Earnings Call Transcript - EC Q2 2021

Operator, Operator

Good morning. My name is Hilda, 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 second quarter 2021. Before we begin, it is important to mention that the comments in this call by Ecopetrol 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, Chief Executive Officer of Ecopetrol; Alberto Consuegra, Chief Operating Officer; and Jaime Caballero, Chief Financial Officer. Thank you for your attention. Mr. Bayón, you may begin your conference.

Felipe Bayón, CEO

Good morning, everyone, and welcome to our second quarter 2021 results conference call. We hope you and your families are well and continue to stay safe as the world aims to recover from the effects of the COVID-19 pandemic. The results of the second quarter and the first half of the year reiterate our ability to capture value in a favorable fundamental scenario. Despite challenging environmental conditions, we maintain our commitment to cost optimization, efficiencies, and improvements in our commercial strategy. Social unrest during May and June caused a complex situation locally, resulting in mobility restrictions and some operational disruptions. Ecopetrol activated a contingency plan to guarantee the security and continuity of its operations and mitigate the impacts across our value chain. During the quarter, we generated a consolidated revenue of COP19.4 trillion and EBITDA of COP9.4 trillion, a 49% EBITDA margin and a net income of COP3.7 trillion. These financial results are historically high on a quarterly basis for Ecopetrol. These outstanding results ratify the resilience that the company has consistently demonstrated amid challenging environmental conditions to which the following milestones can be added. We joined the program of the National Association that allowed for the acquisition of vaccines by the private sector, reaffirming our commitment to the protection of life and care of our workers, their families, and our allies. Under this program, we acquired nearly 26,000 doses of the Sinovac vaccine, with which to date more than 3,400 first doses have been administered. With this program, along with the government's national vaccination plan, around 40% of our employees have completed the immunization program. We announced the creation of a new trading company based in Singapore. This aims to consolidate the positioning of our crude and refined products in the Asian market, capitalizing on our diversification strategy. We announced to market the extension until the end of August of the exclusivity agreement with the Ministry of Finance and Public Credit for the potential acquisition of 51.4% of the shares in the consortium. In addition, on July 30, pursuant to an authorization from our Board of Directors, we submitted a binding offer to the ministry. Its conditions are subject to reserve due to the nondisclosure agreement that governs the process. We resumed normal operations in the Castilla field with an increase in production of 9,000 barrels at the end of June compared to the production of the field at the end of May. Let us now turn to the next slide to see some aspects of the market context. In line with the progress of the vaccination plans and the progressive reactivation of economic activity at a global level, we observed a significant recovery in the market. During the second quarter, domestic demand for natural gas averaged 945 giga BTUs per day. In June, there was an 8% recovery in demand compared to May, a month in which demand was most affected by the public order situation in the country. As for LPG, we reached an average of 22,300 barrels per day during the quarter and in June, an increase of 30% compared to the previous month. In terms of our product sales in the domestic market, there was a reduction of around 5% during the second quarter versus what was observed in the first quarter of 2021. In general, we have observed a recovery in demand to around pre-pandemic levels, except in jet fuel where there is still room for recovery. It is worth highlighting the improvement in the realization prices of our crude oil basket, which have recovered significantly against the Brent price. After having registered levels close to $30 per barrel during the first half of 2020, our crude was sold at close to $62 per barrel for the same period in the year 2021. Please, let's move on to the next slide. There are different actions that allowed us to generate a counter effect to the operational disruptions and deliver positive results in this quarter. Our commercial strategy contributed more than $120 million to the group's EBITDA during the quarter, mainly as a result of the purchase of new crudes for the refineries, increased asphalt sales, and energy cost savings. Also, we observed a strengthening of around $45 per barrel in absolute prices of crude oil exports as compared to the second quarter of 2020, stable flow of exports to the U.S. Gulf Coast, and a greater share of market volume in the Asian continent. As an integrated company, Ecopetrol materializes synergies between its different segments in the various businesses, giving us the flexibility to face volatile contexts. An example of this is the strategy to maximize Cartagena's refinery throughput with our domestic crude oil versus imported crude oil. This allowed us to capture benefits of around $5.5 million in EBITDA during the first half of the year 2021. The diversification of our production and reserves portfolio through the consolidation of business lines, such as gas and the unconventional reservoirs in the United States. In the case of the Permian Basin, in Texas, we can observe its outstanding results. We registered an average net production for Ecopetrol of 21,200 barrels per day during this quarter. Our gas and LPG business showed an EBITDA growth of 32% compared to the same period of the previous year and reached an EBITDA margin of 54%. It also represented 21% of our total production. Our cost efficiency plan, aligned with strict capital discipline standards, has allowed us to incur efficiencies of approximately COP one trillion in the first semester of this year. To date, we have COP197 billion allocated to the implementation of various projects in different subsidiaries of the group. I'll hand the word to Alberto Consuegra, who will elaborate on the main operating milestones for the quarter.

