Earnings Call Transcript - EC Q3 2020

Operator, Operator

Good morning. My name is Hilda and I will be your operator for today. Welcome to Ecopetrol’s Earnings Conference Call in which we will discuss the main financial and operations results for the Third Quarter 2020. All lines have been muted. There will be a Q&A 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. Felipe Bayón, CEO of Ecopetrol; Alberto Consuegra, COO; and Jaime Caballero, CFO. Thank you for your attention. Mr. Bayón, you may begin your conference.

Felipe Bayón, CEO

Good morning, everyone. And welcome to this conference call, where we will discuss our operating and financial results for the third quarter of the year. We hope you and your families continue to be safe. Personal and social awareness continue to be key elements to overcome the health emergency that we have experienced during 2020. The third quarter of the year was characterized by a better operating and financial performance associated with a gradual increase in our operations and aligned with demand recovery. This ramp up has been reflected in higher operational activity levels. For example, Ecopetrol S.A., where we have had an increase of active drilling rigs from two rigs in April to 10 rigs by the end of September. Likewise, in order to preserve our employees’ health and safety, our field personnel have progressively returned to their on-site work since June under strict biosafety protocols. To date, thanks to our digital transformation program, about 75% of our employees continue to work remotely. Although we will remain working remotely during 2020 to preserve social distancing measures, a pilot plan was launched in October that will allow us to be prepared for a safe and steady return of our office employees to the company’s facilities in 2021, as part of our adaptation process to the new normal. This pilot considers a flexible scheme of staff and infrastructure, which will allow operational optimizations and will generate efficiencies for the Ecopetrol Group. Within this process, we highlight the crucial role that an increased digitalized operation during the year has played through the use of artificial intelligence and the implementation of analytical and self-management tools. Regarding the health emergency caused by COVID-19, through our social investment program, Apoyo País, we have executed 59% of the approved investment in line with Ecopetrol’s Group commitment to the well-being of Colombians, as well as the recovery and reactivation and strengthening of local economies. Let’s move on to the next slide to discuss market conditions. After coping with one of the most difficult quarters in recent years, oil prices rose from $33 per barrel at the end of the second quarter to $43 per barrel by the end of the third quarter. Local demand for our main products improved when compared to the trend observed in the first half of the year, highlighting our recovery in sales volumes of around 110% by the end of September, compared to the lowest levels observed in April. This demand recovery allowed us to return to the sales level observed in early March and it’s a consequence of the easing of lockdown restrictions that have resulted in reactivation of economic activity. On the other hand, we also highlight the significant recovery to $38 per barrel of our crude sales basket compared to the second quarter when the basket stood around $20 per barrel. However, we still continue with price levels similar to those observed in the crisis of 2016. Let’s move on to the next slide for a summary of our third quarter results. Our operating and financial results performed better when compared to the second quarter, in line with the recovery in prices and better demand conditions. Ecopetrol’s Group production reached 681,000 barrels of oil equivalent per day. That is 3,000 barrels more compared to the second quarter. The higher production along with price recovery resulted in a 46% increase in revenues, as compared to the second quarter of 2020. Despite some difficult security events that have impacted our operations during the year, Ecopetrol reached an EBITDA of COP5.3 trillion and a net income of COP855 billion in the third quarter. I will now give the floor to Alberto Consuegra, who will provide further details of our operational results for the quarter.

