Investors fear Colombia pressured Ecopetrol into a $4 billion bailout
The deal, as investors from Bogota to New York see it, has all the markings of a cash-strapped federal government forcing a state-run company to bail it out.
Ecopetrol SA, Colombia’s biggest oil company, would hand
over about $4 billion to the government in exchange for control of another
state-sponsored outfit, the electric utility giant known as ISA. From the
moment word of the transaction leaked in early January, questions began to pile
up from perplexed investors -- how did the deal fit with Ecopetrol’s business
model? How will the price tag be settled? -- and the stock began to badly lag
the broad rally in oil drillers across the globe.
Felipe Bayon understands why there’s skepticism out there
but he also wants to squelch it. In a video interview from Bogota, the CEO of
Ecopetrol vehemently denied that he had come under pressure from the government
to buy ISA and argued that the acquisition is a key part of the company’s plan
to protect the company’s core oil drilling business by adding a new source of
revenue.
“If somebody tells me, ‘You are doing this because the
government is asking me to do it,’ the answer is no,” Bayon said. “I’m doing
this because I’m convinced this is a good business. My fiduciary duty is to
preserve the value of the company.”
Like oil executives across the globe, Bayon has been
weighing how to prepare for a future in which there will be less demand for the
fossil fuels the company pumps. While others venture into renewable energy,
Bayon spotted an opportunity in the electricity transmission business with
Interconexion Electrica SA, or ISA as it’s known.
He concedes that it may seem like an unconventional fit: ISA
is Latin America’s largest energy transmission company, with thousands of miles
of high-voltage lines in countries across the region. It also owns toll
highways in Colombia and Chile and has a small fiber optics business. Ecopetrol
isn’t in those businesses, but if the deal goes through, the addition of ISA
will immediately put it “years ahead” in its push to diversify its revenue
base, he said.
“The fact that no other oil and gas company has done it
doesn’t mean it’s a bad idea,” he said in an interview.
So far, investors haven’t been convinced. Ecopetrol shares
are down 2.6% in dollar terms since early January when the potential deal was
first reported. The S&P Global Oil Index, which tracks the performance of
120 oil and gas companies, is up 15% over that span, according to data compiled
by Bloomberg.
Part of the doubt is driven by the way the deal has come
together. The Colombian government is the majority owner of both ISA and
Ecopetrol. By selling its stake in ISA to Ecopetrol, the government effectively
keeps control of both companies.
Ecopetrol will sell equity and raise debt to finance the
transaction, likely in the second half of the year. The estimated price of $4
billion will come in handy for the government at a time when it’s trying to
plug a budget gap, which is key to helping it keep its investment grade credit
rating.
But Bayon defended the proposed acquisition, which may close
by the second half of the year following months of non-binding talks. If it
winds up looking like a bad deal for Ecopetrol, he said he’s prepared to walk
away from negotiations. Ecopetrol has been evaluating making a bid for ISA for
18 months, he said.
Lowest Reserves
It’s not a surprise that Ecopetrol is investing outside of
oil and gas. Several of the biggest oil companies have moved into new business
lines. Royal Dutch Shell Plc aims to become the world’s biggest power
generator, others such as BP Plc have pledged to cut net greenhouse gas
emissions to zero by 2050.
“All the oil and gas companies are going into renewables and
everyone is moving into power generation, that doesn’t mean that that’s the
only route to energy transition,” he said.
He sees the addition of ISA as part of its overall strategy,
which includes reducing carbon emissions and focusing on environmental, social
and governance goals. It’s also generating more solar energy for its own
consumption.
Ecopetrol has struggled for years to find new oil patches in
Colombia. The country has 6.1 years of proved reserves, the lowest of any
oil-producing country in Latin America, according to the BP Statistical Review
of World Energy. The company has turned to foreign markets in recent years,
signing a joint venture with Occidental Petroleum Corp. to produce in the
Permian Basin in Texas, and offshore deals in Brazil.
Even as it prepares to take on ISA, Ecopetrol is doubling
down on oil and gas. It plans to invest $12 billion to $15 billion during the
next three years to increase production to 750,000 barrels a day by 2023 from
697,000 in 2020.
“Oil and gas is the core of what we do, it will continue to
be the core for decades to come,” he said
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