BTN News: At the end of 2019, Ecopetrol, the Colombian state-owned oil giant, made a significant move by entering the fracking business in the United States, partnering with Occidental Petroleum (OXY). This strategic venture has seen tremendous growth over nearly five years, transforming it into Ecopetrol’s most profitable business segment. However, in a surprising turn of events, Ecopetrol recently announced its decision to step back from expanding these operations further by opting out of a potential acquisition of CrownRock’s assets, which are also owned by OXY. This move, though strategic, raises questions about the company’s financial strategy and its future in the fracking industry.
The primary reason behind Ecopetrol’s decision to forego the expansion opportunity was the significant financial burden it would have imposed. The investment required to acquire CrownRock’s assets was a staggering $3.63 billion. According to Ricardo Roa, Ecopetrol’s President, this level of investment would have significantly increased the company’s already substantial debt, which stood at 115 trillion Colombian pesos as of June 2023. With a debt-to-EBITDA ratio of 2.0, Ecopetrol has maintained a policy of not exceeding a debt ratio of 2.5, a threshold that the proposed acquisition would have likely breached. This cautious approach underscores the company’s commitment to maintaining financial stability and avoiding excessive leverage.
Furthermore, the financial feasibility of the acquisition was heavily dependent on obtaining approval from Colombia’s Ministry of Finance for public borrowing to finance nearly 100% of the investment. However, during preliminary discussions with the government, it became apparent that securing such approval would be highly unlikely. Without this crucial green light, Ecopetrol faced the risk of not being able to close the deal, which would have resulted in a hefty penalty of $270 million. Given these financial constraints and risks, the company ultimately decided against pursuing the acquisition.
Despite this decision, Ecopetrol continues to thrive in its existing fracking operations in the Permian Basin, which it entered in 2019. These operations have delivered robust financial results, making fracking the most profitable segment within the Ecopetrol Group. In the first half of 2023 alone, the company reported an EBITDA of $511 million from its fracking activities, with a remarkable EBITDA margin of 81%. This means that for every 100 pesos earned from the sale of oil and natural gas produced through fracking, 81 pesos remain as profit. This level of profitability surpasses that of other key subsidiaries within the group, such as ISA, Reficar, Hocol, and Cenit.
Ecopetrol’s fracking operations have also made a substantial contribution to the company’s overall production. In the first half of 2023, these operations yielded an average production of 91,400 barrels of oil equivalent per day (boed), representing a 65.9% increase compared to the same period in the previous year. This production volume accounts for 12.2% of the total output of the Ecopetrol Group, which reached 749,600 boed, contributed by its four subsidiaries—Ecopetrol, Hocol, Ecopetrol America, and Ecopetrol Permian. Notably, the U.S. fracking operations are the second-largest contributor to the group’s production figures, following the main Ecopetrol entity in Colombia.
Looking ahead to the end of 2024, Ecopetrol projects that its fracking operations will contribute an average production of between 84,000 and 86,000 boed before royalties. The company also plans to drill between 110 and 120 new wells, further solidifying its presence in the Permian Basin. However, a critical juncture lies ahead in 2025, when the joint venture agreement for the Midland area, one of the key regions in the Permian, is set to expire.
Ecopetrol faces several options as this contract approaches its end. According to Nicolás Azcuénaga, Vice President of Corporate Strategy and Business Development, the company is actively working on extending the joint venture with OXY, which has been the operator of the Midland area since 2019. Another option on the table is to continue the partnership with OXY through a joint development agreement. Additionally, Ecopetrol could consider taking over as the operator in its designated area or selling its 49% stake in the venture.
However, it’s important to note that the current political climate in Colombia plays a significant role in shaping Ecopetrol’s strategic decisions. President Gustavo Petro’s administration has made it clear that the exploration and exploitation of non-conventional resources, such as those involved in fracking, are not a priority. Instead, the government is focusing on increasing domestic hydrocarbon production and reserves through Ecopetrol’s own exploration and production projects. Additionally, there is a strong emphasis on advancing energy transition projects, decarbonization, energy efficiency, and the integration of clean energy sources into the company’s portfolio.
In conclusion, Ecopetrol’s decision to step back from expanding its fracking operations in the United States reflects a strategic balancing act between pursuing high-profit ventures and maintaining financial prudence. While the fracking business remains a key contributor to the company’s profitability, the evolving political and economic landscape requires Ecopetrol to carefully navigate its future investments. The company’s focus on financial stability, coupled with the government’s emphasis on energy transition and domestic resource development, will likely shape its trajectory in the coming years.
