Ecopetrol S.A. (EC) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter and Full-Year 2017 Ecopetrol Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to María Catalina Escobar, Head of Capital Markets. Ms. Escobar, you may begin. María Catalina Escobar: Good morning everyone, and welcome to Ecopetrol's earnings conference call and webcast in which we will discuss the main financial and operational results of Ecopetrol for the fourth quarter and full-year 2017. Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management can include projections of the company's future performance. These projections do not constitute any commitment as to future results nor do they take into account risks or uncertainties that could materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections shared on this conference call. The call will be led by Mr. Felipe Bayón, CEO of Ecopetrol. Other participants include María Fernanda Suárez, Vice President of Strategy and Finance; Max Torres, Exploration Vice President; Héctor Manosalva, Acting Executive Vice President; Pedro Manrique, Commercialization and Marketing Vice President; Alberto Consuegra, Acting CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; Rafael Guzmán, Technical Vice President; and Carlos Alberto Vargas, Vice President of Transformation. We will begin the presentation with the main achievements of the year 2017, followed by the highlights by business segments and financial results under international finance reporting standards. We will close with the outlook for 2018 and a Q&A session. I will now hand over the presentation to Ecopetrol's CEO, Felipe Bayón. Felipe Bayón: Thank you very much, María Catalina. Welcome everyone to our 2017 results conference call. 2017 was a year of solid results that confirm our financial and operational strength. It was a year of great achievements for Ecopetrol. We're a more efficient and disciplined company that has demonstrated technical capability and resilience to emerge strengthened from the crisis of low oil prices. Let's look at the next slide to review some of the highlights for the year. In 2017, Ecopetrol reported operating and financial results that are higher than those reported in 2016. During the year, we continue to focus on excellence and safety in all of our operations, achieving our production targets and the increasing reserves, both fundamental pillars for the company's growth. We recover the growth path with reserves. At the end of 2017, our reserves stand at 1.6 billion barrels. The average reserve's life increased from 6.8 years to 7.1. And the reserve replacement ratio was 126%, the highest of the last three years. This result was largely leveraged by the success of our enhanced oil recovery programs and the constant development of our fields. The new Cartagena Refinery, in its second year of operation, generated both positive net profit and EBITDA, marking an important change of trend in the financial figures. During December, we finalized the global performance test, reaching a sustained load of 144,000 barrels per day, which equates to 96% of the refining capacity. The refining margin was $12.5 per barrel during the fourth quarter. This milestone leads to the beginning of the optimization phase. We are successfully going through a profitable growth period in Ecopetrol. Net profits for 2017 were COP 6.6 trillion, the highest of the last four years and 16% higher than the 2014 figure even with a 45% lower rent price in 2017. EBITDA and EBITDA margins reached levels of COP 23 trillion and 42% respectively. The EBITDA margin increased [technical difficulty] to 2016, ranking among the highest in the industry. We ended the year with a very solid cash position of COP 14.5 trillion. This will allow us to continue to work the inorganic growth opportunities in the future. The cash position of the year allowed us to prepay our debt by $2.4 billion, which reflects a 17% reduction of Ecopetrol's group nominal debt, is strengthening our capital structure. Our gross debt to EBITDA ratio in 2017 was 1.9 times, versus 2.9 times at the end of 2016. Let's look at the next slide. Our cash break even was $40 per barrel as a result of the proactive commercial strategy the global shortage of heavy crude. On the market appetite for crudes the export basket spread was reduced by $2.5 per barrel, standing at $6.9 per barrel. This is 26% better than the one registered in 2016. We are prepared to take advantage of the opportunities that we have in front of us. The discipline that we have consolidated along with the more favorable pricing environment will give us the foundations to expand a profitable and safe operation throughout our segments. We have achieved stable and safe operations in all of our segments. This was possible through the operational discipline and compliance with our HSE policies and procedures. In December, Ecopetrol obtained the OHSAS 18001 certification in Occupational Health and Safety, as well as the ISO 14001 certification in Environmental Management. This actually allows us to continue to ratify our high standards in health, safety, and the environment, expands our competitiveness as we continue to align ourselves with the best practices around the world. I will now pass the floor to Héctor Manosalva, who will comment about the operational results for the year. María Catalina Escobar: Héctor Manosalva's remarks in English are a free translation of the original Spanish version. Héctor Manosalva: Thank you, Felipe. The results [ph] for the whole year were solid, maintaining an alignment with the company objectives for 2020, and continuing with the growth path along all the value chain of the group. Before we start with each of the segments it is important to highlight the stable and secure operations in all fronts that the Ecopetrol Group has had, confirming the commitment and compliance to our HSE policies. Now in terms of production, we consider that the most important thing is to point out the fulfillment of the annual production goal of 715,000 barrels of oil equivalent per day, which acquires an additional relevance if one considers the public order situations under operations -- during the year. Within the exploration segment, it is worth highlighting the achievement of the exploration activity goal with drilling of all the wells planned for 2017. We are drilling both in onshore and offshore. Among these new wells is the Molusco project, a milestone for the company as it is the first big water well directly operated by Ecopetrol. It is worth noting that with the preliminary results of this campaign in 2017, we were able to surpass the goal of the new exploratory continued resources with more than 250 new million barrels of oil equivalent. In the transport segment, another key milestone in 2017 was the startup of the San Fernando-Monterrey system which became the main [technical difficulty] and strengthening our capacity to transport heavy crude oil. This result allowed us to consolidate a more comprehensive transport strategy which together with the previous achievement such as increased in viscosity handling capacity at 600 cSt and implementation of bi-directional Bicentenario pipeline allowed us to have a more cost efficient transport scheme and lower deferred production. Finally, we have refining segment. While in December we achieved a historical record of crude oil loading of 346,000 barrels per day including a daily record within the same month of 993,000 barrels per day. I will leave you now with Vargas who will comment about the results of the transformation initiatives.

