Ecopetrol S.

A
Industry: Oil & Gas
Valuation Date: November 1st 2019
Universidad EAFIT
| Investment summary

Fundamental player of the Colombian economy

Market Snapshot
Given an in-depth study of the Colombian company Ecopetrol
(EC), we give a HOLD recommendation, with a target price of Ticker ECOPTL CB
3,289 pesos per share, implying an expected return of 5.64% by Price (COP) $ 3,090.00
2020. To achieve this price, two valuation methods we used: Target price $ 3,289.93
discounted cash flows and the relative multiple. We gave a Market Cap (billions) $37.036
pondered weight to each one. Potencial Stock Return 6.47%
Although the company is the main oil company in the country, we Total Share Return 10.91%
only expect a five-year EPS CAGS of 3.8%. The high uncertainty
$2550-
in the global economy caused by the commercial war between the LTM Range
3565
United States and China generates a high volatility in oil prices and Expected Range $2.028
given the increase in production by the United States, the outlook Montecarlo Sim. (90%) -4.408
for oil prices does not look good. Additionally, the expectations Shares Outstanding
about the oil and gas reserves in Colombia are not favorable, 41,117
(millions)
forcing the company to look for alternatives in other countries and
thus being able to increase them.
Strategy in a low-price environment
We believe that, given the current strategy of the company, it is a priority to maintain good margins and
selectivity on new investments. This is essential, considering the downward trend in international prices of
both refined and crude products. In addition, the company has focused on maintaining a greater than or
equal to one reserve replacement ratio (RRR), since this is one of the main indicators for a healthy oil
company. We firmly consider that this strategy is feasible and that it will be the one that will provide
sustainable returns to the company and shareholders.
Sales volume and revenue
The current policy of the company to seek profitable markets and be active sellers in them has brought
results. We identify an opportunity for the company to gain positioning in the markets where it currently
operates, as we are optimistic about a recovery of the Chinese economy. However, we do not rule out the
possibility of a slowdown in the global economy since the ongoing trade tensions between China and US
fill-up the market with uncertainty. Also, despite the current trend of using "clean energy", short-term
demand for fossil fuels continues to increase, with an expected increase of 0.8% by 2019 and 1.4% by 2020.
This allows Ecopetrol to penetrate new markets and thus increase its sales abroad, which represented its
main source of revenue in 2018 being it 51% of total revenue.
The Colombian state is its main owner
Ecopetrol is a company held in the hands of the Colombian state by 88.49%. The rest is in the hands of
private companies such as investment banks or pension funds. Being a state-owned company mainly, one
would believe that its main objective is to continue in
perpetuity, thus placing the interest of stakeholders
Operation 3Q 2019
Thousands of barrels per day (Mbbl)

over the shareholders’ (as is the case of most German

companies). Additionally, as this company represents a 1400
great source of income for the state, it they must 1200
answer to the state with a maximization of value. 1000
800

Business Description 600

400
Short Description of the activity 200
Ecopetrol is an oil corporation whose activity is the 0
extraction, transportation and refinement of petroleum. Production* Sells* Refinery Transport

2018 2019
 It has the biggest market share in Colombia and is
25000Revenue Vs EBITDA per segment almost the only company in the oil midstream market
20000
(Graph 1). Furthermore, after going through difficult
times due to the BRENT international low prices
15000 during 2014-2018 (onwards: difficult times),
EBITDA

10000 Ecopetrol is now ready to expand and grow to

different parts of Latin America (LATAM), while it
5000 keeps developing its position in Colombia.
0 Geographic and business segments
0 10000 20000 30000 40000 50000 60000
The company’s main segments are transportation
Revenue and logistics (midstream), refining, petrochemicals,
biofuels (downstream), exploration and production
(upstream). Even though its production is primarily
performed on-shore, the company has been
expanding to off-shore well as well (Graph 2).
Player’s in the market
According to Bloomberg, Ecopetrol has 19 direct
competitors in the Colombian market 1 in terms of
upstream. These companies have more experience in
market and are multinational companies, which
make that Ecopetrol must play with big and more

experimented competitors.
Exportation
The highest income source of Ecopetrol is exportation, which constitutes 57% of the total income. While the
refinery only makes for 24.4% of that income, it’s the most profitable line of business (see Graph 1) and for
that reason, Graph 2 (Source: Report
the company’s 20F 2018)
forecast for 2018-2021 is to invest US$365 – US$420 million in order to expand
its downstream segment, specially, Barrancabermeja and Reficar’s refinery.
Market Strategy
Ecopetrol is focusing on reducing costs and increasing its production; a strategy that has proven itself to be
successful. For instance, during 2018 it incorporated a new subsidiary that oversaw supplying energy to all
Ecopetrol’s Group; more over in 2019 a Solar Park was added to this subsidiary in order to decrease its
energy costs, some of the highest in its business. Since 2018, and already before the difficult times,
Ecopetrol increased its production in order to achieve 720 – 730 MBOE 2 by 2021, which was agreed in its
2015 projection. Lastly, an additional objective was to take advantage of higher sales generated by 2018
higher prices.
Apart from that, as oil and gas conventional reserves in Colombia are next to run out and the regulations
about non-conventional extraction is still uncertain, Ecopetrol is looking for new opportunities for quick
production across America as it’s possible to see in Graph 2. This is what is taking place in the off-shore
Santos Basin in Brazil, the biggest off-shore in the world. Furthermore, there is Cuenca Permian (US Gulf of
Mexico), where Ecopetrol is planning to start fracking in cooperation with Occidental Petroleum in 2020;
this area produces 4 million barrels per day.
Finally, as the oil barrels price is decreasing and exhibits high uncertainty, Ecopetrol is forecasting to
increase its investment on the downstream sector, focusing on higher and less unpredictable revenues at
while it plans to produce fuels to join the environmental trend as it’s shown on its report.

1
Appendix B-4
2
MBOE: Million barrels of oil equivalent

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 Industry Overview and Competitive Positioning
Macroeconomic approach.
Oil Industry in Colombia Domestic outlook. Colombia´s economy has
18.0%
7.0% experienced a recovery and it’s expected to
6.0% continue growing. Nevertheless, during previous
13.0% 5.0% years, it has experienced a declining in

Participation
economic growth which is now starting an
Growth

8.0% 4.0%
upturn, where the real GDP growth rate jumped
3.0%
3.0% from 1.4% in 2017 to 2.6% in 2018 and is
2.0% expected to be around 3% for 2019 (Graph 3)
-2.0%
estimations. Economic activity sustained a solid
05

07

09

11

13

15

17
1.0%
20

20

20

20

20

20

20
-7.0% 0.0% expansion during the first semester of 2019
supported by increased retail sales due to robust
Oil industry growth GDP growth
domestic demand that is expected to accelerate
Participation on GDP
Graph 3 (Source: DANE)
the upcoming growth.
Strong dependence on oil industry. Oil industry is a primary source of revenue for the Colombian
government; these resources reach the government
coffers through royalty’s payments made by the oil
and mining company’s exploitation of non-renewable
natural resources. The royalties represent around COP
$92.5 billion to the state. The current exploratory
level, due to the strong dependence of the state on oil
industry is not enough to achieve a macroeconomic
and energetic stability in the long term. This is one of
the main reasons why the discussion about doing
fracking has great importance.
Unconventional resources and oil reserves play a P rices, Exchange Rate and
Revenue Dy namic
Spot

major role. The Colombian government is evaluating

Forward
Revenue

Graph (Source: own construction with Bloomberg

USD/COP

the viability of doing fracking. The first pilot tests data)

already began in October, and Ecopetrol is one of the four companies in charge of these
explorations. According to “Diario La República”3 estimates that these projects will generate COP $2.500
billion in royalties and taxes to the country in a 25 years horizon, along with 5000 new jobs. Should this
happen, the reserves would be increased from 6 to 23 years.
Industry’s Value Drivers
Supply and demand dynamic. The supply side of the market has gone down. In fact, according to the Energy
Information Administration (EIA), during the first three quarters of 2019 the production of petroleum and
other liquid fuels decreased by 1.53 MMBD (comparing September of 2018 with 2019) (see Graph 4). This
is a reduction of 1.5% Year-over-Year (YoY) of the total production. It is important to notice that the
mismatch of supply and demand of petroleum and gas and the higher volatility in both, prices and
production, have been mostly caused by several factors:
1. The shrinking in production that the Organization of the Petroleum Exporting Countries (OPEC) have
been implementing since 2016 in order to force prices up (see Error: Reference source not found). The
production had a severe decline in the first quarter of 2019, meaning a decrease of 1.8% compared to the
previous quarter, but, at the same time the price experienced an upturn.
2. The constant increase in USA production, unlike the
Supply, Demand and BRENT Prices
previous factor, forces prices down.
105.0 80 3. The ongoing economic, political and social crisis in
104.0 75
103.0
70
Venezuela, which is one of the main oil supplying
102.0
65 countries.
101.0
MMBD

