Welcome to Ecopetrol's First Quarter 2018 Operational and financial results Conference Call. My name is Hilda, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Ms. Maria Catalina Escobar, Head of Capital Markets. Ms. Escobar, you may begin.

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 first quarter of 2018. 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 and 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: Maria Fernanda Suárez, CFO; Max Torres, Exploration Vice President; Pedro Manrique, Acting Executive Vice President, Alberto Consuegra, Acting CEO of Cenit; Tomas Hernandez, Vice President of refining and processes; and Rafael Guzman, Technical Vice President. We will begin the presentation with the main achievements of the quarter followed by the highlights by business segments and financial results under International Financial Reporting Standards. We will close with the Q&A session. I will now had over the presentation to Ecopetrol's CEO, Felipe Bayón. Felipe Bayón: Thank you, Maria Catalina, and welcome everyone to our first quarter 2018 results conference call. I am pleased to share with you the best quarterly financial results of the past four years. These reflect amongst other things, greater efficiency and cost reductions through the transformation plan; our commitment to capital discipline; stabilization of the new Cartagena Refinery; and better oil prices and margins. Our commercial strategy continues to yield good results. The export basket spread for the quarter was $7.3 against the Brent. This is 12% better than the first quarter of the previous year. It is important to…

Thank you, Felipe, good morning. During the first quarter 2018, we completed the agreement with wells, Búfalo-1 and Jaspe6D. This one with our partner Frontera. The former is located in the Middle Magdalena Valley and is under evaluation. The later located in the Eastern Llanos Basin was declared successful. Meanwhile, wells drilled in 2017 like Bonifacio-1 and Godric Norte-1 in Llanos Basin and Pollera-1 in [indiscernible] basin are still under evaluation. The wells Lorito-1 and Infantas Oriente-1 are currently under long-term testing. Continuing with our exploration campaign 2018, two operational wells are currently being drilled with are partner Parex: Coyote-2, which is located in the Middle Magdalena Valley in the De Mares block; and Capachos Sur-2 located in the Piedemonte basin in the Capachos block. Concerning our 2D seismic activity, our subsidiary, Hocol S.A. is progressing with the acquisition of 294 kilometers in block SN-15. Currently in sovereign activity with 60% progress. Internationally and with the objective of strengthening our exploration activity to achieve our strategic roles of growth and sustainability, we participated in Mexico Bid Round 3.1, bidded on blocks shallow water #28 and #31. We continue in the preparation process to participate in Brazil's Bid Round in the presalt Round 4. Now Rafael will comment on our production results.

Thank you, Max. In the first quarter of 2018, the average production of Ecopetrol Group is 701,000 barrels of oil equivalent per day. That is 1.5% below the same period in the previous year. The results were affected by challenging community issues that caused the temporary closure of the Castilla, Chichimene and CPO9 fields and the temporary reduction in water disposal capacity in Rubiales. In spite of the events that occurred in February, in March, it was positive to recover the production to 712,000 barrels of oil equivalent per day and 715,000 barrels of oil equivalent per day at the end of March. This lead us on the path to comply with the goal established for the year. To compensate for the events of the first quarter, the company has taken a series of measures among which we have: First, creating well work and the importance of drilling campaign in Castilla with an additional rate; second, anticipation of the development of the project of the Apiay field from 2018 to 2019; and anticipation and acceleration in doing 40-acre water injection for the Chichimene field; and finally, increasing workover activity in the Castilla field, among others. In 2018, we have increased drilling activity. In addition to drilling in Castilla, Rubiales, Quifa and the Cira Infantas fields, we have reactivated the campaign in 7 fields, that is: Dina, Arrayan, Tibú, Llanito, Yarigui, Akacias and Chichimene. We currently have 18 rigs in direct operation, which has doubled the number of rigs used in 2017. In the second semester we expect the simultaneous operation of 27 rigs in our direct opearation. In addition to this 27 rigs breaks during 2018, we will have an additional 25 rigs to our operations with partners. All these activities will allow us to reach our production goal between…