Thank you very much. We continue with capital transformations program executing efficiency strategies in the business group. These strategies allowed us to incorporate in the fourth quarter of 2017 COP 1.18 trillion for accumulated efficiencies in the year of COP 2.59 trillion. Results have been achieved in four pillars. Income margins, with a contribution of COP 882 billion of commercial strategies and increase in the refining products. Excellent in CapEx, with a result of COP 724 billion mainly in strategies to improve operational performance and optimized drilling and completion cost; efficiencies in Ecopetrol profit and loss of payment, with a contribution of COP 559 billion mainly in strategies for dilution and operation of oil, maintenance and management of contracts. Strategies with subsidiaries, with efficiencies of COP 423 billion lead by the optimization of operation and maintenance cost in the Midstream segment as well as the strategy implemented in raw material cost and increase in revenues and margins. With this result, the efficiencies accumulated by the business group during the last three 2015 - 2017 reached a total of COP 7 trillion -- energy management of the business group executed in 2017 made it possible synergies between refining and transportation business in order to supply energy using the existing infrastructure, improved margins and savings in the purchase of unregulated refinery and sale of energy surplus. We also continue the operational activities for the commercialization of energy through Ecopetrol ESP that will start operation in fourth quarter of 2018. All of the above is reflected in the improvement of the indicators of our key operational metrics. Now, Max Torres is going to talk about exploration.