Alberto Consuegra, COO

Thank you, Felipe. On exploration, three exploratory wells were drilled with a total of eight wells year-to-date. By the end of the year, we estimate a total of 14 wells, five additional wells compared to the plan set for 2021. Cumulative production in initial tests, extensive tests, and exploratory wells in post commercialization reached 908,535 barrels of oil equivalent, an increase of 15% as compared to the first half of 2020. Regarding gas, the appraisal of the first discovery confirmed the presence of gas. Initial testing yielded gas production between 2.5 and 9.5 million cubic feet per day. Extensive tests will be carried out to determine its commercial viability. The drilling campaign for the remainder of the year will be focused mainly on gas exploration in Northern Colombia and Piedemonte. On the other hand, we highlight the strengthening of the partnership between Ecopetrol and Parex resources through the assignment of 50% of the Ecopetrol stake in the blocks, promoting the reactivation of exploration in an important oil area of the country. In the block, it is expected to resume production of light crude between 38 and 41 degrees API by drilling two development wells. Meanwhile, initial activity in the block will be focused on drilling our exploratory well in 2022 and acquiring 3D analysis of the area's potential. Let's move on to the next slide, please. During the second quarter, Ecopetrol Group's production was 661,000 barrels equivalent per day, reaching 668,000 barrels equivalent per day year-to-date. When compared to the same period of the previous year, production decreased by 5.3% due to lower production from the Castilla field and the public order issues mentioned by Felipe. The operating restrictions related to water management in the Castilla field were resolved in June, allowing a production increase of 9,700 barrels per day at the end of the second quarter. Production levels above 680,000 barrels equivalent per day are expected by the beginning of July, maintaining our estimated production range between 690,000 and 700,000 barrels for the year 2021. Gas and LPG production increased 8% compared to the same quarter of the previous year, leveraged mainly by higher production from Piedemonte, Permian, and Hocol fields, a 7% decrease versus the previous quarter due to effects on the evacuation of LPG in Piedemonte caused by the social unrest, which led to maximum levels of storage of this product. As of today, there is a recovery in production due to higher demand. Let's move on to the next slide, please. On the Colombian and conventional reservoirs front, on June 17, the National Hydrocarbons Agency approved the alliance with ExxonMobil for the development of research pipelines. The assignment of cross-participation interest with ExxonMobil was also approved, resulting in Ecopetrol as the operator with a 62.5% participation interest in the Kale and 37.5% in Platero. Regarding Kale, we continue to make progress on the environmental impact studies. As for Platero, the first territorial dialogue was initiated, and the monitoring and environmental impact studies began. As for the Permian Basin, during the second quarter, 26 wells were drilled for a total of 47 wells drilled so far this year, reaching a net production after royalties for Ecopetrol of 16,100 barrels of oil equivalent per day. In line with our TESG commitment, we are adopting both drilling and completion equipment aiming to reduce diesel consumption by up to 20%. Additionally, we are continuing with our zero routing faring initiative. With the production levels and efficiencies achieved during the first half of the year, Ecopetrol generated a cumulative EBITDA of $74 million and an EBITDA margin of 79%, with CapEx execution of $371 million in accordance with the plan. Let's move on to the next slide, please. The volume of transported refined products increased by 86,000 barrels of oil equivalent per day compared to the second quarter of 2020 due to the recovery of local demand. On the other hand, the volume of crude transported decreased by 52,000 barrels of oil equivalent per day as a result of operating restrictions caused by the public order situation in the country, which led to the suspension of pumping in some refining systems. In response to the aforementioned, a contingency plan was executed in order to mitigate the impact of fuel supply to the different regions of Colombia. During this period, no reversal cycles of the Bicentenario pipeline were conducted, completing 19 consecutive months without using the contingent alternative. On April 27, the new TLU-2 platform for loading crude oil was inaugurated at the Covenas terminal, the country's main crude export port. This new infrastructure allowed us to almost double the cargo capacity of ships from 18 to 34, thus transferring heavier crude oils and incorporating the highest technology to serve two million-barrel tankers for the next 20 years in harmony with the environment. Next slide, please.

