BREAKINGVIEWS-Latam's new oil king dons large and heavy crown

Mon Jun 4, 2012 8:44pm BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Raul Gallegos

NEW YORK, June 4 (Reuters Breakingviews) - A large and heavy crown awaits Latin America’s next oil king. Colombia’s Ecopetrol (ECO.CN) is jockeying to surpass Brazil’s Petrobras (PETR4.SA)(PBR.N) as the region’s biggest crude producer by market value. Solid management has helped lure billions in capital away from rivals in meddling nearby states. But Ecopetrol may struggle to live up to the high hopes for its reign.

The company’s appeal is easy to see. Last year, it grew production 18 percent to 724,000 barrels of oil equivalent a day. Petrobras, by comparison, generated three times as much but only the same amount as it did the year before. Colombia’s rising star is also more operationally efficient. For each employee on the payroll, Ecopetrol brings in about $3.9 million in sales, nearly double the yield at Petrobras.

These benefits are accruing to the bottom line, too. Ecopetrol’s 24 percent return on capital employed in 2011 easily bested the 8 percent at Petrobras, which Brazil sometimes uses as an instrument of state policy. That helps explain why in the five years since its initial public offering, Ecopetrol’s market value has quintupled to nearly $120 billion, briefly exceeding that of Petrobras in May.

The exuberance has been nearly impossible to contain. Ecopetrol is worth roughly the same as BP (BP.L), a company with nearly twice as much in annual earnings and five times the production volume. Ecopetrol’s price-to-earnings ratio of 12, nearly double the industry average, reflects the market’s anticipation.

It’s hard to justify. Ecopetrol’s enterprise value equates to $90 a barrel of proven oil reserves, the priciest rate in the world. By comparison, analysts at Barclays estimate Exxon Mobil (XOM.N) last November commanded something closer to $11. And Ecopetrol’s reserve life at current production levels is a mere seven years, while larger peers have more than a decade’s worth in store.

Assume, ambitiously, that Ecopetrol could add 6.2 billion barrels in reserves by 2020. Even then, its enterprise value would still be worth $19 a barrel, considerably ahead of comparably sized rivals. Being investment royalty isn’t hard when surrounded by the likes of Argentina, Venezuela and Mexico, where oil underwrites populism. But the lofty expectations for Ecopetrol may yet bring trouble to the kingdom.

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CONTEXT NEWS

- The market value of Colombia’s national oil company Ecopetrol reached almost $127 billion on May 15, exceeding for the first time that of Brazilian peer Petroleo Brasileiro, or Petrobras, at about $124 billion, though they subsequently reversed places. Petrobras’ proven oil reserve base is seven times larger than that of Ecopetrol and its revenue quadruple that of its South American rival. Ecopetrol’s U.S.-listed shares are up 30 percent so far in 2012, while Petrobras’ ADRs have fallen 20 percent.

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(Editing by Jeffrey Goldfarb and Martin Langfield)

((raul.gallegos@thomsonreuters.com)) Keywords: BREAKINGVIEWS ECOPETROL/

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