During the year, 21 wells were drilled including 19 exploratory and two appraisal wells. So far, nine discoveries have been announced while three other wells are under evaluation. The average success rate for year will be in excess of 50% depending on the results of the evaluation operations. Extending our frontiers to Ecopetrol America as a result of lease sale of 249 during November, we succeeded in adding blocks in Garden Banks, Gulf of Mexico, U.S., 77, 78, 129, 122. Our subsidiary Ecopetrol Brazil acquired 446 square kilometers of 3-D seismic in the offshore block FZA-M-320 in the Foz Amazonas basin. Ecopetrol equity in this block is 70% with our partner JX Nippon, 30%. Currently, Ecopetrol is evaluating blocks operating in Brazil bid grounds 15 and 4. 2017 was a year of intense exploratory activity, which allowed to consolidate us as a leading oil company, and establish a base for future growth of the company. In summary, the following were the main milestones for the year. Highlights were the wells Purple Angel 1 and Gorgon 1 in the block Purple Angel. Both wells operated by Anadarko 50% with Ecopetrol as partner in the block 50%. These wells confirm the existence of a large gas province in the Colombian Caribbean. Well Gorgon-1 is one of the most important discoveries in the country over the past years, and apart from that, it establish an historical record in water that operated in offshore Colombia of 2,316 meters. We also drilled on the well Molusco-1, the first offshore operator well by Ecopetrol through our affiliate Ecopetrol Costa Afuera, ECAS, with 50% working interest on partnership with the ONGC 50%. The well was operationally successful, and prove the presence of non-commercial quantities of gas. In Offshore Colombia drilling of the wells Trogon-1 and Lorito-1 in the Block CPO-09 was completed. The well Trogon-1 was plug and abandoned, and Lorito-1 is currently under evaluation with production test ongoing. Through Hocol, we completed the acquisition of 518 kilometers to the seismic in the [indiscernible] Inter Basin. Also, we surpassed our goal of incorporating 250 million barrels of oil equivalent in contingent resources, allowing to leverage our increase in reserves for the Group. With a view of extending our horizon and establishing ourselves as a Pan-American company, we are awarded new exploration blocks in Mexico and in the U.S. Gulf of Mexico with new challenges and opportunities for the company. Through cost savings and greater efficiency, we manage to lower our finding costs to $2.27 per barrel equivalent during 2017. All our activities through the year, we finalized without any incidents, technical, environmental or operational. For 2018, the Group is planning to drill 12 wells in Onshore Colombia, of which Hocol will drill three exploration wells and one appraisal. The plan of Ecopetrol is to drill five exploration wells and three appraisal, all onshore. The main goal for the year will be to drill in excess of 20 exploration wells. As for seismic programs, Hocol refer 294 kilometers to the seismic in this [indiscernible] Inter Basin, and Ecopetrol 162 kilometers to be seismic in the Piedemonte Basin. Equally, Ecopetrol is planning to purchase seismic data in Mexico both on Mexico, U.S., Brazil and Colombia in excess of 100,000 kilometers between 2D and 3D programs. Now, Rafael Guzmán will discuss the production performance for the year. Rafael Guzmán: Thank you, Max. With the end of 2017, we can say with satisfaction that we have met our production goal by reaching 715,000 barrels per day in average. As far as research is concerned, we incorporated 295 million barrels of oil equivalent, we successfully continued our recovery program and added results for that, we still endeavor in our commitment to ensure efficient performance in our operations on returns allow me to start by dictating the information that you have heard from our CEO. The figure you can see shows the breakdown of the 295 million barrels of reserves additions in 2017 which once again represented 126% replacement ratio and the extension of the reserves to 7.1 years. The figure displaced the result based on SEC specifications; there we can see that 94 million barrels out of the 135 million barrel reserves addition from revisions to previous estimate are explained by market price effect. The remaining 81 million barrels correspond to new projects and improvements in fuel production, recovery amounts to 73 million barrels of new reserves. This confirms the value of the recovery program of Ecopetrol; in total, 201 million barrels of added reserves as a result of our technical management and the financial optimization that we have implemented in our organization. On the production side, Ecopetrol's group achieved on average 715,000 barrels per day, fulfilling our goal and representing production levels close to those of 2016. In December, our production close at about 720,000 barrels per day which sets the pace for our production call in 2018 that is production between 715,000 and 725,000 barrels per day. Something to highlight is the increase of production in the reality field. The field increase is production by 15% compared to 2016. We implemented several strategies to improve the operation among which we can list a following. Transports rerouting to mitigate pipeline attack effects, maintenance efficiency, improve electrical systems stability than whole dilution to increase production and incremental activity in well work that were having an effect an operating costs. It has been effective in maintaining production. 2017 was also a year dedicated to improving our own capital discipline without sacrificing the plan target in production and research for the year. These were focusing allowed us to reduce the uncertainty and strengthen our portfolio to obtain projects with lower breakeven price. We continue our proficiencies in the operations. We are pleased to report an additional reduction of 13% in the cost per foot drill compared to 2016. In 2017 about 500 development wells would drill by Ecopetrol. On the other hand, we continue to increase the number of developing fields and to-date, in addition to last year in front of Castilla and Rubiales, we're drilling Tibú, Araguaney and Banadía. Now I would like to add a few words on the recovery program which is a fundamental component of our growth and value generation strategy. Approximately 13% of the current production comes from field that used some type of secondary or tertiary recovery technology and our objective is to expand technologies of improved recovery to most of the production. Thanks to their approaching efficiencies. The results of the pilot and the restructuring of all projects in the program now has close to 65% of the profitable opportunities with an incremental lifting cost close to $5 per barrel. While the development costs are below $5 per barrel. Some of the facts to highlight for the recovery program in 2017 are the addition of 73 million barrels of new reserves. 139 million barrels of new contingent resources were filed in operation. Four new projects in development that is Chichimene, Castilla, Llanito-Gala-Galan and Salina, all of them with water injection and the execution of the chemical you are project Dina K. The graph you have at site illustrates the current performance of the water injection project in Chichimene. As came to see it is yielding better response in the recovery factor than initially expected. This in turn translates into higher volumes, greater efficiencies on a much more competitive cost. Now I would like to hand to Alberto, who will comment on the results of the Midstream segment.

Thank you, Rafael. During the fourth quarter of 2017 we continued achieving positive financial results in the midstream segment. Our EBITDA for the quarter reached COP1.9 trillion as a result of continued implementation of our cost optimization and efficiency agenda across the segment. For the full-year, 2017 EBITDA reached COP7.9 trillion those surpassing last year's results by COP120 billion. Operational results for the fourth quarter included transportation of 116,000 barrels of oil and refined products per day which represents a 1.3% increase compared to the same field in 2016. The total volume of crude oil transported during 2017 was 823,000 barrels per day which represents a reduction of 5% when compared to 2016 due primarily to the disruption of operations at the Cano Limon Covenas pipeline, which was inoperative during 53% of the year. During 2017, approximately 60% of crude oil transported belonged to Ecopetrol and its subsidiaries. The total volume of refined products transported reached 268,000 barrels per day increasing 1.9% in 2017 when compared to 2016 due to increased demand for refined products and the elimination of restrictions in our Pozos Colorados - Galán system approximately 23% of refined products transported belonged to Ecopetrol. It is worth highlighting that in order to comply with transportation commitments a contingent operation to evacuate oil from fields near Cano Limon was established. The contingency plan consists of reversing the flow direction of the Bicentenario pipeline which has been operational in both directions since the end of the first quarter of last year. During 2017, we began transporting heavy crude oil from Apiay to Coveñas at 600 centistokes thus achieving important efficiencies in dilution costs for the upstream segment. Finally, during the fourth quarter of 2017 we accomplished the commissioning and final tests of the San Fernando-Monterrey system which began operations on January 1st of this year. With this, I hand over the call to Tomas Hernandez who will comment on the downstream results.

