Good morning. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ecopetrol 2019 Results Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. Thank you for your attention. Mrs.

María Catalina Escobar, Manager of Corporate Finance and Investor Relations will begin the conference call today. Mrs. Escobar, you may begin your conference..

Alberto Consuegra, Executive Vice President; Jaime Caballero, CFO; Jorge Calvache, Exploration Vice President; Jorge Osorio, Vice President of Development and Production; Milena Lopez, CFO of Cenit; and Tomás Hernández, Vice President of Refining and Industrial Processes.

We will begin the presentation with the main achievements of the second quarter of 2019, followed by the highlights by business segments and financial results under International Finance Reporting Standards. We will close with the Q&A session. I will now hand over the presentation to Ecopetrol's CEO, Felipe Bayón..

Thank you, María Catalina and welcome everyone to our second quarter 2019 results conference call. I am very pleased with the results we delivered yesterday to the market. Despite a challenging environment, the numbers for the second quarter reflect the sustainability of our results.

Thanks, amongst other things to the operational and financial strength of the Ecopetrol Group. Net profit was COP3.5trillion and EBITDA was COP8.3 trillion, again this in spite of the decline of international prices for most of our valuable products and the scheduled maintenance in some of our fields and the refineries.

We continue to deliver against our strategy, especially with the entry into the Permian Basin, the most prolific in the U.S. through our strategic JV with Occidental. This is a transformational and high-value deal for Ecopetrol.

It enables us to improve our research position, increase production in the mid-to-long term and continue to deepen our knowledge into the development of unconventional hydrocarbons. Our expectation is to book around 160 million barrels of oil equivalent of proven reserves by deal close, which we anticipate before the end of the current year.

And gradually we also envisage increasing our production until around 2027, where we expect to have some 95,000 barrels of oil equivalent per day of Ecopetrol’s production share. Let me now move on to the next slide to see some aspects of the market environment.

During the first half of 2019 we experienced a high volatility environment, with a continuous weakness trend of refining margins, however, our price basket continue to perform well.

In particular, brent prices fell by 7% compared to the first semester of 2018, yet we saw strengthening in heavy crudes due to their tighter supply in the region amongst other leases.

Our commercial strategy allowed us to take advantage of this market environment and achieve a spread of $6.40 per barrel on our crude basket versus brent in the first six months of the year. Moreover, that crack spreads for gasoline and NAFTA declined significantly.

This was combined with rising prices of intermediate and heavy crudes feedstock which reduce global refining margins. The evaluation of 12% on average for the exchange rate of the Colombian peso versus the US dollar vis-à-vis the first half of 2018 help us mitigate somehow the impact of the lower brent in the first half of 2019.

I will now hand over the floor to Alberta Consuegra who will discuss our main operating milestones during the semester..

Thank you, Felipe. In the first half of 2019 operating results were positive and strengthened our position against the 2019 targets, in spite of a challenging price environment, the impact of scheduled maintenances and public order situations faced throughout the period.

The average production of the group for the second quarter 2019 was 723,000 barrels of oil equivalent per day, 2,000 barrels more compared to the second quarter of 2018, despite having successfully executed the maintenance plan schedule for the period.

During the quarter there were an average of 37 rigs in operation, six rigs more than the number used in second quarter 2018. The operation of these rigs led to the drilling and completion of 147 development wells. As of the first half of 2019, 311 development wells have been drilled 17.4% more than in the first semester 2018.

On the exploratory front, during the second quarter the presence of hydrocarbons was confirmed in the Andina Norte-1 light crude and gas and Boranda-2 sidetrack medium crude wells.

The cumulative total during the first semester is 10 wells drilled in the Colombian onshore, expecting that by year end we will have exceeded the target of 12 wells set in the plan.

On another note, I am pleased to mention that the Ecopetrol group obtained five of the 11 exploratory blocks awarded in Colombia by the ANH during the Permanent Area Assignment Process 2019.

On the international front, the MC 904 block located in the Gulf of Mexico of the United States was awarded to Ecopetrol in consortium with Fieldwood Energy as operator and Talos energy.

In the midstream, there was a good performance and contribution to the business group cash, due to the production increase, the commercial strategy to transport higher volumes by pipelines and more days of operation at Cano Limon-Covenas pipeline.

During the quarter, there were 16 attacks on the pipeline infrastructure, 48% less than in 2Q 2018, resulting in lower number of reversion cycles compared to the same period in 2018.

It is important to mention that during the second quarter, the Ministry of Mines established a new crude transportation tariffs which will be in effect from the second half of 2019 until June 30, 2023 in the downstream segment.

The Barrancabermeja refinery achieved good operational performance as a result of the maintenance plans executed during the first quarter of the year. The increase in loads compared to the second quarter of 2018 was 77,000 [ph] barrels per day and 33,000 barrels per day compared to the 1Q of 2019 as a result of greater availability of light crudes.

The Cartagena refinery reached an average load of 150,000 barrels per day with 82% of national crudes in the load composition. Mainly because of the efforts in optimizing the crude oil diet and the strong focus on asset integrity management.

The total load of the refineries for the quarter reached 379,000 barrels of oil per day, in line with the target included in the business plan. In the petrochemical sector, Esenttia was awarded the Esmeralda Cruz Merit Medal in the highest excellence category as the Colombian Company with the best results in health, safety and environment.

Please go to the next slide. During the first semester, our lifting costs grew 7.9% compared to the first half of 2018, due to the increase in well maintenance activity as well as the higher cost of subsurface services.