Alberto Consuegra, COO

Thank you, Felipe. During the third quarter, we saw a gradual recovery of our operating results aligned with domestic demand recovery and higher price levels. On exploration, we drilled three wells, totaling 10 wells over the year. We expect to exceed our 2020 targets with 17 wells drilled, four more than originally planned due to the inclusion of three wells through joint operating agreements and the appraisal of the Chacha 3 well. An extensive field test was carried out in the Arrecife-1 side track well, which is a gas discovery drilled by Hocol in 2018. Sales began on October 1st, with production of 3.5 million cubic feet of gas per day. I would like to highlight the commercial agreements achieved by Hocol and Lewis Energy for the exploration of natural gas in the frontier play in the Perdices block located in the department of Atlántico. Currently, the assignment of Hocol interests to Lewis Energy is subject to ANH approval. Abroad, we continue our progress in completing the appraisal phase of the Gato do Mato project. Ecopetrol’s Group production reached the cumulative average of 698,000 barrels of oil equivalent per day. We expect production near 700,000 barrels of oil equivalent per day by year-end in line with our target for the year. Additionally, the Ecopetrol Group launched Ronda Campos 2020, an initiative to offer its entire stake in nine development and production assets, six of them owned by Hocol and three by Ecopetrol. This asset divestment process is part of the company’s portfolio turnover and supports Ecopetrol’s Group’s strategic pillars. During the quarter, we tested transporting heavy crude of 650 centistokes in some of our main pipeline systems, which will allow us to have greater dilution efficiencies. Currently, we are analyzing the economic feasibility of the scheme. The downstream segment presented operational stability across its business units. The refineries reached a combined gross margin of $7.4 per barrel and a consolidated throughput of 324,000 barrels per day. Looking into these figures, it is worth noting that as of September, the refineries reported a 50% recovery of their throughput levels versus April, our most critical month in 2020. For year-end, we expect the consolidated throughput to be within the range set for 2020 between 300,000 barrels per day and 320,000 barrels per day. The Cartagena Refinery achieved two monthly records during this quarter, at full capacity throughput exclusively with domestic crudes in September and an average distillate yield of over 65% in July. In our petrochemical business, Esenttia showed remarkable operational performance. During the quarter, it reported historical polypropylene production highs and sales volume records. Please continue to the next slide to review our gas initiatives. Our gas operations posted an EBITDA margin of 55% and contributed close to 34% of the upstream segment's EBITDA. Gas and NGL production reached 141,000 barrels of oil equivalent, an increase when compared to the same period of the previous year, mainly due to the acquisition of Chevron’s interest in the Guajira fields and the commercial management for gas processed due to the increasing demand. Ecopetrol maintains its social investment in natural gas aiming to connect at least 18,000 new users by 2024. Through this initiative, 692 new users have connected as of September this year. During the third quarter, we completed the 2020 natural gas commercialization process from major fields. Our commercial strategy allowed us to contract 100% of the client’s needs in contracts with a duration ranging from one year to seven years. Please let’s move on to the next slide. In Colombia, the regulatory framework to develop the comprehensive research pilot projects is in place, so we may move forward with the ANH Contractor Selection process for the assignment of the special research projects contracts setting. If we are awarded a contract, we would begin the process of obtaining environmental licensing before the authorities. Regarding our business in the Permian Basin in Texas, as you may recall, we resumed activities in late July with two rigs currently in operation together with our partner Oxy. During the third quarter, we drilled five new wells. By the end of 2020, we expect to have 22 wells in production, 22 wells drilled to be completed during the first quarter of 2021 and an estimated average net production for Ecopetrol in a range of 5,000 to 5,500 barrels of oil equivalent per day before ride out. Let’s move on to the next slide in order to disclose our efforts in terms of costs. For 2020, we have incorporated COP3.5 trillion in savings into our annual plan, which have been gradually reflected in the company’s financial results. During the third quarter, the total unit cost was $24.5 per barrel, a significant decrease compared to the same period in 2019. This is explained by a 28% reduction in costs, mainly purchases and inputs, as well as a 10% reduction in fixed costs. The listing cost was $7.1 per barrel for the year, a decrease of 19% versus the same period of the previous year, explained mainly by the renegotiation of tariffs, decrease and shift of activities and the exchange rate effect. For the fourth quarter, we foresee an increase in costs associated with the reopening of wells, which will enable profitable production. Notwithstanding the above, I wish to reiterate our commitment to achieving greater efficiencies in order to reach a more profitable and sustainable operation over time. I now give the floor to Jaime Caballero, who will share information on the Group’s financial results.