BRENT Prices. This factor has led the operation of the

Price

100.0 60
99.0 55 company until now, as was mentioned before, Ecopetrol
98.0
397.0
50
Published on september 25 of 2019 45
96.0
95.0 40
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Universidad EAFIT | 3
Precios Supply Demand
reduced its market size as consequence of low BRENT prices. Moreover, the value of the company depends
directly on this matter. (see Graph 4)
Production. As the production determines how many
OPEC Vs Non OPECGraph 4 (Source:
Production EIA)
(mmbd)
barrels can be sold, its increase or decrease dictate the
company’s value. In times of low production, companies
decrease their investment, reducing its growth and as a 60
result, its value. (see Graph 5) 50
Exploration. The way that companies can guarantee their 40
30
existence, is granted by the existence of their main 20
activity, in the case of Ecopetrol is produce petroleum. In
that way, the exploration yields resources to remain in the
market, reducing the uncertainty of the future production.
For that reason, it’s important the Replace Ratio (RR) non opec opec
mentioned before.
Graph 5 (Source: EIA)
Competitive Positioning
Oligopolistic market. Oil and gas industry resemble to an oligopolistic market; this means that greater
suppliers have a significant influence over the market. Worldwide, Ecopetrol has no power or control over
the market, as a matter of fact, Ecopetrol is a price taker, which explains why the revenue of the company is
highly dependent on prices. On the other hand, in a domestic context, Ecopetrol is the biggest oil producer,
with a market share of 54.25% in 2018 (refer to Appendix: B-2: Market share Ecopetrol).
Entry barriers. The barriers to entry the oil and gas industry are very strong, these barriers include, large
capital requirements, economies of scale, high resource ownership, patents, governments regulations, among
others. These restrictions make more difficult the entry of new competitors.
Value chain positioning. Ecopetrol operates through 3 segments, upstream, exploration and production;
midstream, transport and logistic, and downstream, refinery and products, (refer to figure 1). In these
segments, the company faces competition from small local players, but mostly from large foreign
multinational (refer to appendix xx). In a local outlook, as was pointed before, Ecopetrol has great
advantage, we believe the company has achieve well established presence and operational scale that will
allow it to maintain its market share. As an international player, Ecopetrol is making efforts in order to gain
competitiveness, increasing the size of its operation with new and ambitious projects.

Corporative Governance
Corporative governance and social
28.34 %
responsibility 65.29% 6.37%
Group Structure. 88.49% of
Ecopetrol is owned by the ESG Index
Colombian government, Upstream Midstream Downstream
100
11.47% is owned by private 80
ESG Score

industries and the 60

Figure 1 (Source: own construction with Financial Report
40Data)
remaining 0.04% is
20
owned by the public
0
. There is no evidence 2014 2015 2016 2017 2018
that indicates pressure from the government for self-benefit. Years
(Appendix C-1)
Board of Directors. It is made up by 8 independent members and
Median Ecopetrol
1 dependent. Two of the independent’s members are selected in
a special way. The first is nominated by the departments with hydrocarbons where Ecopetrol operates and
the second is selected by the minority shareholders of greater representation. The dependent member is the
representative of the largest shareholder: The Colombian state, therefore it is the General Secretary of the
Ministry of Finance and Public Credit (see Appendix C-2). Graph 6 (Source: Eikon)

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ESG Score. Ecopetrol has been decreased his ESG score. However, it is over the median, maintaining a
good international perception (see Graph 6 and Appendix C-3)
Environmental sustainability and social responsibility
Environmental. Ecopetrol’s framework is focused on United Nations Sustainable Development Goals 2030.
For example, it has 128 hectares of land dedicated to preserve the tropical forest, where native animals and
native vegetation are taken care of, contributing with goal 13: climate action. Also, Ecopetrol has
implemented the Global Reporting Initiative (GRI) presenting this and other initiatives worth more than US
$ 200 million for 2018 (Ecopetrol S.A, 2018). For 2019 and 2021, it expects to have invested US $ 615
billion in environmental and sustainability (Ecopetrol S.A, 2018). Furthermore, it expects to have reduced
energy costs by US $ 100 million for 2021 at the same time to have invested in renewable energy, like Solar
Park in Meta.
Social Responsibility. Ecopetrol applied the guiding principles of the United Nations (UN) in all its
operations. In 2018, the company made risk evaluations on the Oriente and Orinoquia activities, which
represents 79% of its operation. As a result, Ecopetrol will execute risks plans to mitigate potential risks and
apply the self-diagnosis designed by UNICEF for children and adolescents, to incorporate that into future
actions.
In the last year, the company carried out a pilot exercise where it diagnosed Human Rights situation of the
key suppliers. It was found that 88% of its suppliers were in line with the politics of Ecopetrol and the gap is
expected to shrink with the rest of suppliers. It also implemented politics that allowed gender inclusion and
moved forward in the same direction with local ethnic communities where it operates.

Valuation
A Hold recommendation is given when a target price of COP 3289.93 is obtained, implying a growth of 647
bp compared to the closing price of COP 3090 on November 1, 2019. This price was obtained using FCF
method and relative multiples, giving more significance to FCF. We believe it measures the company more
accurately, as it captures key fundamentals about the company such as expected investment and cost
reduction strategy. Therefore, we assign it a weight of 85% over the expected price.
For the projected period 2019E-2025F we assume that the tensions between the United States and China are
not going to have a significant impact on the economy's dynamism, leading to the demand for fossil energy
resources not decreasing (See Graph 7). This allows Ecopetrol to maintain its growth in sales volume in the
foreign markets, which represented the main source of revenue for 2018 (51% of total revenue). We expect
foreign sales to present a CAGR of 4.305%, 326 bp higher than the CAGR of projected domestic sales,
which in turn implies a total revenue growth of 2.78% per year.

EBITDAX Margin
60
50
40
30
20
10
0
A A A A A A A A A A A A
16 016 017 017 017 017 018 018 018 018 019 019
20 2 2 2 2 2 2 2 2 2 2 2
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Industry EBITDAX Margin (%) Ecopetrol SA EBITDAX Margin(%)

Graph 7 (Source: Bloomberg)

Above-average margins of industry

We expect the company's operating and gross margins to remain above those of the industry (Appendix F-
2), with an emphasis on Ecopetrol's operating improvement. We expect the average EBITDAX margin to
increase 987 bps over the next few years.
Capex

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For the Capex estimation we prepared an investment budget(Appendix E-7) which reflects the company's
current strategy of focusing on investments in natural resources in order to obtain a higher level of crude oil
and gas reserves to be exploited (See Error: Reference source not found). For the forecast we used the
respective total investment per barrel equivalent as a metric. This gives us enough information on the size of
the investment to generate new barrels.
On the other hand, depreciation was calculated on   SEGMENT INVESTMENT STRUCTURE
a straight-line basis using the value of fixed assets   2016A 2017A 2018A 2019E-2025F
from the previous period, respectively. Under this
set of depreciations, we estimate the net
Upstream 57.96% 76.13% 84.87% 81%
depreciation of the investment. Therefore, we
Downstream 19.02% 10.02% 10.02% 11%
expect the highest level of Capex to be made in the
current year (2019). In the following years, it is Midstream 23.02% 13.85% 13.85% 8%
expected to continue with a level of investment that
Table 1 (Source: own construction with Financial Report 2018 data)
will allow the company to replace its operating
assets and maintain the reserve recovery rate.
Taxes
Given the country's fiscal uncertainty, it was decided to take the effective rate at which the company's last
period results were taxed, which was 38%. This is the lowest tax rate along with the 2014 rate at which
profits have been taxed and it is similar to the nominal income tax rate imposed for 2018 and subsequent
years (33%).
Wacc. For the estimation of unleveraged beta, we elaborated a portfolio with the companies that compose
the oil and gas sector that have ADR in the United States. We used the rolling Beta methodology for a
horizon of 3 years to observe its behavior over time and begin from its reversion to the average (Appendix
E-11), in order to estimate its most likely value and less standard error in its estimation. For the risk
premium we simulated possible results of the S&P 500 index and through Gordon's discount model we
obtained the implicit yield in our simulations (Appendix E-11). For risk-free rates we used forward rates of
the US zero coupon curve as a reference. The return obtained from the assets was added to a country risk
premium from the difference between Yankee bonds and the adjusted inflation between the United States
and Colombia.
For the estimation of the after-tax WACC we started from the assumption of a continuous refinancing. For
the leverage level of the company a circular reference was used on the estimated value of the company and
its debt level, so that the values converge to a value year by year (See Error: Reference source not found).
2019E 2020F 2021F 2022F 2023F 2024F 2025F
E[Bu] 0.759 0.759 0.759 0.759 0.759 0.759 0.759
Risk-free forward rate 1.794% 1.724% 1.609% 1.546% 1.521% 1.532% 1.568%
Long run E[ERP] 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15%
E [Country Risk Premium] 4.12% 4.12% 4.12% 4.12% 4.12% 4.12% 4.12%
Ru USD with country risk premium 10.59% 10.52% 10.40% 10.34% 10.31% 10.32% 10.36%
Inflation COP 3.50% 3.40% 3.50% 3.10% 3% 3% 3%
Inflation USD 1.80% 2.10% 2.10% 2% 2% 2% 2%
Ru COP 12.43% 11.92% 11.91% 11.53% 11.39% 11.40% 11.44%
E [Tax Rate] assumption 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%
E [Cost of debt] AA 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
D/Vl 30.55% 27.23% 26.98% 26.39% 24.30% 23.10% 21.90%
Wacc 11.64% 11.22% 11.21% 10.84% 10.76% 10.81% 10.87%
Re 14.44% 13.48% 13.42% 12.85% 12.57% 12.50% 12.47%