There was an increase in energy costs, particularly associated with the enhanced oil recovery program due to the greater volume of injected water and higher energy prices. Ecopetrol has launched its new efficiency plan.

These efficiencies are focused in reducing the cost per foot drilled, reversing the trend of growing lifting costs, and continuing the effort to reduce the dilution factor in the evacuation of heavy crudes. I will now pass to Jorge, who will tell you about the results of exploration..

Thank you, Alberto. In the second quarter, the exploration campaign continues achieving good results along with our partners. We completed the drilling of six exploratory wells totaling 10 during the year. With these results, we are very close to achieving our target of 12 exploration wells for 2019.

During the quarter we confirmed the presence of hydrocarbon in Andina Norte-1 well operated by Parex with a 50% stake and Ecopetrol with the remaining 50%, finding oil in Guadalupe and formations. Initial test in the Guadalupe formation confirm light oil crude of 40º API and gas.

Additionally the Une formation proved the presence of oil of 37º API and gas. Likewise the drilling of Boranda-2 ST well was completed in May where initial product test confirm the presence of oil of the 23º API in the Emerald formation of Eocene base.

These discoveries benefit from being located close to existing infrastructure, allowing us to leverage our strategic target of increasing reserves and production through exploration in a short period of time.

On the other hand, I am pleased to inform that the Ecopetrol group obtained five out of the 11 exploration blocks awarded in Colombia by the National Hydrocarbon Agency during the 2019 bidding round process. Of those sites, Gua-Off 10 block on the Colombian Caribbean offshore correspond to Ecopetrol and the other four to our subsidiary Hocol.

Internationally, we have strengthened our portfolio in areas of high potential.

Ecopetrol America with a working interest of 31 5% in consortium with Talos Energy with 9.56%, and Fieldwood Energy as an operator with a 58.94%, working interest with MC 904 block located in the Gulf of Mexico of the United States, bring a 252 Gulf of Mexico lease sale round process.

On the other hand Ecopetrol Brasil purchased an additional 341 square kilometers of 3D seismic which will allow us to evaluate the prospectivity of Pau Brasil and 1,600 square kilometers of 3D high resolution seismic to evaluate the participation in this [indiscernible] handed over during the second semester.

Additionally, Ecopetrol Hidrocarburos México acquired the license of 88,015 square kilometers of 3D side meets from the Campeche program for a period of 24 months.

Finally, I would like to highlight that on July 17, the Brazilian Ministry of Mines and Energy approved Ecopetrol’s participation with 10% working interest in Saturno block located in the Santos basins. In the new partnership, Ecopetrol keeps 10% of working interest while Shell, as an operator has 45% and Chevron, the other 45%.

I will now pass the floor to Jorge Osorio who will talk about the production achievement during the quarter..

Thanks Jorge. During 2019 we have been in line with our plan to achieve production between 720,000 and 730,000 barrels equivalent per day. Our production in the second quarter was 723,000 barrels equivalent per day, 2,000 barrels more than the second quarter of the previous year.

Of the total production, Ecopetrol’s fields with recovery programs contributed 30% and the subsidiaries 8.3%, reaching 60,200 barrels per day, compared with the first quarter of the year, the oil and gas production decreased in line with the planned maintenance activities for the period.

This quarter highlights, the good results of the drilling campaign of River Valley’s field compensating for the decline of the field and the drilling in the Akacias field block CPO-09 were production was triple, reaching 2,000 barrels per day average for the quarter.

This slide also illustrates the production of the Castilla, Cupiagua and Yarigui fields, which show an increase from the second quarter of the previous year. Now I turn to Milena Lope, who will tell you about the results of the Transport segment..

Thank you, Jorge. During the second quarter of 2019 the midstream segment continued achieving positive financial result with an EBITDA reaching COP2.5 trillion, this represented an increase of 10.8%, compared to the EBITDA for last year’s second quarter and achieving a 78% EBITDA margin.

During the second quarter of 2019, the segments transported higher volumes of crude and refined products, achieving 1,158,000 barrels per day, which represented 3.8% growth compared to last year’s second quarter figures.

The volume of crude transported, increased 4.3%, mainly due to additional barrels captured from alternative transportation system and the injection of crude at Ayacucho from the Acordionero oil field.

The transported volume of refined products increased 2.5, compared to the second quarter of 2018, mainly due to the inventory replenishment process that took place after the maintenance of the HDT unit at the Barrancabermeja refinery, which took place during the first quarter of 2019.

During the second quarter 2019, the number of attacks on our pipeline infrastructure decreased by 48%. As a result, there were 12 reversion cycles in the Bicentenario pipeline, compared to the 18 cycles that took place during the same period of last year, resulting in more operational days for the Caño Limón-Coveñas pipeline.

Lastly, it is important to highlight that during the second quarter, the Ministry of Mines and Energy published tariffs that have been in place since July, 2019, and will be valid through June 30th, 2023. This year, the Ministry set a negotiation process between producers and transporters, who had a chance to negotiate directly.

In some cases, agreements were reached and endorsed by the Ministry of Mines and Energy. In cases where an agreement was not reached, the ministry set targets according to the existing regulatory framework. The new tariffs will result in a moderate increase in revenues for the midstream segment and entire stability for the next four years.

With this, I hand over the call to Tomás, who will comment on the Refining segment results..

Thanks, Milena. In the first half of 2019, our refineries were impacted by challenging market conditions with international product price differentials versus Brent, reaching historical minimums for NAFTA and gasoline not seen in the last 20 years.