Jaime Caballero, CFO

Thanks, Alberto. During the first half of 2021, Ecopetrol's net income was COP6.8 trillion, exceeding the result for the entire 2020 of COP1.69 trillion. This increase relative to the first semester of 2020 is mainly due to a higher generation of EBITDA of COP10.4 trillion, primarily explained by, first, a contribution of COP7.7 trillion associated with the commercial strategy to capture higher price differentials. With respect to volume, it's worth highlighting the contribution of the Permian business and the recovery of domestic and foreign demand, which helped to offset the decrease in crude oil sales from the Castilla field and the effects of the public order situation in the country. Second, there was a positive inventory valuation of COP2.9 trillion as a result of higher prices of crude oil and products. Third, an increase of COP123 billion in operating costs, mainly due to increased maintenance activities deferred from 2020 and the corresponding raw material consumption. In addition, the semester includes the impact of three non-operational factors: firstly, a nonrecurring positive item of COP362 billion recognized in January 2021 associated with exchange rate adjustments due to the divestment of operations in Peru; secondly, an increase of COP0.9 trillion in items, such as depreciation, financial expenses, and exchange difference; and third, higher income tax for COP2.9 billion associated with improved results. During 2021, no impairment recognitions have been made. And in the absence of new disruptive market scenarios, the corresponding analysis would be carried out by the end of the year. Relative to the first quarter of 2021, the second quarter continues to consolidate the company's financial strength with an increase in net income, mainly explained by the generation of COP1.2 trillion in EBITDA due to improved price realizations and the increasing valuation of inventories, as mentioned above. This positive result helped to offset the effects of protests and social unrest in Colombia, valued at COP403 billion in terms of EBITDA and COP279 billion with respect to net income. The following points stand out on this particular matter. The upstream segment experienced a lower level of production of crude oil, gas, and wide products, along with deferred operational activities and higher expenses associated with the control of the emergency. These elements are valued at COP264 billion in terms of EBITDA. The midstream segment recorded lower refined product sales in the local market affecting the Barrancabermeja refinery, a decrease in polypropylene deliveries by Esenttia, and lower revenues from LPG and natural gas by Invercolsa. These items resulted in an impact of COP78 billion on the EBITDA of that segment. Finally, the midstream segment experienced a decrease in transported oil and refined products valued at COP61 billion in EBITDA. Please turn to the next slide to see the main financial indicators. The financial results achieved during the first half of the year confirm that the company has resumed its successful growth path, aligned with the objectives of the 2021-2023 business plan. By the end of the first semester, EBITDA margin reached 48.1%, among the highest levels recorded historically. This is the result of better price realizations, along with an annual variation in costs and expenses in a smaller proportion. These factors raised the EBITDA per barrel to $40.2 per barrel, exceeding levels registered prior to the pandemic. The evolution of unit costs is also noteworthy as they remain below pre-COVID levels and are expected to continue in line with those established in the business plan despite activity displacement for the second half of the year and seasonal operational expenditure cycles. The leverage ratio is currently below the year-end target established within the business plan, providing a favorable position to leverage 100% of the acquisition transaction through debt resources. Please turn to the next slide to review the main investment figures. CapEx execution is historically high, despite the operational restrictions linked with the pandemic and the public order situation. As of June, the deployed investments were $1.4 billion, representing the second-highest level in the last five years. Upstream investments accounted for 77% of total CapEx, mainly in growth opportunities with a focus on increasing production and reserves. Even though challenging operating conditions remain, we expect a significant rise in the pace of execution throughout the second half of the year and for the year-end CapEx level to be near the bottom of the investment range announced to the market previously. In this regard, a larger share of investment outside Colombia is also expected compared to what was initially forecasted, driven by higher execution at the Permian. Please turn to the next slide to review the 2021 first-half cash flow. The cash balance for the first half of the year closed at COP6.4 trillion, and our main source was the operating cash flow that contributed with COP6.2 trillion. That's without considering the account receivable from the fuel price stabilization fund, which to date totals COP3.8 trillion. For its part, the investment component had an outflow of COP5.2 trillion related to CapEx driven by the good pace of execution outside Colombia and a higher FX effect. As for the financing component, an outflow of COP2 trillion for capital repayment and interest payments was registered. No additional leverage was required during the course of the year due to better price realizations and the evolution of the company's cash flow. On the other hand, as of today, dividends of COP1.2 trillion have been paid to capital shareholders and non-controlling shareholders of the subsidiary companies. The final cash flow consists of cash resources and equivalents for COP5 trillion and short-term investment portfolios for COP1.4 trillion. Of the total liquid resources, 45% is denominated in dollars and 55% in pesos. The free cash flow as of June stands at COP1.1 trillion. To the extent that less tax and dividend payments are foreseen for the second half of the year, we expect the free cash flow to continue moving through a solid path. Finally, it is relevant to highlight the recent authorization to sign a contingent loan agreement for $1.2 billion as a continuation of the strategy used in the past to obtain certainty of funds for the company to finance its operations and organic growth as well as to mitigate the risks associated with unforeseen fluctuations in marketing. Now, I hand over to Felipe Bayón for closing remarks.