Terminal value. For the estimation of the terminal value of the company, the expected value of the
reserves that the company will have at the end of 2025 was considered (Appendix E-8). To estimate this
expected value, an approximation was used based on the history of the company's RRR. The reserves that
were obtained were the sum of proven and unproven reserves 1P. These reserves were valued by a multiple
EBITDA per barrel to reflect the EBITDA that the company would obtain for each one of those barrels that

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 it could put on the market. Given these results, an implicit growth rate in perpetuity of 4.85% was obtained.
(Appendix E-12)
Multiple analysis. In the analysis by EV/EBITD
P/E EV/NOPAT PEG
multiples the companies that were chosen   A
for it, were the ones that Bloomberg’s 15.1 4.0 39.9 2.4
platform recommends as peers of Median 1 7 6 3
10.4 5.5 43.0 2.1
Ecopetrol and adding others to own Ecopetrol 8 4 7 5
criteria, belonging them to the oil industry 2,492.9 3,223.1
and from the American continent. Price Table 3 (Source: 4Bloomberg)5
4,502.04 3,523.80
Additionally (Appendix E-13), 4 multiples Average 3,435.4
were chosen: P/E, EV/EBITDA, EV/ price 8 * MM = Millions
NOPAT and PEG and with them an average price was found for Ecopetrol COP 3.435. Although this price
was close to the one obtained by the FCF it was given little significance because those indicators don’t take
into account the main driver of the stock price in the oil industry: Reserves. However, when the
EV/Reserves were found, atypical values were obtained given the size of the companies, therefore we
choose not to use it.
Financial analysis
Prices and sales volume growth BRENT vs Sales Volume Growth
70.00 4%
In an environment of low prices of crude oil and its 60.00 3%
derivatives, it is essential that Ecopetrol maintains 50.00 2%

SALES VOLUME GROWTH

a good differential for its barrels with respect to 40.00 1%
international prices. This differential must satisfy 30.00 0%
BRENT

the price demands of the group's clients and be 20.00 -1%

10.00 -2%
competitive with its peers. We expect them to
0.00 -3%
continue with their outstanding performance by A A E F F F F F F
maintaining adequate differentials for the valuation 17 18 019 020 021 022 023 024 025
20 20 2 2 2 2 2 2 2
period. In relation to the group's total sales volume, BRENT ∆SALES VOLUME
there was a slowdown in the years following the YEARS
fall in crude oil prices; however, the company
quickly adapted to the new price environment Graph 8 (Source: team estimation)
and recovered its growth in sales volume. That
´s why we expect a CAGR 2019E-2025F of 2.8% in total sales volume, and if Midstream is excluded, the
CAGR would drop to 2.43%. (See Graph 8)
Key financial analysis
The company´s current strategy will lead to sustainable returns already seen during the good oil years
(Appendix F-1), but this time guided by a high operational efficiency achieved by the company. Gross
margin and operating expenses are the main actors in this improvement. This is based on an expected gross
margin growth of 0.79% per year on average (Appendix F-2). This firstly results in an operating margin
capable of providing a sufficiently high profitability to generate value. Secondly, we expect an average
improvement in the turnover of the capital employed, thus contributing to a sustainable ROCE throughout
the projection, which would indicate a more optimal use of capital employed by the company (See Graph
9).
CAPITAL EMPLOYEE($MM)

INVESTED CAPITAL($MM)

CAPITAL EMPLOYEE vs ROCE ROIC-RONIC

200,000 16%
20% 100,000
100,000 14%
10%
Axis Title
ROCE

- 12%
- 0%
20 E
20 F
20 F
20 F
F

VE 20 F
M F
TS

A A E F F F F F F
19
20
21
22
23

4
S T 25

17 18 19 20 21 22 23 24 25
02

EN
20

20 20 20 20 20 20 20 20 20
2
IN

YEARS
RE

YEARS
TU
FU

Capital Employee ROCE

INVESTED CAPITAL ROIC

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We see with optimism the return on invested capital, which, like ROCE, is affected by the price of oil, thus
obtaining an average ROIC of 13.5% in the next six years. This results in an improvement of 482 bp over
the average obtained in the last 5 years, mainly due to a strengthening of EBITDAX. An improvement on
new investments is also expected, obtaining a RONIC of 13.74%. This is explained under the panorama of
good allocations in future capital expenditures. Investments that add value generating greater reserves of
crude oil and gas are taken into consideration. (see Graph 10).

Strong cash position.

In the last two years, the cash generated by the company
has been correctly managed, which implies an efficient FCF Margin Vs FCF Profiability
implementation of the previously mentioned strategy 25.0%
(Appendix D-3). An average FCF/Sales margin of 20.0%

FCF MARGIN
15.0%
16.36% was obtained (2016A-2018A), but this margin is 10.0%
expected to decrease slightly in the following years, to 5.0%
13.68% (Fall of 267 bp), due to the increase in Capex 0.0%
2016 2017 2018 2019 2020 2021 2022 2024 2025
investment that the company plans to make 2019E- E F F F F F
2025E. However, we believe that this investment will be YEARS
Graph 10 (Source: own construction)
properly carried out by the management team and will FCF/Sales FCF PROFIABILITY
play an important role in the coming years by keeping Graph 11 (Source: team estimation)
the operation in progress and good levels of reserves (see
Graph 11).
Shareholders' compensation. Based on the strength we
Share Remuneration expect the company to have in its unlevered cash flows, we
250 10.00%
have a prospect that it will pay a solid dividend over the next
Dividend Per Share

200 8.00%
150 6.00% six years as remuneration to its shareholders for past periods
Dividend Yield

100 4.00% in which it did not pay dividends given the context in which it
50 2.00%
- 0.00% was going through, we should not rule out the possible risks
leading to the dividend not being paid (Graph 12).
E

F
19

20

21

22

23

24

25
20

20

20

20

20

20

20

Forecasted Years Investment Risks

Market Risks Graph 12 (Source: team estimation)
Dividend per share Dividend yield
1. High Volatility on BRENT Prices (MR 1). As Ecopetrol’s
production is selling at BRENT prices, the volatility has direct effects on incomes and decisions; the
relations between United States and the OPEP would explicate the actual volatility on Brent prices.
United States is producing many barrels per day thanks to fracking; it makes the Brent prices goes down.
Low BRENT prices in 2014 have pushed the company to produce less and of course, reduce exploration
and reserves.
2. Technology risk (MR 2). People want to protect the world using less contaminant materials
(commodities). The changes in actual fuel market, is going to obligate Ecopetrol to move to other sector
(renewable energy) to affront this situation and continue operating in the future.
Environmental Risks
1. Armed Conflict (ER 1). The big majority of the company’s operations is in Colombia, a country that has
had an internal armed conflict for more than 50 years, and as a result, part of its operational loses have
been due to terrorist attacks. Although the peace agreement between the government and the main armed
group brought some “peaceful times” that decreased the number of attacks to the company, the rearmed
part of this guerrilla is now generating uncertainty about new possible loses.
2. Changes in Regulation (ER 2). Changes are not only a risk for the company’s operation in Colombia, but
also for the whole activity across America. In Mexico, new legislation that forbade foreign companies to
produce oil and limited them to transportation was put into effect. This caused Ecopetrol to stop
investments in Mexico. In Brazil, the government repealed the law that compelled foreign companies to
exclusively contract local logistics work force. This has brought about new plans to bigger investments