In addition, the refineries experienced higher crude price differentials versus Brent as domestic crude prices strengthened. These conditions have resulted in weaker refining margins consistent with those seen in benchmark refiners in the U.S. Gulf Coast.

Despite this difficult market environment, the Barrancabermeja refineries’ stable operation allowed the second quarter margin to reach a similar level of that obtained in the same period last year, reaching $10.3 per barrel versus $10.5 per barrel in the second quarter of 2018, despite higher crew price differentials for the refinery feed slate.

The gross margin of the Cartagena refinery in the second quarter of 2019, decreased by 41% compared to 2018, reaching $6.6 per barrel, mainly due to international market behavior and the high level turnaround activity during this quarter.

Please go to the next slide to highlight the planned maintenance activity executed at the Cartagena refinery in the quarter and crude throughput performance for the refining segment.

This turnaround activity at the Cartagena refinery consisted of the execution of the first major turnaround over hydrocracking unit since the start up of the new refinery and a planned furnace decoking shutdown at our delayed coking unit.

The hydrocracking unit catalyst was replaced as well as key pieces of equipment cleaned and inspected, ensuring availability of key assets for a new four year operating cycle of the plant.

Even with the execution of this planned turnaround activity of the Cartagena refinery, crude’s throughput reached in an average of 150,000 barrels per day, near the 153,000 barrels per day during the same period the year before, while increasing the percentage of domestic crudes in the feed slate 82%, up from 79% in the second quarter of 2018.

The aforementioned was achieved thanks to the implementation of process optimization initiatives focused on crude slate improvements and plant reliability. During the second quarter of 2019, the Barrancabermeja refinery returned to stable and reliable operations after the heavy return on activity executed during the first quarter of 2019.

The throughput in the second quarter of 2019 increased 33,000 barrels per day as compared to the previous quarter. The higher availability of light crude oil during the second quarter of 2019 versus the same quarter of 2018 allowed a throughput increase of 4%.

In our petrochemicals area, during the second quarter of 2019, Esenttia demonstrated excellent safety performance and stable operations, capturing better margins with a more stable behavior of its raw material price. On the biofuels front, Bioenergy energy advances in activities related to industrial maintenance during the sugarcane growing season.

Now I turn the presentation over to Jaime Caballero, who will comment on the financial results for the period..

Thank you, Tomás. In the first half of 2019, we continue to deliver solid financial results. We achieved an EBITDA of COP15.7 trillion and a net profit of COP6.2 trillion. The group's EBITDA margin has shown a rising trend since 2016 and it’s now at 45.7%.

Our main gearing metrics remain sound and are in line with many industry peers that grows depth to EBITDA and net debt to EBITDA ratios where at 1.2 times and 1 time respectively.

EBITDA per barrel was down slightly compared to 2018, largely due to lower international prices for crude oil and refined products and the impact of scheduled maintenance, especially at the refineries, whilst Brent has fallen $5.5 per barrel in the first semester of the year, our EBITDA per barrel fell only $2.2 which in net terms leaves us being $3.3 per barrel more profitable.

The net profit breakeven close at $31.9 per barrel, showing a favorable trend versus previous periods, also with a larger spread against Brent. We highlight the results below the operational line due to a lower effective tax rate and a reduction in our financial expenses.

Likewise, we also kept our ROACE above 13%, reflecting the efficiency and operational profitability of the capital allocated by the company. The group’s total EBITDA remains stable.

It is worth to highlight the rise of the midstream segment EBITDA to COP5.1 trillion, mainly as a result of the increasing volumes carried by pipeline that were previously carried by tanker trucks.

This increase help mitigate the impacts of lower international prices of Brent, NAFTA and gasoline and the effect of scheduled major maintenance at both refineries, as well as in some producing fields during the first half of the year. Now let's move onto the next slide to see the business group’s cash flow.

In the second quarter cash flow funded the payment of the first and second installments of dividends to shareholders declared over 2018 profits, totaling COP6.5 trillion.

In the first half, free cash flow was positive at COP6.7 trillion, driven by operating cash flow generation of COP16.3 trillion and a variation in working capital, highlighted by the transfer made by the fuel prices stabilization fund to both Ecopetrol and Reficar for COP1.9 trillion, corresponding to the outstanding balance of the first half of 2018.

Operating cash flow also covered the COP3.8 trillion income tax payment and CapEx totalling COP4.1 trillion pestle. The financing flow of COP8.8 trillion, included the aforementioned payment of dividends to Ecopetrol SA’s shareholders and the payment of dividends to non-controlling shareholders in the midstream segment totalling COP0.5 trillion.

The six months period ended with a cash balance of COP12.7 trillion. Let's now move on to the next slide to review the business group’s investment plan. During the first half of the year CapEx execution increased 38% versus the same period the previous year, reaching a total of $1.4 billion. 81% of investments were deployed into the upstream segment.

Growth investments accounted for 73% of the semester's execution. $0.5 billion were allocated to drilling and well completions that support short and medium-term production goals. $0.2 billion to build facilities and $0.1 billion for studies required to progress opportunities that support long-term development plans.

Investments in continuity were primarily related to the major maintenances undertaken in some downstream, upstream and midstream assets. This year, we expect to initiate payments related to the joint venture with Occidental in the Permian announced earlier this month.

Ecopetrol‘s participation in the future joint venture development investments is estimated at $6.4 billion plus $750 million of carry to be deployed mainly between 2022 and 2027. From 2024 onwards, the project is self sufficient in terms of cash.

