Fitch Affirms Ecopetrol's FC and LC IDRs at 'BB+'/'BBB-'; Outlook Stable

Business Wire, Nov 10, 2008

CHICAGO -- Fitch Ratings has affirmed Ecopetrol S.A.'s (Ecopetrol) foreign and local currency issuer default ratings (IDRs) at 'BB ' and 'BBB-', respectively. The Rating Outlook is Stable.

Ecopetrol's ratings are strongly linked with the credit profile of the Republic of Colombia (local and foreign currency ratings of 'BBB-' and 'BB ', respectively), its majority shareholder. This connection is based on the Colombian government's ownership of the company as well as its exposure to changes in regulation and receipt of subsidies from central government. Ecopetrol's capitalization process has separated somewhat, yet not entirely, the company from the government. Now the company has budgetary independency and greater financial flexibility, which bodes well for its financial profile.

Ecopetrol's ratings are supported by the company's strong financial profile, sizable and stable reserves, steady production levels and dominant domestic market share. The ratings also reflect Ecopetrol's vulnerability to fluctuations in international commodity prices and tightening environmental regulations requiring material investment in downstream operations.

Ecopetrol must participate in a competitive bid process to acquire new exploratory blocks. Since 2003, oil and gas exploration and production (E&P) has become a more competitive business for Ecopetrol, when the administration of Colombian petroleum resources was removed from the company and assigned to the National Hydrocarbons Agency (ANH). As a result, Ecopetrol must increase its capital expenditures and enter into joint ventures with other companies in order to develop future reserves and increase crude production levels to remain competitive. Before this, the company had participation rights in successful exploration blocks.

Due to the aforementioned fundamental business change, Ecopetrol established a very aggressive capital expenditure and investment program of approximately US$60 billion for the 2008 to 2015 period. The company plans to finance this capital-expenditure program using internal cash flow generation, on and off balance sheet debt issuances as well as a possible second equity offering, which could increase the company's total floating capital up to 20% and dilute the government ownership down to no more than 80%. This capital expenditure program is aggressive and required of significant internal cash flow generation to be financed. Fitch expects leverage, as measured by total adjusted debt (including off-balance sheet debt) to EBTIDA, to range between 2.0 times (x) and 2.5x over the medium term. Should leverage increase beyond this levels, it could pressure credit quality and result in a rating downgrade.

Ecopetrol is a vertically integrated oil company owned by the Colombian government (approximately 89%). The company's activities include exploration for and production of crude oil and natural gas, as well as refining, transportation, distribution and marketing of refined products. Ecopetrol is Latin America's fourth-largest integrated oil company with crude production during 2007 of 399,000 boe per day and refining capacity of 330,000 bpd.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.