Ecopetrol S.A. Q1 FY2024 Earnings Call

Good morning. My name is Natalia, and I will be your operator today. Welcome to Ecopetrol's Earnings Conference Call in which we will discuss the main financial and operational results for the first quarter of 2024. There will be a questions-and-answer session at the end of the presentation. Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management include projections of the company's future performance. These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections shared in this conference call. The call will be led by Mr. Ricardo Roa, CEO of Ecopetrol; Alberto Consuegra, COO, and Maria Catalina Escobar, acting CFO. Thank you for your attention. Mr. Roa, you may begin your conference.

Good morning, everyone. Welcome to the first quarter of 2024 earnings call, a quarter in which we are moving forward on the path of growth. Thanks to the collaborative work of all our employees and partners. The results show that we are still maximizing the opportunities in our traditional business. We continued to achieve excellent operational figures. We closed the first quarter with a production of 741,000 barrels of oil equivalent per day, a transported volume of 1,118,000 million barrels per day, and refining loads of 428,000 barrels per day with a high operational availability of our refineries at 96%, reaching levels comparable to the best refineries in Latin America. During the quarter, we announced the commercial viability of the Arrecife gas field in the Cordoba department, adding approximately 6.7 million cubic feet of gas and the signing of a gas exploration agreement in Piedmont Norte with Paris. This milestone is indicative of our commitment to the country's energy security. These achievements are complemented by the outstanding commercial strategy highlighting our subsidiary in Houston, Ecopetrol U.S. trading, which started operations in October 2023 with a commercialization of 16.7 million barrels of crude and products generating an EBITDA of $37.1 million and a net profit of $28.5 million in the first quarter of 2024, 185% above the plan for the period. We are able to face the El Niño phenomenon with resilience by implementing planning, optimization, and saving strategies throughout our operations and processes. Examples include the accelerated maintenance at Cupiagua, timely delivery to the power plants, and an 80% water reuse rate in our operations. Our growing production translates into solid financial figures with competitive profitability showing EBITDA margins in line with the average of the last eight years. In this way, revenues reached COP 31.3 trillion, EBITDA reached COP 14.2 trillion, net profit reached COP 4.0 trillion, and ROCE stood at 11%, in line with our annual target. The main impacts on the results compared to the first quarter of 2023 are mainly due to exogenous variables. Over the past year, the exchange rate dropped by COP 845 affecting the reporting of variables in pesos and explaining 80% of the variation in EBITDA. When analyzing the figures in dollars for the quarter, we observed financial results at similar levels compared to the first quarter of 2023. Other variables affecting the results include increased costs due to the El Niño phenomenon, inflationary pressures, and the fall in product differentials as a result of market oversupply. Efficient management of accounts receivable with the Fuel Price Stabilization Fund, accompanied by adjustments to gasoline prices, allowed us to reduce the accumulation by 72% compared to the first quarter of 2023, ensuring lower working capital pressures for the company. Additionally, on April 1st, we received the transfer of COP 7.80 trillion corresponding to the account for the first quarter of 2023, highlighting the nation's commitment to FEPC payments. I want to highlight the successful closure of the legal process of the arbitration award for the Cartagena Refinery after seven years of work and effort, in which we protected the interests and reputation of the company, and we have already received the corresponding compensation. I want to give a special recognition to the Cartagena Refinery team for their constant work and commitment to successfully complete this process. We maintain competitiveness in returns for our shareholders. At the General Shareholders Meeting, a dividend distribution of 67% of the profits for 2023 was approved, corresponding to COP 312 per share to be paid in two installments in 2024, one of which has already been paid to minority shareholders in April. Additionally, I highlight the annual dividend yield of 14%, which continues to be competitive in the industry. The operational achievements align with environmental, social, and governance milestones that support the strong performance of our traditional business and the path towards a fair energy transition. In the environmental field, and in line with our ambition to achieve net-zero emissions by 2050, we achieved a reduction of 50,000 tons of CO2 equivalent direct emissions in Scopes 1 and 2 during the first quarter of the year, accumulating a reduction of 1.54 million tons of CO2 equivalent from our operation, which is equivalent to the annual electricity concession of 80 million Colombian households. We also managed responsibly and efficiently the water that we use for our operations. In the quarter, we achieved a reuse of 39.6 million cubic meters, equivalent to the quarterly domestic demand of 5.4 million Colombians. In line with the above, we highlight the launch of a new circular economy model, which promotes efficient and sustainable management throughout the product lifecycle in our value chain, focusing our effort on achieving goals related to climate change, water, and biodiversity, among others. Regarding the incorporation of renewable energy, we announced the inauguration of the Cartagena solar farm, the first in a refinery in Latin America with solar power. In the social field during the first quarter of the year, COP 65.8 billion were executed in social, environmental, and relationship investments, with 50 projects developed through the tax-for-works mechanism totaling COP 431.6 billion since the beginning of the mechanism. Through the social gas line, we connected 80,052 homes to gas fuel networks, accumulating a total of 43,971 connections since 2019, thus contributing to expanding access to essential public services for the communities where we operate. Additionally, in line with our commitment to these communities, we generated more than 73,000 jobs through our contractor companies, hiring 85% of local labor and generating 23% inclusive jobs. The update of the bylaws reflects our commitment to gender diversity and the adequate preparation of our leaders, ensuring that at least 30% of the Board of Directors are women and requiring more than 12 years of experience for members, ensuring presence from diverse fields. The recent change in the Ecopetrol Board of Directors does not imply modifications or changes in the implementation of Ecopetrol's Group 2040 strategy. Like this, the corporate governance model remains valid, and to date, no change proposals have been presented by Ecopetrol administration. Finally, at the end of March, we observed a normal change in senior management, among which I want to highlight that 73% of the new Vice Presidents come from internal talent in the Ecopetrol Group, reflecting our commitment to the development and recognition of talent. Lastly, on the science, technology, and innovation front, I want to highlight our participation in the 10th Antarctic expedition, where measurements of gases and sampling of particulate matter were carried out, which are valuable for future renewable energy projects. Now I give the floor to Alberto, who will discuss the hydrocarbons line, not without first thanking him for his valuable management during more than seven years in the Ecopetrol Group. His contributions were fundamental for the consolidation of the strategy. Ecopetrol wishes him much success in his new challenges. Rafael Guzman, current President of Hocol, will take over as Executive Vice President starting May 11, 2024. We welcome Rafael, who has been President of the subsidiary for more than five years and has 14 years of experience in the Ecopetrol Group. Go ahead, Alberto.

