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.