(Moody’s 24.Apr.2020) — Moody’s Investors Service assigned a Baa3 rating to Ecopetrol S.A.’s proposed new global notes. The Baa3 rating on the proposed notes is based on the rating of Ecopetrol.
The proposed notes are senior unsecured, unsubordinated and pari passu with Ecopetrol’s other senior foreign currency debt. Proceeds from the notes issuance will be used for corporate purposes, including debt refinancing. The outlook on the rating is stable.
RATINGS RATIONALE
Ecopetrol’s Baa3 ratings and ba1 Baseline Credit Assessment (BCA) reflect the company’s status as Colombia’s leading oil and gas producer, accounting for about two-thirds of the country’s production and 100% of the supply of oil products. The ratings and the BCA also take into consideration Ecopetrol’s solid and relatively stable cash flow from its midstream subsidiary Cenit S.A.S., which includes Oleoducto Central S.A. (Ocensa, Baa3 stable).
Furthermore, we assume high probability of support from the Government of Colombia (Baa2 stable) and a moderate default dependence between the two entities. This assessment results in a one-notch uplift to Ecopetrol’s senior unsecured rating to Baa3 from its ba1 BCA, which reflects the company’s intrinsic credit risk, without support considerations.
Moody’s believes that Ecopetrol’s solid capital structure and cash flow from midstream operations help protect its credit metrics from low oil prices. In addition, the company has announced a $500 million cut in operating expenses and recently adjusted its capital investment plans to between $3.3 billion and$4.3 billion in 2020, down from the $4.5 billion-$5.5 billion guidance earlier in the year.
Ecopetrol’s liquidity position is supported by cash on hand of $2.2 billion as of December 2019 in addition to over $1.1 billion in loans recently borrowed from revolvers and other bank loans. Maturing debt amount to $409 million in 2020 and $270 million in 2021.
The stable rating outlook is based on Moody’s view that Ecopetrol will be successful in continue reducing operating costs, sustaining reserve replacement rate, and at least sustaining reserve life at current levels.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Ecopetrol’s BCA could be positively affected if the company manages to demonstrate ability to grow production and replace reserves without affecting its credit metrics. Specifically, if the company’s Leverage Full Cycle Ratio is above 1.5 times, which would indicate low finding and development costs, and its retained cash flow/net debt is sustained at current levels, the BCA could rise to baa3. Moody’s view as unlikely that Ecopetrol could be rated above the sovereign rating.
A ratings downgrade could occur if Ecopetrol’s faces liquidity constraints, if its reserve life takes a negative trend, or if retained cash flow/net debt is below 20% for the foreseeable future. In addition, because Ecopetrol’s ratings benefit from implicit support from the government of Colombia, a negative action on the government’s rating or a change in Moody’s assumptions about government support, could lead to a negative action on Ecopetrol’s ratings.
The methodologies used in this rating were Integrated Oil and GasMethodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Ecopetrol, 88.5% owned by the government of Colombia, is the largest integrated oil and gas company in the country. Its gross production averaged 725 mboed in 2019, when total assets amounted to $42.3 billion.
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