Felipe Bayón, CEO

Thank you, Jaime. The structural performance drivers are supported by the company's sustainability vision. I want to share some details with you. On the technological front, we have implemented digital transformation projects that have allowed us to capture and certify benefits of around $20.5 million in the first semester. Regarding our environmental initiatives, we highlight the progress in renewable energy projects, such as the Castilla solar farm, which has achieved a reduction of 16,000 tons in equivalent emissions and savings in terms of operational costs of more than $1.6 million, along with the expansion of the generation capacity of the San Fernando solar farm that, through technology and engineering, allowed us to move from 59 megawatts to 61 megawatts capacity. We've also made good progress in terms of the measurement of wind generation capacity in some of our areas of operation. Regarding our social investment, in addition to the continuity of our social investment program, we have implemented initiatives to generate employment, such as the 51% increase in local purchases of goods and services versus the second quarter of 2020, while hiring of 180 young trainees in our teams. Thanks to this, we have now closed deals with micro, small, and medium-sized enterprises for more than COP16.7 billion. Finally, in terms of governance and some of its milestones, we once again made official our interest in participating in the Dow Jones Sustainability Index. We published the first report that responds to the stakeholder capitalism metrics of the World Economic Forum, and we updated and disclosed the succession policies for both the Board of Directors and the President of Ecopetrol. We announced that Ecopetrol voluntarily adopted the recommendations issued by the Task Force on Climate-Related Financial Disclosures as part of our effort to provide better disclosure of information on issues related to climate change and presented for the first time a specialized report aligning the company's disclosure under these guidelines. Let us now move on to the next slide to share the progress on the potential transaction for the acquisition of the 51.4% stake in the consortium. With the attention of the exclusivity agreement and the submission of a binding offer to the Ministry of Finance and Public Credit, I would like to highlight the following developments. To ensure the payment of the potential acquisition through a 100% debt structure, Ecopetrol is advancing the required approval procedures before the authorities for search purposes. The due diligence process was carried out exhaustively by expert advisers in each area. More than 30 sessions were held with executives of the consortium and of its main subsidiaries. Regarding this potential transaction, since the middle of 2019, Ecopetrol's Board of Directors has reviewed topics related to this opportunity in 30 of its main sessions and in 32 of its committee sessions. As a sign of our firm commitment to strong corporate governance practices and to our cultural principle of always being ethical, the non-independent board member did not participate in those board meetings and likewise was not involved in the pricing process. Let's now move on to our conclusions. This quarter, we were able to demonstrate that the measures adopted last year to overcome the crisis were the right ones. We had to face new environmental shocks with their consequent effects throughout our value chain. Despite the above, we achieved outstanding quarterly results, paralleling the company's history. This positions us very well for the remainder of 2021. We will continue to focus on resuming the path of operational activity recovery with the aim of reaching the objectives established for 2021, always complying with a strict capital discipline, efficiency captures, cash protection, and investment sustainability. We continue to work decisively on the potential transaction for the stake acquisition in the consortium, which we firmly believe is a unique opportunity for Ecopetrol's energy transition, its diversification, and its medium and long-term sustainability. Finally, we reiterate our commitment to the socioeconomic reactivation of the country, reaffirming our strength as a fundamental pillar of national energy security and our capacity to continue supplying the country with the energy necessary for its development. Once again, we thank you all for participating today in this call. And with this, I will open up the Q-and-A session.

