Earnings Call Transcript - EC Q4 2023

Operator, Operator

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 fourth quarter and year-end 2023. 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 on this conference call. The call will be led by Mr. Ricardo Roa, CEO of Ecopetrol; Alberto Consuegra, COO; David Riano, Vice President of Low Emission Solutions; and Milena Lopez, CFO. Thank you for your attention. Mr. Roa, you may begin your conference.

Ricardo Roa, CEO

Good morning, everyone. With regards to the 2023 results call, a year of significant achievements driven by goals and progress in energy transition projects. We will have marked numerous operational records and value generation, overcoming a more challenging market environment. In 2023, we strengthened the traditional hydrocarbon business across all its segments. We closed the year with a production of 757,000 barrels of oil equivalent per day, a figure not seen in eight years supported by our fields in Colombia and the Permian subsidiary contributing 9% to the total production. We transported 1,130,000 barrels per day with 306,000 barrels per day through pipelines, the highest in the group's history. In refining, we achieved an unprecedented financial performance with over COP73.3 trillion in EBITDA, the highest refining load in the history of 120 barrels per day. We achieved an exploratory success of 50% above the industry standard, highlighting milestones like Glaucus-1 announced earlier and Orca Norte-1, the first deepwater well 100% drilled by Ecopetrol which confirmed the presence of two gas accumulations in reservoirs different from the Orca-1 discovery. This expands our offshore gas potential, reaffirming our commitment to the country’s energy security. In commercial activities, in October 2023, we announced the opening of a trading office in Houston to be closer to global markets and attain better results. This is ongoing effort to diversify customers and markets as we currently sell more than 50% of our crude oil volumes to the Asian market. In the Transmission, Roads and Telecommunications segment, secured contracts in 2023 represent an investment of COP10 trillion for the coming years. We made significant progress in the commitment to decarbonization and to consolidate energy transition projects, achieving a cumulative reduction of greenhouse gas emissions of nearly 1.5 million tons of CO2 equivalent by the end of the year, aligning with the path to net zero emissions. Of this emission, methane was a significant focus where Ecopetrol aims for zero methane emissions in line with the Oil and Gas Climate Initiative. Our commitment to action on climate change was further showcased by our adherence to the global sector agreement to accelerate the decarbonization of oil and gas during COP28 alongside 49 other oil companies. In 2023, we reused 152 million cubic meters of water during operations, a record-breaking figure recognized by CDP Water Security with an A-minus leadership rating for outstanding water management practices, marking us as one of the best companies in the oil and gas sector in this area. Additionally, Ecopetrol Group reported an energy saving of 3.89 petajoules at the end of 2023, the highest figure since 2018, representing a 250% increase from 2022. We also added 472 megawatts of renewable energy to optimize our energy metrics and decarbonize our operations. We invested COP1.9 trillion in social dimensions, with COP520 million allocated to education, public services, and regional economic diversification, a 17% increase from 2022. We promote the energy transition by expanding the coverage of social gas services through networks benefiting over 20,000 new homes in Colombia with physical connections. In terms of human resources, we successfully negotiated the 2023-2026 collective labor agreement with nine labor organizations. Our recognition in the 2023 Merco ranking as the Colombian company with the greatest capacity to attract and retain talent is a significant achievement. We also maintained low accident levels, with a total recordable injury frequency of 0.26 injuries per million hours worked, ranking us among the top global oil and gas companies according to the International Association of Oil and Gas Producers' data for 2023. We highlighted our commitment to the country with historical transfers to the nation in 2023, represented in COP23 trillion in dividends, COP26 trillion in taxes, and COP10 trillion in royalties. Furthermore, we allocated resources for the execution of a sustainable territorial development portfolio worth COP594 billion, which includes social, strategic, and mandatory environmental investments. Key social investment milestones during the year include benefiting 150,203 students from projects focused on improving the quality and retention rates in higher education. A total of 8,670 entrepreneurs, SMEs, and youth benefited from programs aimed at capacity development in entrepreneurship and innovation. Additionally, 15,019 people gained improved access to clean water and 197.93 kilometers of roads were developed, contributing to regional dynamics and local job creation. We express gratitude to all our workforce, allies, and communities where we operate, whose dedication makes Ecopetrol a leading force in transforming Colombia's energy sector. We closed 2023 with the second-best results in the history of Ecopetrol Group, surpassing the previous year when the average Brent price approached $100 per barrel. In 2023, crude prices dropped to $82 per barrel, combined with inflationary pressures and high energy costs, creating a challenging environment for the company's cost structure. However, we exceptionally overcame these challenges, generating revenues of COP143.1 trillion, equivalent to 9% of the national GDP, an EBITDA of COP60.7 trillion, and a net profit of COP19.1 trillion. The profit was impacted by impairments that reduced net income by COP0.9 trillion for the period. We ended the year with the highest record of transfers to the Nation in Ecopetrol's history, COP58 trillion. We also ended the year with an account receivable from the Fuel Price Stabilization Fund, showing a 44% lower accumulation than in 2022, alleviating cash pressures and highlighting the active management by our teams. Our commitment to fiscal responsibility allowed us to achieve a 97% execution level of our investment plan, amounting to COP27 trillion. Consequently, we generated a total local return for shareholders of 26% for the year and 46% for ADR investors, adding to the market's confidence in our issues and ratings. Looking ahead, we prepare for a challenging 2024, focused on international prices, inflation, and the effects of the El Nino phenomenon and the natural gas market balance. We will confront these challenges by enhancing our operational capacity in the traditional business while adhering to the highest safety standards, maintaining capital discipline, and focusing on competitive returns. I will now hand over to Alberto Consuegra for an in-depth discussion of our 2023 operating performance.