Thanks, Alberto. We're pleased to report that during the fourth quarter of 2017, the Cartagena Refinery successfully completed its global performance test, maintaining an average throughput of 144,000 barrels per day for 60 days. Throughout 2017 the Cartagena Refinery steadily increased its gross margin obtaining a result of $12.5 per barrel in the fourth quarter which represents a 21% increase compared to the previous quarter. The throughput also showed a quarter-on-quarter increase reaching an average of 147,000 barrels per day in the fourth quarter versus an average of 129,000 barrels per day in the same period of 2016. With the completion of the stabilization phase we have started the operations optimization phase in which we will continue looking for improvements in the crude slate and other operational efficiencies. The Barrancabermeja refinery managed to sustain a higher yield of mid distillates by decreasing its production of fuel oil thanks to the implementation of initiatives to increase valuable products despite the lower availability of light crudes. The refining margin during the fourth quarter reached $12 a barrel compared to $14.8 per barrel in the fourth quarter of 2016. This decrease is mainly explained by the increase in the crude slate price that was not offset by the increase in product prices. It is important to note that both the refinery throughput and utilization factor have been impacted by the effect of the heavier crude slate. It's relevant to highlight that in 2017, Colombia achieved the highest average combined throughput in the history of refining, 345,500 barrels per day, thanks to the operational stability of the two refineries. Of note, on December 20th, a new combined throughput record of 393,300 barrels per day was established between the two refineries. In our petrochemical area, Esenttia reported record sales of polypropylene that partially mitigated the impact of higher raw material costs. On the bio fuels front, in 2017, bio energy started commercial operations and the ethanol plant is currently in the stabilization phase and is expected to finish at the end of 2018. Now I turn the presentation over to María Fernanda Suárez who will comment on the financial results for the period. María Fernanda Suárez: Thank you, Tomas. The solid results of 2017 reflect the consolidation of our corporate strategy focus on cash protection, capital discipline and profitable growth. In line with our operations that managed to maximize the performance of each business segment Ecopetrol achieved a net profit of COP 6.6 trillion, the highest of the past four years, and 16% higher versus 2014, even with the Brent price that was 45% lower. EBITDA reached COP 23.1 trillion. It is important to highlight that we earned COP 5 trillion more in EBITDA when compared to 2015, a year that experienced the same price of 2017 and even lower production; this was largely the result of the execution of efficiency strategies through the transformation program as well as better operating results. Finally, operational margins, EBITDA and net margins also continued to improve. Let's move on to the next slide. The business group has achieved financial strength as reflected in its main indicators. We achieved the best EBITDA margin of the past four years rising from 37% in 2014 to 42% in 2017 showing an increase of four points compared to 2016 and of seven points compared to the one registered in 2015, with roughly the same price level observed in 2017. The company's cash position remains solid and leverage dropped considerably versus previous years with significant improvement in the gross debt EBITDA indicator which closed at 1.9x in 2017 versus 2.9x in 2016. On the other hand the net debt to EBITDA indicator reached 1.6x versus 2.4x at the close of 2016. The cash breakeven for 2017 remained at $40 per barrel. These indicators demonstrate the company's resilience to an environment of low prices and a financial flexibility for the growth stage. Let's move on to the next slide to examine the business group's EBITDA performance. Our efficiency and good operating performance along with better price performance allow us to achieve a margin of 42%. With these results Ecopetrol demonstrates that its operational performance consolidated the company as one of the most efficient among the oil and gas industry. In 2017, the largest contribution to EBITDA came from the exploration on production segment, which reflect the recovery of prices and the discipline in the cost structure. Likewise, it is important to mention that in the refining segment the new Cartagena Refinery reached a positive EBITDA of COP 9 billion marking the beginning of positive cash generation only six months after those 34 units enter into a stable operation. Transportation segment continues to be essential for the good financial performance of the business group. Even with lower volumes transported in 2017 and a lower average exchange rate, its revenue is remaining stable and its EBITDA increased as a result of our continuous efficiency program that allowed optimization of operation and maintenance costs. Please go to the next slide to see the evolution of net income. Net profit for 2017 amounted to COP 6.6 trillion, the highest in the last four years and more than 4x that of 2016. Net income excluding impairment to recoveries amounted to approximately COP 5.3 trillion, which implies an increase of about COP 3 trillion when compared to the same profit before impairment of 2016. In 2017, the business group increased its revenue by COP 7.5 trillion, 16% higher than the previous year, this as a result of the price increase and the positive margins achieved in the Cartagena Refinery. The cost of sales grew COP 1.9 trillion, largely due to the effect of higher price on imported purchases increasing maintenance activities and contracted services. It is worth mentioning a decline in the volume purchase of crude end product is explained by three main factors; first, substitution by products produced by the Cartagena Refinery. Second, lower ingress of goods for loading the Cartagena Refinery due to substitutions by local groups and third lower consumptions of dilutant due to the transformation and strategy and commercialization [technical difficulty]. Operating expenses were down some COP 100 billion due to the combined effect of, first, lower wealth tax for approximately COP 200 billion and second a profit of around COP 450 billion generated in the acquisition of 11.6% stake in the K2 field in the Gulf of Mexico in 2017. These expenses were partially offset by the recognition for unsuccessful seismic activity in exploratory wells. Depreciation was up COP 700 billion primarily due to lower [technical difficulty] 2016 versus 2015; the commissioning of Ecopetrol America's Gunflint Field in 2016 and the start of Project P135 in Ocensaamong other contracts. The exchange rate differential result had a change of COP 1 trillion given that the exchange rate impact in 2017 was neutral when compared to an income of COP 962 billion reported in the previous year. The change in the net dollar position was reduced to almost zero by December 2017, as a result of the application of hash accounting and the efficient allocation of debt among the companies comprising the business group. The provision for income tax increased by COP 9 billion as a result of the better financial performance of the year. On the other hand, the effective tax rate dropped from 66% in 2016 to 43% in 2017. This decrease mainly reflects the change from losses to profits in Reficar, which went from deploying a loss of COP 2.4 trillion in 2016 to a positive result in 2017. Ecopetrol America also achieved a positive result in 2017. The change in impairment net of taxes of long-term assets is a result of having an impairment recovery of COP 1.3 trillion in 2017 when compared to an impairment expense in the previous year of COP 0.8 trillion. Let's move on to the next slide. CapEx execution versus the 2017 is mainly explained by, first, the renegotiation of $150 million of commitment with the National Hydrocarbon Agency; second, $245 million of CapEx savings and efficiency mainly driven by strategies in drilling and completion; and third, our lower CapEx execution of roughly $310 million of activities shifted towards 2018 due to a higher time in maturing our project. It is important to mention that despite the lower CapEx execution, we accomplished all the target set for 2017. Now let's move on the next slide to examine the business group's cash flow. The business group stood with a significant cash position of COP 14.5 trillion. Operating cash flow in 2017 was COP 17 trillion reflecting the business efficient operation and the recovery in international crude prices. The investment flow in 2017 totaled COP 4.4 trillion driven primarily by the resumption of activity at the Castilla, Rubiales fields, the development of enhanced oil recovery project in fields such as Chichimene and higher exploration activity. CapEx deployed amounted to COP 6.1 trillion. As part of investment activities, it is worth highlighting the inflow coming from the sale of our shares [indiscernible] as well the dividends received from [indiscernible] and the revenue from the sales of minor field. Cash flow from financing activities totaled COP 12.8 trillion. Out of which, COP 8.9 trillion were debt amortization. COP 2.4 trillion interest payments and a COP 1.5 trillion dividend distribution to our shareholders and to our minority shareholders on our subsidiaries. Throughout 2017, we prepaid $2.4 billion of our foreign currency debts allowing a decline in the group's leverage to 37% in 2017 from 45% in 2016. Those are strengthening the business group's capital structure. The result achieved by the Ecopetrol Group are a clear proof of the consolidation of our transformation strategy. Once our price collapse was overcome, Ecopetrol has become a more efficient player with a robust financial position to walk the path of growth. I will now pass the floor to the CEO for his concluding remarks. Felipe Bayón: Thank you, Maria Fernanda. As we enter 2018, we see all the important challenges that we have in front of us. We aim to increase our production to reach the range of 715 to 725,000 barrels equivalent per day. We want to maintain our operational excellence and safety in all of our operations. We want to continue to produce sound financial metrics. All of these are priorities. In 2018, we plan to invest between $3.5 and $4 billion with a marked focus on exploration and production. Investments in these segments should amount to 85% with the overall CapEx. Exploration and production, we are planning to drill more than 620 development wells. And to-date, we already have 12 confirmed exploration wells. Likewise, we expect to continue the developing activities in about 20 of our enhanced oil recovery projects. In the refining segment, efforts will be focused in optimizing the operation of the new Cartagena refinery. We expect an EBITDA of at least COP 500 billion and a two digit refining margin. The company will achieve a milestone in refine products with its two refineries Barranca and Cartagena processing between 350,000 and 375,000 barrels per day. Ecopetrol is a company focused on growth and development for the country. We care for its workers, the communities in which we operate, whilst we seek shared prosperity and operational safety at all levels. I will now open the floor to questions and answers. Thank you very much.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Pavel Molchanov from Raymond James.