Operator, Operator

Thank you. And we have a question from Guilherme Levy from Morgan Stanley.

Guilherme Levy, Analyst

Hi. Good morning, everyone. Congrats on the results, and thank you for taking my question. I have two questions. The first one is on lifting costs. So I just wanted to understand what should we expect in terms of evolution for that line until the end of the year, considering that, on one hand, you have grown production, but on the other hand, you might have additional costs due to some activity that got delayed from the first half due to the social unrest in the country. And then the second question is the downstream. Part of the strong results that we have seen in the quarter was driven by very healthy petrochemical figures. So I was just wondering if you can tell us what you are seeing in the coming months and quarters regarding demand for polypropylene in inventory levels and what should we expect in terms of spread normalization for this business going forward. Thank you.

Felipe Bayón, CEO

Thanks, Guilherme, and thanks for being here today with us on the call. I will ask Alberto to tell us a bit more around expectations and our view going forward on lifting costs. And in terms of what we're seeing also in terms of downstream operations, I can ask Walter to talk about specifically what we see in terms of inventory levels, and we can talk about spreads. So Alberto, please go ahead.

Alberto Consuegra, COO

Guilherme, good morning. In terms of lifting costs, what we have said is that our lifting cost by the end of the year should be in the range of $8.5 per barrel. That means that we're going to see a slight jump from where we are at the second quarter to the end of the year. This is because of the ramp-up in activities. As you mentioned, we're going to see more subsurface activities, specifically related to workovers, well interventions, and more maintenance work in our facilities, all of these in order to manage a production decline and incremental production that should be coming in the next months.

Felipe Bayón, CEO

Thank you, Alberto. Walter, in terms of what's coming up for the downstream and what are we seeing in terms of spreads and the likes?

Walter Canova, Downstream Manager

Yes. Thank you, Felipe. Thank you, Guilherme, for asking the question. Regarding the downstream, as you have seen, we had a very good second quarter for this year. I would say we achieved an average of 360 KBD between both refineries. We are projecting for the rest of the year to be around 350 to 360. Of course, we are considering that we still need to have a few turnaround activities at the Cartagena refinery and also in Barranca. Regarding the inventory levels, I think that our refinery production is aligned with local demand, especially at Barrancabermeja. We are basically running the crude at Barranca after the local demand, which we expect for the second half of this year to be strong, as we have mentioned before. Regarding the spread, we foresee a spread around the margin based on the combined performance at Cartagena and Barranca. As for the petrochemical sector, we did have a very strong second quarter, but what we foresee for the following months is a slight decrease in demand. So we expect the third and fourth quarters will not be as strong for Esenttia as it was in the second quarter of this year. This is how we see things evolving in the coming months for the downstream. I hope I answered your question, Guilherme. Thank you very much.