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 in this country. Concerning Colombia, insufficient conventional reserves have posted the question about
fracking. Should regulations for fracking practices not be approved in the medium term, the company
would not be able to produce in the country any longer.
Operational Risks
1. Low Replace Rate (OP 1). To keep the Operating Information 2018 2017 2016 2015 2014
company afloat, it should replace every 1P Reserves 129 126
-7% 6%
146
replacement ratio % % %
barrel extracted with new wells. This
Exploratory Wells 17 20 6 5 28
exploration part or upstream is measured in
Table 4 (Source: Financial Report 2018)
reserves replacement ratio (RRR). If the
company cannot invest in exploration to increase its reserves, it will incur in the risk of ceasing
operations, which already occurred in 2014 and 2015 due to the materialized risk of low BREND prices
(see Error: Reference source not found).
2. Unsuccess Exploration (OP 2). This happens when explorations for new wells do not result in new
reserves or these are not profitable.

    MR 2     With the intention of give a better idea of the risk before

High

mentioned, the next figure shows the relationship between

    MR 1     the risk and the impact.
Probability

Medium

      ER 1   Sensitivity of the stock price

  ER 2   OP 2   Risks in the assumptions
Recognizing that there is a possibility that our assumptions
Low

  OP 1       will not be maintained, we made the decision to stress the

model in the assumptions managed, this to evaluate the
Low Medium High
Impact possible impacts that may have the drivers identified.
Figure 2 (Source: own construction) (Error: Reference source not found)
Monte Carlo Simulation
A re-sampling analysis was made for the
historical amounts sold in each of the segments,
obtaining relevant parameters (Appendix F-5) for
the simulation through a general beta distribution

Montecarlo Expected Price 3,288

Montecarlo probability of loss (Under COP
3090) 43.59%
Montecarlo probability of gain (Above COP
Table 5 (Source: own estimation)
3090) 56.41%
adjusted as a proxy. The probability distribution
of the prices was also evaluated taking into
account the new market conditions, in this order
of ideas the simulation of Monte Carlo is
elaborated for the valuation. (See Graph 13)
After this we believe that Ecopetrol's stock is
highly risky since the probability for the price to
fall below 3090 Colombian pesos is 43.59%,
implying a loss. Where the most sensitive
variables are the international price of Brent crude, the quantities sold of refined products domestically,
barrels of crude in foreign markets and the rate of replacement of reserves. (See table 5)

Graph 13 (Source: own estimation)

Universidad EAFIT | 9
Sensitivity analysis
An analysis of sensitivity to the two variables that we consider to be the most relevant for the model used. In
order to give the possible values, the historical values of the company's WACC and the most possible values
for the reserves replacement rate (RRR) were taken into account (Appendix F-4).
The results show that there are high expectations in the performance of the company to maintain the RRR
greater than or equal to one, such expectations are above that the company achieves its optimal average cost
of capital. We conclude that, if the company is unable to maintain a reserve replacement rate greater than or
equal to one by the close of 2019 our recommendation would be to SELL

Appendixes: Table of contents

Appendix A......................................................................................................................................................12
A-1: CANVAS.............................................................................................................................................12
A-2: Analysis per segment...........................................................................................................................13
A-3: Products...............................................................................................................................................13
Appendix B: Industry overview and competitive positioning.........................................................................14
B-1: Porter analysis......................................................................................................................................14
B-2: Market share Ecopetrol........................................................................................................................15
B-3: SWOP analysis.....................................................................................................................................16
B-4: Principal Competitors..........................................................................................................................16
Appendix C: Corporate Governance................................................................................................................17
C-1: Company structure...............................................................................................................................17
C-2: Board of directors.................................................................................................................................18
C-3: ESG index............................................................................................................................................19
Appendix D: Key Financials............................................................................................................................19
D-1: Balance sheet.......................................................................................................................................19
D-2: Income statement.................................................................................................................................20
D-3: Free cash flow......................................................................................................................................21
D-4: Foreign sales volume...........................................................................................................................22
D-5: Domestic sales volume........................................................................................................................22
D-6: Transport volume.................................................................................................................................22
D-7: Refined volume....................................................................................................................................22
Appendix E: Valuation Assumptions...............................................................................................................22
E-1: Macroeconomic assumptions...............................................................................................................22
E-2: Income statement assumptions.............................................................................................................22
E-3: Debt coupon.........................................................................................................................................23

Universidad EAFIT | 10
 E-4: Debt assumption...................................................................................................................................23
E-5: CAPEX.................................................................................................................................................24
E-6: Property, plant and equipment (PPP)...................................................................................................24
E-7: Investment budget................................................................................................................................24
E-8: Crude and gas reserves.........................................................................................................................25
E-9: EBITDA to crude.................................................................................................................................25
E-10: Investment Fracking Pilots Tests.......................................................................................................25
E-11- Expected market return......................................................................................................................25
E-12- Terminal Value..................................................................................................................................26
E-13: Peers...................................................................................................................................................26
Appendix F: Financial Analysis.......................................................................................................................26
F-1: Dupont ROE- ROA..............................................................................................................................26
F-2: Dupont ROIC........................................................................................................................................27
F-3: Net production......................................................................................................................................27
F-4: Sensitivity analysis...............................................................................................................................28
F-5: Montecarlo simulation..........................................................................................................................28
F-6: Catalyst.................................................................................................................................................29
F-7:Stochastic simulations...........................................................................................................................29

Appendix A
A-1: CANVAS
 Key allies Key activities Value Customer Customer
propositio relation segments
 Contractor  Upstream: n
 Their own 65.29%  Efficient
companies  Midstream: attention  Refineries
and 28.34$
 High
subsidiaries  Downstream:6.  Iso-9002  Estate
quality
 The 37% certification.
products.
Colombian  Strict
State * These percentages
were calculated in capital
terms of each discipline.
operation's  “Green
contribution to the production”
EBITDA.  Society
investment

Universidad EAFIT | 11
 Key assets Channels
 High quality  Direct
employees relation
 Pipelines
 Natural
resources
 Property, plant
and equipment
 Refineries

Expenses Revenues:

Salaries, transport, fees, sold good Middle distillates, gasolines,

costs, administration, financials expenses,
operational expenses, impairment expenses,
exchange rate expenses
transport service, natural gas, plastic
and rubber, crude oil, G.L.P and
propane, fuel oil, asphalts, aromatics,
polyethylene, services and other
income gas contracts

A-2: Analysis per segment

  EBITDA per segment

  2014 2015 2016 2017 2018 1T 2019 2T 2019
18,71 2011
Upstream 0 8,494 8,383 13226 0 4564 5486
Midstream 4,514 7,696 7,788 7910 8731 2573 2501
Downstrea
m 1,367 1,907 1,848 1940 1961 220 363

  Revenue per segment

  2014 2015 2016 2017 2018 1T 2019 2T 2019
27,46 3575
Upstream 45,156 31,477 8 1 49589 11598 13532
10,64 1059
Midstream 8,344 10,845 9 8 11354 3052 3212
Downstrea 27,173 23,246 24,82 2864 37011 8552 10225

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m 4 4

Participation
Participationover
overRevenues (2018)
EBITDA (2018)
6%
Liquid fuels Petrochemical and industrial
38%

28% 51%

12%
65%

Upstream Midstream Dowsntream

Upstream Midstream Dowsntream
Current gasoline Extra gasoline
Ordinary Diesel Diesel extra
Kerosene Fuel oil
Aliphatic solvents Benzene Toluene
Jet A-1 Marine Diesel
Mixed Xylenes Orthoxylene Propylene
Aviation gasoline grade 100
Cyclohexane Lubricant bases Paraffin waxes
Asphalts Rotate Low-density polyethylene

