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Published: September 20, 2010
A seldom mentioned emerging market country
is nurturing a future oil giant.
Few are aware that Colombia is a growing and dynamic economy.
Many people think of Colombia as a violent and lawless place
dominated by drug cartels, or perhaps even confuse it with
socialist Venezuela. But, the truth is Colombia has come a long
way.
After nearly 30 years of drug-related violence, a new
pro-business government and a U.S.-supported crackdown have
vastly improved conditions in the past decade. Since 2002,
terrorist acts are down -84%, kidnappings have dropped -88% and
the homicide rate is the lowest in 22 years. Colombia's crime
rate is now lower than that of many U.S. cities.
As a result, Colombia is attracting more investors and domestic
spending is on the rise. In fact, GDP has grown +5% in the first
half of 2010 (compared to +1.6% in the second quarter in the
U.S.) and the market has reacted. The Colombian
exchange-traded fund (ETF), Global X/InterBolsa FTSE
Colombia 20 ETF (NYSE: GXG), has soared +48% so far in 2010
and was the No. 1 performing country specific ETF for the year
as of July 30th.
Colombia is rich in natural resources, including one of the
largest deposits of oil and gas in Latin America. There are just
two Colombian
ADRs trading on the New York Stock Exchange, but luckily,
one of them has been on fire…
Ecopetrol (NYSE: EC) is Colombia's largest integrated oil
company, and is also the fourth largest oil major in Latin
America. The company focuses on exploration and production, but
is also involved in refining and transportation. About 90% of
the firm is owned by the state.
Ecopetrol explores for oil and gas across Colombia and is
expanding internationally through exploration partnerships in
Brazil, Peru, and the United States (Gulf of Mexico). As of the
end of the first quarter, Ecopetrol had reserves of 1.9 billion
barrels of oil equivalent (BOE), 71% of which is oil and 29%
gas. The company's production for the quarter was 83% oil and
17% gas.
The company, like the country, is looking to the future.
Ecopetrol has hyper-aggressive plans to expand and become a
major international oil giant. It plans to invest a whopping $80
billion on expansion in the next 10 years and forecasts dramatic
production and reserve gains in a relatively short period of
time. The company is targeting daily production growth of +27%
in 2011 (from Spring 2010 levels) and reserve growth of +68% by
2015 and more than +200% by 2020.
The market apparently likes the growth of
the company, as well as the Colombian growth story: Ecopetrol's
stock has returned more than +70% so far this year. This is no
small feat considering Morningstar's Independent Oil and Gas
category has returned a paltry +2% year-to-date.
The company should be able to afford the grand $80 billion
expansion plans. Most of it (62% to 67%) will be financed with
cash generated from
earnings, and the rest from debt and new issuances. The
company had virtually no debt and about $2 billion in cash and
short term investments at the end of the first quarter.
However, this company is extremely vulnerable to the price and
demand for oil and gas. In 2009, net income fell -43% from 2008
as energy demand and prices plummeted amidst the financial
crisis and recession. But, as world economies have recovered, so
have Ecopetrol's earnings. Profits in the second quarter of 2010
rocketed an amazing +137% compared to the year ago quarter, and
first half profits increased +64% compared to a year ago.
Ecopetrol also pays a solid
dividend. There are usually several payments every year, and
dividends during the past 12 months have totaled $1.36,
translating to a solid 3.5%
yield even after the run up in the stock's price. Dividends
are paid in Colombian Pesos and converted to dollars for
American investors, so there is some
currency risk. However, the superior economic growth in
Colombia bodes well for the Colombian Peso, which has already
soared +16% against the dollar in 2010.
Despite its expansion plans and the emergence of the Colombian
economy, Ecopetrol's performance will be tied to energy prices.
The long term growth in worldwide demand for oil and gas as well
as oil's increasing scarcity portend well for the longer term.
However, a slowdown in world economies and falling energy prices
could hurt Ecopetrol's performance and stock price just like any
major oil company.
Action to Take --> At this
point, Ecopetrol encompasses several likely trends going
forward. It is an aggressive way to play growing demand and
higher prices for energy. It is also a
hedge against
inflation and a falling dollar that provides exposure to a
fast growing emerging market.
The stock is selling at a relatively high 28 times 2010
forecasted earnings. However, the possibility of significantly
higher energy prices in the future combined with rapid expansion
of production add to the possibility of explosive earnings
growth and make the stock worth it.
-- Tom Hutchinson
Staff Writer
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