Thanks for taking the question. We have seen, in January, an acceleration in pipeline attacks by the ELN group, and given the time that has passed since then, can you give some perspective on how those pipeline attacks have disrupted the company's production so far into 2018? Felipe Bayón: Absolutely, Pavel. Thank you so much for your questions. In respect to the Caño Limón Pipeline, which is the one you're referring to, we've seen this year 15 attacks compared to 62 attacks last year. Clearly, if you look at period from January 10, when the bilateral truce fire was ceased, we actually have seen in increase in these terrorist attacks and the activity. We're working [technical difficulty] authorities, the armed forces, police, the local authorities to ensure that we can go into the different areas where we've seen the attacks to assess the situation and the condition on each and every one of these geographically pinpointed areas, and ensure that we can repair the pipeline and bring it back to operation. But I think it's also important to remind ourselves that we have not seen the need or we have not had to stop production or cease production at the Caño Limón field. And the reason for that is that close to 12 to 14 months ago we established the bi-directional 00:02:52] where we can now flow two ways using the Bicentenario [indiscernible], which allows us a lot of flexibility. So bottom line, we've seen the pipeline hit, and we stress the message that the biggest impact that we've seen in to those communities to live around the pipeline, to the environment which sometimes is a very big, or could be a very big impact. But from an operational point of view we haven't seen the need to actually shut down any production from Caño Limón. So we have the flexibility, and in that sense there is no impact in terms of volumes so far.