Thank you, Ricardo. We highlight the advances in our exploratory campaign, allowing us to progress discovered resources into contingent resources and reserves. I would like to mention the following. The commerciality of the Arrecife gas field, 100% operated by Hocol, located in the Cordoba department, consists of the producing wells Arrecife-1ST, Arrecife-3, Arrecife Norte-1, and Coralino-1. The field showed an initial production range between 5 million to 10 million cubic feet per day already available in the local market and is expected to reach a production of 20 million to 30 million cubic feet per day by 2026. We continue to pursue the commercial viability of the exploratory success of the Arauca-8 well drilled in 2023 in the Llanos Foothills by our partner Parex, who holds 50% participation. The well confirmed the presence of light crude of 32 API degrees in the Gacheta formation and condensate gas in the Une formation with a gross production of approximately 4,573 barrels of oil per day and 7.5 million cubic feet of gas as of the end of April. Additionally, I want to highlight the agreement with our partner Parex Resources to explore new sources of domestic gas and light crude in the Piedemonte Norte Foothills. The agreement includes the Llanos 4-1, Llanos 16-1, Llanos 121, and Siriri Blocks, with a 50% participation for each party, as well as the option to jointly participate in two additional blocks. With this alliance, both companies expand their exploratory portfolio and work together to reactivate exploratory areas, expecting to increase gas supply in the medium term. Regarding offshore exploration activity, progress is being made in the maturation of the Uchuva-2 appraisal well, which is expected to start drilling by the end of this month in partnership with Petrobras as the operator. We also continue to make progress in structuring the business case for developing the Gorgon and Glaucus discoveries. Let's move on to the next slide, please. During the first quarter of 2024, the Ecopetrol Group achieved a production of 741,000 barrels of oil equivalent per day, increasing by 22,000 barrels of oil equivalent per day compared to the same period last year, maintaining outstanding results even under security issues and blockades in some territories, which impacted production by 7,500 barrels of oil equivalent per day. These results were driven by increased production from our subsidiaries, mainly in Permian, as well as positive results in Cano Sur, CPO-09, and contributions from secondary and tertiary recovery through water injection. We highlight the successful execution of the scheduled turnaround of the Cupiagua plant in January, which improved its reliability and integrity. The plant maintenance was executed in a shorter time, resulting in less production loss and more flaring reduction. Thanks to operational discipline and the use of state-of-the-art equipment, the higher production level during the first quarter has led us to increase our projection for the year to a range between 730,000 and 735,000 barrels of oil equivalent per day. In line with our TESG strategy, it is important to highlight that 93% of the water required for operations in the Upstream segment came from the reuse of production water, effectively reducing dependence on water resources. Let's move to the next slide, please. Regarding our activities in the Permian Basin, we drilled 25 new wells during the first quarter of 2024, reaching a production of 84,600 barrels of oil equivalent per day for Ecopetrol before royalties, representing 11% of the group's production. We also highlight the strong financial results of Ecopetrol Permian. In the first quarter of 2024, we achieved an EBITDA of $229 million and an EBITDA margin of 80%. Next slide, please. The Upstream segment contributed 54% of the group's EBITDA, being a profitable and sustainable segment that leverages the energy transition. The EBITDA per barrel increased by 4%, reaching $29.2 per barrel, mainly due to higher production levels, better crude basket prices, and cost efficiencies, which partially offset exogenous effects such as inflation, a higher exchange rate, and the El Niño phenomenon. On the other hand, the lifting cost was $12.1 per barrel. If normalized for exogenous factors, which represent about $3.45 per barrel, the lifting cost would be at levels similar to those of the first quarter of 2023. We also achieved efficiencies of $0.38 per barrel, driven by executing strategies focused on electrical power, reliability, and subsurface maintenance, contributing to mitigating impacts on lifting costs. Let's go to the next slide, please. Transported volumes increased by approximately 28,000 barrels per day, mainly driven by increasing crude oil production in the Llanos area and higher deliveries of Castilla Norte crude at the Barrancabermeja refinery. During the first quarter, we conducted five reversal cycles through the Bicentenario pipeline, transporting more than 1.2 million barrels in response to a preventive intervention at kilometer 153 of the Cano Limon Covenas pipeline, affecting operations in the Ayacucho section in March. Following successful repair work, the pipeline resumed operations on April 7th. As part of the strategy against crude oil theft, beginning November 2023, the Ecopetrol Group implemented an operational adjustment to transport crude oil production from the Southern region of the country through Ecuador's pipelines. During the first quarter, the Trasandino system has remained in contingency mode, available for use as needed. This measure will be reviewed throughout the year. Lastly, we highlight the segment's financial results, generating revenues of nearly COP 3.6 trillion and an EBITDA of COP 2.8 trillion, contributing 20% of the group's EBITDA. Next slide, please. In the first quarter of 2024, combined refining throughput reached 428,000 barrels per day. This was leveraged by more than 96% operational availability, the rigorous execution of scheduled major maintenance activities, and the maximization of domestic crude loads. The integrated refining gross margin was $14.8 per barrel, mainly affected by weaker diesel, jet, and gasoline spreads, resulting in an EBITDA of COP 1.4 trillion for the quarter. In this quarter, we accomplished multiple milestones highlighted by the commissioning of the mechanical recycling plant at Esenttia, currently under stabilization with a production capacity of 12,000 tons per year; the start-up of the third chemical recycling reactor to increase the production of pyrolysis oil for processing at the Barrancabermeja refinery; the completion of the construction phase of the solar park at the Cartagena refinery, inaugurated on April 12, with a self-generation capacity of up to 22.1 megawatts; and the commissioning of the new wastewater treatment plant at the Barrancabermeja refinery in February of this year. Finally, the solid cash generation of the segment resulted from strong operational results and the repayment of the FEPEC to the Cartagena refinery on April 1, 2024, corresponding to the balance of the first quarter of 2023. Now I will turn it over to Ricardo, who will discuss the main milestones of the Low Emission Solution business line.