In 2019, expected payments amounted to around $900 million, out of which $750 million are allocated to the initial payment between $50 million and $60 million to the carry with Occidental and between $65 million and $75 million to Ecopetrol’s share in the development CapEx.

We reiterate our organic investment guidance between $3.5 billion and $4 billion that added to the inorganic investment planned for this year would bring our 2019 CapEx to a range of $4.4 billion to $4.9 billion. I will now hand the floor over to the CEO for his final remarks..

Thank you very much, Jaime. We believe that the long-term growth demands are clear commitment to sustainability, and it is for this reasons that I would like to share with you some and just a few of the many initiatives we're working around, specifically sustainability.

First of all, we're contributing to improve the air quality in the cities in Colombia, this by supplying natural gas and low sulfur diesel to the massive transportation systems. We're supplying to the new fleet of Bogotá’s TransMilenio, ultra low sulfur diesel with less than 10 parts per million of sulfur.

Secondly, we have achieved the independent verification of a reduction of over 1 million tons of CO2-equivalent in our production processes between 2013 and 2017.

Finally, in the first half of 2019, we recycled over 44 million cubic meters of water, this is 4% more than what we did in the same period of 2018, thereby, reducing disposal into water streams. Now let's go to the next slide to see the progress on our business plan.

To conclude, I would like to mention some of the most prominent results of our business plan. In the international arena, we achieved two very important milestones that point out to the growth of reserves and production. First, our entry into the Midland in the prolific Permian basin in a JV with Occidental.

First, our entry into the Midland in the prolific Permian basin in a JV with Occidental, with this JV, we will further deepen our knowledge in the development of unconventional hydrocarbons. Secondly, the recent approval by the Ministry of Mines and Energy in Brazil for the transfer of 10% stake in the Saturno block to Ecopetrol.

This located in the central region of the Santos Basin in the Pre-salt in Brazil. In the midstream segment, recently, the new transportation tariffs were set and this provides a key signal of stability for the next four years.

We continued to meet the operational goals of our plan and remain committed to improve structural efficiencies across our operations to accomplish sustainable and profitable growth.

Finally, I want to highlight the solid financial results achieved amid a highly uncertain market and the multiple challenges imposed by the environment in which we operate. With this, I want to thank you again, and open it for Q&A..

[Operator Instructions] And we have a question from Carlos Rodríguez from Ultraserfinco. Please go ahead..

Good morning, everyone and thank you for the conference call. I have two questions.

The first one is related to the cost and – I mean if we should see this behavior for the rest of the year, I mean, what is the rationale behind that costs that I believe are mostly in pesos are rising faster than revenues, that are in dollars and actually are boosted by the weakness of the currency..

[Foreign Language].

Okay. And my second question is another topic, I mean, it’s regarding the Saturno block that you currently have 10% of stake.

I want to know what are the terms of intellectual property with the – all the engineering developed there? And is it similar as the agreement reach in the Permian in order to bring this knowhow to Columbia, when you start operating the offshore?.

Thanks for the questions, Carlos. With regards to the first question around cost, I think the frameworks for thinking about costs and its link to currencies that around 60% to 65% of our revenues are straight dollar-based and around 40% of our cost structure is peso-based.

So that gives you and obviously, there's some kind of natural balances between them but it does create an overall effect whereby peso devaluation actually benefits the group.

So broadly speaking, a change of COP100 in the representative exchange rate, it has an effect of around COP400 billion to COP600 billion in EBITDA so that’s the way to think about it. Now when you think about the outlook for the remainder of the year, I think you need to go back to the fundamentals of the guidance that we have provided.

Generally, when you see our integral cost structure, there's only two places where you're actually seeing increase in cost. One, you're seeing a cost related to the product imports that we've made associated to the maintenances in refineries over the second part of the year. That's very episodic.

That's something that we don't see as a sustained effect over the coming six months. And secondly, when you see at the lifting cost structure in E&P, Alberto has spoken about the increase that we've seen going from $8.5 per barrel to $9.1 per barrel.

We see that as a result of the increased activity levels associated to maintenance but we believe that's not going to fundamentally change over the coming months. We believe that our year-end position around this is going to be anywhere between $8.5 to $9.5 per barrel, which is in line with the guidance that we have provided in the business plan.

I think exchange rate is going to be a factor on this, to the extent that the exchange rate remains where it is right now, it's actually going to leverage overall group results. And that's something that we need to kind of monitor through the coming months..

Thanks Carlos. This is Felipe and I'm going to talk about the Saturno and probably more broadly around the offshore. If you think about the two businesses, the joint venture, we announced recently with Occidental for the Permian and the confirmation from the Ministry of Mines and Energy in Brazil of our 10% stake in Saturno.

So the nature of the two businesses is a little bit different. The Permian, we announced precisely a joint venture. So we're both with Occidental before being a company and we'll have some of our staff seconded into the operation. If you think of Saturno, it would be the equivalent of an unincorporated joint venture. We have three partners.

We have Chevron, we have Shell and we have Ecopetrol and we'll be working within the remits and the frame of JOA, so a joint operating agreement, which has very specific clauses around the usage of information. And how we share things, how we discuss things and more importantly, how we actually take decisions.

Having said that, our objective is to strengthen our knowledge in the offshore, we've recently opened up or inaugurated a new office in Brazil with the latest in terms of technology, in terms of having everything.

In the cloud, we brought some more expertise, so people with a lot of experience in the offshore, some veterans from industry from Petrobras and other companies.