Alberto Consuegra, COO

Thank you, Ricardo. By year-end 2023, the net proven reserves of the Ecopetrol Group amounted to 1,883 million barrels of oil equivalent, maintaining average levels of the last nine years even under challenging market conditions. Proven developed reserves increased by 4% versus 2022, reflecting improved CapEx execution. Organically, we incorporated 307 million barrels of oil equivalent, while 188 million barrels of oil equivalent were debooked, primarily due to external factors linked to lower Brent prices and inflationary effects, resulting in a net addition of 119 million barrels of oil equivalent. Future sources of reserve additions are concentrated in fields like Castilla, Rubiales, Cano Sur, CPO 09, Cira Infantas, Piedmonte, and tertiary recovery in heavy oil fields. Contingent gas resources grew by 79% compared to 2022, from 1.9 to 3.4 trillion cubic feet, primarily driven by Uchuva and Gorgon offshore developments. In 2023, Ecopetrol and its partners drilled 23 exploratory wells, in line with our plan. Three wells drilled in 2022 were declared successful in 2023, totaling 11 last year, with an estimated potential of 100 million to 150 million barrels of oil equivalent resources, with 70% being gas. Regarding offshore exploration, I would like to highlight the exploratory success of Glaucos-1 in the coal-fired block operated by Shell, which confirmed the presence of a gas reservoir. The Orca Norte-1 well, drilled in 2023 and completed in 2024, confirmed two gas accumulations in reservoirs different from the Orca-1 discovery, prompting a reevaluation of the regional project and expanding the gas potential of La Guajira Offshore. Orca Norte-1 was the first deepwater well operated entirely by Ecopetrol, completed without any operational incidents, adhering to the highest industry standards. We plan to kick off the appraisal campaign of the Uchuva discovery located in the Tayrona block with the Uchuva-2 well to be drilled in the second quarter of 2024. Onshore, we are appraising the frontier between the Castilla and Chichimene fields in block CPO 09 following the Magnus and Kimera-1 discoveries in partnership with Repsol. The Arauca-8 well drilled in 2023 and completed in 2024 confirmed the presence of light crude in a new reservoir, enhancing the potential of the Arauca field in the channels basin. As Ricardo stated, in 2023, we reached production of 737,000 barrels of oil equivalent per day, an increase of 27,000 barrels per oil equivalent per day compared to 2022. I would like to highlight the startup of the first fluid treatment train at Cano Sur field, boosting field production to 41,000 barrels of oil in December 2023, and the incremental production from the Permian and improved water management capacity in the Rubiales field. These advancements enabled an additional production of 70,000 barrels of oil equivalent per day, an 18% increase when compared to 2022. By year-end, fields associated with secondary and enhanced recovery programs contributed nearly 41% to the Ecopetrol Group's daily production. We have demonstrated superior execution capabilities supported by the construction initiation of the water treatment station at CPO 09, the fluid expansion at the Centauros station at Cano Sur, and the water management facilities at Rubiales. Overall production growth was achieved in a sustainable manner, including a reduction of 486,000 tons of CO2 equivalent, a contribution of 84% to the total emission reduction of the Ecopetrol Group. These efforts were supported by energy efficiency initiatives, elimination of venting and methane leaks, reduction of flaring, and integration of renewable energy into operations. For 2024, we expect production between 725,000 and 730,000 barrels of oil equivalent per day, largely driven by drilling campaigns in Rubiales, Cano Sur, and the Permian, as well as continued secondary recovery projects in heavy oil fields and new gas projects in Piedmont. These target volumes take into account challenges that are being managed, such as the El Nino phenomenon, security issues, and ongoing environmental permit processes. Regarding our activities in the Permian Basin, 120 new wells were drilled in 2023, making a total of 318 wells on production since 2019, reaching production of 66,400 barrels of oil equivalent per day for Ecopetrol before royalties, which constitutes 9% of the group's production. The strong financial results of Ecopetrol Permian are noteworthy; by year-end, we achieved an EBITDA of $799 million and an EBITDA margin of 88%. Additionally, the achievements of the Ecopetrol-Oxy Association merit recognition. After four years, the association produced 163,000 barrels of oil equivalent per day before royalties by early December, of which 103,000 barrels of oil equivalent per day belong to Ecopetrol, reflecting the drilling and completion of a well with the longest lateral length of 18,000 feet. In line with our TESG strategy, we emphasize progress toward the decarbonization of our Permian operation, maintaining a low emission intensity of 7 to 8 kilograms of CO2 per barrel of oil equivalent. The association also took significant steps to reduce diesel consumption, replacing an average of 36% of diesel used in drilling and completion operations with compressed natural gas, or CNG. For 2024, we expect to drill over 110 wells, and Ecopetrol anticipates average production between 80,000 and 83,000 barrels of oil equivalent per day before royalties. Additionally, in 2023, transmitted volumes surged by over 42,000 barrels per day, primarily due to increased crude oil transportation and elevated production, especially in the Llanos region. We achieved significant milestones in 2023, including a historical record in refined product evacuation of 306,000 barrels per day, primarily driven by enhanced product availability at both refineries and operational optimizations in transportation systems. In oil pipelines, we reached records with the dilution of Rubiales crude at the Monterrey station, receiving a total of 163,000 barrels of naphtha, and approximately 858,000 barrels of Rubiales crude were diluted, achieving a quality of 21.2 degrees API crude. This reinforces our midstream strategy to become an integrated logistics service provider. We ensured the evacuation of oil from the Cano Limon field by executing 13 reversal cycles of the Bicentenario pipeline. The segment has maintained a carbon-neutral operation certified by ICONTEC since 2022, achieving a reduction of over 15,000 tons of CO2 emissions. Financially, the segment generated revenues of nearly COP16 trillion and an EBITDA of COP11.8 trillion, contributing 19% to the Ecopetrol Group's EBITDA. Regarding regulation, on December 20, 2023, the Ministry of Mines and Energy issued Resolution 40745, regulating transportation activities by multiphase pipeline. This regulatory framework enables the midstream segment to evaluate projects that could enhance transport levels and optimize current infrastructure. In the downstream segment, we registered outstanding financial and operational results, achieving historical records in refining throughput and operational availability due to rigorous maintenance activities and operational efficiencies amid favorable pricing conditions. This resulted in an EBITDA of COP7.3 trillion, marking the second highest in the segment's history. In the fourth quarter of 2023, the combined refining throughput reached 429,000 barrels per day, representing an increase of 84,000 barrels per day compared to the same period last year. The integrated refining gross margin was $13.1 per barrel, mainly affected by weaker diesel, jet, and gasoline spreads. In 2023, we accomplished multiple milestones, including operational availability of refining plants exceeding 95%, the highest in the last five years. We also successfully executed pyrolytic oil tests from post-consumer plastic waste at the Barrancabermeja refinery, producing around 19 tons of polypropylene in Esenttia, supporting Ecopetrol Group's circular economy strategy. The construction of the mechanical recycling plant in Esenttia is 95% complete and expected to commence operations in the first quarter of 2024. Finally, Ecodiesel received certification from ICONTEC as a carbon-neutral company, becoming Colombia's first biodiesel firm to achieve this status. In 2023, the Ecopetrol Group successfully integrated efficiencies valued at COP4.5 trillion, stemming from excellent operational performance and partially mitigating inflationary pressures and rising energy costs affecting our cost structure and investments. The total unit cost reached $47.6 per barrel, largely influenced by lower prices on crude and product purchases. The incorporation of efficiencies of $0.68 per barrel helped to mitigate these cost pressures. The lifting costs increased by 18.45%, reaching $10.91 per barrel due to external factors such as the El Nino phenomenon, inflation, and exchange rate fluctuations, representing a $1.41 per barrel increase in 2023. Nonetheless, our efficiency strategy successfully mitigated the rise in lifting costs by $0.33 per barrel. The costs in transporting and refining also rose by 8.8% and 1.6%, respectively, mainly due to inflationary factors and heightened activity in both segments. In 2024, we will continue to prioritize incorporating efficiencies to maintain our competitiveness and sustainability. Now I will turn it over to David Riano to discuss the main milestones of the Low Emission Solutions business line.