Thank you, Rafael. Good morning, during the first quarter of 2018, we continued achieving positive financial results in the midstream segment. Our EBITDA for the quarter reached COP 2.2 trillion, mainly as a result of higher income across the segment. The COP 2.2 trillion EBITDA surpassed last year's first quarter results by COP 255 billion, representing an increase of 13%. Operational results for the first quarter included transportation of 1,078,000 barrels of oil and refined products per day, which represents a 0.7% increase compared to the same period of 2017. The total volume of crude oil transported during the first quarter of 2018 was 796,000 barrels per day, which represents a reduction of 1.2% when compared to the same period of 2017, due primarily to lower production from Chichimene and Castilla fields related to public order problems during the beginning of the year. In the first quarter of 2018, approximately 70% of crude oil transported belong to Ecopetrol and its subsidiaries. It is worth highlighting that the contingent operation of the Bicentenario pipeline allow the evacuation of 33,000 barrels per day during the first quarter of 2018 as the Caño Limón-Coveñas pipeline was operational just over 9 days of 2018. During the first quarter of 2018, 12 reversion cycles have been made. The total volume of refined products transported during the first quarter of 2018 increased 6.3% in comparison with the same period of 2017, reaching 282,000 barrels per day. These are due mainly to the fact that during the first quarter of 2017, the Cartagena-Barranquilla line was out of operation for 21 days to address mechanical integrity problems. Approximately 28% of refined products transported belong to Ecopetrol. Finally, on January 1, 2018, the San Fernando-Apiay system began operations, transporting 206,000 barrels per day during the first quarter 2018. With this, I hand over the call to Tomas, who will comment on the downstream results.

Thanks, Alberto. In the first quarter of 2018, the Cartagena Refinery increased it's gross margin to $11.50 per barrel, which represents a 69% increase compared to the same period in 2017. It is relevant to highlight that the Cartagena refinery has maintained double-digit gross margin for 7 consecutive months since September 2017 demonstrating steady consolidation of its operations. The throughput also showed growth reaching an average of 144,000 barrels per day in the first quarter versus an average of 123,000 barrels per day during the same in 2017. In March, the refinery established a record average throughput of 160,000 barrels per day, the Barrancabermeja refinery continue its stable operation. The refining margin during the first quarter reached $11.80 per bill compared to $14.60 per barrel in the first quarter of 2017. This decrease is mainly explained by lower gasoline and fuel oil price differentials in line with the behavior of international markets and the increase in the domestic crude oil price. The throughput remained stable in respect to the same period in the previous year. On the biofuels front, Bioenergy continues in the stabilization phase of its operation. It's worth mentioning in March 2018, Bioenergy completed its first European harvest and lessons learned have been included in the next operating line. Now I turned the presentation over to Maria Fernanda Suárez, who will comment on the financial results for the period. Maria Fernanda Suárez: Thank you, Tomas. During the first quarter of 2018, Ecopetrol Business Group posted its best quarterly financial results over the past 4 years. Earnings of COP 2.6 trillion, EBITDA of COP 7.1 trillion, and an EBITDA margin of 49%. These results were actually in the midst public security problems that affected production during the quarter. The results continue to demonstrate our solid operational performance and ability…

[Operator Instructions]. We have a question from Frank McGann with Bank of America.

Just two questions if I could. One, just in terms of the cost pressures that you may be seeing in the E&P business. I'm just wondering, if you're seeing any and what specific types of pressures you might be seeing from some suppliers or elsewhere? And then secondly, with the stronger results in the various strong oil prices environment that we're seeing right now. I was wondering, if you had thought of potentially expanding your CapEx program and moving a little bit more quickly in some of the developments that you have in some of your areas? Felipe Bayón: Thanks, Frank. Well in terms of any potential cost pressure in the E&P business, what we are seeing is that as we are ramping up on the activity, particularly around drilling development wells and all the services related to drilling those wells and putting them into production, we have clearly caught up with the offer in the market in terms of equipment, in terms of rigs. So it's something that we indeed are watching quite closely. We haven't seen any dramatic increase in terms of any potential cost pressure. But it's, I think, relevant to say that the level of activity that we are actually conducting this year is indeed ensuring that most of the equipment, if not, all of the equipment in country is being put at use; which is to some extent is actually very good news, but your point is very well taken. It's something that we watched very closely. In terms of your second question and I was having the ability or desire to expand the CapEx, I think that all the time we're looking at opportunities particularly around ILX, the near field exploration, things that we can do more quickly and we can take some developments quickly from them being prospects into them being actually resources and reserves and production and we've done some of those recently. We can talk in more detail, but I think it's important to stress that we want to remain very, very disciplined in terms of both maturing our projects and ensuring that we abide by our capital discipline. Those are very, very important in terms of assuring that we stay focused. And to some extent, even though prices have actually been higher in the 1Q of this year versus a year ago, we want to be very focused in terms of the long-term and ensuring that we can have flexibility as you point out, but we want to stay very disciplined in terms of our investments going forward.