So clearly our intent is to deepen our knowledge in the offshore and the work we are doing in Brazil, not only in Saturno but also Brazil combined with the work we've done in Columbia and the work we're doing in Houston, also our presence in Mexico. It's all, with the aim, the longer term aim of improving our capabilities around the offshore.

And we've discussed in prior conversations that ultimately we would like to merge or evolve at some stage into an offshore operator. And clearly as you rightly point out, one of the bigger goals is to bring all that expertise back into the country, into Columbia. So I think it's working very closely with partners in Brazil.

There's very clear rules in terms of information and technology transfer and how we deal within the JOA with the end objective of bringing that expertise back into the country. Thanks Carlos..

Okay. Thank you, Felipe. And thank you, Jaime..

And we have a question from Luiz Carvalho from UBS. Please go ahead..

Yes. Hey, how are you? It’s Luiz Carvalho from UBS here. I have basically three questions, if I may. The first one and then we acknowledge due to the recent movements that you made on the upstream part of the business, which I mean was part of our concern in terms of the reserve life and so on.

So how can we see these movements looking forward in terms of reserve level, I mean, is there any target or internal target that you can share with us that you would be more comfortable in terms of reserve life for – in terms of production growth sustainability in the long-term. So that's the first one.

The second one is more on the downstream part of the business. I mean, recently the government announced some changes or some plans on the stabilization fund because of the deficit. And by the way, I have to say, the IR team that provided of great help for us here trying to descend.

But how the company see these looking forward, because now, we’re understanding that there’s not an easy solution, in terms of reducing the deficit, I mean, someone has to pay for that either the population or the government or – it’s the companies you’re covering the process? And the third one, the third question is about you’d say potential for the acquisitions, I mean, when it look to the balance sheet of the company.

You’re still in a very comfortable situation that one-time net debt-to-EBITDA. So, I was wondering if you looking to acquire potential some companies or even more assets looking forward. Thank you very much..

Thanks, Luiz. And I’ll take the first one and the third one and then I’ll ask Jaime to talk about the FEPC on this stabilization fund. So, if you think about the recent announcements we made particularly with the JV in the Permian. Few things that I think, it’s worth just putting again into the context of the conversation.

So, the first thing, we estimate that we will be able to add around 160 million barrels of reserves before year-end. So, this is in line with closing of the transaction. We will be able to book those reserves. If you think about how much we produce in a year, and I’m giving you sort of ballpark numbers, but we produce around 240 million barrels.

So, 160 million barrels that we would add through the JV is equivalent to 0.7 years of reserves. So, I think that’s very good news. Historically, we’ve said that we want to be able to book in the order of 100% of our production every year. So, from an organic point of view, we want to replace every single barrel that we’ve produced.

If you look at 2015-2016, those were not good years. We’re basically netting out one year with the other, we added nothing, 2017 and 2018 126% and 129%. So, I think that trend is being reverted. The announcement that we made recently with the JV with Oxy clearly is very accretive.

It’s substantially accretive in terms of reserves; it gives me 0.7 more years and this will be in addition to our objective of adding 100% reserves organically. So again, the trend is something we will not be able to change in one quarter. But I think as in directionally, we’re showing that we’ve – we’re delivering on what we’ve told the market.

You ask us, if you’re comfortable? We’ve said, look, we – we’d love to be in the eight years to production range or a research production rate eight years or eight and a half or nine years clearly, this year 2019 will move us in the right direction.

Remember that this is probably 80%, 85% of the JV in the Permian is liquids, where we have a lower reserve life. So clearly, we’re making very good moves in terms of creating a better reserve life. So, I think that’s how we actually view it. And I link this to number three, rightly, again – signaled, we have a very strong balance sheet.

We’ve managed to reduce our leverage. We’ve reduced the overall level of our deck. We’re generating good cash. We’re very resilient in terms of prices. We continue to have a very strong transformation program.

So, all that – having said all of that, we are assessing quite a few number of opportunities, but as I’ve said before, when these opportunities are reality, we will announce them to the market, which is exactly what we did two weeks ago with the JV in the Permian, which again, we think it’s extremely, accretive, is good not only in terms of production and reserves, but it’s extremely important in terms of EBITDA and the impact that it will have on our financials mid-to-long term.

Jaime?.

Luiz, thanks for your question. And with regards to the FEPC, the stabilization fund for fuels. And I think, there has been a number of announcements lately, but I think it’s important that we start with the facts.

I think what the government has stated and our understanding from conversations with the government, is that – what the government seeks is the sustainability of this system, right? It’s not about eliminating necessarily the system, it’s about how do you make it sustainable? And in particular, how do you lower the fiscal burden associated to the system? I think, when it was designed it had contemplated some compensation mechanisms that due to a recent market dynamics, by reason, I mean over the last couple of years, it has actually created an increasing burden for the government.

And I think the way that we look at it in Ecopetrol; I think there’s kind of three or four a key principles in the way that we engage with that conversation. I think firstly, when you look at the market outlook that deficit that the government is in a way taking care of should reduce over time. It should not become more ample.

It should actually reduce. I think that’s going to help. That’s one consideration.

The second consideration is that the government already has taken some steps in that regard such as the change that we discussed in the previous call with regards to the treatment of VAT associated to the value chain – to the fuels value chain in particular, you might recall that we spoke about that change of the 19% to 5%, which is actually reducing the burden that the government needs to carry.