David Riano, Vice President of Low Emission Solutions

Thank you, Alberto. Our Low Emission Solutions business continues to advance in decarbonization, energy security, and contributing to society. In 2023, we highlight the outstanding performance of our energy efficiency program, which, between 2018 and 2023, achieved an optimization of the energy demand of 10.9 petajoules. This translates to COP262 billion in savings with an environmental impact of approximately 708,000 tons of CO2 equivalent. Only in 2023, we achieved a reduction of 3.9 petajoules and 274,000 tons of CO2 equivalent in our operations, thanks to the adoption of new technologies for energy optimization. These recent results reflect the best performance measurements since 2018, marking a 250% increase compared to those reported in 2022. In terms of scale, this optimization is equivalent to the annual consumption of all households within the Colombian cities of Cartagena, Ibagué, and Cúcuta. Aligning with our commitment to decarbonization, we closed 2023 with the incorporation of 472 megawatts of operational, construction, and execution of non-conventional renewable energy sources. These renewable energy solutions allowed us to reduce close to 19,000 tons of CO2 equivalent and capture savings exceeding COP28 billion. Our goals, within our strategy, are to incorporate 900 megawatts by 2025, focusing on sustainable growth and generating value for our stakeholders. On the social front, we highlight two significant initiatives positively impacting community welfare. Through the social gas program, we connected over 20,000 families in rural areas of Arauca, Guajira, and Atlántico to natural gas services in 2023. We also successfully completed the micro LNG project agreement in Buenaventura, providing reliable gas supply to 37,000 families in this region of the country. Throughout 2023, our gas and LPG production reached 162,000 barrels equivalent per day, representing 22% of the group's production mix and maintaining 75% market share in the country, while recording approximately COP3.5 trillion in EBITDA. This year affirms our commitment to the energy transition, prioritizing national energy security, and facilitating opportunities that help us achieve our objectives. Now I will pass the floor to Milena Lopez, who will discuss the primary results of the Transmission, Roads, and Telecommunications segment.

Milena Lopez, CFO

Thank you, David. The Transmission and Roads business generated positive operational and financial results, accompanied by significant awards throughout 2023, which will translate into investments of COP9.8 trillion in the coming years, reinforcing the growth trajectory of our subsidiaries across various geographies. In 2023, we sustained a growing trend in financial performance, with revenues reaching COP14.2 trillion and an EBITDA of COP9.1 trillion, reflecting nearly 6% growth in these two areas compared to 2022. The net profit attributable to Ecopetrol remained relatively stable at COP675 billion. As of the close of 2023, a committed investment balance of approximately COP30 trillion was achieved for the coming years, with around 93% of these investments corresponding to awarded bids and tenders. Among the notable milestones for the fourth quarter are the following: In Peru, the award to ISA in consortium with Grupo Energia de Bogota for the construction, operation, and maintenance of two projects encompassing over 1,000 kilometers of electrical transmission grids, with a referential CapEx of approximately COP3.2 trillion. In Chile, ISA Intervial was awarded the Southern Orbital Santiago concession for designing, constructing, and operating 25 kilometers of a new urban highway, with a reference CapEx of approximately COP1.9 trillion. In Brazil, via ISA CTEEP, 40 enhancements have been awarded, which collectively will amount to a CapEx of around COP181 billion. Additionally, we commenced operations for various projects, including the Guayepo Solar Park connection in Colombia and electrical interconnections by ISA CTEEP in Brazil, as well as three substations and the approval of integration into the National Electrical System for the private project, Puerto Chancay, in Peru. ISA continues to progress with the construction of 34 energy transmission projects in countries where it operates, which, upon completion, will add over 5,500 kilometers to the grid and generate approximately COP1.7 trillion in revenue between 2024 and 2030. Furthermore, work continues on the execution of the Ruta del Loa project and concessions in Chile, generating new income and extending the terms of these agreements. Moving to our financial results, they reflect the excellent performance of the Ecopetrol Group, allowing us to achieve in 2023 the second best results in the company's history. Throughout the year, we surpassed set financial targets, achieving superior results across key indicators. Our EBITDA margin reached 42% with a return on average capital invested of 