Okay, if I could just follow up just in terms of how you're looking at the opportunity you have in Brazil, Mexico I mean the U.S. Gulf of Mexico, what are your activities right now? And what are you seeing for the next 1 to 2 years there? Felipe Bayón: In terms of Mexico and I'll start there. We've recently won a couple of contracts, those are exploration contracts. We have one with Petronas and one with Pemex. We're working on all of the design and planning stages of the activity that we need to conduct in both of those contracts. And we're very, very pleased. It's our first entry, formal entry into Mexico. We have very good relationships with Pemex. And it's something that we're very much looking forward in terms of ensuring that we can build our capability around the offshore in terms of not only prospectively but potential operations should we be successful. In terms of Brazil, we had a very long standing presence in Brazil. We have some exploration blocks. We've been trying to participate in some of the rounds. It's a market that's very, very hot in terms of people wanting to be in Brazil. Some of the bids have been on the higher end of the scale, if you will, but it's something that we are looking very closely. It's important to remind ourselves that we have very good value relationships with Petrobras. We have common interests here in Columbia, so we actually have a quite a good strategic relationship with them and I think that's worth also mentioning. In terms of the Gulf of Mexico, we've grown our production over the last couple of years. We've conducted some additional exploration activities. We have some other opportunities last year and we won a few license in the Gulf of Mexico. So we're actually quite keen in terms of the operations, themselves, in the Gulf of Mexico but also in terms of capability and expertise, because actually our Houston office supports a lot of the activity that we have around offshore operations from drilling, also from all the geosciences side of the business but also in terms of potential development. So we're very, very pleased in terms of what it brings to the overall group in terms of not only operations but capability as well.

Your next question comes from Muhammad Ghulam from Raymond James.

So the attorney general is investigating the Lisama still, what can you tell us about this investigation? Do you expect that the company will face any penalties? Felipe Bayón: Okay, Muhammad, this is Felipe again. So it's fair worth mentioning that in terms of contacts, the Lisama 158 well event is something that's been described as unforeseen. Talking to some of the experts that visited the area, this is a group of experts from the United Nations, they said looking 25, 30 years of experience we had not seen something like this. Remember that the actual outcrop for the spill was located some almost 700 feet or 220 meters away from the wellhead itself. We've had not only the Attorney General, we've had Fiscalía, Contraloria, the ANLA, which is the environmental authority. We've had [indiscernible]. So all the organizations and government that have to control activity have looked into this. And we're collaborating with them in terms of their site visits, in terms of information, in terms of ensuring that they have access to, not only everything that we're doing that's part of the response but all the activity. Two additional points: One, we're conducting our own internal investigation. This is handled by people that are not related to the operation directly so they are independent in that sense. We're going to bring some people from the outside as well of the company and we're advancing in that sense. Second thing I was going to mention is that the UN preliminary report, the group of experts from the UN have actually said, not only that this was unforeseen, it was not something that you could actually see happening, but they've actually stressed that the response was timely, has been good, and they described, although there was crude that made it…

Okay, so like you mentioned abandoning the well and cleaning up any ecological impact. Can you put a certain dollar amount on that? Or place some amount on that, how much did it cost in 1Q? And what the full cost is estimated to be? Felipe Bayón: Muhammad, I think it is still very early stages. We are committed to ensure that we have a very comprehensive response to the event. We'll have the -- I mean obviously, we're tracking cost very diligently in terms of ensuring that everything that we're doing goes into the books in terms of ensuring that we have line of sight of every single dollar or peso that is being spend. We'll update the market recently, but we don't for see that it will have a significant impact in our numbers. And the other thing that we're looking at as well is that we do have insurance. So in due course, we'll update the markets not only in the extent and scope of the recovery and the response, the extent of the cost but also all the relevant insurance aspects as well.

[Operator Instructions]. Our next question comes from Luiz Carvalho from UBS.

Felipe and Maria, I basically have 3 questions if I may here. First one, you mentioned about the long-term approach for Ecopetrol and so on. And the company has close to seven years of reserve life and from many years has been able to actually to keep this level from several -- I don't know, several actions that have been performed. But it's a little level when you compare to your main -- how can I say it, your peers. So I would like to understand it a bit better, how can we expect return on investments in order to try to increased the reserve life. And how comfortable you are with the current reserve life of the company looking out, say, to the next five years? And what could be done in order to accelerate the increase of the reserve life, that's the first one. The second, it's basically, how can I say, kind of a point where we discussed it a while ago on the potential sale of the [indiscernible] year the government stake, which was approved by the congress already, if I'm not wrong, by 80%. I mean the stock has been performing quite well at the back of the [indiscernible] and also all the actions that you were able to command. How do you see that as the CEO of the company, of the momentum of the government potentially -- how can say, perform in order to potentially even capitalize the company to go after some opportunities? Felipe Bayón: Luis, so the first question in terms of reserves. And I think it's important to sit back for a minute. So on 1/1/17, we had 6.8 years of reserves, this is combined oil and gas. At the end of 2017, so that's December 31, we had 7.1…