As we look forward, I think there’s two or three principles that the government is taking into account in this conversation or at least as we plan ahead, we think our key planning principles. The first one is that the formulas associated to recognition of fuels will remain tied to international prices.

I think there’s several mechanisms around this, but that fundamental view that it’s going to be tied to international prices, it will remain. I think that’s a commitment from the government. Secondly, we believe that there is not to be any negative impact to the prices that are recognized to the producers. I think that’s very important too.

in any scenario that you cover, whether you go to, currently we’re on an expert parody, where we move to a flat pricing or input priority in any of those scenarios, the prices that are recognized to the producers will remain unharmed, right? So, I think that gives us some of view that from a planning standpoint, while there is some uncertainty around exactly what road the government is going to take on this, it actually does not represent a downside to Ecopetrol.

That’s how we’re looking at it. I think lastly, a couple of developments that we think are particularly interesting and I just want to recognize what you mentioned about there’s not being any easy solution for this.

the government as you know, in the national development plans, actually included an article that makes references to specific to hedging to allow management of this.

We believe and we have been in conversations with the government on that regard that those sort of instruments could actually have a material impact in the – in lowering the fiscal burden that the government has.

So, all these to say that, that we remain cautiously optimistic about how this is going to develop, but certainly, in the near and medium-term, we don’t see any negative effects for the group..

Thank you very much. Very clear explanation. If I just may come back to the first question – the first and third question that you, I mean, you just comment on, I mean a knowledge you attribute the great efforts that the company made over the past, mainly the couple of months and we believe that there is very, in the right direction we premature that.

But I mean, despite the current liquidity of the stock, are there any blends that, I mean from a capital market’s perspective that you might considering to actually increase the free flow of the company..

Yes, Luiz. well, let me take that one. In terms of what we’ve said before, and this hasn’t changed in the last few quarters or so. We understand that there may be appetite for increased liquidity in the market, which is good. It’s acknowledgement of what the company’s doing, what it’s done in terms of the value that it can provide.

but rightly pointing out at this stage, we’re in a very good position in terms of our leverage and how much depth we have in terms of our ability to generate in terms of us being able to continue to be self-funded, which is fundamental.

So, from that point of view, there’s no – if you will, immediate action that we would take in this arena or in this area. So, yes, no changes to what we’ve said before. Thanks, Luiz..

Okay. Thank you very much. Sorry for the long questions. Thank you..

And we have a question from Pavel Molchanov from Raymond James. Please go ahead..

Thanks for taking my question. My first one is about the shale pilot that I know you had in the Guane area that I believe was recently blocked by the court and by the environmental regulator.

Can you give us an update on what exactly happened with the guane-A and what the next steps are for you to actually begin drilling operations there?.

Yes. Hi, Pavel. This is Felipe here and let me take that one. And I’m assuming you probably said you wanted to have a couple of questions.

So, first thing, and let me step back for a second, when we presented to the market to yourselves, the 2019-2021 business plan, we highlighted that as part of our forward investment, we had included $500 million to do the pilots for the unconventionals that has not changed.

So, we are – we continue to view that as something that we will do, but you’re rightly pointing out, there’s a few things that happen. So, I’ll spend just a few minutes trying to provide a bit more color and clarity around this. So recently, there was a commission of experts like Comisión de Expertos that’s how it’s called.

That was put together by basically, the Ministry of Mines and Energy on the Ministry of the environment. So, government created these group of 13 experts, both national and international in many different fields and the experts provided a report.

And the report basically is saying, there is something called [Foreign Language], so its pilot projects for unconventionals that would allow us to do research in a way that's holistic, that's basically the intent. And they said, yes, those can be done, but there are some caveats.

And the caveats are basically around how the companies would, how the relationships would be with the communities in those areas. How we would deal with things like water management, chemicals, microseismicity emissions, noise, there seems like inflation. Potentially inflation would be an effect of us bringing that level of activity into the areas.

So that's I think the first thing, the committee of the experts is which I think was very, very helpful and it provided us a lot of light in terms of what we needed to do. Second Point is that we've actually continued to develop, through the planning and design of the pilots work inside the company. So that hasn't stopped.

We continued to do that, we’ve mentioned that we would eventually be doing pilots in the Middle Magdalena Valley and that's where warning is, but one thing that I want to point out is just one of the options that we're looking at.

So there's several opportunities in terms of the pilots in Middle Magdalena, we're also looking at Cesar and Suria, which is further north. If you look at the map and that would be more – gassier play and remember, there's a lot of conversations in country around the need to bring more gas molecules into the system, into the market quickly.

And there's actually conversation around the potential for unconventionals in Atlantic, which is further north. So from a geological point of view, there's more than one geography, where we're looking at. In terms of the two things that happened recently.

One, the Consejo de Estado which is like the highest administrative court in country said that they would study in detail the exploration of unconventionals and the regulation – and the technical regulation around doing unconventionals..

So we've said we'll leave close, but we've said a few things. One, we're extremely respectful of the work that the Consejo de Estado is doing. It's going to take some time, but we remain committed to do the unconventional pilots.

Second thing we want to do this, description we've used is like operating inside a fishbowl so everybody can look into communities, the unions, the regulators, the academia, NGOs, everybody will look into in terms of how we're operating.

And probably the more important thing, this is a mid-to-long term transformational opportunity, not for Ecopetrol, for the country. We've said that currently the country has around 2 billion barrels of reserves, what we've assessed is liquids there could be 4 billiion to 7 billion, 4 billion to 8 billion barrels.

