Beaten-Down Colombia Oil Bonds Lure Yield-Hungry Bargain Hunters

Published 30 August 2021 12:00:00.9 GMT

(Bloomberg) -- Colombia’s Ecopetrol SA is doing a lot of things right. It’s cutting debt, boosting profit and planning for the long term by finding ways to diversify its business away from pumping and refining crude.

And yet the state-controlled oil producer has handed bondholders the worst returns this year among peers in developing nations. Dragged down by Colombia’s loss of its investment-grade credit rating and questions over how it would pay for this month’s $3.7 billion purchase of a majority stake in electric utility giant Interconexion Electrica SA, Ecopetrol’s notes due in 2045 have lost more than 9% this year, while peers returned 1.2% on average.

Investors and analysts from Oppenheimer & Co. to Lucror Analytics are saying the pessimism has gone too far and that the bonds are an attractive opportunity. They see the acquisition of ISA as a smart move that will diversify revenue streams and help prepare Ecopetrol for a future in which there will be less demand for fossil fuels.

“Owning a high-quality transmission business will provide Ecopetrol with a more stable source of cash flow,” said Alejandro Di Bernardo, a credit analyst at Jupiter Asset Management, which has about $80 billion in assets, including Ecopetrol bonds. And although the purchase raised Ecopetrol’s debt levels, “overall, the net impact for the credit should be positive,” he said.

He said some of the company’s bonds look attractive not only compared with Colombia’s sovereign debt, but also versus notes from Brazil’s state-controlled oil company Petroleo Brasileiro SA.

“I’ve always liked the name (Ecopetrol), but most of the time it feels like it’s expensive,” Lorena Reich, a senior credit analyst at Lucror Analytics, said in an interview from Buenos Aires.

To fund the acquisition of Medellin-based ISA, Ecopetrol took out a syndicated loan that it will repay within the next two years. After working to drive down leverage, with its net debt-to-Ebitda ratios having returned to pre-Covid levels in the second quarter, the move will cause debt levels to climb.

Unnerved Investors

The adjusted leverage will temporarily increase to about 2.3 times earnings but should ease over the next year to 18 months, S&P Global Ratings analysts Fabiola Ortiz and Luis Manuel Martinez wrote in a report this month. In May, S&P cut its credit rating on Ecopetrol to BB+, one level below investment grade, in line with the sovereign.

The ISA transaction is a “transformational event” for Ecopetrol, Ortiz and Martinez wrote. “This assures a resilient and stable revenue stream, which will offset in part the volatility of international oil and gas prices.”

ISA, Latin America’s largest energy transmission company, has thousands of miles of high-voltage lines across the region, toll highways in Colombia and Chile and a small fiber optics business. Its revenue has averaged about one-eighth of Ecopetrol’s annual sales.

There are skeptics of the move who think Ecopetrol should be more focused on shoring up its oil business, according to Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. Besides Ecopetrol’s lack of expertise in electricity, there is concern about an increase in the supply of bonds if the company taps overseas markets to refinance the two-year bank loan.

“At first it was investor concern about a state-run oil company being diverted from its core mission, which is replacing reserves and growing cash generation,” Horn said in an interview. “But now, bonds might be pressured by an expectation of some likely significant bond issuance to replace the bank bridge loans.”

The 70-year-old company has long struggled to find new reserves in Colombia, which at the end of 2020 had enough oil to continue pumping at current rates for about 7.1 years, the lowest reserve life among countries in Latin America that produce crude, according to the BP Statistical Review of World Energy.

Ecopetrol, which is responsible for the vast majority of Colombia’s production, saw output decline 2.5% in the second quarter from the year earlier to 661,000 barrels a day. 

“Ecopetrol’s fundamentals remain strong,” the company’s press office said in an email. Buying ISA was part of an “energy transition strategy, which seeks to maximize the life and value of its hydrocarbon portfolio, while progressing in decarbonization and diversification towards low-emission businesses.”

Reich said ultimately the ISA purchase will prove to be a boon as it makes the company less dependent on oil and gas.

“It’s not an obvious fit, but it brings stability to Ecopetrol’s earnings,” she said.

Omar Zeolla, a New York-based Oppenheimer & Co. analyst also sees potential upside in the bonds.

“Bringing ISA into the business, Ecopetrol’s results become more stable, more predictable,” he said.

By Andrea Jaramillo and Ezra Fieser

--With assistance from Oscar Medina.