Moody’s modifies Ecopetrol’s global credit rating to Ba1; changed outlook to stable

Moody’s assured that its decision to lower Ecopetrol’s rating reflects a change in the company’s financial policy, as leverage has increased simultaneously with current dividend distributions and the implementation of an ambitious capital investment plan spanning the next three years.

According to the rating agency, this could deteriorate the company’s liquidity position or lead to greater indebtedness. The decline also reflects the recording of negative free cash flow in 2023 and Moody’s expectation that Ecopetrol will continue to record negative free cash flows into 2025.

Moody’s assured that Ecopetrol has increased its debt levels to finance its expansion, including the acquisition of ISA. However, he acknowledges that the capital investments have not translated into a similar increase in the company’s ebitda.

It notes that debt increased at a compound annual growth rate of 22 percent during 2019-2023, while ebitda only grew at 11 percent. The increase in debt has also led to lower interest coverage of 8.3x in 2023, compared to 12.6x in 2022.

Given the Moody’s expects Ecopetrol to continue financing its ambitious capital investment plan with debt In a context of high interest rates, interest coverage will further decrease to 7.3x, on average, by 2024 and 2025.

Moody’s also recognizes that some of Ecopetrol’s planned projects, particularly those involving natural gas, carry increased execution risk due to their deepwater offshore location.

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After learning of Moody’s decision, Ecopetrol assured that The price of Ecopetrol bonds already reflected the same risk of the new Moody’s rating (one level below investment grade) due to Ecopetrol’s global ratings from Fitch Ratings (BB+) and S&P Global Ratings (BB+) generated since 2021.

The company also ensures that no significant impact on the share price is expected, given that this group of investors prioritize business performance over risk rating announcements. Additionally, the movements of said asset are mainly associated with oil prices.

“Ecopetrol ratifies its commitment to efficient management of its resources, compliance with the 2024 plan and the responsible management of its liquidity position and debt metrics,” the oil company stated.

Likewise, the company stated that it will continue to focus its efforts on compliance with the efficiencies and cost control plan in 2024.

The reduction also considers that the distributions by Ecopetrol of dividends above its current policy of 40-60 percent over the last three yearsat the same time that debt levels have increased, demonstrates a more aggressive financial policy.

These cash outflows have been partially offset by transfers from the National Government (Baa2 stable) to cover fuel subsidies. However, Moody’s recognizes that, Available cash has been used to pay dividends rather than reduce debt or strengthen the company’s liquidity position.
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​Moody’s also commented that Ecopetrol’s Ba1 ratings continue to reflect the company’s position as Colombia’s leading oil and gas producer. since it represents more than 60 percent of the country’s production and close to 100 percent of the supply of petroleum products, in addition to its important energy transmission business in Colombia and other Latin American countries.

Likewise, Moody’s assumes a high probability that the company will receive support from the Government and the existence of moderate dependence in the event of default between the two entities. This assessment results in a three-notch increase in Ecopetrol’s rating to Ba1 from its base credit risk of b1.
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Ecopetrol’s liquidity position is adequate, according to Moody’s. During 2023, Ecopetrol recorded negative free cash flow of $3.4 billion financed by a debt increase of $3.8 billion given its unprecedented capital investments.

Ecopetrol’s cash position as of December 2023 was $3.6 billion. Moody’s expects that in 2024 the company’s cash generation, along with government transfers to offset fuel subsidies, will be enough to cover cash obligations plus annual capital expenditures of about $6 billion, according to the company. financial guidance of the management team, and dividends.

However, Moody’s expects that liquidity could remain tight over the next two years, based on its expectation that capital expenditures will remain around $6 billion and whether dividend distributions continue to exceed the distribution policy.

The rating action also takes into account that, although The company was slow to refinance the maturities of 2023 and 2024, It has already refinanced those for 2025. The next major debt maturity is in 2026, of about $2.8 billion.

Moody’s estimates that Ecopetrol’s financial obligations will continue to be supported for access to global and local capital markets, and for the support of the government.

Ecopetrol’s Ba1 ratings also take into account the strong and relatively stable cash flow of its power transmission company, ISA, and its transportation and logistics subsidiary, Cenit, which includes Oleoducto Central (Ocensa).

The stable outlook on Ecopetrol’s ratings reflects Moody’s view that its credit profileor will remain virtually unchanged for the next 12 to 18 months.