Thank you, Alberto. In the first quarter of 2024, gas and LPG production reached 172,000 barrels of oil equivalent per day, representing 23% of the group's total production and 65% of the Colombian market share, with an EBITDA of COP 753 billion. Reinforcing our commitment to continue the path of decarbonization and diversification of our energy metrics, during the first quarter of 2024 in a scenario marked by the El Niño phenomenon, the Ecopetrol Group intensified its efforts in energy efficiency, achieving cumulative optimization of internal consumption of 0.4 petajoules for this quarter, resulting in approximately 36,000 tons of CO2 equivalent and saving COP 11.6 billion. These efforts combined with timely efficient commercial actions allowed us to decrease the energy cost per barrel from $3.03 in the last quarter of 2023 to $2.5 in the first quarter of 2024. In addition, progress was made in the planning of the supply chain, maintaining backup inventories to guarantee eventual diesel requirements for thermal generation, and optimizing times for major maintenance at Cupiagua to ensure reliability and availability of one of the main sources of gas in the country. In terms of renewable energies, we completed the construction of the solar plant at the Cartagena refinery, which has a capacity of 22 megawatts, equivalent to the consumption of 18,200 Colombian homes. This solar farm was built inside our refinery, making it the first of its kind in Latin America. We expect to reach 524 megawatts in operation, construction, and execution by the end of 2024, restating our goals within our strategy to incorporate 900 megawatts by 2025, growing sustainably and generating value for our shareholders. On the social front, we highlight two important initiatives with positive impacts on the sustainable development of the communities in which we operate. In the social gas program, we completed a pilot project in Manaure in La Guajira, where we connected more than 500 families to the natural gas service, and the beginning of Phase 2 will extend access to 250 more families, consolidating energy communities in Puerto Para and Barrancabermeja, Santander, Clavinorte, Arauca, and Puerto Carreno. In collaboration with the Wildlife Conservation Society, we aim to improve population access to renewable energy while ensuring the conservation of key ecosystems and species in the country. I will pass the floor to Maria Catalina, who will discuss our transmission and toll roads line, as well as the main financial milestones.

