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TEXT-S&P affirms Ecopetrol 'BBB-' rating, outlook remains positive
December 11, 2012 / 8:40 PM / 5 years ago

TEXT-S&P affirms Ecopetrol 'BBB-' rating, outlook remains positive

Overview
     -- Ecopetrol S.A. continues to play a significant role in
Colombia's economy as the largest company in the country and the main supplier
of oil-derived products in the local market. We expect this to continue.
     -- We are affirming our 'BBB-' issuer credit rating on Ecopetrol. The 
outlook remains positive.
     -- We are also affirmed our 'BBB-' issue rating on the company's senior 
unsecured debt.
     -- The positive outlook on Ecopetrol reflects that on the Republic of 
Colombia. 

Rating Action
On Dec. 11, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 
issuer credit rating on Ecopetrol S.A. The outlook remains positive. At the 
same time, Standard & Poor's affirmed its 'BBB-' issue rating on the company's 
senior unsecured debt. The rating affirmations follow our regular annual 
review.

Rationale
The rating on Ecopetrol is based on the company's stand-alone credit profile 
(SACP), which we assess at 'bbb-', and on our view that there is a high 
likelihood that the government of the Republic of Colombia (foreign currency 
rating BBB-/Positive/A-3, local currency rating BBB+/Positive/A-2) would 
provide timely and sufficient extraordinary support to Ecopetrol in the event 
of financial distress. 

In accordance with our criteria for government-related entities, our view of a 
high likelihood of extraordinary government support is based on our assessment 
of the following:
     -- Ecopetrol's very important role in Colombia, given its position as the 
largest company in the country and the main supplier of oil-derived products 
in the local market; and
     -- Ecopetrol's strong link with the government,  despite the company's 
clear corporate governance and independent management team.

Ecopetrol's SACP reflects the company's leading position in Colombia's oil and 
gas industry, its low production costs, its large reserve base and strong 
reserve replacement, and its proven access to capital markets. The rating also 
reflects Ecopetrol's exposure to commodity price volatility and its aggressive 
expansion plans. We assess the company's business risk profile as 
"satisfactory," its financial risk profile as "intermediate," and its 
management and governance as "strong."

Ecopetrol is a vertically integrated oil company, and we expect it to continue 
playing a key role in the local energy supply market in Colombia. The company 
is engaged in an aggressive expansion plan, which includes estimated capital 
expenditures of approximately US$80 billion from 2012 to 2020 in oil and gas 
exploration and development in Colombia and abroad, as well as in refining and 
transportation infrastructure locally. The company's goal is to increase its 
daily output of hydrocarbons to approximately 1 million barrels of oil 
equivalent per day (boepd) by 2015 and 1.3 million boepd by 2020.

The company faced some operations-related difficulties in third-quarter 2012, 
which caused delays and negatively affected its total production levels. 
However, the company's total production increased slightly 1.6% to 743.1 
million barrels of oil equivalent per day (mboed), compared with 731.5 mboed a 
year earlier. Although we view Ecopetrol's capital expenditure program as 
aggressive, we don't expect it to negatively affect company's financial 
performance due to the company's manageable business plan combined with market 
conditions where oil prices are at more than US$70 per barrel.
The company's key financial metrics has maintained a positive trend, with 
EBITDA interest coverage, total debt to EBITDA, and funds from operations to 
total debt of 5.3x, 0.5x, and 96.8%, respectively, compared with 3.2x, 0.6x, 
and 96.9 % a year earlier. For the next two to three years, we expect that 
Ecopetrol would be able to generate at least $8 billion to $9 billion in funds 
from operations (FFO), which will allow the company to finance its capital 
expenditures of about $8 billion annually and about $2 billion in dividends 
mostly internally. These expectations are based on our price deck for oil and 
our view that the company would continue to gradually increase its production 
levels to about 1.1 billion barrels per day in 2016 from about 750,000 barrels 
per day as of Sept. 30, 2012 (see "Revised Methodology For Oil and Natural Gas 
Price Assumptions," published Nov. 16, 2011, on RatingsDirect on the Global 
Credit Portal). Although we estimate that Ecopetrol might need to moderately 
increase its leverage (depending on actual oil prices), we foresee its debt to 
EBITDA ratio will remain at about 1.0x during the next two or three years.

Liquidity
We revised our assessment of Ecopetrol's liquidity to "strong" from 
"adequate," as defined in our criteria. Our liquidity assessment is based on 
the following assumptions and considerations:
     -- The sources of liquidity will exceed uses by a ratio of 1.6x for the 
following 12 months to 18 months under our West Texas Intermediate (WTI) price 
deck;
     -- The company will generate positive working capital during the next two 
years;
     -- Capital expenditures of about US$8.5 billion in 2012, and about US$8 
billion will be entirely financed internally during the next two years;
     -- Dividends for approximately US$2.0 billion in 2012 and afterwards; and 
     -- Very manageable debt maturities in 2013. 

Even under its aggressive capital expenditure program, we expect that the 
company will continue to generate positive free operating cash flow (FOCF) of 
about US$2.0 billion by year-end 2012. Given the company's expected large 
capital expenditures of about US$8.0 billion in 2013, we expect that FOCF will 
be lower but positive in 2013, at approximately US$1.4 billion, and to exceed 
US$500 million per year from 2014 and beyond.

Our liquidity assessment also incorporates qualitative factors, including our 
view that the company has the capacity to withstand high-impact 
low-probability events based on its sound banking relationships and 
satisfactory access to capital markets, as seen in its equity offering, which 
was completely distributed in Colombia.

Ecopetrol's cash and equivalents totaled approximately US$5.0 billion as of 
Sept. 30, 2012, compared with US$1.0 billion in short-term debt maturities. We 
estimate that the company will have FFO of approximately US$12 billion by 
year-end 2012.

Outlook
The positive outlook on Ecopetrol reflects that on Colombia. We could raise 
the rating on the company if we upgrade the sovereign. A downgrade is unlikely 
at this point based on our assessment of the high likelihood that Ecopetrol's 
main shareholder, the government of Colombia, would provide timely and 
sufficient extraordinary support to the company, if necessary, and that the 
company's SACP would have to fall below 'bb' to result in a downgrade.

Related Criteria And Research
     -- Methodology: Management And Governance Credit Factors For Corporate 
Entities And Insurers, Nov. 13, 2012
     -- Revised Methodology For Oil and Natural Gas Price Assumptions, Nov. 
16, 2011
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010
     -- 2008 Corporate Ratings Criteria, April 15, 2008

Ratings List
Ratings Affirmed

Ecopetrol S.A.
 Issuer Credit Rating                   BBB-/Positive/--   
 Senior Unsecured                       BBB-               


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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