Corporates

Energy (Oil & Gas) / Colombia

Ecopetrol S.A.
Full Rating Report Key Rating Drivers
BBB BBB

Ratings
Foreign Currency Long-Term IDR Local Currency Long-Term IDR National Long-Term Rating IDR Issuer default rating.

AAA(col)

Linkage to Sovereign: Ecopetrols ratings are linked to the credit profile of the Republic of Colombia (local and foreign currency IDRs of BBB and BBB, respectively), which owns 88.5% of the companys total capital. The company is also linked closely with the Colombian government through its exposure to changes in regulation and its receipt of subsidies for retail fuel consumers from the central government in the past and potentially in the future. The company generates approximately 20% of government revenues and is of great strategic importance to the country. Aggressive Growth Strategy: Ecopetrol has an aggressive growth strategy and its operating metrics are improving and are now considered somewhat in line with the rating category. As of December 2011, Ecopetrols consolidated reserve life was approximately eight and a half years. The company reserve replacement ratio improved significantly during 2011 to 164%. The company plans to increase production to 1.3 million barrels of oil equivalent per day (boepd) by 2020, from 716,400 boepd during the first nine months of 2011. It also intends to increase refining capacity to 420,000 barrels per day (bpd) from 335,000 bpd. These aggressive goals increase both business and event risk. Fitch Ratings believes that Ecopetrol will face challenges in meeting these goals and improving reserve life in the aforementioned time frame while maintaining all of its stated credit metric targets. These include leverage below 2.0x, EBITDA interest coverage above 5.0x, debt to capitalization of 20%40% and debt to proven reserves of USD4.5 per barrel. Strong Financial Profile: Ecopetrol maintains a strong financial profile with USD15.2 billion of EBITDA and USD4.7 billion of debt as of the LTM ended September 2011. The company reported moderate leverage measured as total proven reserves to total debt of approximately USD2.7 per barrel, sizable reserves are increasing production levels. These factors, plus its dominant domestic market share, allow the company to generate consistently strong cash flows from operations and meet its obligations in a timely manner. Liquidity is strong with USD2.2 billion of cash on hand as of Sept. 30 2011.

Rating Outlooks
Long-Term Foreign Currency IDR Stable Long-Term Local Currency IDR Stable National Long-Term Rating Stable

Financial Data
Ecopetrol S.A. (USD Mil.) Total Assets Total Debt Operating Revenue EBITDA Net Income Debt/EBITDA (x) LTM 9/30/11 43,830 4,655 31,906 15,150 7,396 0.3 12/31/10 35,841 4,645 22,114 9,077 4,216 0.5

Related Research
Fitch Upgrades Ecopetrols FC & LC IDRs to BBB/BBB; Outlook Stable, June 23, 2011

The company plans to finance its USD80 billion capital expenditure program for 20112020 using internal cash flow generation, debt issuances as well as a possible second primary equity offering, which could increase the companys total floating capital to 20% (per law 1118 of 2006, the company cannot issue more shares than 20% of the total). Due to the high dividend policy and aggressive capital expenditure plan, free cash flow is expected to be under pressure in the foreseeable future while debt could continue to rise. Fitch expects leverage, as measured by total debt to EBTIDA, to range between 2.0x and 2.5x over the medium term.

Analysts
Lucas Aristizabal +1 212 908-9158 lucas.aristizabal@fitchratings.com Ana Paula Ares +54 11 5235-8121 ana.ares@fitchratings.com Glucia Calp +571 326-9999, ext. 1110

What Could Trigger a Rating Action

Rating Divers: A downgrade of Colombias ratings, an increase in leverage beyond Fitchs expectations, weak operating performance resulting in lower production/reserves could negatively affect Ecopetrols ratings. A leverage below Fitchs expectations, strong operating performance resulting in higher production/reserves, as well as an expansion of export revenues could result in an upgrade.

www.fitchratings.com

February 3, 2012

Corporates
Liquidity and Debt Structure
Ecopetrols liquidity position is considered strong and supported by the companys internal cash flow generation, cash on hand, and manageable maturity schedule. As of September 2011, the company had USD2.2 billion in cash on hand and USD4.7 billion in total financial debt. The company has also benefited from equity issuances during past few years. Going forward, the company is expected to finance its capital expenditures with internal cash flow generation, debt and, to a lesser extent, equity.

