Ecopetrol S.A. (ECOPETROL) Earnings Call Transcript & Summary

Good morning. My name is Natalia, and I will be your operator today. Welcome to Ecopetrol's conference call regarding the acquisition of Brava Energia. During today's presentation, management will discuss the strategic rationale, key transaction highlights, expected synergies and long-term value creation opportunities resulting from this transformative transaction. There will be a question-and-answer session at the end of the presentation. Before we begin, it is important to mention that the comments made during this call by Ecopetrol senior management may include forward-looking statements regarding the company's future performance, expectations and the anticipated impact of the transaction. These statements do not constitute any commitment as to future results and are subject to risks and uncertainties that could cause actual outcomes to differ materially. As a result, Ecopetrol assumes no responsibility in the event that future results differ from the projections shared during this conference call. Participating in today's call are Mr. Julian Lemos, Corporate Vice President of Strategy and New Businesses; and Mr. Camilo Barco, Chief Financial Officer.

Good morning, everyone, and thank you for joining us today to discuss on Brava acquisition. I am Julian Lemos, Strategy and Business Development, Corporate by the President at Ecopetrol. The acquisition of a 51% controlling stake in Brava Energia represent a significant milestone in the execution of our long-term strategy. More than an acquisition it establishes a meaningful operating platform in Brazil and certainly strengthens Ecopetrol position in an integrated regional energy company with more diversified and resilient portfolio. to understand the strategic rationale behind this transaction and contribution to Ecopetrol. It is important to start showcasing Brazil's potential. Brazil is one of the leading energy markets worldwide combining scale, resource quality, investment attractiveness and highly developed energy ecosystem. Today, the country is the eighth largest oil producer and the eighth largest oil consumer and home of the ninth largest refining park globally. For Ecopetrol, Brazil offers much more than a geographical diversification. It provides access to world-class hydrocarbon resources, prolific offshore basins and a mature regulatory framework and a deep pool of technical talent. These attributes create a compelling environment for long-term value creation and disciplined investment. All of this summarizes our view on Brazil as a strategic growth market. Our investment thesis is straightforward, expanding our exposure to high-quality reserves and production, strengthening our EBITDA and cash flow generation potential and creating additional avenues for profitable growth while maintaining financial discipline. The acquisition of Brava provides an immediate platform to advance on that strategy and positions Ecopetrol to participate more actively in one of the most attractive energy markets worldwide. Next slide, please. After covering why Brazil is a strategic market for Ecopetrol, the next question is why Brava. Brava stands out as a diversified independent oil and gas company in Brazil and the second largest independent player in the country in terms of production and reserves. What makes Brava particularly attractive is the quality and diversity of its all asset portfolio. The company combines onshore and offshore producing assets, exploration opportunities and strategic infrastructure across the energy value chain, especially in the upstream segment, but also midstream and downstream. Production is oil-based mainly and supported by a strong offshore position complemented by gas and onshore assets that enhance portfolio diversification and resilience. During the first half of 2026, Brava produced approximately 79,000 barrels of oil equivalent per day, of which 79% was oil and 21% gas on a diversified operation footprint across some of Brazil's most relevant producing basins. For Ecopetrol group, this means immediate scale in Brazil. an increased footprint in the platform that is already operating today while preserving significant upside to reserves development, production growth and operational improvement over time. Ultimately, Brava provides the combination we look for in strategic acquisitions, a solid consolidated business, meaningful cash generation and high-quality reserves is precisely is what makes it the right platform to support Ecopetrol's long growth ambition in Brazil. incorporating actual production and material reserves after 20 years of presence in this country. Next slide, please. Let me now briefly walk you through the execution of this transaction. From the outset, our objective was not simply to acquire an asset, but to establish a controlling position in a disciplined minor way, maintaining transparency, governance and alignment with market regulations. The acquisition was completed through Ecopetrol Investimentos Brazil, our spell purpose vehicle created for this transaction following a structured 2 step pros. In April 2026 we signed a share porches agreement with key shareholders securing an initial 26% interest in Brava. We then launched a public tender offer in the Brazilian market to acquire an additional 25% providing all shareholders with an equal opportunity to participate on the tender under the same economic conditions, following the successful completion of the tender offer and the settlement process on August 17 we acquired 51% controlling stake in Brava, representing a total investment of approximately USD 1.2 billion. More importantly, this transaction reflects the principles that guide our capital allocation decisions. We pursue this opportunity because it met our strategic objective offered a compelling value proposition and provides a clear path to long-term value creation for Ecopetrol shareholders and complies with our capital discipline criteria. The acquisition also marks the beginning of a governance integration process. With the appointment of 3 Ecopetrol representatives to Brava Board of Directors, we have established the foundation for effective control, alignment of strategic priorities and a disciplined integration process. As controlling shareholders, our focus is to support Brava continued growth while preserving strong corporate governance standards and operational excellence and value creation for all shareholders. Next slide, please. After establishing control, our focus moves from acquisition by building a threefold road map focused on the following: in the near term, our focus is on ensuring governance, alignment on the business plan, capital allocation and reporting standards to ensure a smooth integration process. In the short to medium term, our priority is to optimize operational performance, improve reliability, enhance capital efficiency as well as a strengthened cash flow generation and debt management. On the medium to long term, we expect focusing on developing Brava's reserves base converting growth opportunities into cash flow and pursuing value-accretive opportunities with a strict capital discipline. Success will be measured through the metrics that matter most to the shareholders, operational performance, research growth, EBITDA, free cash flow, returns on capital and disciplined leverage management. Brava provide us with immediate production reserves and operating capabilities in Brazil. Our objective now is straightforward, leverage those assets to deliver sustainable value creation for both Ecopetrol and Brava shareholders. Now I will hand over to Camilo, who will walk you through the transaction's financial contribution.

