We came across a bullish thesis on Ecopetrol S.A. (EC) on Value Degen’s Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on EC. Ecopetrol S.A. (EC)'s share was trading at $8.05 as of Oct 28^th. EC’s trailing and forward P/E were 4.59 and 5.44 respectively according to Yahoo Finance.

A crowded drilling platform in the Western Canada Sedimentary Basin, the workers handling oil and natural gas equipment.

Ecopetrol, Colombia's state-owned oil company, primarily focuses on oil and gas production, with output reaching around 750,000 barrels of oil equivalent daily. In addition to oil production, Ecopetrol has expanded into various other sectors, including electricity transmission, toll road management, and telecommunications.

The Ecopetrol (EC) thesis centers around sustained global inflation and the ongoing commodity supercycle driven by prolonged underinvestment in resource extraction. Gold’s leading position as a reserve asset among central banks, which now hold 15% of global reserves in gold, exemplifies this trend. Ecopetrol presents a particularly compelling opportunity with its low valuations. The U.S. stock market has dominated international markets largely due to foreign capital inflows into tech giants like NVIDIA, Apple, and Microsoft. However, rising U.S. interest rates have kept capital flowing stateside, supporting a strong dollar. This outperformance is challenged by the high price-to-earnings (P/E) ratio of the S&P 500, which currently sits 4.62 standard deviations above its 20-year average. In stark contrast, Colombia is currently the cheapest country on a relative basis, with a P/E ratio that is 2.48 standard deviations below its 20-year average. With its significantly undervalued assets, international markets like Colombia may soon attract capital outflows from U.S. markets, potentially marking a reversal of this trend.

Ecopetrol, which hit a peak stock price of $64.70 in 2012, has paid out $20.50 in dividends since then while revenue and net income have grown substantially. Over this period, the share count has remained unchanged, with revenue now approximately five times larger and net income nearly three times higher. Its stock, currently priced at $8.10, reflects an attractive value play, especially as its dividend yield exceeds 10% based on current prices. Despite Colombia’s jurisdictional risks, Ecopetrol’s financial stability is noteworthy. The company maintains high operating margins, aided by a lifting cost of just $8-10 per barrel, resulting in a 40-45% EBITDA margin. While a significant portion of earnings is directed toward capital expenditures and acquisitions, Ecopetrol still provides a solid dividend payout. The company also holds a stable capital structure with minimal dilution, a large cash reserve of $4 billion, and a comfortable debt position, with a 2023 EBITDA covering over six times its interest expense.