Jaime Caballero, CFO

Thank you, Alberto. EBITDA for the quarter was COP5.3 trillion, reverting to the level reached in the first quarter of this year, despite lower Brent reference levels and lower production on sales. Thanks to improved realization prices, operating performance, and OpEx optimizations, which contributed towards an EBITDA margin of 43% comparable to 2019 levels. I’d like to highlight the turnaround in EBITDA generation across the upstream and downstream segments, which are once again showing positive results, some even higher than those experienced in the first quarter and generating an EBITDA per barrel of $22.5, the best year-to-date. Cash indicators exhibited a major improvement during the quarter. The business reached a positive free cash flow, reversing the trend of the first semester. Cash breakeven, which is the Brent price necessary to fulfill the commitments of the period considering all inflows and outflows was $26.6 per barrel. Thanks to the increasing cash flow from operational activities, we prepaid short-term obligations for the amount of COP1.6 trillion equivalence. If current market conditions remain, we anticipate a strengthened gross debt-to-EBITDA year-end closing position versus our previous estimates. Net income breakeven was $38 per barrel, the lowest year-to-date, demonstrating the increasing impact of the interventions carried out to guarantee the Group’s resilience to the new market conditions. Please let’s move on to the next slide to discuss the income for the quarter. Net income for the third quarter of 2020 increased compared to the second quarter, mainly due to a COP1.9 trillion increase in revenues due to a higher sales basket price, which grew 23% more than the Brent reference, supported by a commercial strategy that captured the improvement in demand conditions for both crude oil and products. Second, the positive effect associated with the increase in sold gas and products. Third, improving operating costs and expenses, thanks to the austerity plan and higher valuation of inventories, which were partially offset by higher expenses associated with the reactivation of operations and wells reopening. Fourth, the net financial expense showed an increase of COP420 billion mainly due to a lower mark-to-market valuation of the securities portfolio linked to volatility, as well as the premium paid in the make of the Ocensa Bond, which allowed the extension of its maturity profile from 2021 to 2027. Fifth, during this quarter, we did not recognize material non-recurring events as those observed in the previous quarter. The most relevant being the business combination revenue of COP1.2 trillion associated with the acquisition of offshore gas assets in La Guajira fields. Finally, the income tax provision for the third quarter was higher as a result of income increase during the period with an effective tax rate for the quarter of 33.3%. Net income reached COP855 billion, the highest year-to-date. Let’s please continue to the next slide. Operating cash flow including variations in working capital amounted to COP3.5 trillion. CapEx outflows during the quarter reached COP2.1 trillion, underpinning a positive free cash flow for the quarter. During the period, the dividend outflow amounted to COP2.9 trillion, of which COP2.4 trillion were paid to the nation as majority shareholder and the balance to non-controlling shareholders of our transport subsidiaries and Invercolsa. During the fourth quarter, we expect to pay the remaining balance due of COP3.2 trillion to the majority shareholder. Net debt related disbursements for the quarter totaled COP1.9 trillion. Highlighting among these, the prepayment and refinancing operation of Ocensa’s 2021 bond, as well as the prepayment of Ecopetrol short-term obligations. Our cash position closed at COP12 trillion, reflecting the Group’s ability to deliver the business plan while maintaining cash management discipline. Let’s please continue to the next slide to view the execution of our investment plan. CapEx execution as of September totaled $1.8 billion, with 71% directed towards growth opportunities, mainly to the drilling campaigns carried out in the Permian, Castilla, Rubiales, and Llanito fields, among others. The execution rate has been lower than expected due to, firstly, measures implemented to decrease the spread of COVID-19 cases, which required the postponement of activities mainly in the Rubiales and Caño Sur fields and the Cartagena and Barrancabermeja refineries, secondly, community blockades resulting from the current situation in certain territories, and thirdly, operational factors that affected execution schedules and extended project maturity timelines. On the other hand, efficiencies have been achieved due to lower project costs in Castilla, Casabe, and Tibú fields, among others. Although execution challenges remain, we expect a strong acceleration in terms of CapEx execution during the fourth quarter as compared to the previous two quarters, maintaining the growth trend observed in September. The CapEx execution increase in the fourth quarter is underpinned by the reactivation of facility investments and increasing workovers, drilling and completing the main fields and the operational continuity projects in all segments, leaving the total execution for 2020 within a range of $2.5 billion and $3 billion. I now give the floor to our President, Mr. Felipe Bayón for his closing remarks.