Thank you, Ricardo. In the first quarter of the year, the transmission and roads business maintained good financial results despite the strong impact of the Colombian peso revaluation against currencies such as the dollar, the Chilean peso, and the Brazilian real during the period. EBITDA decreased by around 16%, standing at COP 2.3 trillion. However, when eliminating the exchange rate effect on EBITDA, the results are at similar levels to those of 2023. Furthermore, we are committed to our strategic objective of diversifying our operations. The transmission and roads business continues to sustain growth in Ecopetrol Group's results, reaching a 16% share of EBITDA for the first quarter of 2024. Some of the most relevant milestones for the first quarter of 2024 include, in Panama, ISA was awarded the tender to rehabilitate, improve, and maintain 246 kilometers of the East Pan American Highway. The Panamanian Ministry of Public Works awarded this project to Intervial Chile in January with an estimated investment of COP 1.1 trillion. In Colombia, ISA was awarded the contract for the design, construction, operation, and maintenance of the second transformer project at the Primavera substation, and the fourth transformer project at the Sogamoso substation. Additionally, it signed a private connection contract for the execution of a project for the expansion of the Sabanalarga substation. The awarded projects amount to a reference CapEx of COP 146 billion. With these significant awards, the total committed investments up to 2030 amount to around COP 29.4 trillion, consolidating the growth trajectory of our subsidiary in different geographies. Finally, on April 1st, the sale of Internexa Brasil was closed with a final estimated price of COP 2.1 billion equivalent. Please move on to the next slide to detail the group's financial performance. In the first quarter of 2024, we maintained competitive levels of profitability supported by excellent operational results and efficiencies captured worth over COP 600 billion. We achieved an EBITDA of COP 14.2 trillion and an EBITDA margin of 45%, keeping us within the average of the last eight years for this period and at competitive levels compared to the industry. Additionally, the return on average capital employed, ROCE, remains in double-digits, recording 11% and above our annual target of around 9%. On the path to diversifying our business lines, in the first quarter of 2024, the contribution to total EBITDA from exploration and production was 54%, followed by transportation with 20%, transmission and roads with 16%, and finally, refining with 10%. On the other hand, we maintain healthy debt metrics with a gross debt-to-EBITDA ratio of 1.9x at the end of March. This is in line with our long-term guideline, where we aim to maintain a level below 2.5x for this indicator. Regarding debt maturity management, we maintain a dynamic of anticipating refinancing needs. Thus, Ecopetrol successfully issued bonds in the international market in January of this year for $1,850 million and obtained approval from the Ministry of Finance and Public Credit to carry out a debt management operation for $1.2 billion in March. These resources are committed by banking entities and are expected to be disbursed in the second quarter of the year. With these operations, Ecopetrol addresses its debt maturities for 2024 and 2025, in addition to demonstrating its commitment to a refinancing strategy through the capital markets and access to different credit alternatives with local and international banks. As for our investment plan by the end of the first quarter of 2024, the Ecopetrol Group invested around $1,289 million, equivalent to COP 5 trillion, with dollar investments being the highest recorded since 2016 for the same period. Investments were mainly made in Colombia with a 57% share, while the remaining 43% was at the international level, mainly in the United States and Brazil. Investments in the hydrocarbons line accounted for 67% of the total investments, grouping exploration and production, transportation, and refining businesses. For exploration and production activities in Colombia, investments were concentrated in the Rubiales, Castilla, Cano Sur, CPO09, and Chichimene fields. Meanwhile, internationally, exploration investments focus on the Permian Basin in the United States. Refining and transportation activities focus on operational continuity and maintenance of refineries and pipeline systems. In the low emission business line, projects associated with gas and energy transition represented 13% of total investments in the quarter. Resources were mainly allocated to the growth of the gas chain and supplies for fuels such as Florena and Cupiagua and in the Tayrona block in the offshore Caribbean in Colombia. By the end of 2024, we expect to make investments between COP 23 trillion and COP 27 trillion as we announce our financial and investment plan. Please move on to the next slide. Regarding net income, in the first quarter of 2024, we recorded COP 4 trillion with the following highlights compared to the same period in 2023. First, an outstanding operational performance reflected in our EBITDA through a positive volumetric effect of COP 0.8 trillion, which was associated with increased production and greater operational availability in both refineries, as well as lower purchases of crude and products. Second, an impact of COP 2.9 trillion due to a lower average exchange rate, a higher level of costs and expenses of COP 0.8 trillion, and a lower weighted average selling price of crudes and products with an impact of COP 0.7 trillion. This resulted in a total decrease in EBITDA of COP 3.6 trillion in the period. Likewise, there was an increase of COP 0.7 trillion in the recognition of depreciation and amortization as a result of higher investment levels and increased production. On the other hand, there was a lower tax provision, resulting in a positive effect on net income of COP 2.7 trillion, derived from the decrease in results. The effective tax rate for the first quarter of 2024 was 36.5%, considering the deductibility of royalties and a windfall tax of 10%. Regarding tax regulation, the final ruling on the prohibition of deducting royalties will be issued soon by the constitutional court, and the effects of such a decision on the Ecopetrol Group will be analyzed based on this ruling for the corresponding periods. On the liquidity position, we finished the quarter with a robust cash balance at Ecopetrol Group of COP 17.3 trillion. The primary source of liquidity during this period was the operating cash flow of COP 6 trillion, followed by net debt and interest inflows of COP 1 trillion. There is an improvement in working capital associated with the lower accumulation of the fuel price stabilization fund. Regarding cash outflows, the main disbursements were allocated to Ecopetrol's CapEx and its subsidiaries, totaling about COP 4.3 trillion. Additionally, in early April, the first installment of dividends was paid to minority shareholders, totaling approximately COP 738 billion, along with a payment to the nation for the same concept amounting to COP 4 trillion. Regarding the fuel price stabilization front, we continue to make progress towards reducing the accounts receivable balance, which by the end of the first quarter of the year stood at COP 22.7 trillion, supported by the positive differential between local gasoline prices and the international reference price. We see a notable and sustained decrease in the pace of accumulation, with a 72% decrease in its value in the first quarter of 2024 compared to the same period in 2023. Furthermore, the government's commitment to reduce the balance was clear in April of this year with the payment of COP 7.8 trillion from the accumulation corresponding to the first quarter of 2023. During 2024, we expect to continue receiving quarterly payments from the FEPC and collect the entire outstanding balance from 2023 totalling COP 12.7 trillion. By the end of the year, with an average Brent price close to $83 per barrel, we estimate the fund's receivable accumulation to be between COP 8 trillion to COP 10 trillion, accounting for fluctuations in the international crude oil market price and the exchange rate. This estimate is significantly lower than the amounts accumulated in 2023, which was COP 20.5 trillion and in 2022, COP 36.8 trillion. I'll now hand over to Ricardo for the closing remarks.

Thank you, Maria Catalina, and thanks to all who have made these results possible for the first quarter of 2024. In conclusion, capital discipline and the rigor of the financial evaluation of our processes allow us to face the challenging environment marked by the revaluation of the peso, the increase in energy costs, inflationary pressures, the price differential of products, and our full commitment to advancing gas supply to the country. Likewise, thanks to our technical and operational strength, we have been able to capture opportunities such as the Brent price situation, exceeding our expectations, maximizing our excellent operational performance, and diversifying into new markets to maintain a profitable and competitive business. On the production front, the good operational management of the last few months highlights the performance of our drilling campaigns in the Permian, Rubiales, and Cano Sur, the success in scheduled maintenance, the assurance of reliability levels, and the entry of new wells allows us to move forward on the growth path. We expect to exceed the target range by 2024, placing us between 730,000 and 755,000 barrels of oil equivalent per day. We will continue to execute our plan for 2024 with technical and financial strength as we advance in our strategy towards 2040. Our operation remains solid, accompanied by a rigorous plan for efficiencies and cost control. I thank everyone for their participation. With this, we'll begin the question-and-answer session.

We'll take questions in Spanish, followed by a session for questions in English. Please limit your questions to a maximum of three to ensure everyone has a chance to participate. Mr. Guardiola, you may proceed with your question.