Okay. And following-up on that, you ended last year with 717 MBOE a day of production. You're guiding to essentially the same in 2018. Given that you're capital budget is increasing by more than 30% what explains the lack of production growth in your production guidance? Felipe Bayón: Thanks, Pavel. And I think there are several things. Context-wise, remember that some of our fields have very steep and sharp declines, that we're fighting day in and day out, so some of those fields will have declines that range from 15% to 25%. Having said that and just case in point, for example, Rubiales, which we took the operation less than 24 months ago, we've actually been able to increase production in Rubiales. So there's things that we're doing that are working. But we need to sort of run very fast to stay still. And in that sense, we've given a guidance of 715,000 to 725,000 barrels per day for 2018. We're in the range for that number. But we do need to acknowledge that, for example, during the last month of February, we did have some impacts in our production in Meta in our areas of operation around Castilla and Chichimene there was some social unrest; there were some attacks to the infrastructure mainly electrical switchgear and some of the other electrical facilities. This was so 10 to 12 days ago. We've now managed to reestablish all of the production from the field. So we do see some challenges. I just want to be very blunt in terms of saying there's always challenges in and around the operation. But we feel very, very comfortable in terms of the guidance we've given of production. To your point, clearly, the challenge that we have and what we'll need to demonstrate is our ability to deploy the CapEx in a way that's efficient that sounds and underpins production growth.

Our following question comes from Leonardo Marcondes from UBS.

Hi, guys. Thanks for the call. I have two questions. The first one is what should we expect from Reficar [ph] in terms of margins and its utilization rates this year? And my second question is a follow-up from the pervious one. Do you have any additional cost by using distinctive auto pipelines that using Caño Limón? And how Meta situation should affect your figures in the first quarter? Thanks.

Leonardo, thanks for your question. This is Tomas Hernandez, Vice President Refining. Yes, your question on the throughput for 2018, we're looking at throughput between 135,000 and 145,000 barrels a day for Reficar. And just as a reminder, we completed the stabilization phase, which was a complete success. We did the global performance tests, and we go into an optimization phase now. And that includes looking at the diets of crudes that we have in the refinery. We're looking at maintaining double-digit margins for 2018, as we did in the fourth quarter. As you know, we had $12.5 a barrel in the fourth quarter of 2017, and we expect that to continue. And as a reminder, Reficar, we completed the stabilization phase in 18 months. Just a reminder, we started the plants, all the plants, in July of 2016. In 18 months we completed the complete stabilization process. And when you look at the industry standard across refining globally, that standard is more like two to three years. So that was a great process we finished, and it was a result of great teamwork at the refinery, and also Ecopetrol's support groups coming together and making that a success. We expect that to continue into 2018 obviously, and continue with the optimization phase. María Catalina Escobar: Leonardo, apologies, can you please repeat your second question to make sure that we understood correctly?

Sure. Do you have any additional thought by using the Bicentenario Pipeline instead of using Caño Limón? And how Meta's situation should affect your production figures in this first quarter? María Fernanda Suárez: Leonardo, thank you for the question. Regarding our operational situation on Bicentenario and Caño Limón, I think that the most important thing to highlight is that on previous times when we had those kinds of issues we needed to stop production, and that has not been the case this time. And in terms of production you can expect if things stay as they are right now. In terms of cost, I will have to say that for the action segment it increases its cost because the action segment has had a cheaper pay with Bicentenario. And when they have to use the other corridor and transfer the crew through Ocensa they have to pay both the cheaper pay at Bicentenario and also the tariff at Ocensa. However, this is highly compensated by the revenues that we get out of Ocensa. So, for the group it does not account for an extra cost, but it does for the action.