Felipe Bayón, CEO

Thank you, Jaime. During the third quarter, we continued to move forward in our commitment to technology, environment, social and governance, TESG. On our social front, by the end of September, Ecopetrol has allocated some COP192 billion to social and environmental investment, compared to an investment of COP60 billion for the first nine months of the past year. As a milestone for the quarter, we joined The Valuable 500, a global movement made up of companies committed to the inclusion of people with disabilities within their operations. In terms of governance, the company will report again to the Dow Jones Sustainability Index and to the carbon disclosure project, and it formalized its adherence to the International Petroleum Industry Environmental Conservation Association, IPIECA, to promote environmental and social improvements within the performance of the oil and gas industry. Likewise, we continue to make progress in evaluating the adoption of the Sustainability Accounting Standards, SASB, and The Task Force on Climate-related Financial Disclosures, TCFD recommendations. On the environmental front, we highlight achievements in four axes of our strategy. First, we increased our water reuse percentage from 62% in 3Q 2019 to 64% at the end of the third quarter 2020. Secondly, regarding our strategy in fugitive emissions, around 20% of the total facilities of the Production Vice Presidency have been monitored, identifying 752 leaks. As of September, we have already repaired and closed 66% of them. That equates to about 496 leaks and we have a plan for the definitive closure of the remaining leaks. Thirdly, leveraging technology, progress is being made in the analysis of satellite images from the European Space Agency, TROPOMI, in order to identify the areas with the highest methane concentrations in our operations in Colombia. We expect this analysis to be concluded by December 2020. Finally, in August, we signed a contract for the construction of the San Fernando Solar Park with a capacity of 59 megawatts, which will be the largest self-generation solar park in Colombia and whose construction is scheduled to begin in November 2020. To meet our target of 300 megawatts of generation capacity from renewable sources by 2022, we have launched the competitive processes for a new wave of projects for a total of 112 megawatts in different regions in Colombia. Let’s move on to the next slide. Ecopetrol has demonstrated its resilience, adaptability, and the commitment of its employees to an efficient operation that is safe, ethical and responsible. For the year-end, we remain committed to our main operational, financial, and Technological Environmental Social and Governance, TESG metrics of our new 2020-2022 business plan presented to you in the last quarter, which protects the main pillars of our corporate strategy guaranteeing the Group’s sustainability and ratifying our commitment to climate change action, energy transition and social development in the regions where we operate. Before moving on to the Q&A session, I invite you to download the TESG dashboard from our website. This is an annual report designed for you. It includes historical data on the main environmental, social, and governance indicators, as well as Ecopetrol’s targets to move towards a sustainable future. Thank you all again for joining us in this conference call. Now, I would like to open the call to the Q&A session.

Operator, Operator

Thank you. We have a question from Gabriel Barra from UBS.

Gabriel Barra, Analyst

Hi, Felipe, Jaime, Alberto. Thanks for the presentation. I have two questions. First, regarding production developments in Colombia, does the new framework mean the country now has the necessary guidelines to move forward with pilot tests? As mentioned, Ecopetrol is interested in these new opportunities. After the National Hydrocarbons Agency announces contract selections next month, what are the next steps, and how should we view the timeline for unconventional development in Colombia? When can we expect the first production from these developments, and what is the company's assessment of these new market sizes? On lifting costs, the figures reported by the company year-to-date are significantly lower than the $8.5 per barrel from 2019. Is this a normalized level moving forward? Should we anticipate an impact from the monthly delays in lifting costs during 2020 and 2021 on the fourth quarter results? Lastly, regarding domestic demand, the presentation indicated an expectation of improved fuel sales for the last quarter, although these are still below pre-COVID levels. What are the company's projections for a rebound in demand next year, and how do you view the base case for 2021? Those are my questions. Thank you.