Guilherme Levy, Analyst

Okay, thank you.

Operator, Operator

Thank you. We have another question from Declan Hanlon from Santander.

Declan Hanlon, Analyst

Hello, everyone. Thank you for the call. Just a quick question on your commentary around credit lines or bank loans to fund the potential acquisition ISA. Should we read that as a conventional long-term three- to five-year syndicated loan? Or is this more likely to be something in the bridge loan category so banks have a bit more time to anticipate how to place this in the public market in advance? How should we understand the plans around this?

Felipe Bayón, CEO

Thanks, Declan, for the question. Jaime?

Jaime Caballero, CFO

Thanks, Felipe. Hi, Declan. With regards to how we're thinking about ISA, we're thinking about a specific purpose credit line with a duration of two to three years that's going to be materially replaced by some form of longer-term bond. That's how we're considering it, okay? We are well advanced in that conversation, so we are quite certain about the terms that we would be obtaining.

Declan Hanlon, Analyst

Thank you very much. Appreciate it.

Operator, Operator

Thank you. Our next question comes from Frank McGann from Bank of America.

Frank McGann, Analyst

Hi. Good morning - good day. Just to follow up on the comments you had made on ISA earlier. Just in terms of timing, when you think we might get more information on the structure of the deal or the price that you're paying and any other issues. And then secondly, you've indicated that it's not contingent on an equity offering. I'm wondering how you're seeing an equity offering right now. Is that something that could be part of the financing here, either directly as far as the ISA financing or done at a separate time? Or is that something that's been put on hold for now?

Felipe Bayón, CEO

Thanks, Frank, and thanks for being here today. In terms of the deal itself, we're currently, after having presented the binding offer, waiting for the ministry to do its assessments and analysis. Hopefully, we'll be getting a response soon. We need to remind that we are currently under an exclusivity period until the end of August, which gives us some guidelines on how to treat the information in terms of confidentiality and the like. So in that sense, we'll wait for them to continue with their analysis. And hopefully, if it’s an answer with an affirmative acceptance of the offer, we anticipate the signing of an agreement between the parties, followed by the closing of the transaction. So that's sort of the timing. It's still not precise, but after two years of having studied this, we're not rushing anything. We want to ensure that both parties feel comfortable. As for the equity offering, we continue to work in that front. The teams are moving ahead, and we're not conditioning the closing of the ISA transaction to the equity offering.

Frank McGann, Analyst

Great. Thank you.

Operator, Operator

Thank you. The next question comes from Anne Milne from Bank of America.

Anne Milne, Analyst

Good morning. Thank you very much for the call today. Congratulations on the good results. My question partly overlaps with the previous one, regarding the funding for the ISA acquisition. A related question is, do you have a maximum leverage that you think you'll go to? And then the second question is slightly different, but it's on the recent credit downgrade, which was, of course, triggered by the sudden downgrade of Colombia. Does this change anything for Ecopetrol in terms of your strategic plan, whether it's your CapEx budget, your funding, your debt or leverage levels, production, or anything else?

Felipe Bayón, CEO

Thanks, Anne, and thanks for being here. I'll start by saying that we don't foresee any changes in terms of the plan that we've shared with the market. Regarding our activity levels, our agenda around energy transition maintains a CapEx of COP3.5 billion to COP4 billion for the year. That hasn't changed at all. We demonstrated today that we are very resilient and can withstand changes in terms of demand destruction or prices, or even things like the social unrest that we had to go through in Q2. Jaime, could you please add anything else regarding the credit downgrade?