If I may just follow up on the first question. Is there any internal target or -- that you can share with us in terms of the reserve life for the next, let's say kind of five years that you would like to achieve or something like this? Of course in line with the capital discipline and so on? Felipe Bayón: Yes, I think the way that we think about it is in principle we want to make sure that we at least replace 100% of our production every year. And I think that's a very important principle. So you've seen that we've gone up from 6.8 to 7.1, most of that is organic, there was very, very small inorganic activity last year. I mean actually you'd like to be in the 8-year range, 8 to 9, and taking that north of 8. It's going to be a mid to long-term thing, we've been very clear that it's not something that you can fix in 1 quarter. We are taking it 1 step at a time. But we're doing a lot of work to ensure that we have optionality. I think the fact that we have cash gives us a lot of room in terms of and should we decide to pursue some of those opportunities that we're actually assessing right now.

[Operator Instructions]. The next question comes from Bruno Montanari from Morgan Stanley.

Just two quick ones. One on capital allocation and the other one on social unrest. On capital allocation, I assuming that we are at these level of oil prices for longer. So once the company is comfortable that this is the new norm, what are the priorities if you could rank in between expediting your CapEx as already been discussed, doing M&A, or perhaps increasing shareholder distribution? So I wanted to get your feeling on what is the course of action assuming the $75 oil price environment. And the second question on social unrest, there seems to be a recurring thing in the country of course it's not something that the company can control by itself, but what are things that you can change for these issues, you have a lower or a smaller impact on Ecopetrol's production going forward? Felipe Bayón: Bruno, I think based on the strategy that we've laid out, some months ago, I would say that actually we have a very balanced view on the things that you've mentioned. So going back in terms of where should we actually allocate the CapEx and which are our priorities, we want to remain very focused on discipline in terms of how we actually cover the CapEx into the activity. We mentioned that 85% to 90% of the CapEx will go into exploration of production, that is the case, we've done over the last few years. Most of the investment that we needed both in transportation and in the downstream, so we're very comfortable with that. So it's clearly staying focused on exploration and production, and going back to the heart of the business. So from that point of view, we may see some opportunities on the French to accelerate some activities, we have some better results in one…

The next question comes from [indiscernible].

I have only one question. It is -- which are your expectations for the rest of the year regarding any spreads for the crude and the product A baskets? Felipe Bayón: Yes, I think that -- and the way that we've talked about this is having a good set of results for 1Q gives us a couple of lenses that we want to use in how we look at the year. One, it demonstrates that we've been successful in terms of the transformation of the company over the last 2 or 3 years, I think that's very important. But I think it also highlights the fact that we need to stay very, very, very discipline. We want to ensure that we remain focused, discipline. We ensure that we don't lose sight of that because prices have gone out. And again where prices will go, we don't know. We've followed that very, very quickly. We've changed some of our marketing strategies in terms of how do we sell our crudes. We are actually defining more local crudes in Reficar and Cartagena, which gives us a lot of leverage. And we can take better -- yes, better leverage of the opportunity of the spreads. But it's something that we're following very, very closely. I'll ask Pedro our Vice President for marketing to comment a bit more on this.

Thank you, Juan and we look for your question. Regarding the crude, we believe that the results that we had in the first quarter were very strong compared to the results that we had on the first quarter of last year. On the crude side, if the level of prices remain pretty much the same as we have seen so far into the year, we believe that the spreads are going to be very similar to last year. So that's what we're seeing on that side. If the crude goes up, normally the spreads widened a little bit for the Kappa crudes that we export here and, which are on the heavier side. Regardless of the products, we has seen this year that the low [indiscernible] for diesel spreads, they have remain strong and the gasoline and the fuel oil from our exports, they have a lowered a little bit. So we believe that this is also a seasonality in the years in the first quarter. Normally, they weaken a little bit and going into the summer, we believe that we can update higher demand in the refinery systems, in the U.S. Gulf Coast. They will start being stronger again. And then towards the end of the year, going back to seasonality issue that we have on the products side, they will continue weaken a little bit, but on the average in the year, we believe that they're going to continue behaving pretty much the same.

Our next question comes from Lilyanna Yang from HSBC.