Good morning. I have a couple of questions. The first one on production. I'd like to understand in a better way if you could give me some details about the reduction we saw quarter versus quarter both in Colombian and Permian and how you would expect the production to be during the rest of the year. And in line with production, looking at the new production change you published, this means that we'll have an average production for the next nine months between 720 million and 730 million barrels per day. What are the risks you're seeing in relation to that production during the next nine months? Would it fall by 14,000 barrels per day versus what you had in the first quarter of 2024? And the last one, a very quick one: could you give us details about the tax provisions for the second quarter of 2024 as a result of the decision of the Constitutional Court in 2024? Those would be my questions. Thank you.

Good morning, Daniel. This is Alberto Consuegra. I'd like to give you my greetings. Let's talk about production. When you look at the last quarter of the previous year, we have to take into account that Permian was completing its last drilling and completion campaign. Therefore, production increased during the last quarter, reaching 158,000 equivalent barrels per day. What happened during this first quarter? First, we see the effect of the declination of the basic curve of Permian. This means that production goes down from 100,000 to approximately 840,000, which was the average in the first quarter. Then there's the materialization of risks, including a maintenance campaign at the Cupiagua plant that affected gas production. I'll discuss forward-looking insights later for the rest of the year. The second factor was risks associated with blockades and issues we faced from third-party actions, impacting us by 374,000 barrels of oil per day in areas like Cano Sur, Rubiales, and Capachos. Lastly, we also saw the effects of El Niño phenomenon that changed production averages from 757 to what we currently have. What's in store for the rest of the year? Everything involves managing risks. We were observing the expansion of the El Niño phenomenon into April and May; however, that hasn't occurred as intensely as we were expecting, allowing production to behave better and helping to increase the range from 725,000 to 730,000 or 735,000 barrels per day. The issue of blockages and theft, particularly in heavy oil well areas, could impact production throughout the year. This links to how we approach the local territories and build relationships with communities and authorities to manage risks effectively, ultimately leading to a better production perspective. Lastly, developing activities on time is critical. We need to handle the natural downward slope of the fields correctly, for example, in CPO09, where we want an early start between June and September, but this depends on construction work progress. Failure to do so could lead to reduced production, yielding positive results only in the last quarter. Therefore, risk management is crucial. We're very optimistic and believe we will have production above our initial target, but we must reiterate that this requires timely risk management. Thank you.

This is María Catalina. Thank you for your question. First, I want to mention that the court notified the Ministry of Finance regarding the suspension of the decision. While the decision is still pending, it's important to note that in Ecopetrol, we filed our income tax returns while the decision was still in effect and related to the impact that could be observed in the second quarter of 2024. It's challenging to specify the exact impact, as it depends on how the court will rule after reviewing the fiscal aspect. Allow me to provide some possible scenarios. The best-case scenario would allow us to continue with deductible royalties, consistent with what we announced at the end of last year and at the close of the first quarter of 2024. A moderate scenario might see the court allow that adjustment of the income tax in 2023 to be carried forward into future years. Such moderation could impact our cash flow. The worst-case scenario would involve the court ruling that we cannot deduct royalties for 2023, which could impact us by COP 1.5 trillion. This would lead to a need to adjust our balance, reflecting an increased tax versus what we had reported in the first quarter, resulting in an estimated impact of COP 500 million. When the court issues the ruling, we'll assess how much would have accrued in the second quarter of the year. The anticipated impact could be around COP 2 trillion or 2.3 trillion. I reiterate that these are scenarios; the final outcome will depend on the court's judgment, and we respect their decisions. Thank you.

Thank you, Maria Catalina and Alberto.

Good morning, everybody, and thank you for the talk. I have a doubt in relation to your interest related to gas. I'd like to hear from Alberto and Ricardo about whether you have studied the assets that Canacol has in the production of gas, which represents about 20% of the demand in the country. It's clear that the country needs gas produced by that company, which might be going through some difficult financial situations. I'd like to know about those assets and if you'd be interested in an acquisition process or if you think that it's likely you might improve gas production in those fields. What are your thoughts about this?

Good morning, Ricardo, and thank you for your question. This is Ricardo Roa speaking. Indeed, we have learned through media communication about the possibility of Canacol selling its shares and assets in the country. That is certainly part of the investment opportunities that Ecopetrol continually evaluates on its portfolio, especially given our previous announcements regarding certain gas deficits in the country for the next five years. We will consider this asset in our internal investment opportunity assessments, as we do with any asset we might think of incorporating to ensure a permanent gas supply to the country. All such evaluations will occur within the rigor of our assessment processes. Any decision taken will be communicated to the market in due time regarding production levels we would aim to reach as at the end of the fourth quarter of 2023. That's our primary focus in our current investment plan. We're working to maintain the production levels we achieved at the end of last year, and the outlook appears positive; we expect even better numbers for April, reflecting our ongoing efforts to prepare our fields. Now I'll hand it over to Alberto for more insights on Canacol's gas assets.

Thank you for your question, Ricardo. I’d like to add the following. We are neighboring many different fields or blocks of Canacol in the lower valley of the Helena area. Thus, we analyze what's occurring in our fields to identify what adjustments are necessary in the development plans of our production fields. For example, in our recent announcements, we aim to adjust our objectives of exploration in those blocks or fields. We are continuously observing Canacol to develop more certainty regarding what adjustments to make in our fields.