11.5%. Our total EBITDA sat at COP60.7 trillion, with efficiency gains reaching COP4.5 trillion, representing a 25% annual growth. Our investment execution capacity reached its highest level in eight years, totaling approximately COP27 trillion, aligning with our annual target. Of these investments, 63% were concentrated in Colombia, and the remaining 37% executed in the United States, Chile, and Peru, among others. About 70% of total investments were allocated to exploration and production activities in our primary assets, such as Rubiales, Cano Sur, and Castilla in Colombia, as well as Permian in the United States. This category also included investments in natural gas totaling around COP3 trillion focused on assets like Florena and Cupiagua in the Piedemonte region, as well as offshore blocks Tayrona and Col-5. Investments in transportation and refining accounted for 13% combined, aimed at maintenance and reliability improvements to support increased activities throughout the year. The transmission and toll road businesses represented 17% of the CapEx for Grupo Ecopetrol, primarily directed towards power transmission investments, accounting for approximately 87% of total spending across Latin America. Traditional business lines, including natural gas, contributed to approximately 85% of EBITDA in 2023. In addition, the transmission and toll road segments contributed 15%, enhancing the stability of the group's income and operating cash. The gross debt-to-EBITDA ratio was 1.7 times, in line with our long-term guidance to remain below 2.5 times gross debt to EBITDA. As part of our financing strategy, in January 2024, we successfully issued a $1.85 billion bond in the international markets, which was 3.2 times oversubscribed, confirming strong investment appetite for our offerings. This bond issuance was paired with the repurchase of bonds maturing in 2025 as part of our proactive debt management strategy, optimizing short-term liquidity while maintaining competitive debt costs. In 2024, we are in the process of renewing a committed line of credit for $1.2 billion, which will cover remaining amortizations using proceeds from the aforementioned bond. Let’s move on to the next slide. The Ecopetrol Group concluded 2023 with a robust cash position of COP14.3 trillion. Our operating cash flow reached COP19.8 trillion, which rises to COP41.4 trillion when including the fuel price stabilization fund compensation. Additionally, significant cash disbursements were allocated for CapEx, and the net movements of debt and interest totaled COP5.8 trillion. Regarding the fuel price stabilization fund, we ended 2023 with positive news, fully settling the outstanding balance from 2022 through dividend payments to the Nation totaling COP2.6 trillion and COP4.7 trillion received in cash. Due to a gradual increase in gasoline prices in the country, averaging approximately COP4,800 per gallon throughout 2023, we have experienced a decreased accumulation of demands compared to 2022, concluding the year with FEPC balance reaching COP20.5 trillion. On the topic of taxes, the effective tax rate for 2023 registered at 36.6%, compared to 31.4% in 2022, driven primarily by a windfall tax introduced by recent tax reforms. In the fourth quarter of 2023, two tax adjustments had to be addressed. The first adjustment pertains to the income tax provision in alignment with the Constitutional Court ruling in November 2023, which permitted the tax deductibility of royalty payments. The second adjustment is related to the income tax surcharge, which ended the year at 10% due to an average Brent price throughout 2023. Turning to our investment plan for 2024, with a focus on the 2040 strategy, we expect high levels of investment, reflecting our unwavering commitment to the country’s energy security and transition. We plan to execute investments between COP23 trillion and COP27 trillion in 2024, with approximately 45% allocated toward energy transition initiatives, including low-emission solutions, natural gas supply, TESG investments, and decarbonization. Conversely, the remaining 55% will concentrate on energy security and long-term cash protection, reinforcing our traditional business model. Such investment levels will allow us to plan for profitable production between 725,000 and 730,000 barrels per day, maintain transported volumes around 1 million barrels per day, and throughput at our refineries between 420,000 and 430,000 barrels per day. Assuming an average Brent price scenario of $75 per barrel for the year, we expect competitive returns with a projected return on average capital invested of around 9% and an EBITDA margin of 38%, as well as transfers to the nation exceeding COP38 trillion. Furthermore, focusing on cost control and mitigation, from 2024 to 2026, we plan to implement benchmarks for commercial and operational efficiencies, with expense control and austerity measures totaling over COP7 trillion. Now, I will hand it back to Ricardo for closing remarks.