Felipe Bayón, CEO

Thanks, Gabriel. I am going to take the first part on unconventionals, talk a little bit about demand and I will ask Alberto Consuegra to talk about lifting costs. In terms of the unconventionals, the regulation and norms around how the development of the pilot projects will be conducted have been presented by the government and we hope that by the end of November, we will sign the contract with the ANH. As you know, Ecopetrol has been prequalified already, and we have stated publicly that we want to be the operators in this area. So, what comes next? We need to conduct all the work related to the environmental impact assessment studies that will inform the request for the licenses of the pilot projects. That is some work that we will start by year-end this year, a big piece of work around the licensing and the support for the license request. In parallel, we will start all the preparation work for the civil works, construction works for the well pads, all the preparatory work for the contracting of rigs and logistics, and everything else. Once we have the licenses in place, we will be able to start construction and then operations. I wouldn’t put a specific date on when that activity will start, specifically drilling, and then completing the wells and fracking of the wells because it’s largely dependent on the licenses themselves. In terms of the timeline for the development, we have concentrated right now as a country on doing the Proyectos Piloto de Investigación Integral, the pilot projects. Once the pilot projects give us the results, we can as a country decide based on the science and the technical data on the potential impacts of the activity and how to mitigate those impacts, we will have clarity on the timing. One thing I would stress, if you look at the experience we have had in the Permian in Midland, Texas from November when we started production in that area of operations, we have ramped up quickly to close to 18,000 barrels by the end of June. So being short cycled, it’s an activity that you can deploy and bring quickly into production and into the market. But again, the final answer will depend on how the pilot projects advance and the results of those. In terms of domestic demand, if you look at gasoline and diesel mainly, pre-COVID we were at 120,000 barrels per day for each one of those, so diesel and gasoline and jet was at roughly 30,000. What we are seeing right now are ballpark numbers of 110,000 for diesel and gasoline, jet is still below. You can imagine that as flights have resumed, but very limited in numbers, that will probably take more time in terms of recovery of demand. We do expect diesel and gasoline to come back to pre-COVID or pre-pandemic numbers, while jet, I think, will still have some uncertainty. Alberto, please go ahead with the question around lifting costs.

Alberto Consuegra, COO

Gabriel, good morning and thanks for your question. Regarding lifting costs, we have to remind that, during the second quarter, we had to stop activities and basically operate with a minimum vital level. This took our lifting costs under $7 per barrel. As we have been reopening fields and wells, the lifting costs have slightly increased. In the third quarter, we look at a lifting cost of $7.20 and we expect by year-end a slight increase to be in the range of $7.04 to $8 per barrel. This will be due to ensuring that we reopen all closed production, because of our pricing and also because we have been able to cope with some operating closures associated with social unrest.

Gabriel Barra, Analyst

Thank you. Good. Thank you, guys.

Operator, Operator

Thank you. Our next question comes from Bruno Montanari from Morgan Stanley.

Bruno Montanari, Analyst

Hi. Good afternoon, everyone. Thanks for taking my questions. I have two questions. Felipe, if I may, a follow-up from the Spanish call. I believe you mentioned that reserves could potentially decline between 15% to 20% with the information available to date. I just wanted to check if that is purely based on the oil price movement only or if it also accounts for any other technical aspects that the company might have revised in the process of starting to build up the reserve report? My second question is about gas, and first, thanks very much for providing more granularity on the gas results. It’s very useful for us. You showed that your gas margins are actually quite attractive, especially while oil prices remain depressed. With that in mind, would it make sense perhaps to increase investments in gas versus oil in the coming years? Thank you very much.