So instead of having six years of reserves, we could have 20 years, 25 years, 30 years. And in gas where we currently hold as a country, 10 years of reserves, if we look at Cesar and Suria alone, we could have 50 years, 60 years or 70 years of reserves. And lastly, we've said this is something we don't want to do quickly.

This is something we want to do, right? And we want to do as it has to be done, precisely because it could be a transformational opportunity for the country. And Pavel, not sure if you had a follow-up question or a second question. I think you've mentioned something..

Yes, I do. Thank you for that. On offshore exploration, so you've talked, quite a bit about the Brazilian opportunity, but of course, the domestic opportunity in Colombia on the Caribbean has seems to have been sidelined or not a central for you as maybe a two or three years ago.

I'm curious what the next steps are to kind of continue or revive offshore exploration along the Caribbean coast?.

Thanks for the question, Pavel. Great question. And I think it's important to mention a few things. So we remain committed to Colombia. I think that's the first thing.

We've made some very important discoveries in the next to the border with Panama, so, Kronos, Purple Angel, Gorgon and it's an area that we've now retained 100%, that's Ecopetrol and recently you may have followed this in the news that we signed the transition from a sort of study area to an E&P contract.

So I think that is in line with our continuous commitment to find the right way to develop those resources. So we're actually currently conducting a data room exercise around those discoveries.

We want to bring one or two partners that can bring expertise, remember these are large gas reservoirs that have a water depth of between 1,500 and 2,500 meters of water. So we will require expertise, technical knowledge, some of these could be at least complicated from a technical point of view.

So we are finding through these processes the right partner to bring those molecules to the market. So that hasn't changed. We recently signed another off shore next to La Guajira, so that’s in the other side of the country and the other side of the Caribbean. So that's something that we will pursue.

And we continue to look at opportunities, so a Caribbean in Colombia, clearly a focus area and very important for us in the future in terms of developing additional resources. In parallel, we continue to do our activities in Brazil and as you rightly pointed out, we've talked quite a bit about that.

We continue with our presence in Mexico and we continue with a good presence in the Gulf of Mexico, in the U.S., where we were producing roughly 14,000 to 15,000 barrels a day. And also very importantly, we continued to develop a lot of expertise around offshore exploration and development. Thanks, Pavel..

Thank you..

We have a question from Andrés Cardona from Citi Group. Please go ahead. Andrés, your line is now open and unmuted. Please go ahead..

All right, good morning guys. Sorry I was mute. My first question has to do with the dilution factor, what drives it up in the second quarter to something around 50%. And the second question has to do with the divestment of some non-core assets at the upstream segment.

Are you still working underneath and targeting to sell the asset or are you pursuing some farming's on, that's it guys. Thank you very much..

Thanks, Andrés I'll ask Alberto to talk a bit more about dilution, but if you look at our dilution factor, and I think we did include a graph in the material that we shared with you today. It's moved from a 20% in 2014 to 14.6% in the first six months of the year.

So dilution factor stays in line with what we've envisioned and clearly a fundamental area of focus in terms of what we want to do. It's allowed us to continue to transform the company. We're transporting heavier, much heavier crudes and it's given us, I think an expertise that it's valued outside of Colombia as well.

So we're working with some with some NLCs outside Colombia to – in all of our expertise on heavy crudes. And I will ask Alberto to comment on that. But in terms – and then the second thing, I have the mic, so I’ll go on.

In terms of divestments of non-core assets, we’ve said before that over the last two or three years we’ve strengthen our muscle around acquisitions on divestments.

Couple of weeks ago, we announced the JV with Oxy, which I think demonstrates that we’ve managed to take across the finish line substantial, important and transformational opportunities from the acquisition point of view.

And we continue – I’ve just mentioned, these Kronos, Purple Angel, Gorgon opportunity that we’re data roaming as we speak, where we have several companies interested in looking at the development of this gas discovery. So that will continue.

In terms of divesting things from the upstream, we permanently and on a continuous basis review, how competitive all of our assets are, in terms of their own merits. In terms of how they actually compare and stack up or how they actually look, in terms of portfolio.

We did some exercise like this back in 2016, which was, I think, relatively successful, it was good. And it’s something that we’ll continue to look on affairs, there is no announcement in this front, in terms of something that we’ll be doing very, very soon or quickly.

But I think important, we now that have been able to strengthen the company to the point where we are, we like to keep our options open, in terms of looking at things going forward and in due course should we decide to do something, we’ll communicated properly to the market. Thanks, Andrés.

Alberto?.

Good morning, Andrés and thanks for your question. Actually what we are seeing is a reduction in the dilution factor, mainly attributed to that we are transporting the crudes with higher viscosity throughout our pipelines. Secondly, we are substituting diluent, with lighter crudes that we have available locally.

And thirdly, we have cheaper costs of the NAFTA imported. So in total, we are seeing actually a reduction as I mentioned in our dilution factor..

Alberto, if I may, I know the long-term trend is the one you are describing, but it seems at least to me that in the second quarter in particular, there was an increase of this dilution factor. And I wanted to understand what is driving needs and if it affects the long-term trends, growth trend is very positive.

But my question is more about second quarter..

No. But in reality, we don’t see any affectation of our long-term view on dilution factor. On the contrary, we are seeing a steady reduction through the implementation of the co-dilution strategy, which is actually sit to the NAFTA with propane that we will see that effect broadly to 2020 or 2021..

Okay, thank you very much..