Jaime Caballero, CFO

Thank you, Felipe. Hello, Anne. A couple of notes on the credit downgrade. First, our stand-alone credit rating remains unchanged. Secondly, in light of the committed credit facility and ongoing conversations about ISA funding, we’ve been closely in touch with the market around the credit conditions that we would obtain, and they are very competitive. We’ve also been monitoring our bonds’ behavior in the market. After the short-term market reactions, we have seen a trend towards stability and investor confidence. Therefore, we don't have any reason to believe our plans should change because of the recent sovereign credit downgrade. Regarding ISA funding, we previously referenced keeping our leverage below 2.5 times gross debt to EBITDA. Given the robust performance of the company, we believe we can stay within that limit, including significant inorganic activity. This leads us to estimate a leverage range of 2.1 to 2.2 times debt to EBITDA, well within the 2.5 ceiling we previously mentioned.

Anne Milne, Analyst

Thank you very much. Yes, it helps very much.

Operator, Operator

Thank you. Our next question comes from Luiz Carvalho from UBS.

Luiz Carvalho, Analyst

Hi. Thanks for taking the question. Hi, Felipe. Hi, Alberto. I have two questions from my end. The first one is I'm trying to understand the rationale behind Ecopetrol trying to maintain the exclusivity through the ISA acquisition process instead of the government having, for example, an open negotiation with several players for the stake. This could be more accretive for the country and a bit more transparent as well to the investor community. So what is the reason for having an exclusivity priority to negotiate the asset? The second question is more on the fiscal situation of the country. I would like two follow-ups here. The first one is, do you have any issue assessment on how government projects may impact the company or the oil industry in general? The second one is if you have any sense of how the company might fit into the controlling shareholders' funding plan or the ISA acquisition. Do we have now higher dividends or savings for an eventual follow-on for the government to sell the stake?

Felipe Bayón, CEO

Thank you, Luiz, for the opportunity to discuss the ISA potential acquisition. We've been assessing this opportunity for more than two years. There’s been a lot of detailed work in understanding the strategic benefits for Ecopetrol and the potential impact on energy transition. This transaction is beneficial for both Ecopetrol shareholders and Colombia. Through this transaction, the country would retain ownership of strategic assets critical to energy transition. We believe this enables us to achieve in one transaction what would take several transactions over an extended period, making it transformational for both Ecopetrol and Colombia. We've communicated timely to the market at every step of the process, so we're quite comfortable. Jaime, could you address the fiscal projects or tax reform?

Jaime Caballero, CFO

Indeed, Felipe. This is a project and it has to go through the legislative steps. From an awareness angle, we've looked at the numbers. We estimate increased tax contributions in the order between COP400,000 million and COP600,000 million due to the corporate tax rate increase to 35%. This reform increases the government take and the transfers we make to the nation, which is good for providing fiscal stability.

Luiz Carvalho, Analyst

Okay. Thank you, Felipe. Thank you, Jaime.

Operator, Operator

Thank you. Our next question comes from Christian Audi from Santander.

Christian Audi, Analyst

Thanks. Hello, Felipe. Hello, Jaime. I had a few questions. The first one focuses on production. If you could give us a sense and update, given the positive results of the second quarter, how you envision reaching or not your target for 2021 in terms of production? If you could speak more specifically about the evolution of production in the Permian and provide an update on when you could potentially see the first oil for Brazil. The second question in terms of uses of cash was just to get a sense of, regarding dividends, given the ongoing ISA acquisition process, where do you see the dividend payout being in the 40% to 60% range that you've used in the past? Also, on the CapEx front, where do you see yourself falling for total CapEx for this year? Third and final question, you've always done an excellent job generating high returns on capital employed. How do you see your ROACE evolving after the numbers we observed in this first half of the year of around 9.1%?

Felipe Bayón, CEO

Thanks, Christian. I was having issues with my microphone. So quite a few topics here. I'll give you a broader context, and I'll ask Alberto to touch on some of the production details; Jaime will discuss ROACE. Regarding production, I want to go back to some of the numbers we've shared: 661,000 barrels in Q2; 686,000 barrels at the exit rate for Q2. We continue to envision the range of 690,000 to 700,000 barrels as the average for the year. Alberto, please provide more details about production support.