A-3: Products

Others

Liquefied petroleum gas (LPG) Natural gas

Appendix B: Industry overview and competitive positioning

B-1: Porter analysis

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Porter
Forces Analysis Grade
Given the high initial investment costs and the fact that the
Potential of industry is already mature, making entering in this industry is
new entrants extremely difficult. Entry barriers make this industry one of the
into the most complex to begin in. Additionally, the legal issue plays a
industry crucial factor, where the requirements are extremely rigorous
given the social, economic and ecological impact they generate. 1.5
In the Colombian oil industry Ecopetrol exercises hegemony over
the rest of the companies, which is why at the local level does not
Competitio present significant competitors. However, at the international level
n in the there is a drastic difference given the size and financial muscle of
industry the main oil companies such as Chevron, Petrobras and Exxon. 4.1
Ecopetrol has a high power over the clients speaking regionally,
mainly because its majority client is the Colombian government,
which depends directly on its offer. For the foreign sales the
situation is similar, this due to the specific characteristics that
Power of Ecopetrol products have, making it difficult for a refinery to get
customers another supplier. 2.1
The company has great bargaining power over its suppliers,
because most of its requirements in goods and services are
satisfied by the local market and since it is the largest company in
the country allows it to negotiate with its suppliers (not to say
impose itself over them). Additionally, it has several subsidiaries
 Power of along its value chain, which allows the company to reduce their
suppliers cost and not depend on external companies. 1
With the wave of "clean energy" Ecopetrol faces a very important
challenge in order to remain at the forefront of this type of energy,
however, in the short term the increase in renewable energy fails
Threat of to meet the increase in global energy demand, so Ecopetrol has the
substitute possibility even to continue to grow in sales without necessarily
products being threatened. 3.3

B-2: Market share Ecopetrol

54.26%
of crude productionUniversidad EAFIT is
in Colombia | 14
from Ecopetrol. Source: ACP
 Ecopetrol production/ National production
69%
68%
67%
66%
65%
64%
63%
62%
61%
60%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

B-3: SWOP analysis

Scalability problems Largest Colombian company
Bad relation with sindicate Among the 5 largest in Latin America
Among the 50 largest in the world
High government support
Margins above industry
100% control over Colombian pipelines

W S

Incursion in the renewable energy sector

Acquisition of reserves abroad
Increase in global energy demand
Association with other companies to venture into other
O T
High dependence on oil price
Low reserve expectations in Colombia
Strong competition from big companies
High fiscal risk
countries
Wave of renewable energies

B-4: Principal Competitors

Scop Origen
Competitor
e Country

Universidad EAFIT | 15
Anadarko International United States

United
BP PLC International
Kingdom

Cenovus Energy Inc International Canada

Chevron Corp International United States

Sinopec Ltd International China

Eni SpA International Italy

Equinor ASA International Norway

Exxon Mobil International United States

Galp Energia SGPS

International Portugal
SA

Gran Tierra Energy International Canada

Husky Energy Inc International Canada

Imperial Oil Ltd International Canada

MOL International Hungary

Nexen International China

OMV AG International Austria

Parex Resources International Canada

PetroChina Co Ltd International China

Petrobras International Brazil

Source: Bloomberg, 2019 and companies that compete for exploratory wells in 2019.

Universidad EAFIT | 16
Appendix C: Corporate Governance

C-1: Company structure

Universidad EAFIT | 17
C-2: Board of directors

Universidad EAFIT | 18
 Mg. Luis
Dr. Orlando Ayala Dr. German Quintero (Not Mg. Juan Posada Mg. Sergio Restrepo
Echeverry
(independent) Independent) (Independent) (Independent)
(Independent)

- Former IDB - Mg, in International

- Chief experience - General Secretary Ministry of - MBA from Stanford
Executive Financial Law from London
on Microsoft Finance and Public Credit University
Director Business School
- Former Vice President of
- Management - Studies on
- Public Sector Experience - Member of YPO Colombia Capital Market of the
experience Law
Bancolombia Group
         
Mg. Esteban
Mr. Luis Perdomo Mg. Hernando Ramirez Mg. Carlos Cano
Piedrahita  
(Independent) (Independent)* (Independent)**
(Independent)
- 30 years of - Economist - Former evaluator of
- Mg in Government and
experience in the from Harvard technological projects of natural  
Economy from Harvard
banking industry University gas of Colciencias
- On BoD of - Senior - Former minister of
- Experience in the public sector  
Scotiabank, Peru Specialist of BID agriculture

C-3: ESG index

ESG Index
80.00 YPFD AR
70.00 PETR4 BZ
60.00 FEC CN
50.00 CSAN3 BZ
DVN US
Score

40.00
XOM US
30.00
CVX US
20.00 Median
10.00
-
2016 2017

Appendix D:
Key Financials
D-1: Balance sheet

Balance sheet (Million COP)

  2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

ASSETS                  

Current Assets                  
Cash and equivalents 7,945,885 6,311,744 4,201,608 4,282,567 6,361,301 9,881,088 5,657,298 4,817,391 4,562,512
Trade and other receivables 6,098,918 8,194,243 8,221,000 8,070,263 8,380,466 8,688,655 9,004,832 8,895,971 9,305,558
Net inventories 4,601,396 5,100,407 5,854,000 4,744,912 5,016,696 5,447,909 5,810,073 5,497,828 5,656,703
Other financial assets 2,967,878 5,321,098 3,508,336 3,804,305 4,746,555 4,526,869 4,901,758 4,753,351 5,051,800
Current tax assets 625,374 1,031,307 787,000 984,330 1,107,390 1,147,848 1,162,308 1,164,726 1,217,126
Other current assets 880,425 1,020,428 1,256,000 1,263,345 1,291,708 1,277,568 1,348,340 1,368,270 1,418,578
Assets held for sale 104,140 51,385 118,183 91,449 91,289 88,076 97,249 92,016 92,158
Total current assets 23,224,016 27,030,612 23,946,127 23,241,171 26,995,405 31,058,014 27,981,857 26,589,554 27,304,436
                   
Non-current assets                  

Universidad EAFIT | 19
investments in associates and
1,330,460 1,844,336 2,133,051 2,123,350 2,152,370 2,209,550 2,410,088 2,457,260 2,614,884
joint ventures

Trade and other receivables 777,132 755,574 784,666 865,275 929,331 924,014 936,157 939,475 995,095
Property, plant and equipment 61,359,819 62,770,279 67,510,140 69,035,236 72,894,372 74,130,961 77,065,214 80,060,233 83,016,287
Natural resources 21,308,265 23,075,450 29,408,558 31,722,798 33,801,023 34,258,959 37,434,500 40,304,204 42,671,791
Intangibles 380,226 410,747 551,351 645,354 653,156 689,214 745,059 827,203 886,304
Deferred tax assets 5,346,339 5,746,730 5,937,125 6,728,977 6,940,590 6,544,731 6,541,366 6,919,497 7,449,847
Other financial assets 3,565,847 2,826,717 2,111,872 2,426,838 2,793,392 3,082,416 2,949,600 2,956,012 3,158,800
Goodwill 919,445 919,445 919,445 919,445 919,445 919,445 919,445 919,445 919,445
Other non-current assets 681,009 860,730 832,213 721,218 698,537 738,379 738,759 696,054 642,704
110,188,42 115,188,49 121,782,21 123,497,67 129,740,18 136,079,38 142,355,15
Total non-current assets 95,668,542 99,210,008
1 2 7 0 8 3 7
118,892,55 126,240,62 134,134,54 138,429,66 148,777,62 154,555,68 157,722,04 162,668,93 169,659,59
Total assets
8 0 8 3 3 4 5 7 3
LIABILITIES                  
Current liabilities                  
Loans and borrowings 5,144,504 4,019,927 4,366,253 4,178,370 4,411,870 4,730,350 4,393,172 4,406,399 4,548,228
Trade and other payables 6,968,207 8,945,790 11,825,000 8,561,361 9,194,958 10,242,030 11,257,474 10,847,511 10,683,194
Labor and pension plan
1,829,819 1,816,882 1,753,366 1,840,876 1,814,152 1,811,019 1,807,259 1,805,335 1,815,728
obligations
Derivative financial instrument   82,554 41,687 24,850 31,575 40,127 51,180 41,850 43,155
Current tax liabilities 2,005,688 1,751,300 1,126,000 2,709,628 2,642,508 2,609,773 2,696,709 2,801,265 2,918,026
Accrued liabilities and provisions 558,828 814,409 712,172 693,238 667,495 689,228 715,309 695,488 692,152
Other financial liabilities 339,565 393,760 316,925 326,793 363,263 348,061 349,760 340,960 345,767
Total current liabilities 16,846,611 17,824,622 20,141,403 18,335,117 19,125,822 20,470,589 21,270,864 20,938,808 21,046,251
                   