Company Profile
Ecopetrol is a vertically integrated oil and gas company that operates primarily in Colombia. The company is 88.5% owned by the Colombian government, and the balance was placed in the Colombian stock exchange and registered in the New York Stock Exchange. In 2010, Ecopetrols crude oil production was approximately 616,000 boe/d (714,600 boe/d as of September 2011) and total proved developed and undeveloped reserves of approximately 1,857 million barrels as of December 2011. Ecopetrols strategy has been affected by a decree introduced in 2003 and implemented in 2004, which separated the administration of Colombian hydrocarbon resources from the company. The decree marks a relevant change in Ecopetrols profile in terms of operations and strategy. In the past, the company was afforded low-risk access to oil reserves through its exclusive option to participate, post exploration, in any commercial discoveries made by the private sector. Nowadays, while existing association agreements remain in place, exploration agreements depend on Ecopetrols own strategy and performance. The company must compete for exploration blocks, or it may enter into joint ventures with other energy partners. Ecopetrols current strategic plan for 2020 encompasses its growth and operational consolidation goals. The companys growth goals are to be vertically integrated, producing 1.3 million boe/d by 2020; to have some of the top refineries and transportation systems in Latin America; and to be the best hydrocarbon supply option for Colombia. The 1.3 million boe/d goal seems very aggressive, as the company would have to almost double its current production level. Although Ecopetrols production has presented and upward trend in recent years, doubling production in seven years will be costly and challenging. In line with its goals, the company has increased its exploration efforts in order to be more competitive going forward. Understanding the limitations that stem from being a public sector company, Ecopetrol and the Colombian government began a capitalization process. During the first phase of this process, the company placed 10.1% of its total equity in the market, diluting the government participation to 89.9%. This allowed the company to become a mixedcapital company with more independence from the central government. The main benefit from the capitalization process was budgetary impendence from the central government, which allows it to

Crude Production Colombia

Ecopetrol 1,000 900 800 700 600 500 400 300 200 100 0
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Others

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20 08

Related Criteria
Corporate Rating Aug. 12, 2011 Methodology,

E Estimate. Source: Ecopetrol S.A. and ANH.

Ecopetrol S.A. February 3, 2012

20 11 E

Corporates
raise debt to finance its capital expenditure needs. In addition, the company is now able to retain human capital by offering more competitive remuneration.

Reserves and Production

Ecopetrol uses its crude oil production for the countrys refineries and exports any excess not used locally. Approximately 40% of crude oil production is used in the domestic refinery market, and the balance is exported. In 2010, Colombias crude reserves continued increasing after reversing its declining trend in 2007. As of Dec. 31, 2010, Colombias proved conventional oil and gas reserves totaled 1.7 billion barrels, yielding a proved crude oil reserve life of approximately eight and a half years. In 2010, Ecopetrol reported an increase in reserves of approximately 11.4% to 1.71 billion boe in accordance with the U.S. Securities and Exchange Commissions (SEC) methodology. Ecopetrols consolidated crude oil production for the first nine months of 2011 average approximately 716,400 boe/d and was approximately 70% light and medium crudes and natural gas, and the balance was heavy crude. This production level represented a 16.4% increase from the same period during 2010. For the first nine months of 2011, the companys lifting cost increased by USD0.95 per barrel to USD9.5 per barrel when compared with the same period in 2010. The companys near-term strategy is expected to be focused on activities near existing producing projects with relatively lower levels of risk. For larger, riskier projects, Ecopetrol is looking to participate in partnerships, as is the case with ExxonMobil Corporation and Petrleo Brasileiro S.A. (Petrobras) in the Tayrona block. Ecopetrol has participated in bidding processes in Brazil and Peru and the U.S. Gulf of Mexico. Ecopetrol, in association with other companies, was awarded several blocks in those countries. Of the approximately USD68 billion of expected capital expenditures for exploration and production for the period 2012 to 2020, USD20 billion are expected to be earmarked for exploration and the balance for production activities.

