EC - Ecopetrol: Improving Outlook 23% Yield Ex-Dividend Date Next Week

2023-04-19 00:46:39 ET

Summary

• Colombia's Ecopetrol has had a positive month thanks to both company-specific developments and macroeconomic factors.
• Despite that, the share price has been flat since my previous report.
• I believe this sets up a favorable outlook for Ecopetrol shares, especially as the stock is set to go ex-dividend next week.

Last month, I highlighted the opportunity in Colombia's state-run oil company Ecopetrol ( EC ). While the Colombian government owns 88% of the firm, foreign investors can tag along via the small minority listing of shares that trade freely, including on the New York Stock Exchange.

That has given foreign investors the opportunity to participated in a lucrative income asset. Ecopetrol owns the majority of Colombia's upstream oil production, all of its refining capacity, and sizable holdings in midstream, electric grid, renewable power, and toll roads, among other assets.

Historically, this has resulted in large dividend payments. These primarily go to the government -- as the majority owner -- to help fund its numerous expenses. However, EC stock owners get to enjoy the high dividends as well. The company has a variable dividend policy, based around its annual earnings, with dividends usually being around 60% of the prior year's earnings.

As Ecopetrol earned more than $3/share last year and is trading at a trailing P/E ratio of less than 4, this entitles its owners to a large dividend in 2023. This amounts to a 23% dividend yield, as we'll discuss in a minute. First, though, what's new with Ecopetrol since my last report?

A New CEO And Positive Political Developments

First things first, Ecopetrol announced its new CEO earlier this month. Ricardo Roa Barragán takes over as the new leader of the firm.

It was widely expected that Ecopetrol would change leadership with the new president of the country taking the reins last year.

In theory, President Petro could have appointed someone with limited industry experience or a skeptical view of the energy industry as part of his broader anti-fossil fuels rhetoric. Instead, in Roa, Ecopetrol gets a mechanical engineer with more than 30 years of energy industry experience to run the company. This is a significantly better outcome than folks may have feared last year when President Petro was elected.

Additionally, the government has not been as negative toward extractive industries as expected.

Take this press release from last week from Gran Tierra ( GTE ), an independent Canadian oil company with operations in Colombia.

"Gran Tierra Energy is pleased to announce that the Company has entered into an agreement with Ecopetrol S.A. (“Ecopetrol”), the national oil company of Colombia, by which the parties renegotiated the terms and the duration of the contract for the Suroriente Block (“Suroriente”) in the Department of Putumayo, which was scheduled to end in mid-2024 (the “Agreement”).

The Agreement provides an opportunity to add significant value, as well as economic life, to Suroriente by continuing its duration for 20 years from the Agreement’s effective date. The additional term of the contract allows long-term investment in infrastructure and work programs to enhance oil recovery efficiency in existing fields, and appraisal drilling to potentially prolong the life of the fields ."

In other words, Ecopetrol is still allowing its private operating partners such as Gran Tierra to extend their concessions in Colombia and included in that is apparently the right to keep drilling for more oil.

As a reminder, the Colombian government owns 88% of Ecopetrol. Thus, we can effectively view this as policy of the current administration that private oil companies (in partnership with Ecopetrol) are allowed to keep exploring and producing for additional oil reserves in Colombia.

This is a better case than just about anyone (certainly including myself) had been anticipating. I'd expected that the state would allow Ecopetrol to produce more oil (since it needs the income) but would block independent foreign-owned operators from exploring for additional oil (or gold, copper, etc.) under the current left-wing government.

Instead, it seems, even the foreign oil companies that the left-wingers often criticize will get to keep operating in a reasonable manner.

Recently, the Colombian government has also been talking about developing more copper mining as a way to power the green revolution. This is a favorable change in tone from previously when we were hearing that there might not be any new mine permits under the current government.

To summarize, it seems that the government has chosen to be pragmatic rather than dogmatic. This makes some sense given the political realities on the ground; namely with Congress in opposition, the president has to act rationally if he wants to get much done.

As we've seen this shift in recent weeks, suddenly we've seen the Colombian Peso launch its biggest rally in a year and Colombian equities rebound from their recent lows.

Ecopetrol Dividend Update

The biggest catalyst for EC stock in the near term is its dividend. Last month, the company announced its dividend plans for 2023. See my prior article for more detailed discussion of the company's dividend track record and capital allocation strategy.

For today, let's zoom in on the 2023 outlook. Here is what was announced last month:

As you can see, Ecopetrol is set to pay out its annual dividend in three equal parts, with these payment dates set for May, October, and December. However, the action starts next week.

That's because the first portion of Ecopetrol's three-part 2023 dividend payment is set to occur Tuesday, April 25th. On that day, the stock will go ex-dividend, with the dividend to be paid May 4th.

Each Ecopetrol ADR will pay 11,860 Colombian Pesos in dividends this year, in three equal portions. At the time Ecopetrol announced its 2023 plans, 11,860 Colombian Pesos amounted to an annual dividend of $2.47, or roughly 82 cents per three-part payment.

Since Ecopetrol announced the dividend, however, the Peso has appreciated significantly. 11,860 Colombian Pesos is now worth $2.67, meaning each payment should be 89 cents per share, including the dividend payment coming up later this month. The final rate should be set at or around the ex-date when Ecopetrol sends out cash and the depository institution that runs the ADR program converts said Pesos into U.S. Dollars.

For a shareholder with 1,000 shares of Ecopetrol, for example, the annual dividend will now be worth about $200 more than it was at the time it was announced last month thanks to the subsequent rise in the exchange rate.

People generally worry about depreciation when owning foreign stocks, and that's understandable given the historic strength in the U.S. Dollar compared to many currencies.

On the flip side of that, however, if a currency is dramatically undervalued, as the Colombian Peso appears to be at the moment, there are benefits both from a rising share price and also increasing dividend payments as the exchange rate returns to a more normalized level.

EC Stock's Bottom Line

Don't be surprised if we see a rally in EC stock in the near term as people seek to position themselves ahead of the approximately 89 cent per share payment which will go ex-date next week. Also, if you hold any options on Ecopetrol shares, don't forget to account for the upcoming dividend when considering any potential trades on those option positions.

For the bigger picture, I remain bullish. Over the past month, the Colombian Peso has appreciated sharply, which increases the value of the firm's profit stream for foreign owners. In addition, oil prices have jumped amid OPEC's recent moves to trim the supply of oil.

By all accounts, Ecopetrol shares should be up meaningfully. Certainly, some other Colombian assets, such as leading bank Bancolombia ( CIB ), have jumped sharply in April. I believe Ecopetrol shares should also be trading higher, especially as both the price of oil and the value of the Peso have risen. With the outsized dividend on deck as well, things are nicely lined up here for EC stock owners.

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