Ecopetrol: Another South American Energy Giant Trading For Pennies On The Dollar

Capitalize On A Double Digit Dividend From Colombia

Summary

• Ecopetrol is the state owned Colombian oil giant with a double-digit yield.

• Like Petrobras, shares are dirt-cheap due to the perceived political risk.

• I own Ecopetrol for the traditional energy side of the business, but they also have two growing segments outside of traditional energy.

• While oil prices will certainly have an impact on performance of the business, I think Ecopetrol is well-positioned to provide strong returns for investors for years to come.

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Earlier this week I covered Petrobras PBR 0.00%↑, the Brazilian oil giant and explained why I’m so bullish on the stock. Today we will be sticking with the theme of state owned South American oil companies, with Colombian company Ecopetrol EC 0.00%↑.

Company Overview

Ecopetrol has a market cap just under $20B. For the visual learners, this table will be helpful to understand that Ecopetrol is not just an oil company. Yes, the hydrocarbon segment is the dominant piece of the company, with significant midstream and refinery operations. However, they also have been building out other segments to complement with energy business.

While the reason I’m invested in the company is certainly the energy side of things, the other segments are a nice bonus, and both have plenty of room to grow. Like Petrobras, Ecopetrol showed up on my watchlist last year due to a huge selloff after the presidential election. It is a different situation than Brazil, but I do think the perceived risk is overblown, just like Petrobras.

Political Risk

Ecopetrol is in a similar boat as Petrobras with the perceived political risk. Gustavo Petro, who is viewed as more extreme than Lula, was elected in 2022. Like Lula, he has an interesting history, and was actually a guerrilla fighter in the 70s and 80s. While I definitely would prefer a non-leftist president, I don’t think we will see Ecopetrol’s operations get nuked from orbit by the Colombian government. Ecopetrol shares were trading above $15 and promptly sold off to the $10 level, and shares have been bouncing around between $8 and $12 since then. This has put the valuation at extremely attractive levels.

Like Petrobras, the government holds a huge stake in the company, and I don’t see why they would cut themselves off from external capital markets. Nationalizing the remaining 11.5% would create more trouble than its worth, and I just don’t see a scenario where they kill the golden goose. The government has an 88.5% stake in the company, and their dividends actually go towards reducing debt owed to the company due to fuel subsidies, which are being unwound now. I think it will take some time, but the market will eventually wake up to how cheap Ecopetrol is.

Valuation

Ecopetrol is in the same bucket as Petrobras as far as valuation. Depending on where you pull data, Ecopetrol has a price to earnings multiple of 3x or 4x. While I understand why there is a discount for the South American companies, I think the discount creates an opportunity for discerning investors. The company will continue to be profitable at current oil prices, and last year’s profits with higher average oil prices give a rough outline of how profitable Ecopetrol could be if oil prices go higher. Either way, I think investors can expect dividends to continue to flow over the next couple years.