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Is Ecopetrol an Expensive Stock?
Posted by: Fede Zaldua (IP Logged)
Date: December 9, 2013 04:56PM

Colombia has been one of the brightest rising stars of the decade. The country knew how to ride the decade long boom in commodity prices by opening its economy and adopting wise macro economic policies. That said, I think most of the country's financial assets are overvalued. Is this true for Ecopetrol (EC)? The state controlled oil and gas company held by Ken Fisher became public in 2007, when the state sold a 10.1% stake. Since the IPO the company's shares have out-performed most of its Latin American peers and some analysts seem to be thinking that the rally in Ecopetrol's shares has gone too far. Let's take a look!

Outstanding Performance

Not only has Ecopetrol increased its production at a 16% year-over-year rate since 2008. The company has also been ameliorating its margins and its rate of its resource discoveries. Ecopetrol's third quarter results are proof of the company's continued out-performance. Ecopetrol increased its EBITDA by 13% yoy while margins expanded to 44% as a result of (1) Higher oil and gas production and sales volumes, (2) Higher refined products average prices and (3) Operating expenses decreasing by 38% yoy reflecting lower exploration costs and lower labor costs. On top of this, Ecopetrol's debt remains negligible at 0.7 times EBITDA. Besides, the company is paying an outstanding 6.48% cash dividend yield.

Most Latin American state controlled oil majors are going through some serious issues. For example Argentina's YPF (YPF) is struggling to get investments for its huge unconventional reserves and Brazil's Petrobras (PBR) is having its profitability threatened by a government that is trying to control a surging inflation rate. In this context, Ecopetrol seems like a bright oasis within a dessert. Let's take a look at the company's valuation metrics to decide if there is still room for continued out-performance by this Colombian oil major.

Is Ecopetrol's Valuation Rich?

Ecopetrol’s market value has risen by more than 400% since its IPO and the company's market capitalization now resembles Petrobras's. Still, Petrobras produces 300% more oil than its Colombian peer. That said, Ecopetrol's 2014 P/E multiple stands at 10.5 times while the company is increasing its EPS at a 20% yoy pace. Meanwhile, YPF and Petrobras trade at 2014 8.5 and 13 times earnings, respectively. Even when Petrobras's earnings multiple should return to 8.5 times earnings by 2015 if the market price of the shares stay at the same level, Ecopetrol's dividend makes me rather the Colombian oil major to its Brazilian peer. YPF is a different story since the company is, from a fundamentals-only point of view, one of the cheapest oil companies in the world as a strict result of Argentina's complicated political landscape.

Hence, comparing YPF to Ecopetrol does not make much practical sense at least for now. Ecopetrol does not look cheap but it doesn’t look awfully overvalued either. Overall, I would hold on the shares given its outstanding dividend yield but the market seems to be already discounting Ecopetrol's outstanding growth and Colombia's great potential.

Stocks Discussed: EC, PBR, YPF,
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