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As a sign of its intrinsic credit strength, Moody’s Ratings lowered Ecopetrol’s base credit risk assessment to b1 from ba3. Likewise, it lowered Ecopetrol’s long-term issuer rating and senior unsecured rating to Ba1 from Baa3, and changed the outlook to stable from negative.
The reasons behind the change in these ratings are a reflection of a change in the company’s financial policy, as leverage has increased simultaneously with the current dividend distribution. “The downgrade 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 towards 2025,” the rating agency said.
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Although Ecopetrol has increased its debt levels to finance its expansion, including the acquisition of Interconnection Eléctrica SA, Moody’s recognizes that capital investments have not translated into a similar increase in Ebitda of the company.
Debt increased at a compound annual growth rate (CAGR) of 22% during 2019-2023, while Ebitda only grew at a Cagr of 11%. As Moody’s expects Ecopetrol to continue debt financing its ambitious capital investment plan in a context of high interest rates, interest coverage will decline further to 7.3x, on average, by 2024 and 2025.
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Moody’s also recognizes that some of the projects planned by Ecopetrol, Particularly those involving natural gas, carry a higher execution risk due to their deepwater offshore location. Likewise, the firm expressed that the state oil company’s liquidity position is adequate as it recorded a negative free cash flow of US$3.4 billion financed by an increase in debt of US$3.8 billion given its unprecedented capital investments. Ecopetrol’s cash position as of December 2023 was US$3.6 billion.
Finally, Moody’s Rating said that it is unlikely that there will be an upgrade in the ratings, at least in the next 12 to 18 months, This is because Ecopetrol’s credit indicators are expected to remain stable. In turn, they recommended that if Ecopetrol chose to strengthen its financial policy, reduce its leverage, increase its production and keep the average life of its proven reserves stable, its rating could change.