And regarding Meta, Meta's present situation? Felipe Bayón: Meta, yes, can you expand a bit in terms of Meta?

Like should it affect your production this quarter? Felipe Bayón: Yes, we should see an impact in the quarter. I think the good news is we've managed to restore production fully. We've actually seen an increase in some of the production. We're doing some things in and around our operating fields, but we may see a small impact in the first quarter because of that situation.

Okay, guys. Thanks for the answers.

Our following question comes from Daniel Guardiola from BTG Pactual.

Hi, good morning guys. Can you hear me well? So, I have a couple of questions here. One related to hedging strategy, the other to CapEx on potential inorganic growth. So the first one is basically, I mean, in the last weeks we saw the finance minister announcing that they were analyzing the possibility of developing an oil hedging strategy in order to smooth to volatility of the oil fiscal income. And in that sense, I wanted to ask you guys if the company is considering to put in place a heading strategy and take advantage of the current high oil price scenario, and somehow locking profit right now? So that's my first question. And my second question is regarding to the already announced potential source of reserves growth coming through inorganic growth. And I would like to know if you guys could share with us more color on what's the strategy that you are looking at right now in terms of metrics, countries, and the main rationale behind the strategy to possibly add reserves in organics? María Fernanda Suárez: Daniel, thank you for the question. Well, regarding our hedging let me tell you two things. First of all, what the minister of finance announced in the last two weeks, it's different from the companies. What the government has said is that they're interested in using or applying a program similar to the one that Mexico has, where they hedged part of the exposure of the national budget to the oil prices. In terms of the companies' hedging strategies, what we said is that we are in the process of making a full analysis regarding the type of hedging policy that we can use. And that will be something that will be ended in the second quarter of 2018, and we expect to have something by the third quarter of 2018. It is important to mention that we at Ecopetrol have both the exposure to the brand price but also to the FX price. So fully analyzing all the risk factors affecting our financial statement and also our cash flow it's part of what we're working at currently. However, I would also like to highlight that due to our active debt strategy and accounting hedging strategy, by the end of 2017 we were able to have a neutral position in terms of FX exposure. That was something that brought some noise in the previous years. Felipe Bayón: Daniel, with respect to your question on inorganic growth and reserves, what we've said, and there's two or three things that are worth highlighting. The first one, strategically we've defined Ecopetrol as a Pan-American company. So from that point of view we'll be operating in the Americas. We have already a well-established and very solid position in the U.S. that we've grown recently. As a matter of fact, we did a deepening in our interest in the K2 Field which was extremely accretive to the value of our business in the U.S. in terms of production, in terms of reserves, in terms of lifting costs. So clearly something that we value and we will do a bit more of those when they come. But these are opportunistic. They would come on specific timings. So in terms of countries, we have a very strong presence in the U.S., we are looking at the U.S. Last year we were awarded a couple of blocks in Mexico, and we have a very, very solid and deep relationship with MX. So we'll be looking at Mexico as well. We're looking intensely at Brazil, and we're looking at our neighbors as well. So technically we're conducting a very detailed assessment of opportunities in the continent. And you can very well understand that we won't be able to give you specific details on the opportunities themselves, but when they do come we'll report them as soon as we can in terms of what we're thinking. The good news, again, and I'll just reinforce some of the messages that we gave during the presentation. We have a very strong financial position. We have a solid cash position. We've actually reduced our leverage, so I think we're very well placed to ensure that when we need to deploy the inorganic opportunities we can do so.

Our next question comes from Frank McGann from Bank of America Merrill Lynch.

Hello, good day. Just a quick question in terms of the [technical difficulty], your production has increased a bit in the quarter. And obviously I assume you're doing a lot of work here. I was just wondering how you're seeing that field, as well as maybe the results of some of the other mature fields that you have. [Technical difficulty] you seeing on costs in order to get the positive results that you're getting? Felipe Bayón: Frank, thank you for your question. The Rubiales Field I think is a successful story for us. We initiated direct operations just recently and embarked on an important investment in the field. And we saw drilling of many wells last year. And with those wells, with that investment we are able to reverse the trend of the field. It was a declining field and we were able to increase production, and you have seen that in the last year. Our goal for the field is to continue more or less the same investment that we have seen last year this year mostly to drilling wells, and also increasing the capacity to inject water in the field. Those are the two priorities we have on the field. And our aim is to maintain the production of this high-potential field for the future.

Okay. And in terms of cost, do the unit costs. Do they rise significantly as you do this work or do they stay similar, or how --? Felipe Bayón: No, we do not expect to have increasing costs. We do produce more water, so with that water we do see an incremental cost. But to efficiencies that we have gained in the operation we were able to offset that incremental cost. So actually if you see, we have seen a reduction in the cost in the field in the unit basis. And we expect to maintain that cost for the future.