Downstream Operations
The company owns all of Colombias refining capacity. Downstream operations encompass two major domestic refineries with a combined installed capacity of 330,000 bpd, Barrancabermeja (250,000 bpd) and Cartagena (80,000 Refinery Throughput bpd). During the first nine months of 2011, throughput at Ecopetrols (000 bpd) 315 refineries was 305,700 bpd.
310

Ecopetrol currently supplies close to 100% of the national gasoline and diesel demand. The national fuel demand composition continues to change, with demand for gasoline declining and that for diesel increasing. The decrease in gasoline demand is mainly due to the conversion of public-service vehicles to natural gas, the higher use of ethanol-mix gasoline, and the lower overall demand for gasoline due to
Ecopetrol S.A. February 3, 2012

305 300 295 290 285 280 275 270

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Source: Ecopetrol S.A.

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subsidies reduction. Higher diesel demand is mostly driven by the countrys massive transportation systems and subsidized diesel price. Ecopetrols export strategy aims to export to the most profitable markets under medium-term contracts, reducing the companys exposure to the spot market. Crude exports have increased in recent years with the Castilla blend, the most exported crude. Refined product exports have declined mainly due to higher national diesel demand. The most significant project currently under development is the Plan Maestro de Desarrollo (PMD) of the Cartagena refinery, which is expected to increase refining capacity to 150,000 bpd from approximately 80,000 bpd and increase conversion capacity to 94%. In addition, the Cartagena, PMD expects to increase the refinery capacity to produce better quality fuels. The company also plans to modernize the Barrancabermeja refinery. This project will enable the countrys largest refinery to increase its conversion rate to 95% from 76%, which will allow the company to obtain more products, such as gasoline and diesel, and to process a greater quantity of heavy crudes. These two projects will give Ecopetrol a competitive edge, allowing the company to offer a product that meets stricter environmental requirements. They will also increase Ecopetrols throughput.

Financial Profile
Ecopetrols financial profile is considered strong, with steadily growing revenues, strong operational margins, and low financial leverage. Ecopetrol reported revenues for the LTM ended Sept. 30, 2011 of USD31.9 billion, an increase from USD22.1 billion in 2010, reflecting higher international energy and product prices, as well as increasing production levels. EBITDA for the LTM ended Sept. 30, 2011 was approximately USD15.2 billion versus USD9.0 billion in 2010 due to higher revenues. The companys main costs are directly related to oil and gas production as well as royalties to the Colombian government. Royalties represent the payments for the depletion of governmentowned, nonrenewable natural resources. Ecopetrol commercializes the production from its direct operations and under association agreements that were originated prior to Dec. 31, 2003, as well as all of ANHs royalties. With Decree 1760 introduced in 2003, this function was transferred to the ANH for contracts originated on Jan. 1, 2004, and thereafter. EBITDA to interest coverage should remain strong given the companys conservative capital structure and relatively low debt levels. Ecopetrols pension liabilities are not considered a major concern for the companys credit profile due to the meaningful steps taken by Ecopetrol to address the situation. The company is responsible for the pension liabilities of all employees that have been with Ecopetrol prior to 1990. As of Dec. 31, 2010, the companys unfunded pension liabilities and other post-employment benefits were approximately USD1.2 billion, or approximately 17% of total pension liabilities. Ecopetrol expects capital expenses to amount to USD80 billion between 2012 and 2020. The company expects to finance this very aggressive growth strategy by using internal cash flow generation during this period, estimated by the company to provide approximately USD60 billion for capital expenditure. The company also expects to issue approximately USD13 billion of debt, possibly on- and off-balance sheet, and do a second primary equity offering to raise an estimated USD7 billion. This last transaction would further capitalize the company and dilute the governments total capital position in the company to 80% from its current 88.5%.