Non-current liabilities                  
Loans and borrowings 38,403,331 34,042,718 40,286,568 38,781,375 39,901,328 40,898,240 39,199,399 39,741,067 40,835,734
Trade and other payables 29,469 30,522 23,762 21,822 27,817 30,161 30,848 28,412 29,637
Labor and pension plan
6,502,475 6,789,669 7,091,130 7,405,976 7,734,802 8,078,227 8,436,900 8,811,499 9,202,729
obligations
Current tax liabilities 812,819 738,407 762,871 864,618 891,808 840,943 840,511 889,098 957,243
Accrued liabilities and provisions 5,978,621 6,939,603 9,008,181 9,607,227 9,546,751 9,425,499 9,252,546 9,756,787 10,590,394
Other non-current liabilities 537,927 570,641 551,735 478,149 463,112 489,525 489,777 461,465 426,096
Total non-current liabilities 52,264,642 49,111,560 57,724,248 57,159,166 58,565,617 59,762,596 58,249,982 59,688,327 62,041,834
Total liabilities 69,111,253 66,936,182 77,865,651 75,494,283 77,691,439 80,233,185 79,520,846 80,627,136 83,088,084
EQUITY                  
Subscribed and paid capital 25,040,067 25,040,067 25,040,067 25,040,067 25,040,067 25,040,067 25,040,067 25,040,067 25,040,067
Share issuance premium 6,607,700 6,607,699 6,607,699 6,607,699 6,607,699 6,607,699 6,607,699 6,607,699 6,607,699
Reserves 2,177,869 5,138,895 4,232,223 4,794,970 5,366,592 4,796,511 4,837,743 5,179,616 5,515,362
Other integrated results 6,364,129 7,782,086 7,073,108 7,427,597 7,250,352 7,338,974 7,294,663 7,316,819 7,305,741
Accumulated results 7,708,866 12,644,860 13,315,800 19,065,047 26,821,473 30,539,247 34,421,027 37,897,601 42,102,640

 
Equity attributable to the 47,898,631 57,213,607 56,268,896 62,935,380 71,086,183 74,322,498 78,201,199 82,041,801 86,571,509
shareholders of the Company
 
1,882,674 2,090,831 2,441,894 2,607,889 2,772,257 2,575,312 2,593,392 2,733,043 2,948,044
Non-controlling interest
Total equity 49,781,305 59,304,438 58,710,791 65,543,270 73,858,441 76,897,810 80,794,591 84,774,844 89,519,553

  118,892,55 126,240,62 134,134,54 138,429,66 148,777,62 154,555,68 157,722,04 162,668,93 169,659,59

Total liabilities and equity 8 0 8 3 3 4 5 7 3

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 D-2: Income statement

Income Statement (Million COP)

  2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
55,210, 67,819,
Revenue 67,272,443 68,256,453 71,664,730 73,891,189 76,791,410 75,758,524 79,301,233
224 935
28,236, 33,022,
National revenue 32,747,858 33,548,853 34,913,992 34,970,694 35,423,837 34,329,083 34,843,743
092 600
26,974, 34,797,
Foreign revenue 34,524,586 34,707,600 36,750,738 38,920,495 41,367,572 41,429,441 44,457,490
132 335
- -
Cost of sales 36,893, 41,169, -40,323,543 -38,588,632 -40,994,516 -44,702,464 -47,467,060 -44,984,583 -46,304,623
474 527
26,553, 29,823,
Variables cost 29,204,251 27,947,745 29,690,202 32,375,676 34,377,930 32,580,001 33,536,037
082 489
10,340, 11,346,
Fixed cost 11,119,292 10,640,887 11,304,314 12,326,787 13,089,130 12,404,582 12,768,586
392 038
18,316, 26,650,
Gross profit 26,948,901 29,667,821 30,670,214 29,188,725 29,324,350 30,773,941 32,996,610
750 408
- -
Administration
1,764,5 1,653,8 -2,072,684 -2,185,617 -2,285,672 -2,232,564 -2,293,378 -2,345,547 -2,457,620
expenses
24 58
- -
Operating and
2,926,0 2,903,1 -2,445,538 -2,059,878 -2,162,735 -2,229,926 -2,317,450 -2,286,279 -2,393,193
project expenses
65 32

Operating 13,626, 22,093,

22,430,679 25,422,326 26,221,807 24,726,235 24,713,522 26,142,114 28,145,798
income 161 418

1,159,3 1,129,5
Financial income 1,200,221 1,163,047 1,164,277 1,175,848 1,167,724 1,169,283 1,170,952
56 63
- -
Financial
3,665,3 3,511,8 -3,500,586 -4,106,679 -3,860,232 -3,935,051 -4,003,673 -3,825,023 -3,873,712
expenses
90 14

Foreign exchange
5,514 372,223 580,195 323,373 450,307 483,881 449,734 -471,942 470,349
gain (loss), net

Share of profit of
associates and 32,791 154,520
joint ventures - - - - - - -

Income before
11,158, 20,237,
income tax 20,710,508 22,802,066 23,976,159 22,450,913 22,327,307 23,014,433 25,913,386
432 910
expenses
- -
Income tax
5,634,9 7,322,0 -8,840,689 -9,733,511 -10,234,696 -9,583,615 -9,530,851 -9,824,164 -11,061,639
expense
44 19
5,523,4 12,915,
Net income 11,869,820 13,068,555 13,741,463 12,867,298 12,796,456 13,190,269 14,851,746
88 891

D-3: Free cash flow

  2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

8 15,5 25, 26,22 2 24,713 26,1 28,145

EBIT ,252,970.00 04,595.00 21,711,359.00 22,430,678.76 422,325.89 1,807.29 4,726,235.35 ,521.77 42,114.46 ,797.56
- - - - -
Capex y 4 - - - 4,653,705.1 6,175,421 - 5,828,60 5,863,728. 6,157,0
KTNO net ,741,500.00 206,372.00 4,520,078.00 9,855,521.50 6 .89 1,470,441.68 8.16 25 10.53
12, 15,2 20, 20,04 2 18,884 20,2 21,988
OCF 994,470.00 98,223.00 17,191,281.00 12,575,157.25 768,620.73 6,385.39 3,255,793.68 ,913.60 78,386.22 ,787.03
- - - - - -
- 6,201,838. - - 9,660,483.8 9,964,286 - 9,391,13 9,934,003. 10,695,
Taxes 3,301,188.00 00 8,033,202.83 8,523,657.93 4 .77 9,395,969.43 8.27 50 403.07
9 9,0 11, 10,08 1 9,49 10,3 11,293
Unl FCF ,693,282.00 96,385.00 9,158,078.17 4,051,499.33 108,136.89 2,098.63 3,859,824.24 3,775.33 44,382.72 ,383.95

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 D-4: Foreign sales volume

Foreign Sales Volume - Kbped 2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Crude oil 532.1 537.3 435.3 416.3 392.4 402 415.75 430.17 450.47 471.73 493.99 508.81
Refined products 82.2 73.3 142 105.5 114.3 118.3 116.25 124.04 129.45 134.49 141.74 148.19
Gas 18.4 8 2.5 1.7 1.5 1.5 1.61 1.64 1.73 1.8 1.89 1.98

D-5: Domestic sales volume

Domestic sales volume - Kbped 2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Crude oil 22.5 13.4 14.4 18.2 8 7.05 7.59 7.31 7.4 7.35 7.43 7.44
Refined products 266.9 289.4 293 301.6 306.3 307.5 306.91 306.91 306.61 307.2 308.4 309.59
Gas 82.8 84.5 75.3 73.9 77 76.7 80.1 78.43 76.87 77 78.04 78.45

D-6: Transport volume

Transported Volume -
2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Kbped
Crude oil 954.2 978 867 823.3 836.17 834.56 832.94 831.33 829.72 828.12 826.52 824.92
Refined Products 251.2 253.8 263.1 268.2 273.4 272.87 272.87 272.61 273.14 274.2 275.26 276.33
1,205.4 1,231.8 1,130.1 1,091.5 1,109.5 1,107.4 1,105.8 1,103.9 1,102.8 1,102.3 1,101.7 1,101.2
Total 0 0 0 0 7 3 1 4 6 1 8 5

D-7: Refined volume

Refined Products - Kbped 2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

Barrancabermeja 230.5 223.17 214.18 212.4 224.38 225.78 225.05 229.35 232.68 236.01 241.2 245.83
Cartagena       131.8 146.79 143.86 145.3 147.11 149.73 151.62 155.09 158
Total 230.5 223.17 214.18 344.2 371.17 369.64 370.35 376.46 382.41 387.63 396.29 403.82

