The oil world is in turmoil. Most of the big companies have had to redo their calculations and make adjustments due to the fall in oil prices. According to figures by the U.S.-based Energy Information Administration (EIA), this year oil will have an average price of $42.06 USD per barrel, which is 57.8% less than the average from 2008. This has dramatic effects on companies.
BP announced that their global exploration and production projections have been adjusted because during the last three months of 2008 they lost $3.3 billion USD. Others such as Occidental have begun to delay projects. Such is the case of the refinery in Panama, a project that could cost more than 8 billion USD, whose feasibility study was delayed until December 2009. ConocoPhillips will dismiss 1,000 employees just in Canada. The state oil company from Mexico, Pemex, is wondering how to overcome the 7 billion USD they lost last year.
In the midst of all of this contraction, it is surprising that there is a company that seems to be swimming against the current: Ecopetrol. The firm has announced key deals such as the recent acquisition of Hocol for 580 million USD and Enbridge’s stake in the Ocensa pipeline. Last year acquisitions exceeded 2.5 billion USD, including the repurchase of the Glencore shares in the Cartagena refinery. Additionally, their dividends and their salaries will be adjusted upwards.
How advisable is this strategy? Experts have already begun to warn about the risks that the company is taking. Interbolsa, a stock broker and capital market research firm, pointed out that these are times for “austerity and moderation” given the price situation. Interbolsa highlights that Ecopetrol needs to invest $25 billion USD in the coming years and that is why it must guarantee a solid cash flow for future years.
That criticism is valid but it is necessary to look at both sides of the coin. If everything goes according to what top executives think, the company will take off in the next few years. These are the arguments:
Today the environment is favorable for buying, because obviously an oil company is worth much less when oil is at $40 USD a barrel than when it is at $140. It is worth remembering that in the height of the crisis at the end of the 1990s, big mergers and acquisitions like that of BP with Amoco and Arco, Exxon with Mobil and Total with Petrofina and Elf marked a milestone in the history of consolidation in the oil industry.
This means that Ecopetrol is buying on the cheap, and nobody can criticize that.
On the other hand, the company is acquiring good assets. Hocol not only offers them thousands of barrels of production on a daily basis and prospective areas of oil, but also it practically leaves Ecopetrol with the monopoly of the oil pipelines in the country.
Evidently the company is doing things contrary to many of its competitors. As occurs with salmon, the effort of going against the current is great with many risks, but that is the only way that doors are opened in order for prosperity in the next few years to come about. The firm aspires to become one of the 27 largest oil companies in the world, with a daily production of a million barrels. It is an interesting outlook, if oil returns to levels of 70 USD per barrel.