I guess I had a question, a follow-up on your CapEx. First quarter was very low at COP 400 million level, you had the guidance of -- well, more than COP 3 billion closer to COP 4 billion. The question is, how much of this is stepping stone? Or how much is flexible to be pushed for next year? I think if you could just let me know how much of this will be for the enhanced recovery projects? And I also wonder if there's anything within this number that would be unconventional? How is the potential pilot project there's for you guys? Maria Fernanda Suárez: Regarding CapEx execution on the first quarter, I will highlight that further. There's a lot of seasonality in our capital expenditures. So we keep our target of investing during 2018 between COP 3.5 billion in COP 4 billion, that's the target and we keep it. The only problems that we have during the first quarter due to the Los Llanos social unrest that resulted in a lower execution of around COP 50 million. Regarding your question for longer-term. What we expect is to be on the same range of CapEx as the ones that you're seeing this year. So you can expect for the years 2019 and afterwords, more or less the same level of CapEx. And regarding your question on unconventional's, we do not have any plans on unconventional's for 2018.

The next question comes from [indiscernible] from CrossRegional.

During the first quarter you made some changes to your bylaws. Could you please expand and explain to us what the objectives were in doing so and maybe the major changes that were affected? Felipe Bayón: Susan, during the AGM, that took place at the end of March we updated the bylaws via [indiscernible] for the company. And a lot of those had to do with ensuring that we were up to speed with some of the changes in terms of regulation. So there is nothing in terms of a big structural change. There's a lot of ensuring that we were very clearly and orderly following some of the changes that we've seen in terms of updating, some of the decision-making and how the company is one. So there is no one specific change. There is actually a lot of -- many different minor things that were updated. We can provide a bit of detail should you want that, sort of as a follow-on conversation or in terms of an offline. And the other thing that was important is that the government restated its commitment to ensuring that the rights and how minority shareholders were going to be treated was explicitly reinforced, restated and included in these bylaws. And I think that, that's a very important point. So that's the one that I would highlight, and I was obviously very [Technical Difficulty] for all the minority shareholders and should you wish, so we can have a follow-on conversation with more detail.

We have a question from Daniel Guardiola with BTG.

I have a couple of ones. One regarding the cost structure, and the other 2 regarding production. So looking at the cost structure, you did a terrific job on controlling cost in the quarter. Overall, oil prices went up, 24%, so I wanted to know, looking forward, how sustainable is this cost structure? And what are you expecting out of your costs? So that's my first question. And my second question is regarding production. And I wanted to know your thoughts on this. And even for the production peaked somewhere around 100k barrels per barrel back in 2014. And if you were to assume the oil prices remain at this current levels of $70 to $75, how likely it is for the Ecopetrol to actually become once again into growth store in terms of production? Felipe Bayón: So I think in terms of the cost structure, I would highlight that the job is still not done. So it's something that we need to continue doing day in and day out 24/7. We do think that a lot of the costs are sustainable and I'll take a couple of examples. One, transportation, very, very large costs in terms of getting our production from the fields to the market. And in that, the level of this cost that we transport is very important and the fact that we have lower dilution factors from 3 to 4 years ago, back than 22%, now 14% to 15%, demonstrates that we can continue to push the envelope from a technical and operational point of view and have a transportation of heavier crudes basically. And that hits the bottom line. So we do think that a lot of these are actually sustainable. Same thing for energy, we're very large consumer of energy. Last year, we created…

The next question comes from Andres Cardona from Citibank.

Just one quick question regarding the transport segment. I want to understand if possible, how much EBITDA do you think San Fernando-Apiay system system add to the first quarter results?

This is Alberto Consuegra. It is about COP 100 billion for the first quarter.

Thank you. We have no further questions. I will turn the call over to Felipe Bayón, CEO of Ecopetrol for final remarks. Felipe Bayón: Well, thank you again. Thank you very much for participating in this results call for the first quarter of 2018. We appreciate the work that you do in ensuring that we have a comprehensive follow-up from yourselves, we valued that. We appreciate the feedback and input and the questions. I've said before at the call, we're very pleased with the results. But I think we're very cognizant that we need to remain focused. We need to stay very close to the operational discipline to ensure that we operate in a way that's responsible with the environment, the communities, that are around -- in and around operations. And we do see ourselves in the past to ensure that we can deliver our strategy and particularly around the growth on both production and reserves. And again doing this in a way that's very disciplined and ensuring that we always have -- we abide by the financial frame that we have set for ourselves. We thank you for participating in the call again. And hope you have a very good rest of the day. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.