Ecopetrol S.A. February 3, 2012

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Financial Summary Ecopetrol S.A.
(USD Mil., As of Dec. 31) Period-End Exchange Rate Average Exchange Rate Profitability Operating EBITDA Operating EBITDAR Operating EBITDA Margin (%) Operating EBITDAR Margin (%) FFO Return on Adjusted Capital (%) Free Cash Flow Margin (%) Return on Average Equity (%) Coverage (x) FFO Interest Coverage Operating EBITDA/Interest Expense Operating EBITDAR/Interest Expense + Rents Operating EBITDA/Debt Service Coverage Operating EBITDAR/Debt Service Coverage FFO Fixed-Charge Coverage FCF Debt Service Coverage (FCF + Cash and Marketable Securities)/Debt Service Coverage Cash Flow from Operations/Capital Expenditures Capital Structure and Leverage (x) FFO Adjusted Leverage Total Debt with Equity Credit/Operating EBITDA Total Net Debt with Equity Credit/Operating EBITDA Total Adjusted Debt/Operating EBITDAR Total Adjusted Net Debt/Operating EBITDAR Implied Cost of Funds (%) Secured Debt/Total Debt Short-Term Debt/Total Debt Balance Sheet Total Assets Cash and Marketable Securities Short-Term Debt Long-Term Debt Total Debt Equity Credit Total Debt with Equity Credit Off-Balance Sheet Debt Total Adjusted Debt with Equity Credit Total Equity Total Adjusted Capital Cash Flow Funds from Operations Change in Operating Working Capital Cash Flow from Operations Total Non-Operating/Nonrecurring Cash Flow Capital Expenditures Dividends Free Cash Flow Net Acquisitions and Divestitures Other Investments, Net Net Debt Proceeds Net Equity Proceeds Other Financing, Net Total Change in Cash Continued on next page. Source: Ecopetrol S.A. 10,725 (112) 10,613 (9,857) (2,852) (2,097) (6,164) 5,767 927 399 (1,167) 6,480 1,008 7,488 (5,438) (1,997) 53 (6,835) 5,576 1,455 (240) 10 2,757 1,521 4,278 (5,969) (4,135) (5,826) (4,190) 7,419 2,862 19 324 608 5,445 (142) 5,303 (3,407) (2,365) (470) (1,619) 144 423 (1,522) 4,136 397 4,533 (1,492) (2,157) 884 (2,423) (19) 2,583 (1) 1,023 43,830 2,217 4,033 4,655 4,655 4,655 24,816 29,471 35,841 1,942 562 4,083 4,645 4,645 4,645 21,792 26,437 27,195 1,744 214 2,797 3,011 3,011 3,011 16,403 19,414 21,658 940 125 2 127 127 127 15,503 15,630 23,841 1,858 2 2 2 2 13,285 13,287 0.4 0.3 0.2 0.3 0.2 4.8 0.1 0.7 0.5 0.3 0.5 0.3 2.0 0.1 1.1 0.6 0.2 0.6 0.2 4.1 0.1 (0.1) (0.1) 15.5 1 (0.4) (0.4) 1 52.5 72.7 72.7 18.2 18.2 52.5 (2.3) 0.4 1.1 85.3 118.1 118.1 14.2 14.2 85.3 0.2 3.2 1.4 43.8 82.9 82.9 19.2 19.2 43.8 (20.7) (14.5) 0.7 554.0 732.7 732.7 53.5 53.5 554.0 (3.4) 3.6 1.6 499.8 1,550.4 3.0 2,779.6 2,779.6 15,150 15,150 48 48 35 (7) 33 9,077 9,077 41 41 25 0 22 5,342 5,342 38 38 15 (41) 15 7,215 7,215 42 42 31 (3) 41 4,916 4,916 46 46 32 8 22 LTM 9/30/11 1,925.20 1,834.93 2010 1,918.75 1,897.80 2009 2,043.00 2,153.20 2008 2,248.70 1,967.83 2007 2,018.00 2,075.16

Ecopetrol S.A. February 3, 2012

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Financial Summary Ecopetrol S.A. (Continued)
(USD Mil., As of Dec. 31) Income Statement Net Revenues Revenue Growth (%) Operating EBIT Gross Interest Expense Net Income Source: Ecopetrol S.A. 31,906 44.3 12,123 208 7,396 22,114 56.6 6,786 77 4,216 14,121 (18.0) 3,657 64 2,319 17,225 60.1 6,311 10 5,910 10,762 4,234 2,496 LTM 9/30/11 2010 2009 2008 2007

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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