ECOPETROL S.A.
Fitch Ratings has affirmed
The Rating Outlook is Stable.
In addition, Fitch has affirmed
SierraCol's ratings reflect its small but stable low-cost production profile of roughly 43,000 boed in 2023, which is balanced across its two main assets,
Despite strong operating metrics, the ratings remain constrained by the company's relatively small size and the low diversification of its oil fields.
Key Rating Drivers
Small Production Profile: SierraCol's ratings are constrained by its production size, projected to average 47,000 boed over the next four years, relative to the rating trigger of 75,000 boed. The company has a concentrated production profile split between its mains assets (CLM and LCI), representing 90% of total production, which it operates as a joint venture with
SierraCol produces high-quality crude with 94% of production having API gravity between 25-35. This gives it preferential treatment to sell locally to
Efficient Cost Producer: SierraCol is one of the lowest-cost producers in
Strong Leverage Profile: Fitch projects SierraCol's total debt/EBITDA ratio will be at or below 2.0x over the rating horizon. Fitch does not assume material addition or decreases in debt through the rating horizon. Fitch expects the company's debt to proven, developed, & producing (PDP) reserves of
Financial Flexibility: SierraCol is fully financed and should be able to cover all capex projects with internal cash flows. Under Fitch's price deck and production assumptions, cash flow from operations (CFO) should cover capex by more than 1.5x over the next four years. As of
The rating case is assuming dividends will be paid each year to its controlling shareholder,
Derivation Summary
SierraCol's credit and business profile is comparable with other small independent oil producers in
SierraCol's production profile compares favorably with other 'B' rated oil exploration and production companies operating in
SierraCol's strong capital structure is expected to have a gross leverage that will be at or below 2.0x over the rated horizon and debt/PDP of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
Fitch's price deck for Brent of
Average daily gross production of 47,000 boed from 2024 through 2027;
Reserve replacement ratio of 102% per annum over the rated horizon;
Lifting and transportation cost average of $16boe over the rated horizon;
SG&A cost average of
Hedging cost average of
Consolidated capex of
Minimum cash balance assumed at
Effective tax rate of 45% over the rated horizon.
Recovery Analysis
The recovery analysis assumes that SierraCol would be a going concern (GC) in bankruptcy and that it would be reorganized rather than liquidated.
GC Approach:
A 10% administrative claim.
The GC EBITDA is estimated at
EV multiple of 4.0x.
With these assumptions, Fitch's waterfall generated recovery computation (WGRC) for the senior unsecured notes is in the 'RR3' band. However, according to Fitch's Country-Specific Treatment of Recovery Ratings Criteria, the Recovery Rating for corporate issuers in
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Net production rising consistently to 75,000 boed on a sustained basis while maintaining a total debt to 1P reserves of
Reserve life is unaffected as a result of production increases, at approximately seven to eight years.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Extraordinary dividend payments that exceed FCF and weaken liquidity;
Sustainable net production falls below 30,000 boed;
Reserve life declines to below 6.0 years on a sustained basis;
A significant deterioration of total debt/EBITDA to 3.0x or more.
Liquidity and Debt Structure
Adequate Liquidity: SierraCol's cash and cash equivalents balance as of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
SierraCol's ESG Relevance Score for GHG Emissions & Air Quality is '4' due to the growing importance of the continued development and execution of the company's energy-transition strategy. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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