Analistas 08/06/2017


Rupert James Stebbings
Grupo Bancolombia
Analista LR
La República Más
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In close to 12 years here in Colombia, I have seen innumerable overseas fund managers and analysts visiting, and why not! There are plenty of companies to visit in Bogotá, Medellín as well as occasional appointments in Cali & Barranquilla, however Cartagena has always been a quandary. How do get yourself to the jewel of Colombia when there are no companies in situ? Normally it involves the sacrifice of a weekend at the beginning or end of the trip. Anecdotally I once bumped into a PM on a Monday morning in Bogotá airport who supposedly had left for the UK the previous Friday - awkward. 

 But no longer do we need to suffer these situations, the solution is upon us, the excuse to spend some time working in Cartagena and then while away the evening strolling the street of the old town, most probably beating off street vendors clutching tacky paintings or Cohiba cigars.

 The answer is a seven letter word: Reficar.

 In life us men are constantly consoled with the advice that  size is not everything, but just occasionally you find yourself overawed by size and all talk of performance goes out of the window - this was the case on Wednesday when on the same day as Ecopetrol finally delivered their 20F to the US authorities, held up by PWC’s questions over the Reficar (Refinary of Cartagena) investigation, I found myself at the same aforementioned facility, in hard hat and chunky boots, in 35 degrees of rasping heat, akin to walking the desert carrying your camel.

The numbers alone are staggering: a total of 34.000 people were involved in the overhaul of the refinery - at its peak 18.000 workers on site at the same time, more iron and steel than 7 Eiffel towers, a control room with over 14km of fibre optic cable - I could go on but I am sure you get my drift, even on a bus tour it takes 45 minutes to get around the site.

At 165.000 bpd it is not even the largest refinery in Colombia (that goes to easily pronounced Barrancabermeja) and on a global scale it is about mid-size but first of all there is lot going on (no need to translate the diagram to see that) and again reassuringly it isn’t about size, it is about efficiency and this is the most efficient to be found anywhere in Latam. It is all about conversion rates - back in the old days Reficar converted just 74% of its 80.000 bpd of crude into value added products, the other 26% destroyed value, now  we are looking at a conversion rate of 97,5% and that is the absolute key.

 There is another key difference as well - once you start to convert at higher levels you can move more of your product into products that have higher return. A refinery that has a low conversion rate will produce more low value/return products, the best example being Diesel & Fuel Oil - if you are converting at a low level expect your basket of products to have around 39% in low return Fuel Oil & 27% Diesel. If you can crank up the conversion rate those numbers are altered to 8% & 40% respectively - beyond that there is a surge in Jet Fuel from 10-16% and that also adds value.

Due to the high tech nature of the facility and the James Bond style control room that can be sealed off if Spectre are spotted off the coast, the production of the plant can be tweaked between products at 24 hours’ notice, so if there is a glut or scarcity of any product the taps can be adjusted.  

 On a final note what it does lack in overall size, it is still big, it more than makes up for in location with easy access to multiple markets from its Caribbean location, distribution capacity to both the north and south has been taken advantage of.

Reficar serves a dual role in Colombia - it is an important asset from both a top down and bottom up perspective - we shall start at the bottom and work our way upwards.

 As even my mother knows, global oil prices have created tremendous pressure on the oil sector, it took care of Pacific Exploration locally and has put the squeeze on Ecopetrol; income has been halved and the capacity to invest in exploration greatly hindered. There are real long term concerns about the self-sufficiency of Colombia in oil terms with one influential weekend magazine dedicating pages to the ever dwindling reserves.

Amid all this Ecopetrol took on the massive task of upgrading Reficar, which they took over in the 1970s for the first time since the 1950s, an enormous undertaking as they tried to double capacity from the previous 80.000 bpd as well as improving efficiency  which had been in decline.

 Whilst all this began before oil prices collapsed and without contemplating such an event this proved to be a very fortunate undertaking as precisely at the moment when Ecopetrol’s income were coming under pressure and exploration being capped Reficar started to contribute and in 2016 represented 13,6% of total revenues.

 Unfortunately for the time being this isn’t being reflected in the profits as Ebitda is more or less at the breakeven level but expectations are for more. Sales are gradually increasing - 1Q 2017 total sales stood at US$634 millions whilst a year ago they were just US$380 millions - the trick is to now turn that into profits.

Finally we should briefly look at the facility and its role from a top down perspective. The impact of ‘new’ Reficar is also easy to see and especially in its contribution to the Industrial Production data where it has bounced back over the past 12 months and that is down to the ‘new Reficar’ - if we move to GDP it also has an important role, especially when we consider that oil has almost disappeared from the radar due to collapse in prices.

The question of course is what is the expand even further to contribute even more to the nation however at this juncture it is certainly helping to stead the ship.

On that note as I from your conscious for the time being it just remains to thank the good people of Ecopetrol & Reficar for their kind invitation and hopefully they will be getting more request from investors for the same VIP treatment in the near future.

 My regards to all, Roops.

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