Ricardo Roa, CEO

We closed a challenging 2023 marked by lower oil prices and higher inflationary pressures. However, we achieved the group's second-best year ever with tactical operational results in terms of production, throughput at our refinery, and volumes transported through our pipeline system, as well as progress on energy transition projects. Today, the Ecopetrol Group aspires to be the leader in energy diversification in Latin America, aligning with our 2040 strategy, Energy That Transforms. I want to express my special thanks to the subsidiaries of the Ecopetrol Group that have contributed to this success alongside us. I thank Ecopetrol Permian for its exceptional performance, contributing significantly to production and ensuring that we achieved unprecedented evacuation levels in our pipelines. I commend our refineries for their record loads and operational availability over the last five years. Additionally, I want to highlight the performance of Hocol for its contributions toward the 11 successful wells in the Ecopetrol Group this year, reaffirming our commitment to our traditional business. I also want to acknowledge ISA’s transition awards amounting to COP10 trillion to be realized in the coming years, further enhancing the business growth. We remain dedicated to generating value for our shareholders, investors, and the nations we serve, always upholding responsible and sustainable operations that accelerate the transitions of energy. Thank you all for your participation. With this, we open the question-and-answer session.

Operator, Operator

Thank you very much. We'll start with our Q&A session. Ricardo Sandoval from Bancolombia is online with a question. Mr. Sandoval, you can ask.

Ricardo Sandoval, Analyst

Good morning, everyone. Thank you for this space and for the explanations. If it's possible to know a little bit more about the reservoirs; when you mentioned that the organic growth, I would like to know if you can tell me how much was due to better forecasts, new projects, extensions, and findings? For the 180 million barrels, how much was due to the price effect or in general for each of these items you mentioned in the report?