Felipe Bayón, CEO

Bruno, thanks for the question. In terms of reserves, I will take that question and I am going to ask Yeimy Baez, our Gas Vice President, to take the second one, but I will provide some context. The guidance we see right now, the 15% to 20% decline in reserves is a number we see factoring everything in. It reflects our view on prices, our level of activity or investment, and some of the difficulties mentioned in the call in terms of our ability to go back to higher levels of activity. Even though we have gone back to over 350 work fronts around the country, that guidance does reflect our view on how the fields are performing, the pricing outlook, and our level of investment. The challenge for us is how do we get back quickly to a reserve replacement ratio of over 100%, which will depend largely on our ability to deploy CapEx, our understanding of the fields, and the use of technology. It’s a holistic view of things. In terms of gas, we have signaled that in the next three years, we will invest about $780 million to $870 million. Clearly, there is a big focus in our strategy and I do believe there’s an opportunity for us to accelerate some of these investments. Yeimy, if you can provide a bit more detail and color around our gas outlook, please go ahead.

Yeimy Baez, Gas Vice President

Sure. Bruno, thank you very much for your question. First, I would like to emphasize that gas has a strategic priority position within the Ecopetrol business plan as it is an essential fuel in the energy and economy transition. We will invest about $800 million in the 2020-2022 period in projects related to exploiting potential in the Colombian foothills, Caribbean onshore and offshore, and unconventional basins. Of course, to be consistent with our strategic intent, we are actively looking for opportunities to create optionality and deliver growth. In particular, I would like to highlight three sources of opportunities to increase our investment outlook. First, in the foothills, we are in the process of maturing debottlenecking projects to maximize production and deliver the full potential of that basin. Second, if we are successful in exploring the foothills and Caribbean places, the investments will significantly increase to develop those resources. Also, we continue pursuing new exploration opportunities by mapping new prospects within our current portfolio. Finally, I would say that we are committing to our sustainable business, and therefore, we also plan to increase investments in social projects to provide access to gas and LPG to the most vulnerable communities in Colombia. From an environmental perspective, we are striving to increase the usage of gas in transportation and to become a supporting beam for electricity generation. I hope I have answered your question, Bruno.

Bruno Montanari, Analyst

That’s very clear. Thank you both for the detailed explanation.

Operator, Operator

Thank you. We have a question from Lilyanna Yang from HSBC.

Lilyanna Yang, Analyst

Hi. This is Lily Yang. Just a quick question, please. I wonder why the midstream business was weak quarter-over-quarter. I don’t know if you addressed that in the beginning, but volumes came up, right, in the third quarter versus the second quarter. I think that the type of discounts that you are giving to the producers were also already lifted. Can you explain how I could see the business going forward? Thank you.

Felipe Bayón, CEO

Lily, good morning and thanks for being on the call again. I appreciate your question. I am going to ask Milena López from the Midstream segment to take your question around the performance in the quarter. Milena, please go ahead.

Milena López, Midstream Segment

Thank you, Felipe. Hi, Lily. Thank you for your question. When you look at the second quarter numbers versus third quarter numbers at the midstream level, you have basically three sources of revenue. You have the refined product pipeline where volume was up and consequently revenues were up. This went from approximately COP438 billion to COP529 billion, so you have a COP90 billion increase in terms of the refined products pipeline. However, at the same time, when you look at production and volumes that are transported to our crude oil pipeline, there is an impact in the change of the way volumes are routed. The big difference between second quarter and third quarter, if you remember the results from the refining segment, is that when we look at the volumes used at the Barrancabermeja refinery, this was up by approximately 40,000 barrels when you compare second quarter to third quarter. These 40,000 barrels are part of our total volume because they are delivered to refineries, but they no longer go to a segment that pays export fees at port. What you see is that well-evacuated volumes are the same; they are 40,000 barrels. They are no longer making it to port because they are used by the refiners. Hence, they pay a total overall tariff in the system that is lower when you compare second quarter to third quarter. Going forward, you should continue to expect to see this behavior as we continue providing transportation services to Barranca and these barrels no longer make it to port because they are used by the refiners.

