offset its exposure as a single-asset pipeline, its relatively small scale within the midstream peer group, and a high dividend payout policy.

The company is close to completing its latest major growth project, which will increase its transportation capacity to 745,000 b/d from 610,000 b/d. In addition, the last tariff revision, in late 2015 and valid for the next four years, kept the prevailing tariffs unchanged. Both events will increase Ocensa’s cash generation, which will further strengthen its credit metrics starting in mid2016.

Although political and guerilla risk in Colombia is a lingering concern, Ocensa has not directly experienced any problems in recent years and its 100 percent underground pipeline system gives the company a competitive advantage.

Ocensa has adequate liquidity, with operating cash needs of about $50 million versus the company’s policies to maintain a minimum of $100 million in cash at all times as a cushion. Starting this year, CAPEX will be small and limited to maintenance only. In addition, the company’s next major debt payment is due in 2021. However, Ocensa pays out 100 percent of net profit in dividends, which is detrimental to bondholders. The company has no committed bank facilities but has close relations with Colombian banks.

Although Moody’s expects that Ocensa’s credit profile and cash flow generation will remain strong given its predictable tariff structure and high capacity utilization, the negative outlook reflects Ocensa’s strong ties with Ecopetrol, its controlling shareholder and main off-taker.

Large projects or acquisitions that increase financial leverage could trigger a negative rating action, although Moody’s believes that Ocensa’s management and Ecopetrol are aligned in a desire to maintain modest leverage at the pipeline. A downgrade of Ecopetrol’s or Colombia’s sovereign rating could result in a rating downgrade for Ocensa.

For Moody’s to consider a ratings upgrade, Ocensa would have to sustain current credit metrics but show lower vulnerability to Ecopetrol’s financial profile and have a dividend policy more aligned with the interests of bondholders. An upgrade of Ecopetrol could also result in a upgrade of Ocensa’s ratings. A rating upgrade of Colombia’s sovereign rating would not necessarily trigger a rating upgrade of Ocensa.

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