Good morning, and thank you very much. I have three questions. If you could answer them all, well, great. But at least the first, I would appreciate if you can answer. In relation to Ecopetrol's production without America, Permian, and without Hocol, focusing solely on CPO-09, Victor, Caño Sur, and San Francisco, with Caño Sur showing production increases while others reflect reductions, both on a year-over-year and quarterly basis. I'd like to know if you expect a recovery of some of those fields that have seen reductions and what would support that expectation. The second question relates to gas, specifically regarding the feasibility of importing gas from Venezuela, and whether there are potential restrictions. Also, I'd like to know if 100% of the investments related to restoring that oil line/gas line would be done by them or if you expect participation from corporate funds for the recovery of that pipeline. Lastly, regarding midstream, there is a recorded quarterly cost reduction of around 22.8% compared to last year's fourth quarter. I would like to have an explanation of this reduction in dollars, and if you could remind us what part of the transport is priced in dollars versus pesos, and if it is gas or oil pipelines involved. Thank you very much and good luck for the rest of the year.

Well, in relation to production, I’d like to clarify the following. Generally, production in Rubiales and Castilla tends to fall during the first quarter, particularly pronounced in Rubiales due to maintenance work that takes place in the summertime. We expect to increase production in Rubiales and Castilla in addition to the mentioned fields. But you must remember that national production is mainly in Rubiales, Castilla, Chichimene, CPO-09, and Caño Sur. We need to increase production there to offset natural declines in production, especially concerning gas declines in Piedmont fields. By the end of the year, we expect slight increases in Castilla, Chichimene, and Rubiales. This, together with an expected 81,000 to 83,000 barrels of production in the Permian for the year. Regarding gas imports, I will allow María Catalina to respond to this query.

Ricardo Roa, good morning. Regarding the potential to import gas from Venezuela, we are still holding discussions with OFAC to evaluate the conditions under which we can proceed with gas import plans. The Ambassador of the U.S. in Colombia has indicated that they are reviewing this situation. We also reminder that we have an agreement in effect from 2017 to 2027, which enables the transportation of around 340,000 cubic feet per day, contingent on the quality and price established. This agreement is in effect, and it provides a legal mechanism for action once the restrictions are lifted. We've received indications that they could deliver about 50,000 cubic meters of gas per day. We're working with them on activities related to inspecting the gas-oil line. The estimated repair budget is between $35 billion to $40 billion, and the asset is owned by us. Hence, any needed activities or investments must be borne by the gas company. Several Colombian gas transporters have expressed interest in participating in the repairs and also in potentially receiving compensation for utilizing that system once it becomes operational, so we believe there shouldn't be any restrictions involved.

This is Hector Manosalva. I'd like to discuss transportation costs. The average cost of transportation for 2023 was approximately $3 per barrel, and for the last quarter of 2023, it rose to $3.75, mainly attributed to higher operational expenditures due to system repairs, either from geotechnical or mechanical reasons. For the first quarter of 2024, the cost stood at $2.99, this decline is linked to two primary factors; one, to the exchange rate and two, lower OpEx costs due to fewer repair needs compared to the last quarter of the previous year. As for revenue, approximately 80% of our revenue for the segment is dollar-denominated, while 20% is in pesos. When it comes to costs, around 84% of costs are incurred in pesos while only 16% are in dollars. Thank you.

Thank you. Good morning. I have two questions. The first is related to the lifting cost. Even though that cost was impacted by the exchange rate significantly, I'd like to know if you see a stabilization of that cost, or if on the contrary, might we observe additional inflationary effects or other factors influencing that? That would be my first question. Then the second question connects to the earlier discussion around gas imports from Venezuela. I’d like to ask whether Ecopetrol would not act as an intermediary in any aspect of this process, meaning it would occur completely through external parties, and Ecopetrol would not intervene?

Katherine, good morning, and thank you for your question. In reference to lifting costs, we examine both the monetary mass and the previous outcome from the last quarter. The lifting cost was $20; this first quarter, it showed a better result of $12 per barrel, driven by significant production levels and achieved efficiencies. We're effectively countering inflation levels—consistently renewing contracts. A critical factor is also the energy stock exchange price, which constitutes 25% of the total lifting cost. As the El Niño phenomenon diminishes, we expect energy stock exchange prices to reflect improvements throughout the rest of the year. Our aim is to maintain stability in lifting cost trends with guidance solidifying between $12 and $13 per barrel, leaning towards the lower end. Lastly, our efficiency program has targeted COP 3 billion in savings for 2024, and during the first quarter, we've achieved around COP 650,000 million in efficiencies. If we hadn't enacted this efficiency plan, lifting costs could have seen a higher increase. Regarding your second question about gas imports from Venezuela, Ecopetrol would likely engage in that commercial interaction, although assigning rights to an operator for a potential intermediary role is possible. However, it's contingent on agreements and approval, all given the legal parameters allowing for our presence in an area as such.

This is Ricardo Roa. Good morning. To clarify, regarding the potential importation of gas from Venezuela, if restrictions are alleviated, Ecopetrol would handle the commercial arrangement; otherwise, we may work with designated operators to conduct transactions. Ultimately, engaging in interactions will depend on legal clarity from officials, and none of our plans are fixed until we receive the necessary green light. Confirmed agreements are visible, but they remain contingent until obligations are fulfilled.

Good morning. My question refers to the recent changes in senior management. I'd like to know more about the process of how this unfolds, the timeline for any changes, and if you could describe the selection process given the challenges in the country. Thank you.

Ana, good morning. Again, it's Ricardo Roa. I want to remind you that we have a succession policy in Ecopetrol that we are following diligently. This policy governs the importance of deputy positions for roles deemed highly relevant and arises from various reasons; some executives might conclude their contracts, while others may pivot due to health or personal reasons. With 7,553 employees, we are naturally exposed to such dynamics. Our succession policy ensures that individuals filling deputy positions meet 100% of the required profile qualifications. This year, 72% of the positions filled were taken by individuals already within the organizational structure, many possessing years of experience in the company. We've coordinated with the Board of Directors who assess high-level roles, and we've implemented screening processes for these leadership roles when necessary; we source potential candidates internally to undergo assessments through a headhunting process when needed. So we are maintaining timelines aligned with established policies.