Appendix E: Valuation Assumptions

E-1: Macroeconomic assumptions

Real growth
  2019E 2020F 2021F 2022F 2023F 2024F 2025F
United states 2.30% 1.70% 1.80% 3.12% 3.12% 3.12% 3.12%
Asia 6.10% 5.90% 5.80% 8.07% 8.07% 8.07% 8.07%
Central America 3.10% 3.47% 3.67% 2.94% 2.94% 2.94% 2.94%
South America 0.63% 1.53% 2.60% 2.48% 2.48% 2.48% 2.48%
Europe 1.40% 1.20% 1.50% 1.77% 1.77% 1.77% 1.77%
Source: Bloomberg

E-2: Income statement assumptions

          Income Statement Assumptions
  2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

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 Income statement                        

Variable cost metric4 4.19% 2.29% 2.03% 2.48% 3.15% 2.83% 2.55% 2.61% 2.72% 2.77% 2.70% 2.67%

Fixed cost ratio 23.81% 26.02% 27.14% 28.03% 27.56% 27.58% 27.58% 27.58% 27.58% 27.58% 27.58% 27.58%
Admin expenses ratio 1.56% 3.27% 4.03% 3.20% 2.44% 3.08% 3.20% 3.19% 3.02% 2.99% 3.10% 3.10%
Operative and projects expenses 8.37% 7.74% 5.76% 5.30% 4.28% 3.64% 3.02% 3.02% 3.02% 3.02% 3.02% 3.02%

Finance expenses (WACR+ Libor)   7.76% 6.50% 7.02% 8.06% 9.20% 9.20% 8.99% 8.88% 8.77% 8.77% 8.77%

Ratio foreign exchange gain to sales 3.44% 3.59% 2.03% -0.01% -0.55% 0.86% 0.47% 0.63% 0.65% 0.59% -0.62% 0.59%

E-3: Debt coupon

2018 debt with coupon

Coupon rate Coupon debt Share Debt
8.00% 1,568,034 4.12%
7.90% 1,439,590 3.78%
7.60% 1,041,151 2.74%
5.70% 25,599,996 67.26%
4.40% 7,352,002 19.32%
3.10% 1,061,872 2.79%
Total Debt 38,062,645  
WACR5 5.61%  

E-4: Debt assumption

Debt Assumptions 2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

Debt to EBITDA 1.69 6.58 3.32 1.84 1.3 1.3 1.1 1.1 1.2 1.15 1.1 1.05

EBITDA to Interest Expense 12.67 2.98 4.54 6.46 8.35 8.8 8.97 11.59 11.72 11.05 11.66 11.42

Interest Coverage Ratio Rating Spread

> 8.5 AAA 0.75%
6.5-8.5 AA 1.00%
5.5-6.5 A+ 1.50%
4.25-5.5 A 1.80%
3- 4.25 A- 2.00%
2.5-3 BBB 2.25%
2-2.5 BB 3.50%
1.75-2 B+ 4.75%
1.5-1.75 B 6.50%
1.25-1.5 B- 8.00%
0.8-1.25 CCC 10.00%
0.65-0.8 CC 11.50%
0.2-0.65 C 12.70%
<0.2 D 14.00%

4
The “variable cost metric” is calculated based on the sales volumen, the exchange rate USD/COP and the implicit information contained in
historial variable cost.

5
Weigthed average coupon rate

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 E-5: CAPEX

Investments Assumptions
  2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

KTNO                        
11.05 12.08 11.56 11.82 11.69 11.76 11.73 11.74 11.73
Receivables to sales 6.50% 6.58% 8.83%
% % % % % % % % %
11.22 12.47 12.39 12.03 12.30 12.24 12.19 12.24 12.22 12.22
Inventories to sales 6.82% 8.27%
% % % % % % % % % %
Current tax assets 2.40% 8.64% 2.37% 1.13% 1.52% 1.67% 1.44% 1.55% 1.55% 1.51% 1.54% 1.53%

Other assets short term 2.10% 2.09% 2.17% 1.59% 1.50% 1.89% 1.85% 1.80% 1.73% 1.76% 1.81% 1.79%
20.47 20.97 20.02 18.89 21.73 33.35 22.99 23.40 24.07 25.11 25.78 24.27
Accounts payable % % % % % % % % % % % %
Deferred tax liabilities 2.88% 5.38% 4.46% 3.63% 2.58% 3.79% 3.97% 3.69% 3.53% 3.51% 3.70% 3.68%

Derivatives liabilities 0.37% 0.00% 0.00% 0.00% 0.24% 0.12% 0.07% 0.09% 0.10% 0.12% 0.10% 0.10%

CAPEX                        
Gross Capex to crude barrels (COP $ $ $ $ $ $ $ $ $ $
   
Millions) 82.49 10.00 13.13 34.59 35.26 35.10 25.62 28.74 31.86 31.32
Depreciation rate 4.09% 5.61% 7.91% 7.22% 5.80% 6.13% 6.53% 6.72% 6.48% 6.33% 6.44% 6.50%

Amortization rate 5.50% 7.15% 7.76% 7.56% 5.41% 6.68% 6.91% 6.86% 6.68% 6.51% 6.73% 6.74%

E-6: Property, plant and equipment (PPP)

Presumed Investment Plan 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

PP&E 62.47% 38.69% 39.04% 38.87% 38.87% 38.92% 38.89% 38.89% 38.90% 38.89%

Natural resources 36.34% 58.43% 59.71% 59.07% 59.07% 59.28% 59.14% 59.16% 59.20% 59.17%

Intangibles 1.19% 2.88% 1.25% 2.06% 2.06% 1.79% 1.97% 1.94% 1.90% 1.94%

E-7: Investment budget

Presumed Investment Budget (Trillion COP) 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F

Investments in PP&E $ 17,353 $ 1,425 $ 1,834 $ 7,438 $ 4,820 $ 4,853 $ 4,943 $ 3,536 $ 4,078 $ 4,666 $ 4,688

Investments in natural resources $ 6,922 $ 2,102 $ 2,706 $ 4,753 $ 7,324 $ 7,375 $ 7,528 $ 5,378 $ 6,204 $ 7,101 $ 7,131

Investments in intangibles $ 274 -$ 54 $ 206 $ 84 $ 256 $ 258 $ 228 $ 179 $ 204 $ 228 $ 234

This was constructed by taking the CAPEX metric and dividing it by the historical sales volume expressed
in barrels. Subsequently, the projected sales volume multiplied it.

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 E-8: Crude and gas reserves

Crude & Gas Reserves (BBO) 2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Purchases 0 0 0 4     30 30 30      
Additions 355 15 -16 295 307 182.48 307.26 321.94 300.19 283.07 285.21 291.26
Production -241.07 -238.62 -219.38 -221.68 -225.8 -219.86 -231.05 -233.55 -241.24 -248.75 -257.51 -262.96

Net change 113.93 -223.62 -235.38 73.32 81.2 -37.38 76.21 88.39 58.95 34.33 27.71 28.29

1P Reserves 2,084.00 1,860.38 1,625.00 1,698.33 1,779.52 1,742.15 1,818.36 1,906.75 1,965.69 2,000.02 2,027.73 2,056.02
RRR 1.47 0.06 -0.07 1.26 1.29 0.83 1.2 1.25 1.12 1.14 1.11 1.11

E-9: EBITDA to crude

  2014A 2015A 2016A 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
EBITDA to crude oil barrel 56.64 22.07 44.79 70.68 89.27 93.15 101.82 102.58 96.48 94.54 95.4 99.79
This metric was used to calculated terminal value.