Alberto Consuegra, COO

Thank you, Felipe. Good morning, Christian. Regarding production and building on what Felipe said, we foresee a ramp-up coming from various activities. First, gas demand should increase, allowing additional cash sales, representing about 5,000 barrels of oil equivalent per day. Then we have subsurface activities, mainly workovers and well interventions that will help manage base production decline. Incremental production will come from facilities and drilling activities, amounting to about 3,000 to 5,000 barrels per day. Additionally, we have explorations that will add production in the second semester.

Felipe Bayón, CEO

Thank you, Alberto. Jaime?

Jaime Caballero, CFO

With regards to ROACE, you've seen our second-quarter position at around 9%, which is quite healthy. We've made a number of functional interventions associated with adjusting CapEx to market circumstances. We aim to be back at double-digit ROACEs very soon, depending on how market conditions evolve. The perspective on ROACE is very positive.

Operator, Operator

Thank you. Our next question comes from Bruno Amorim from Goldman Sachs.

Bruno Amorim, Analyst

Hi. Good morning, everyone. Thank you for taking my question. I have a question, which is somewhat related to the ISA acquisition. There seems to be a long-term view that the company should move towards different segments within the energy space, which sometimes implies additional uncertainty around performance. I'm interested in your view on this trade-off, balancing the transition into new segments with the need to deliver high returns on capital. What do you expect in terms of returns on the marginal investments going forward?

Felipe Bayón, CEO

Bruno, this is Felipe. I want to ensure that I understood your question correctly. You're asking about our long-term view regarding the ISA transaction and the expected returns on that investment. If you step back from a more holistic view, there are four things we need to do as a group. First, in our core business, we need to remain competitive. This means utilizing technology and processes to protect and enhance the value generated from our investments in oil and gas. Jaime briefly mentioned our ability to bounce back quickly, demonstrating our discipline with investments. The second lens is diversifying our business, where the ISA transaction comes into play. Additionally, we’re exploring hydrogen opportunities as we aim for a more sustainable future. Lastly, we’re focusing on decarbonization and corporate social responsibility to ensure that our operations are ethical and efficient.

Operator, Operator

Thank you. The next question comes from Badr Alami from Barclays.

Badr Alami, Analyst

Yes. Thank you so much for taking my question. Congrats on the 2Q earnings. So quick questions from my end. The first one is, can we get an update on the account receivables, especially the fuel price stability fund? I want to understand how much you expect in terms of cash outflow in the second half of the year, especially if oil prices and pump prices were to increase. When do you expect the government to pay you back on that? My second question was partially answered before. It's about bond issuance. My understanding is that you have COP1.4 billion approved for potential issuance. When will this approval expire? Is the plan to replace both the credit facility and refinance the bond maturing in 2023 at the same time or one after the other?

Felipe Bayón, CEO

Thanks, Badar, for the question. Jaime, could you provide an update on the fuel price stability fund and the potential bond issuance?

Jaime Caballero, CFO

Thank you, Felipe. Badr, the general background is that accounts receivable grew over the first half of this year due to the growing FX balance from the increasing delta between international prices and local pump prices. The balance is at COP3.8 billion and continues to grow in the coming months, with an estimation by the end of the year between COP6.5 billion and COP7.5 billion. The timing of payment can fluctuate; however, we do not expect cash inflows this year but anticipate payment recognition next year. Regarding the bond issuance, the COP1.4 billion is a preemptive approval from the Ministry of Finance, and we intend to reach the market. We do not have immediate plans to do that as we don't need to finalize that right now. Regarding the credit facility, it serves purely as a contingency, and we are keeping flexibility around that. It does not relate to the ISA acquisition.

Badr Alami, Analyst

Thank you so much, guys.

Operator, Operator

Thank you. And at this moment, I would like to turn the call back to Mr. Bayón for final remarks.

Felipe Bayón, CEO

Thank you, and thanks again, everyone, for participating in today's conference call about our second-quarter 2021 results. Thank you for your feedback, your questions, and your interest in following Ecopetrol. Your questions help us improve our communications and clarify specific issues. I hope everyone stays safe, and I look forward to seeing you in one of our next conference calls. Have a great day.

Operator, Operator

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