Hi. Good morning, everyone. I have two questions. First, I wanted to discuss the company's capital allocation strategy, particularly regarding hydrocarbons and reserves growth from an inorganic perspective. It seems the company is witnessing positive prospects in Colombia, mainly gas-focused; however, I want to understand the international strategy as well. In light of various low-carbon profile discoveries, like those in Namibia and mentions of Venezuela, could you share what your priorities are for international investments, particularly in the U.S., Brazil, and other regions? I’d also like a quick update on exploration efforts in Brazil offshore concerning Pau Brasil and Gato do Mato. If I'm not mistaken, you may have just begun drilling in Pau Brasil while Gato do Mato was under review a couple of years ago; I want to see where it currently stands. Also, given your low leverage, do you foresee room for inorganic growth outside Colombia? Secondly, regarding lifting costs, they have decreased this quarter sequentially but have been erratic; how can we think about this moving forward? Lastly, could you comment on the downstream refining segment, as we have seen strong refining margins, and how you see that behaving for the remaining year?

Rodrigo, good morning. This is María Catalina Escobar. Thank you for your questions. First, I'd like to highlight that we announced an investment plan for the next three years, from 2024 to 2026, that totals around $20.2 billion. We plan to maintain annual investments between $5 billion and $7 billion, with 60% to 65% of this capex allocated to hydrocarbons. We prioritize growth in reserves while ensuring profitable investments, targeting returns of around 8% to 10%, as previously stated. Specifically for the 2024 plan, of the $6.5 billion total investment, around $1 billion is allocated for the U.S. and $51 million for Brazil. Importantly, we did not incorporate any funds for Venezuela assets. We will explore opportunities as they present themselves, ensuring that all evaluations align with our capital allocation process. Alberto, please go ahead.

Rodrigo, thank you for your question. Currently, we're undertaking three key activities in Brazil; first, completing seismic studies in fields where we've partnered with Shell facing Santoz. Those studies have been concluded, with the evaluation phase now ongoing. Secondly, we're ready to commence drilling for some wells but await the resolution of an environmental hold affecting our sites. Lastly, we aim to secure sanctioning for another project either in the last quarter of this year or the start of next year.

Could I just make a follow-up on this question, Maria Catalina regarding...

Maria Catalina here; I was stating that we maintain surveillance on possible inorganic growth strategies. If suitable opportunities mature, we will inform the market accordingly. Regarding lifting costs, we aim to keep them stable, maintaining the projected guidance of $12 to $13 per barrel, with proactive costs managed through efficient maintenance strategies.

Hi, thanks for taking my questions. My first inquiry pertains to the lifting costs, which decreased this quarter sequentially; it has been rather volatile. I would like to understand the outlook throughout the year. I would also appreciate insights into the progress regarding extending the Permian deal with OXY. Also, regarding the downstream refining segment, we’ve seen solid margins; could you comment on how that could continue to perform for the remainder of the year?

Matheus, good morning, and thank you for your question. Regarding lifting costs, I would say that they naturally fluctuate due to external factors relating to exchange rates and the overall energy costs, as well as maintenance expenses. As long as we manage those external factors effectively, we will achieve a stable environment for lifting costs. We will retain guidance between $12 to $13 per barrel. Concerning refining margins, while we experience solid margins, they are lower than last year, primarily stemming from diminished international gasoline and diesel prices, resulting in expectations of margins around $14 a barrel for the rest of the year. Further commentary will be added by Ricardo and Nicolas.

Good morning, this is Nicolas Azcuenaga. In pursuit of expanding our relationship with Oxy and exploring other prospects, we continuously assess various options within our portfolio. Should a viable opportunity arise, we would formally communicate this to the market in a timely manner.

Thank you all.

Now we have Ann Mills from the Bank of America. You may proceed with your question, Ms. Mills.

You can hear me. Some of my questions have already been answered before. So my final one would be about your cash balance; if we can have an update. Based on your 1Q earnings, your cash balance ended around $4 billion, and you also suggested that you would receive between $1.5 billion to $2 billion from governmental payments early April, potentially bringing the cash balance to $5.5 billion to $6 billion. I think that in the slides, you only show that you have something around $1.5 billion to $1.8 billion in maturities for the remainder of 2024. Part of that would be covered with the $1.2 billion revolver that you expect to fund in 2Q. So my question is, why are you keeping such high cash balances right now? Is it related to previous inquiries for potential M&A? I have not seen such high balances for Ecopetrol, so what are your plans?

Good morning. This is Maria Catalina Escobar. Thank you for your question. In relation to cash balance, what we report at the Eco Petrol Group is approximately $6.5 billion, with around $1.7 billion of that being ISA’s cash position. It's worth noting that those funds will be allocated by ISA throughout the year to ensure operations. The cash position reflects funds received at the beginning of April post the payment from the government. However, it's important to state that we made a payment to the nation and minority shareholders in early April amounting to approximately COP 4 trillion, equivalent to $1 billion in dividends distributed. These payments, along with the cash balance needed to assure operational continuity, demonstrate that our balance, while significant now, is expected to transition as the year continues, particularly with forthcoming dividend payments slated throughout the second quarter and more projects in the pipeline.

Thank you so much.

The next question comes from Ed Paso Vasconcelles from UBS. You may proceed with your question, Mr. Vasconcelles.