Alberto Consuegra, COO

Good morning, Ricardo. Thank you for your question. Yes, we can provide those details. Regarding the 307 million barrels I mentioned, we can break that down. Based on the report, we noted the impact of about 31 million barrels which we can associate with additional maturity processes over a five-year view contributing around 103 million barrels. Other new findings accounted for 2 million barrels, while improvements in production behavior accounted for 109 million barrels. So that gives you the total of 307 million. On the other side, regarding external impacts, we noted 58 million barrels, with 30 million related to price effects and 28 million coming from inflation. This indicates that cash flows from each field were affected by both price and inflation. In terms of technical reviews, we debooked 130 million barrels, mainly affecting gas due to water issues and declines in mature fields such as Ballena, Cupiagua, and Recetor. There were also about 30 million barrels affected by regulatory or technical revisions in the Magdalena Medio and Villa areas.

Ricardo Sandoval, Analyst

Thank you very much.

Operator, Operator

The next question is from Andres Duarte from Corficolombiana. Mr. Duarte, you can ask now.

Andres Duarte, Analyst

Thank you. I have three questions. The first one is, please, can you explain how you can justify the impairment evolution in the downstream, considering that price differentials between oil products have annual and quarterly decreases? I would like to understand why you are showing an improvement of COP1.4 million there. The second question is related to production. Congratulations on the production data for this quarter. If you consider the permit from outside Colombia, the production you show in the fourth quarter is only surpassed by the fourth quarter of 2015. This wouldn't have been the case without the increase in Permian production. So I would like to understand your expectations regarding production in the Permian in the US, considering it might go down faster. The last question, if feasible, due to the increase in lifting costs above $13 in the fourth quarter, how do you reconcile this with a 90% decrease in exploration and production CapEx for 2024 if you don't take the average numbers of '24-26 that you published last December? Thank you for allowing me to ask these three questions, and good luck for 2024.

Ricardo Roa, CEO

Thank you, Andres, for your acknowledgment of our results for the fourth quarter production of the year we just finalized. To address your first question, yes, the impairment of our assets has impacted our results, equating to around COP0.9 trillion. To clarify these details regarding cost increases, expectations for Permian production in the coming years, I will turn it over to Alberto Consuegra.

Alberto Consuegra, COO

Andres, good morning. Regarding the Permian, while it's true it played a role in boosting production in the last quarter, we also experienced steady contributions from Cano Sur and Rubiales fields. We traditionally replace around 100,000 barrels per year due to natural declines from our mature fields, which have performed well. So for Permian growth, our goal is to maintain production, aiming for approximately 80,000 to 83,000 barrels per day in 2024, with expectations for 2025 reaching around 100,000 barrels. This expectation is driven by recent acquisitions, particularly in the Delaware area. Regarding your observation on the decrease in CapEx, it's essential to note that while the investment level in 2024 is forecasted to be lower than in 2023, we will focus on maintaining investment levels similar to those in 2022 and 2023 for Colombia. Thus, our exploration investment for 2024 is estimated at around $300 million, similar to last year’s figures.

Unidentified Company Representative, Unidentified

Andres, I’d like to clarify that my earlier reference to 2024 CapEx considered the annual average across the high and low ranges published, comparing both the prior year's plan and this year's execution. Additionally, to clarify the earlier discussion on impairment, I specifically referred to the downstream. I apologize for the interruption and will allow Milena to elaborate.

Milena Lopez, CFO

Hi Andres, this is Milena Lopez discussing the downstream impairment. To clarify, when performing the impairment analysis for our assets, we must take into account the long-term projections, as these comparisons cannot be viewed in isolation within a particular quarter. When assessing projections for downstream performance, we see improvements in refinery availability, suggesting higher loads during projections. Secondly, reviewing long-term refinery benchmarks against previous forecasts shows better margins. Hence, this leads to a recovery of approximately $370 million in the downstream. It is also essential to incorporate historical cyclicality for the differentials of the products, particularly with gas. Analyzing the numbers of the fourth quarter, we see deviations from projected figures averaging annually and should adjust for mid- and long-term expectations.

Andres Duarte, Analyst

Thank you very much.

Operator, Operator

Juan Jose Munoz is online and has a question. Mr. Munoz, you can ask.

Juan Jose Munoz, Analyst

Good morning. Juan Jose Munoz from BTG Pactual. Thank you for the time. I have a quick question about sales costs. In this quarter, why did you have a strong increase in the sales cost that caused the net margin to fall below what we saw in the first quarter? Was there something specific? What is your plan for the next quarters to recover the net margin that you previously had?

