Diversified Midstream And Low Carbon Expansion Will Support Long Term Earnings Stability

Catalysts

About Ecopetrol

Ecopetrol is an integrated Latin American energy company focused on hydrocarbons, natural gas infrastructure and low carbon energy solutions.

What are the underlying business or industry changes driving this perspective?

• Scaling domestic and international upstream production, including continued development in Colombia and the Permian, may support resilient volumes even in a softer oil price environment and could underpin stable revenue and EBITDA.
• Ongoing efficiency gains in lifting costs, drilling productivity and energy intensity, together with portfolio pruning of high cost assets, may position Ecopetrol to defend or expand net margins despite inflation and currency volatility.
• Expansion of midstream and gas value chain infrastructure, such as the Covenas LNG regasification hub and higher pipeline throughput, may help capture growing regional gas demand and fee based income, supporting cash flow visibility and earnings stability.
• Rising exposure to transmission, toll roads and regulated energy assets across Colombia and the wider region adds a diversified stream of inflation linked cash flows, which may reduce reliance on crude prices and support more predictable EBITDA and net income.
• Accelerated investment in renewables, self generation and low carbon initiatives including solar, wind and green hydrogen is intended to reduce structural energy costs and carbon liabilities over time, which may support operating margins and long term earnings durability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ecopetrol's revenue will decrease by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 10.8% in 3 years time.
• Analysts expect earnings to reach COP 11649.3 billion (and earnings per share of COP 285.18) by about December 2028, up from COP 11399.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as COP13314.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 6.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 6.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.95%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural exposure to lower Brent prices in 2026 and beyond, as flagged by management, could outweigh current efficiency gains and capex discipline, compressing EBITDA and net income if crude prices stay below the planning range over the long term.
• Potential political or regulatory shocks, including tax controversies with DIAN, the risk of senior management being subject to OFAC sanctions and ongoing government influence on strategic assets like the Permian, could raise funding costs and restrict access to capital markets, pressuring earnings and cash flow.
• Execution risk in large scale transition projects such as offshore gas fields like Sirius, the Covenas LNG regasification hub, the Coral green hydrogen project and newly acquired solar and wind portfolios could lead to delays or cost overruns, reducing the expected diversification of revenue and weakening long term returns on invested capital and EBITDA growth.
• Rising dependence on Colombia’s electricity system as Ecopetrol’s power demand grows and its role reaches around 10% of national consumption, combined with regional security issues such as partial shutdowns in fields like Tibu, could drive higher input costs and intermittent disruptions, eroding net margins over time.
• The long term shift toward decarbonization and tighter environmental standards, despite Ecopetrol’s current gains in emissions reduction and renewable capacity, may accelerate faster than anticipated and force additional capex or asset write downs in higher cost or carbon intensive upstream and refining operations, negatively affecting free cash flow and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of COP1866.67 for Ecopetrol based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of COP2200.0, and the most bearish reporting a price target of just COP1575.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be COP108160.8 billion, earnings will come to COP11649.3 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 17.9%.
  
• Given the current share price of COP1915.0, the analyst price target of COP1866.67 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.