Hi, thanks for taking my question. It's on the energy transition theme, and taking advantage of the company's stake. I'd like to get your updated view on precisely how to balance investments between the core hydrocarbons business and investments in alternative sources of energy. In your view, what would be the best alternative for investment? Should this be organic expansion, inorganic options outside Colombia, and what would be the top priorities in terms of regions? Are you seeing performance disparity in returns across the various regions? That’s my question. Thank you.

Thank you for your question, Tasso. This is Ricardo Roa speaking. ISA has demonstrated better economic performance in its core business model, particularly with electricity transmission. Today in Brazil, ISA's business is larger in assets and revenues than in Colombia, operating in seven countries and facilitating CapEx investments in roadways alongside energy transmission projects. ISA has the capacity to develop additional services to its traditional segment to drive growth in revenues; for instance, by potentially entering the energy generation or storage sectors with battery technologies. Should ISA’s performance grow due to the value it brings, contributing around COP 2.3 trillion to the Ecopetrol Group's EBITDA, its investors are more intentional in pursuing viable projects. Regarding hydrocarbons, we maintain a watch on potential external operations that would yield both growth in economic statistics and advantageous reserve contributions that meet our repositioning targets. The assets evaluated must align with our return expectations, and our vice-presidency regularly assesses those opportunities.

Thank you very much. Right now, we don't have any questions live. Now we have questions from the chat. Bruno, since the government has paid a considerable part of the balance and accounts payable of the FEPC. Those were reduced to COP 23,000 million to COP 15,000 billion on April 1st, expecting significant quarterly payments from the government. In this case, how quickly could the FEPC balance converge to zero? Additionally, given free cash flow and the recent agreement regarding the FEPC, what payment levels are anticipated for the next 12 months? Lastly, could you remind us about the price disparities between gasoline and diesel within Colombia versus international prices and comment on the recent price trends for both gasoline and diesel within the country?

Bruno, good morning. This is María Catalina Escobar. Thank you for your questions. To address your first question regarding anticipated payments from the FEPC, I’d like to affirm that Ecopetrol benefits significantly from the funds we continue receiving from the national government, allowing us to lower the accumulated amounts to nearly COP 15,000 billion. Out of those COP 15,000 billion, approximately COP 12.7 trillion pertains to balances accrued during the second, third, and fourth quarters of 2023. We hope to receive payments regarding those outstanding balances during 2024. Our expectation is based on discussions with the Ministry of Finance, and we are optimistic. The normal balance management reflects that we might not experience significant price increases for diesel within 2024 unless the government decides otherwise, keeping in mind that higher rent prices could pressure upward accumulation. This leads us to project that FEPC accumulation over 2024 varies between COP 8 trillion to COP 10 trillion; this range could depend on occurring price behaviors.

Yes. I'd like to inform Bruno that during the last 18 months, we have been managing revenues and payments to the bank amounting to COP 51 trillion due to a substantial government attitude. Additionally, managing those revenues and payments has encouraged timely recoveries. It's also imperative to acknowledge that price conditions contribute to the increase; while gasoline prices recently have seen an uptick of 3.3%, diesel prices also experienced a notable increase of 6.3%. The government's Ministry of Mines and Finance is reviewing the subsidy policies for both fuels. They’re assessing routes to secure better pricing tiers that can alleviate the gaps we see in pricing, although we roughly target returning to historical FEPC conditions at a deficit of around COP 2 trillion to 3 trillion per year.

Thank you, Bruno. Following up on your second question regarding dividends and expected payments within the upcoming 12 months, the dividend of COP 312 per share that was approved at the General Shareholders Meeting entails the first payment to minority shareholders and the majority stakeholder, while remaining installment payments by year-end will fulfill a 60% distribution margin of profits and approximately 7% as extraordinary dividends, in alignment with our guiding policy of 60% to 90% dividend distribution.

This is Felipe Trujillo, the Marketing and Commercial Vice President. Regarding Brent prices and spreads, we notice a positive trend in our favor. We observe spreads in single digits, contrasting with the earlier period where we managed to achieve double digits in spreads in the first quarter of 2023. Presently, we handle a recovery strategy towards achieving these single-digit spreads.

Thank you for your inquiry regarding anticipated tax rates for the second quarter of 2024. After factoring the first quarter's effective tax rate, which was around 35%. It's crucial to note that this was affected by a 10% surcharge based on the level of rent we experienced. For the second quarter, we project that Brent pricing will maintain above $82.5 per barrel, which will likely lead to a differential which would raise the tax rate accordingly, as we estimate falling between 50% and 60%, resulting in a higher effective tax rate in comparison to the previous quarter.

This is Alberto Consuegra in relation to Orca Norte. We continue to conduct technical assessments on the gas findings in fields like Orca Norte, and we plan to finalize assessments by the end of the second quarter, providing updated results for that timeframe. Looking at offshore operations, it's crucial to see this as a larger province where we hold interests and conduct drilling. Continuing our drilling efforts will yield opportunities to explore various prospects in thearea.

This is Ricardo Roa. To follow up on offshore renewable developments in Colombia, as part of our portfolio, we're keen on integrating offshore power projects within our energy matrix, maximizing our production of low-emission hydrogen. The parameters and figures are under analysis, and I assure you; it remains a priority to initiate developments in regions exhibiting strong wind regimes. Thank you for all your presence, questions, and participation. We reiterate our commitment to working diligently to improve performance metrics at Ecopetrol. We appreciate your support as we pursue our strategy for growth and energy transition. Our collective efforts will continue to secure energy resources that drive progress for all Colombians. Thank you very much.

Thank you, everybody. With that, we close the conference on our results for the first quarter of 2024. Thank you for your participation. You can now disconnect.