Milena Lopez, CFO

There are two important components to understand the quarterly cost dynamics. Historically, Ecopetrol sees elevated costs in the fourth quarter due to accelerated execution and accrued expenses. Last year, expenditures were around 14% higher than Q3, and this year reflected an even more severe increase of around 19% in quarterly costs. To evaluate more accurately, I'll compare the fourth quarter of this year with the same timeframe last year. Our variable costs are affected by inventory fluctuations: in Q4, variable costs saw an increase primarily due to an inventory valuation drop, amounting to COP1.7 trillion. This occurred due to volumetric impacts from increased sales, alongside valuation mismatches because we evaluated inventories against an exchange rate near COP900. Furthermore, operational changes resulted in decreased exchange rates of around COP740 and crude prices slipping from $86 to $82 per barrel, triggering reductions to diesel differentials well above $20 and drops of $7 in gasoline. Therefore, this particular cost spike is unlikely to persist. The increased costs from power are also significant, with an upward trend of COP300 billion this quarter. This stems from our exposure to the stock market and energy price hikes due to the El Nino phenomenon, which will also exert upward pressure on prices in the first quarter of the year. Nevertheless, we expect this situation to self-correct by the yearend. Fixed costs also include structural challenges: hiring prices for operations showed COP300 billion increases, alongside maintenance pushes of COP100 billion. These components contribute to overall cost increases compared to the prior year's quarter, revealing inflationary influences and efficiency plans to mitigate these trends over the long term.

Juan Jose Munoz, Analyst

Thank you, Milena.

Operator, Operator

The next question comes from Andres Cardona from Citibank. Mr. Cardona, you can ask now.

Andres Cardona, Analyst

Thank you. Good morning to everyone. I have two questions. The first relates to the 2024 production guidance of 725,000 to 730,000 barrels. How does this connect with the 758,000 barrels reported in the fourth quarter? When can we expect an explanation for this decline? The second question concerns the reservoirs: in relation to inflation, which components exhibit the most significant variations, and what is their magnitude? Regarding the reservoir certification from the previous year, considering the price effect, the price is expected to fall; why do you have this revision based on the price effect from $82 per barrel?

Alberto Consuegra, COO

Andres, Alberto Consuegra. Thank you for your questions. I will begin with the production guidance again. Regarding the Permian, we typically see historical production behavior, with year-end figures peaking, followed by the standard decline of wells already in production and new drilling campaigns. For example, the peak in the Permian was 113,000 barrels per day. The average production projected for 2024 is between 80,000 to 83,000 barrels due to anticipated declines. Additionally, we need to closely manage our risk exposure as it pertains to the El Nino phenomenon, which specifically affects operations in fields like Rubiales and Castilla during extended dry seasons. Historical data shows a pattern of marginal impacts on production from January to March, hence our outlook. The second element is that we do need to keep track of factors tied to liability management concerning security situations. Turning to reserves, I previously mentioned the impact of external factors such as Brent prices and inflation. The revision of our cash flow economics against the set limit affects our reservoir certification, especially with SEC prices approximating $15.5 per barrel, combined with current inflation impacts for some fields. Thus, while cash flows indicate possible reservoir reductions from preceding years, we have to account for pricing conditions that don't align with the previous year's dynamics.

Operator, Operator

Katherine Ortiz from Corredores Davivienda is going to ask a question. Ms. Ortiz, you can ask.

Katherine Ortiz, Analyst

Good morning, everyone. I hope you can hear me well. Thank you for providing me with this space. I have a question related to the price stability fund of the fuels. We learned about the dividend proposal for 2024. We have heard the Minister state that, this year, dividends from Ecopetrol capital will not overlap with the price stability fund. I would like to know if you are clear on how you're going to pay this amount, especially because when we look at budget availability and the government’s fiscal plan, we cannot see that Ecopetrol’s payment is incorporated. Or if we decide that at least in 2024, they will not pay this sum, which leverage indicators are you expecting in order for Ecopetrol to close this year without considering the payment and including what you've already mentioned with the government?

Ricardo Roa, CEO

Thank you, Katherine. Yes, indeed, we’ve acknowledged an important aspect of the national government's support, which relates to the payment of FEPC resources outstanding since the closure of 2022, totaling COP36.7 million. These have been settled, leading to the execution level of 97% for COP27 trillion in 2023. For this year, this fund closes at a positive expectation of $20.5 million regarding subsidies for gasoline and diesel demand in 2023. Under the new agreements, those resources do not come under the previous methodologies due to the dividend debt crossover policy. Therefore, Milena will provide an explanation.

Milena Lopez, CFO

Hi Katherine, this is Milena Lopez. Indeed, during 2024, we expect to receive COP20.7 trillion as a payment from FEPC by the national government. According to previous distributions, we cost the subsidies quarterly over the next twelve months. Thus, we will receive payments quarterly from the government to cover the outstanding debts. What differentiates this year from past practices is that we won’t cross dividends — an accounting maneuver where we exchange the invoice for the government payments with our dividends payable. Instead, we will secure cash payments from the government quarterly. For our dividend obligations, we will pay the nation while maintaining the appropriate quarterly operations. The proposed dividends for the nation equal COP11.3 trillion. The remaining details are still pending board meetings for voting.

Operator, Operator

Let's begin with questions in English. Bruno Montanari from Morgan Stanley has a question. Mr. Montanari, you can ask now.