E-10: Investment Fracking Pilots Tests

  2019 2020 2021

Investments
516,667 538,333 548,333
Pilot Tests

E-11- Expected market return

3,120
Expected SPX price .00
Div0 Expected 2020 16
SPX 2.86
Expected ROE SPX 16.51%
Payout ratio SPX 47.51%
Retention rate SPX 52.49%
Sustainable growth
SPX 8.67%
Cash yield SPX 5.22%
Expected Long run
growth 2.15%
E[Ke] 7.82%

Rolling Industry Unlevered Beta

0.95

0.9

0.85
Beta

0.8

0.75

0.7

Days

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 E-12- Terminal Value

  Terminal value
Value of
continuity $205,176,593
Implied
perpetuity
growth
rate 0.0485

E-13: Peers
MKT CAP P/E(x EV/EBITD EV/NOPA
Ticker Company PEG
(COP MM*) ) A T
YPFD - -
AR YPF S.A. 15,876,900.00 nm 3.03 3,902.07 0.04
PETR4 -
BZ Petrobras 329,617,400.00 15.64 5.41 503.54 1.95
FEC Frontera -
CN Energy 2,606,100.00 3.01 2.42 19.20 nm
GPRK
US GeoPark Ltd 3,880,700.00 12.64 4.07 196.02 nm
ENAT3 Enauta
BZ Participacoes 2,901,200.00 14.57 3.52 36.16 28.21
CSAN
3 BZ Cosan SA 19,743,700.00 8.12 8.87 39.96 0.70
DVN Devon
US Energy Corp 28,976,100.00 22.47 3.16 62.44 2.43
XOM Exxon Mobil
US Corp 1,001,100,000.00 19.40 10.06 269.44 2.85
CVX Chevron
US Corp 796,568,800.00 18.22 6.51 130.28 13.19

Appendix F: Financial Analysis

F-1: Dupont ROE- ROA
Dupont ROE & ROA
Dates 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Net margin 13.41% 18.48% 17.64% 19.15% 19.17% 17.41% 16.66% 17.41% 18.73%
Operational margin 28.08% 32.01% 33.34% 37.25% 36.59% 33.46% 32.18% 34.51% 35.49%
Net financial result /sales -4.53% -2.96% -2.56% -3.84% -3.13% -3.08% -3.11% -4.13% -2.82%
- - - -
Effective tax expense /sales -10.21% -10.80% -14.26% -12.97% -13.95%
13.14% 14.28% 12.41% 12.97%
Rotation of total assets 0.46 0.57 0.53 0.51 0.52 0.5 0.5 0.48 0.49
A/P 2.68 2.39 2.13 2.28 2.11 2.01 2.01 1.95 1.92
ROA 6.10% 10.54% 9.40% 9.74% 9.93% 8.65% 8.28% 8.36% 9.13%
ROE 16.33% 25.18% 20.02% 22.26% 20.97% 17.42% 16.64% 16.33% 17.52%
EPS 180.02 304.83 288.69 317.85 334.21 312.95 311.23 320.81 361.22
EPS growth 207.87 69.33% -5.30% 10.10% 5.15% -6.36% -0.55% 3.08% 12.60%

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 %
Dividend per share 89 225 225 127.1 133.7 187.8 186.7 192.5 216.7
Dividend yield 4.03% 8.51% 7.84% 3.88% 3.82% 5.01% 4.87% 4.77% 5.08%

F-2: Dupont ROIC

Dupont ROIC
Dates 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F
Sales growth 15.67% 22.84% -0.81% 1.50% 5.00% 3.10% 3.90% -1.30% 4.70%
Taxes 40.00% 37.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%
Operational Margin 28.08% 32.01% 33.34% 37.25% 36.59% 33.46% 32.18% 34.51% 35.49%
Gross Margin 33.18% 39.30% 40.06% 43.47% 42.80% 39.50% 38.19% 40.62% 41.61%
%Domestic sales 51.14% 48.69% 48.68% 49.15% 48.72% 47.33% 46.13% 45.31% 43.94%
%Foreign sales 48.86% 51.31% 51.32% 50.85% 51.28% 52.67% 53.87% 54.69% 56.06%
- - - - - - -
cost margin -61.81% -58.39%
66.82% 60.70% 59.94% 56.53% 57.20% 60.50% 59.38%
- - - - - - -
%Variable Cost -44.77% -42.29%
48.09% 43.97% 43.41% 40.95% 41.43% 43.82% 43.01%
- - - - - - -
%Fixed cost -17.05% -16.10%
18.73% 16.73% 16.53% 15.59% 15.77% 16.68% 16.37%

Administrative expenses/sales -3.20% -2.44% -3.08% -3.20% -3.19% -3.02% -2.99% -3.10% -3.10%

Operational cost/sales -5.30% -4.28% -3.64% -3.02% -3.02% -3.02% -3.02% -3.02% -3.02%

                   
Rotation of the invested capital without goodwill 0.62 0.77 0.7 0.67 0.68 0.66 0.68 0.63 0.63
Rotation of the invested capital with goodwill 0.62 0.76 0.69 0.67 0.67 0.65 0.67 0.63 0.63
KTNO productivity 0.06 0.07 0.07 0.05 0.05 0.05 0.05 0.04 0.04

Productivity of long-term assets without goodwill 1.55 1.24 1.36 1.44 1.43 1.47 1.43 1.53 1.54

productivity of long-term assets with goodwill 1.57 1.25 1.37 1.45 1.44 1.48 1.44 1.55 1.55

                   
ROIC without goodwill 10.47% 15.48% 14.47% 15.54% 15.33% 13.66% 13.48% 13.56% 13.92%
ROIC with goodwill 10.37% 15.32% 14.33% 15.40% 15.20% 13.55% 13.37% 13.46% 13.81%

F-3: Net production

2014 2015 2016 2017 2018
Net Production - Kbped 2019E 2020F 2021F 2022F 2023F 2024F 2025F
A A A A A
497.1 522.0 530.8 553.9 573.8
Oil crude 539.1 540.4 503 501.4 509.7 596.8 611.31
5 3 9 2 1
104.8 110.6 108.6 106.6 107.3 108.3
Natural gas 121 113 97.7 105.6 108.6 108.75
7 3 3 6 2 1
602.0 632.6 639.5 660.5 681.1 705.1
Total 660.1 653.4 600.7 607 618.3 720.05
2 7 2 8 2 1

F-4: Sensitivity analysis

    WACC BEFORE TAXES
    10,50% 10,75% 11,00% 11,25% 11,50% 11,75% 12,00% 12,25%
RESER 0,675 0,92% 0,66% 0,40% 0,14% -0,12% -0,38% -0,64% -0,90%
VES 0,700 1,41% 1,14% 0,88% 0,62% 0,35% 0,09% -0,16% -0,42%
RECOV 0,725 1,89% 1,62% 1,36% 1,10% 0,83% 0,57% 0,31% 0,05%
ERY 0,750 2,37% 2,11% 1,84% 1,58% 1,31% 1,05% 0,79% 0,53%
RATE 0,775 2,86% 2,59% 2,32% 2,06% 1,79% 1,53% 1,27% 1,01%
2020 0,800 3,34% 3,07% 2,80% 2,54% 2,27% 2,01% 1,74% 1,48%

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 0,825 3,83% 3,55% 3,29% 3,02% 2,75% 2,49% 2,22% 1,96%
0,850 4,31% 4,04% 3,77% 3,50% 3,23% 2,96% 2,70% 2,43%
0,875 4,79% 4,52% 4,25% 3,98% 3,71% 3,44% 3,17% 2,91%
0,900 5,28% 5,00% 4,73% 4,46% 4,19% 3,92% 3,65% 3,39%
0,925 5,76% 5,48% 5,21% 4,94% 4,67% 4,40% 4,13% 3,86%
0,950 6,24% 5,97% 5,69% 5,42% 5,15% 4,88% 4,61% 4,34%
0,975 6,73% 6,45% 6,17% 5,90% 5,63% 5,35% 5,08% 4,81%
1,000 7,21% 6,93% 6,65% 6,38% 6,11% 5,83% 5,56% 5,29%
1,025 7,69% 7,41% 7,14% 6,86% 6,58% 6,31% 6,04% 5,77%

F-5: Montecarlo simulation

QNational QNation QNational_ QNational_ QForeing QForein QForeing Crude oil

  _Crude al_Gas Products Transport _Crude f_Gas _Products RRR price
General General General General General General Genera General
  Beta Beta Weibull Beta Beta Beta Beta l Beta Beta
Average 5601 28723 106374 421430 168448 2311 37700 0.80 58
Standard
deviation 787 699 2241 8647 9592 1043 3985 0.30 12
Max 7902 30843 111456 447925 196114 5555 49808 1.47 86
Min 3314 26974 97472 398616 146358 562 26755 -0.05 26
Alfa1 6.91 4.44 6.84 8.58 5.91 1.41 8.13 4.62 4.31
Alfa2 6.24 5.54 13955 12.17 7.96 2.81 9.77 3.20 3.34
Displacemen
t-Shift factor - - 93,338 - - -   - -

F-6: Catalyst

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 F-7:Stochastic simulations

Two models were elaborated from stochastic differential equations taking the ADR prices, this because a
high correlation was found between the ADR price and the stock in Colombia (85% correlation as of
11/20/2019). The first model (Graph 1) was elaborated with the tendency that the prices took until
10/18/2019, the second model (Graph 2) takes the expected tendency from the fundamental valuation
elaborated by the team.
Based on our research and economic intuition we believe that the model that best fits the trend of the data is
the second, with a well-founded trend*, since we see feasible compliance with the proposed catalysts.
*the fundamental trend comes from the potential return of the stock (see market snapshot)

Graph 1

Graph 2

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