Okay. Thank you very much.

Our next question comes from Andres Duarte from Corficolombiana.

Okay. Congratulations for the results, especially the ones related to costs. I have two questions. The first one has to do with reserves and the other one has to do with the refining activity. So what the midterm expectation or forecast of the company related to the certification of offshore gas reserves? That's the first question. And the second question is how long does the optimization stage that the -- Reficar is undertaking takes. And what's the target EBITDA and EBITDA margin for the company, as well as for the activity of refining? Thank you very much. Felipe Bayón: Yes, Andres, thanks for your question. So in terms of reserves, if I may step back for a bit, if you look at 2015 and '16, the overall net reserve result was neutral. Between '15 and '16 we did not advance in our reserves booking. In terms of '17, as we announced last week, we brought our reserves to 1.659 billion barrels, which is a 126 reserves replacement ratio. In terms of offshore gas, we need to think that we've had some very, very good results in terms of discoveries. So 2014 we had Orca, and in '15 we had Kronos, and then, all the way to '17, when we confirmed the presence of a massive, very large gas province. As you will know, these would be contingent resources that need to be moved into reserves once we have development plans in place and once we have sanction of the projects and gas contract. So, there will be a bit of time or a lag between the discoveries and when these are actually booked as reserves. What we are actually doing is pushing very very hard to ensure that some of those discoveries in particular the ones in Guajira, the once [technical difficulty] can be brought to the market quickly. There is a declining production in some of the fields in Guajira. We have the discoveries. We have a very strong partnership in that area. So, that's something that we are working hard to ensure that we can bring those molecules to the market. In terms of refining, and Andres, I'll over to Tomas Hernandez. We have said that since we started the first unit in Reficar, which was October 2015, it took us between 24–26 months before we had the global performance test done on the refinery. This was December 2017. So, 34 individual plants are working very well; more importantly, the whole refinery working extremely well. We have talked about not only the positive EBITDA and profit in Reficar but also in terms of the margins that we closed at $12.5 per barrel. But, I'll let Tomas take the question in terms of how we actually see things moving forward.

All right. Thank you very much, Andres. Yes, the first part of your question is around optimization. And we like to think of the optimization phase as continuous and never ending, right? But having said that, we have defined about 150 to 200 initiates that we prioritize and we are focused on completing those. In this year, we are focusing on diet [ph] initiatives. We are focusing on cost efficiencies. And we are looking are synergies between Barrancabermeja and Cartagena refineries. That's the focus of the optimization phase in 2018. We have many other initiatives that we will continue on and out of years, but that's the focus for 2018. As far as the EBITDA target, we talked about COP 500 billion -- minimum COP 500 billion. However, as you know that depends on international margins for -- in the market and how they work through the year; both refineries expecting to run very well next year. And both expect them in to be in double digit margins for 2018.

Okay, thank you.

Our next question comes from Carlos Rodriguez from [indiscernible].

Good morning, gentlemen. Thank you for the conference call. I have one question given your investment plan between $2.5 billion or $4 billion. Do you have any guidance about the replacement reserve ratio for this year? I mean what number are you expecting for the next year in terms of this ratio? Or, if you have any target about the reserve like index for the near term that you will feel comfortable? Thank you. Felipe Bayón: So in terms of reserve replacement ratio for '18, the way we think about this is that at a minimum we need replace 100% of our reserves each year. Last year, we were successful in basically changing the defining trend in reserves replacement that we have seen over the last couple of years. So, our aim is to ensure that we can replace -- reserves as we did in '17, we not only each and every barrel that they produced but it came at a replacement ratio of 110%. So, I think that's something that's achievable. And we need to look at different sources to replenish the hopper in terms of reserves. There is existing fields in recovery and we have had some very, very successful pilot in terms of EOR, secondary and tertiary recovery in terms of bringing exploration continuing resources much quicker into reserves and production but also in terms of our inorganic focus that we want to deepen in 2018.

Thank you. We have no further questions at this time. I would like to turn the call over to Felipe Bayón for final remarks. Felipe Bayón: Thank you very much and thanks for taking part in the conference call for 4Q and 2017 results. I want to first acknowledge our workers, employees, and everybody who day in and day out is committed to insure that we produce safe, sustainable, operational and financial results. Today we have actually presented what we think is a very solid set of results. It demonstrates that we are actually deploying the strategy in a way that's successful. We have talked about some of the challenges that we have in respect of the operational environment and how we are dealing with them, but I would say that we are very, very comfortable in terms of the direction in which the Group is going. And again, 4Q and 2017 demonstrates that the transportation, the adjustments, the focus on efficiency and continuous improvement pace out. We have a very solid financial position. And we look forward to continue our discussions in the next quarterly results. Thanks again for your participation, and have a great day.

Thank you. You may now disconnect.