Bruno Montanari, Analyst

Hi, hello everyone. Thank you for answering my questions. I have two questions and a follow-up. First, about lifting costs, we've seen increases in the second half of the year, finishing the year at $13 per barrel. I recall beforehand that the company often spoke about a short to medium term target range for lifting costs between $9 and $10 per barrel. Should we expect lifting costs to stabilize around $12 to $13 per barrel in 2024, or will they revert to lower levels in the coming time? The second question is related to refining margins: I wanted to comprehend why the company's realized margins differ significantly from international fracs spreads and gain some insights into what margins may look like in the coming quarters. Lastly, could you confirm if the spike in production during the fourth quarter was solely attributed to Permian production and should we expect a more pronounced decline in production for the first quarter of this year?

Alberto Consuegra, COO

Bruno, Alberto Consuegra. Thank you for your questions. Improved lifting costs were recorded; in the last quarter of 2023, the average around $13 per barrel and an overall average for the year at $10.91. The increase is associated with power and service costs. If you review cost details, 75% of our expenses occur in pesos and approximately 25% in dollars. The peso impact involves significant inflation, particularly with 2022 and 2023 inflation levels in Colombia around 30%. The energy cost has also seen upward impacts due to El Nino, an effect expected to continue into the first quarter of 2024. Accordingly, our expectation is to maintain lifting cost averages in 2024 at around $13 per barrel while launching strategic renegotiations for operational costs aimed at instilling greater efficiencies through operational interventions. With regard to refining, I’ll turn over to Walter for additional details about spread performance.

Unidentified Company Representative, Unidentified

Bruno, for 2023, we had a great season with one of the highest EBITDA historical margins, closing close to $18 per barrel for consolidated performance, only second to 2022. Specifically reaching large volumes and operational efficiency marks, we secured records in the Barrancabermeja and Cartagena refineries, achieving throughput of 241,000 barrels by year-end – the best seen in 16 years. Although the fourth quarter did have high operational results, we did experience decreased refinery margins due to the drop in product prices from October, particularly diesel and gasoline, which fell to a one-digit margin of around $7-8 per barrel triggering lower margins for the fourth quarter. However, the positive performance in January and February indicates the margins trending back above the originally anticipated target at approximately $15 per barrel.

Alberto Consuegra, COO

Bruno, regarding production, the expected decline occurs typically in the first quarter with historical trends. We anticipate lower production volumes in Q1 versus Q4 primarily due to the natural decline from production wells, and due to planned maintenance activities affecting gas output from the Cupiagua plant. Furthermore, security concerns have delayed production timelines in various fields including Arauca and Rubiales. Overall, this could lead to approximately 400,000 barrels in deferred production.

Operator, Operator

Next question from Alejandra Andrade from JPMorgan.

Alejandra Andrade, Analyst

Hi, I think my first question was already answered. It was related to the downstream margins, which you explained were influenced by spreads and costs. I just wanted to ask if there are any opportunities you see to acquire any assets in Colombia, particularly in the gas sector? Are you focused solely on exploration at this point?

Unidentified Company Representative, Vice President, Strategy and New Business

Good morning, Alejandra. As always, we are looking for growth options both for gas and oil in Colombia and in other regions. It’s a habitual process where we assess inorganic possibilities actively and comprehensively, and as those opportunities materialize, we will make them public through our standard procedures.

Operator, Operator

Luiz Carvalho with a question.

Luiz Carvalho, Analyst

I'm trying to reconcile and understand management's approach concerning dividend proposals in 2024.

Ricardo Roa, CEO

Thank you, Luiz, for your questions. Some aspects had already been touched upon previously. We note that production in the fourth quarter of 2023 ranks among the highest records of the preceding eight years due to improved performance from our assets despite the challenging downturn in average Brent prices. We expect production to undergo some adjustments, particularly amidst the anticipated price declines, which affect our decision-making about extracting from various resources currently explored commercially. Our internal analysis suggests a potential target towards achieving 800,000-830,000 barrels per day in mid to late 2029. Regarding dividends, it is important to clarify that we will not apply last year’s strategy regarding accounting techniques for crossing dividends against subsidies. Thus, there should be no expectation of measuring through these adjustments this year.

Milena Lopez, CFO

As reiterated, the dividend payout for 2024 is projected based on a 67% distribution, comprising COP12.8 trillion overall, with COP11.3 trillion for the nation and COP1.5 trillion for minority shareholders. Regardless of the timing of payments, we will ensure recipients adhere to the schedule once the FEPC funds are received quarterly.

Operator, Operator

We have no more questions live. So we give the floor to the President for the final message.

Ricardo Roa, CEO

Thank you again for your participation. Please keep a firm confidence in our company and the subsidiaries. Our dedicated team shows remarkable leadership within Ecopetrol, facing critical market conditions effectively. We will remain committed to develop Ecopetrol into a premier organization both within Colombia and the wider international landscape. Thank you very much for joining.