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Ecopetrol S.A. -- Moody's affirms Ecopetrol Baa3 rating; stable outlook

·14 min read

Rating Action: Moody's affirms Ecopetrol Baa3 rating; stable outlook

Global Credit Research - 04 Dec 2020

New York, December 04, 2020 -- Moody's Investors Service, ("Moody's") affirmed Ecopetrol S.A. (Ecopetrol)'s Baa3 senior unsecured ratings and affirmed the company's BCA (Baseline Credit Assessment) at ba1. The rating outlook remains stable.

Affirmations: ..Issuer: Ecopetrol S.A.

.... Issuer Rating, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions: ..Issuer: Ecopetrol S.A. ....Outlook, Remains Stable RATINGS RATIONALE

On 3 December 2020 Moody's affirmed the Government of Colombia's Baa2 ratings and changed the rating outlook to negative from stable reflecting the risks that the economic and fiscal effects of the coronavirus shock may leave a lasting impact on Colombia's fiscal strength and its overall credit profile. The change in the Government of Colombia's rating outlook to negative has not affected the Baa3 ratings or stable outlook of the state-owned company Ecopetrol S.A. Our expectations of government support for Ecopetrol are unchanged, and the company's fundamental performance remains solid despite the challenges of low oil prices and reduced refined products demand caused by the COVID-19 pandemic. For further information, including factors that could drive Colombia's rating up or down, refer to the rating action press release: https://www.moodys.com/research/--PR_435668.

Ecopetrol's Baa3 ratings and ba1 BCA continue to reflect the company's status as Colombia's leading oil and gas producer, accounting for about two-thirds of the country's production and 100% of the supply of oil products. The ratings also take into consideration Ecopetrol's solid and relatively stable cash flows from its midstream subsidiary, Cenit SAS, which includes Oleoducto Central S.A. (Baa3 stable). Furthermore, we assume high probability of support from the Government of Colombia and a moderate default dependence between the two entities. This assessment results in a one-notch uplift of Ecopetrol's senior unsecured rating to Baa3 from its ba1 BCA (baseline credit assessment), which reflects the company's intrinsic credit risk without support considerations.

Ecopetrol took proactive measures to protect its liquidity at the start of the COVID-19 outbreak such as reducing its capital spending and cutting operating expenses for 2020 to adjust to lower revenue and refined products demand. The company's reserve replacement strategy has been well executed in recent years, with a reserve replacement rate approaching 170% in 2019. Ecopetrol's liquidity is adequate and its refinancing risk is manageable.

The stable rating outlook is based on Moody's view that Ecopetrol will be successful maintaining its lower operating costs, largely sustaining its reserves and reserve life, and that its metrics will significantly recover in 2021 and 2022 as oil prices and refined products demand improve over the period.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ecopetrol's BCA could be upgraded if the company demonstrates the ability to grow production and replace reserves without affecting its credit metrics. Specifically, if the company's Leverage Full Cycle Ratio is above 1.5 times, which would indicate low finding and development costs, and its retained cash flow/net debt were to rise to over 40% on a sustained basis, the BCA could rise to baa3. However, in order for the company's rating to rise from Baa3, the Government of Colombia's rating would have to be sustained at Baa2 because Moody's views it as unlikely that Ecopetrol could be rated above the sovereign rating.

A ratings downgrade could occur if Ecopetrol faces liquidity constraints, if its reserve life declines significantly on a sustained basis, or if retained cash flow/net debt is sustained below 20%. In addition, because Ecopetrol's ratings benefit from implicit support from the Government of Colombia, a negative action on the government's rating or a change in Moody's assumptions about government support, could lead to a negative action on Ecopetrol's ratings.

The methodologies used in these ratings were Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Ecopetrol, 88.5% owned by the government of Colombia, is the largest integrated oil and gas company in the country. Its gross production averaged close to 700 mboed in the first nine months of 2020, and total assets amounted to $37.9 billion at 30 September.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Speer Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Marianna Waltz, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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