Lilyanna Yang, Analyst

Okay. Got it. Clear. Excellent. Thank you so much.

Operator, Operator

Thank you. We have a follow-up question from Bruno Montanari from Morgan Stanley.

Bruno Montanari, Analyst

Hi. Thanks. I have two more questions. First, one on the oil price baskets; it was interesting to see that you returned basically back to the same level of discount before the crisis at around $5 a barrel. Should we expect this to remain stable at those levels, or do you see an opportunity to capture even better realizations going forward on the back of your oil slate? The second question is about the CapEx range for the fourth quarter. I fully understand that you had the budget for the year with the variance of $500 million. But it strikes me as a little odd that we are already in November and there’s still such a big variance of $500 million. Are you more inclined to be on the bottom end of the range or the top end for the CapEx in the year? Thank you.

Felipe Bayón, CEO

Thanks, Bruno. I will give you some context and then ask Pedro on the oil price for our basket of crudes and Jaime and Alberto to add any comments on CapEx. In terms of the basket for our exports, please bear in mind that normally we sell our crude two months in advance. So crude for November-December have been placed already in markets, and we are actually seeing good behavior in that sense. We estimate the year should finish in good shape. As you know, we saw a very dramatic drop in 2Q, very difficult, but our crudes are considered a part of the base run for some refineries in China, and we have expanded some of our destinations to India and Korea. I think that’s part of how we should view the question. There’s still uncertainty around the topline and the price for Brent. In terms of CapEx, as I said, I will ask Alberto and Jaime to comment. So, Pedro, if you can give us more color around these kinds of price baskets, that would be great, and then Alberto and Jaime, a little bit on the CapEx.

Pedro Manrique, Oil Pricing Manager

Thank you, Felipe. And thank you, Bruno for your questions. Yes, because of the market conditions in the third quarter, what we are seeing is demand is recovering, and as demand recovered, our discounts were much lower compared to the second quarter. They are coming back to levels that we had in the first quarter and the average discount we saw last year. This is due to the commercial strategy we have been working on for quite some time because, as Felipe mentioned, most of our crude has been placed in customers that use it in their base branch of their refineries. Most of the crude is going into end users. We are also very active in looking for the best markets to place our barrels, and we have been able to sign long-term contracts with end users, refineries in strategic markets like Asia, the U.S. Gulf region, and Europe. What we are doing commercially is that we basically place our barrels wherever we can get the best realization for them. Our production program has already been placed in the market, and next week we are going to start showing barrels in key markets for the beginning of the year. Because of all these conditions together, the discounts are very good and realization prices are being optimized and maximized over time and going forward.

Jaime Caballero, CFO

Bruno, with regards to CapEx, we feel very comfortable with the CapEx deployment in terms of the midstream and the refining segments, as well as in exploration. The uncertainty comes out of the CapEx associated with development. Specifically, we are ramping up activity, and we feel that October has been a good month. However, I have to remind you that we are still facing the pandemic. There is uncertainty regarding the degree of the pandemic during the months of November and December and how it will affect our operations, specifically in regions like Llanos and the Medio del Magdalena. That’s why we still maintain the range. Hopefully in November, we can have a better view on how that CapEx will go.

Bruno Montanari, Analyst

All right. Fair enough. Thank you very much again.

Operator, Operator

Thank you. We have no further questions at this time. Now, I will turn the call back to Mr. Bayón for final remarks.

Felipe Bayón, CEO

Thank you. And thanks again, everyone for being here today for participating in the 3Q conference call for Ecopetrol. We value your insights and questions. We will continue to work to ensure that we can provide timely, transparent, and relevant information that can help your analysis. Q3 shows signs of recovery after a very tough second quarter. We are seeing different aspects of the operational side of the business that are improving, showing resilience in the company that is then transferred into the financial results we shared with you today. Thanks again for your participation. We hope that you stay safe, and hopefully, we can chat again soon in the near future. Have a great day.

Operator, Operator

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