Andrés, if I may – this is Felipe, again. If you actually look at the report, our dilution cost has gone down. If you look at the second quarter 2018 to the second quarter 2019, there is a 4.9% reduction in the costs.

So, and again, maybe there’s a follow-up, follow on, you can reach out to the team, the IR team and I’m sure they will be able to provide more context around some more specifics. Thanks, Andrés..

And we have a question from Christian Audi from Santander. Please go ahead..

Thank you. Hello, Felipe. Hi, Ecopetrol team. I have three questions. The first one, Felipe, if you could talk a little bit, given your continued growth in Brazil, we have this important upcoming auction in November, related to the transfer of rights.

How interesting is that opportunity for you or do you currently have just too much, particularly with the Oxy joint venture to be pursuing yet additional growth in that country? The second question also Felipe, with regards to unconventional, given how attractive this JV with OXY has been and how time consuming and lengthy the development of unconventionals in Colombia is bound to be for the reasons you explained earlier.

Would it make more sense for you to just continue to grow your unconventional presence in the U.S. rather than focusing Colombia, given that it may take so long and you have to overcome so many barriers there? And the third and final question had to do with refining margins.

I was just wondering, given what we saw in the second quarter, in July and August, have you seen already an improvement or continually difficult refining margin situation? Has that changed at all vis-à-vis what we saw in the second quarter. Thank you..

Thanks. Thanks for the question. So, yes, I’ll take the Brazil one first. So, if you step back for a second, our strategy has been that we will operate in the Americas, so we’ll operate in the continent. So that hasn’t changed.

And clearly, I think we’ve demonstrated recently with our two entries into the Pre-salt in Brazil, that we are able to compete and we’re able to be part of a very, very competitive consortiums’ with top-notch and world-class partners, which is great.

I’ve mentioned earlier in the call that we’ve actually developed a lot of expertise in-house in Brazil. So we feel very comfortable in terms of – from a technical point of view, our ability to assess opportunities.

So, in terms of things going forward, there is – as you mentioned, there’s quite a few things in the next few months round 16, round 6, Espinoza Rozo and we’re assessing, we’re assessing things and we’ll hopefully be able to inform the market in due course. We don’t want to get ahead of the game. So we’ll be looking at that.

So we do have some other things that we have on the pipeline in terms of potential acquisitions. And I think we’ve shown the market that with the recent JV announcements, we’re able from a technical operational, financial point of view to incorporate these opportunities into the portfolio of Ecopetrol, which is I think, great news.

And we’ve talked a little bit about transfer of knowledge, transfer of technology. Second is into the operation in the JV. In terms of unconventional, and I’ll follow up with that and I’ll ask Tomás to talk about refining margins in a bit. Yes, I mean, I fully agree with you, this is not only attractive, but it’s value accretive.

The business and it also provides us with the opportunity to deepen our understanding around unconventionals. But I think the way we view this is that the opportunity in the Permian and the opportunities in Colombia are complimentary to each other.

We need to look at them as a set of things that we could do that can actually can – one can help leverage the other in terms of operational practices, in terms of expertise, in terms of developing the capabilities of our own staff.

So again, we haven’t said that, I spend quite a bit when Pavel was asking around this on some of the things that have happened in Columbia, but we’ll continue to do our work in the Permian and it will continue on that track and we’ll continue to pursue the opportunities in Colombia.

So one doesn’t exclude the other, we are fully convinced that unconventionals is something that would be transformational for the country. I mean, never mind Ecopetrol would be transformational for us.

But for the countries, one of these probably once in a lifetime opportunities in terms of ensuring there’s more a potential to underpin especially economic growth. So we don’t see these two things are exclusive or one canceling the other. There are actually two things that complement each other very, very well. Tomás, refining margins..

Great. Thank you, Christian.

Talking about margins as we know and as we’ve been talking about the market environment and the challenging conditions, that’s been the largest effect in the first semester of 2019 both the impact on product prices and the strengthening of the crude prices to our refineries, what we see going forward is we see a lot of uncertainty in the prices in the second half, continuing with crudes and products.

We do see an expect – an improvement in the environment in the second semester, especially in the fourth quarter with the impact of MARPOL in refining, which is a positive impact.

We don’t have any major turnarounds planned for the second semester, which helps actually that’s a strength that we took the two large turnarounds and we took them in the first semester. So we could take advantage in the second semester. And we do expect margins to be in the double digits in refining for the year.

So basically, the other important thing is if you look at the performance from an operating point of view, the charge – the crude throughput to refining was third – the third largest crude throughput in the quarter – over other quarters. It’s the third largest in the history.

And our cost of OpEx was continues to reduce and we think that has a positive impact and everything that we’re doing around reducing the – improving the margins in both Reficar and Barrancabermeja..

Great. Thank you..

And we have no further questions at this time. I will now turn the call over to Felipe Bayón for final remarks..

Well, thank you. And thanks again to everyone who participated in today’s call.

It’s always great to be able to understand some of the lenses and some of the things that you are interested in, some of the things that we need to further continue to assess and understand and deepen in terms of our – not only the assessments but the way in which we actually communicate and some of other focus areas. So we value that.

We value your insights and we value the questions and we value the reports as well. So thanks again for participating today. I think as Ecopetrol, we continue to demonstrate that we’re delivering against the plan that we’ve shared in the past. We continue to deliver very strongly against strategy.

We’ve had some good news around our international operations and the opportunities in the past few weeks and months. And hopefully we’ll be able to spend some more time in the next quarters or so. So thanks again and have a great day..

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