Ecopetrol: Negative Results with Surprise in Net Income, 2020 Outlook is Worrying TP COP3,420 1Q20 Reading and Important Considerations for 2Q20

We believe Ecopetrol’s results to be negative with surprise in net income due to impairment expense (not cash) caused during 1Q20. While revenue presented a slight surprise vs. our estimate, costs were even more surprising.

In our opinion, 2Q20 results will most likely be the worst recorded in the history of the company. For us these factors justify this so far qualitative guideline:

1) The fall in the sales volumes of gasoline and diesel nationwide may be around 50% for 2Q20.

2) The value of exports of oil and some oil products will be strongly impacted via prices.

3) Although Ecopetrol announced a search for efficiencies in costs and expenses, the very short term (2Q20) will be a transition period in the adjustments of costs and fixed and subsequently variable expenses.

4) The valuation of the Company’s inventories of crude oil and oil products could continue to generate cost overruns. In addition, cost overruns for storage capacity are not ruled out, since according to data from the UPME and the Universidad de los , has storage space for 22 days and national sales volumes may drop around 50% during the 90 days of 2Q20.

5) The decreases in refining load can be significant, mainly in the Barrancabermeja refinery, largely responsible for the national supply of products.

6) Finally, in the non-operating aspect, we will see several negative impacts: the increase in financial debt by +21% annual, which will generate higher interest for 2Q20; possible negative results of the investment portfolio due to market conditions, and as noted by Ecopetrol, impairments of long-term assets may continue, affecting the distributable net income to the shareholder.

Ecopetrol’s 1Q20 Results

% var. % var. 1Q20 1Q19 1Q20E COP 000mn () (pps) Revenues 15,072 15,943 -5.5% 13,845 8.9% Gross income 3,785 5,708 -33.7% 4,044 -6.4% EBITDA 5,257 7,357 -28.5% 5,095 3.2% Net income 133 2,745 -95.2% 1,063 -87.5%

Gross margin 25.1% 35.8% (1,069) 29.2% (410) EBITDA margin 34.9% 46.1% (1,127) 36.8% (192) Net margin 0.9% 17.2% (1,634) 7.7% (680) Ecopetrol: Negative Results with Surprise in Net Income, 2020 Outlook is Worrying TP COP3,420 Comments on 1Q20 Results

Revenues amounted to COP15 tn, down 5.5% YoY, mainly explained by a decrease in the weighted average sales price. Compared to our estimate, the main difference was generated by sales volumes since we expected a decrease and, on the contrary, these increased slightly by 22 kboed.

Despite declining revenue, total costs increased 10.3%, causing a dramatic drop in the gross margin of more than 1,000 bps. Variable costs increased 9.4% mainly due to an adjustment to the inventories of crude oil and refined products maintained by Ecopetrol and Reficar; in addition, during the quarter, higher volumes of purchases were made for the operation. Fixed costs increased 13.6% as much of the quarter went by without the widely announced efficiency measures.

Lastly, on the operating front, EBITDA decreased 28.5% given the drop in revenues and the increase in costs and expenses explained before. This led the company’s EBITDA margin to stand at 34.9%, a level similar to that recorded during 2015 and 2016.

From a non-operating perspective, the increase in financial expenses was 72.3%, mainly explained by an unrealized accounting loss in the valuation of the portfolio and higher interest expenses. Finally, an impairment expense of long-term assets (not cash) for COP1.2 tn brought the company’s net income to practically zero. Economic, Industry and Market Research Juan Pablo Espinosa Arango Chief Economist and Head of Economic, Industry and Market Research juespino@.com.co +571 7463991 ext. 37313

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