Thank you, Julian. This pro forma view illustrates the financial and strategic contribution that Brava brings to Ecopetrol based on first half '26 results, Brava would have increased the group consolidated revenue by 7% and EBITDA by 8% approximately, while maintaining profitability levels consistent with Ecopetrol's trust performance. Net income attributable to Ecopetrol shareholders would have increased by approximately 2%, reflecting our 51% ownership interest and excluding the debt-related costs associated with the transaction. It is not worthy that the impact on Ecopetrol third quarter 2026 results will be partial due to the consolidation of Brava's operations starting from September. From the fourth quarter of 2026 onwards, investors will see the pull effect of 3 complete months of financial performance. Julian, let me hand it back to you to cover the operating contribution.

From an operating standpoint, Brava adds approximately 79,000 barrels of oil equivalent per day corresponding to 11% of Ecopetrol production, while its 1P reserves represent nearly 24% of Ecopetrol reserve base at 2025 closing repo. It is meaningfully strengthened both the scale and longevity of our upstream portfolio. The acquisition of Brava was completed with attractive valuation metrics. Approximately USD 84 per barrel of 1P reserves and USD 6.3 per barrel of 2P reserves, reinforcing the value proposition of this transaction. With that, I will hand it back to Camilo to discuss the financing structures supporting the transaction.

Regarding financing, our objective was clear, to fund this acquisition in a consistent manner with our capital discipline criteria while preserving the financial strength and flexibility of the Ecopetrol Group. To ensure a timely closing we initially secured a bridge facility of about $1.2 billion for a period of approximately 1 year, including the transaction value as well as estimated 2026 financing costs, fees and interest. This structure provides full funding certainty and enable the successful closing of the transaction on August 17. The financing was arranged through Ecopetrol Capital AG, our international financing subsidiary, which subsequently channeled the funds to Ecopetrol Investimentos do Brasil, the entity that completed the acquisition. Looking ahead, our focus is on implementing a long-term funding solution that further strengthen our liquidity position and optimizes the transaction financial profile. We are evaluating a range of alternatives, including long-term debt, portfolio management initiatives and internal funding sources. The final structure will be determined based on 4 key principles: cost efficiency, maturity profile, funding diversification and liquidity preservation. The financing alternatives available to us provide flexibility to select the most efficient and sustainable solution. This refinancing process will not create obligations or guarantees at Brava operating company level, Brava's capital structure, cash flow generation and operating activities will remain independent from the financing structure used to acquire control. As a part of this process, we will continue evaluating market conditions and obtaining the required approvals to execute the long-term financing strategy under the most cost and risk conditions. This transaction remains fully aligned with our commitment to financial discipline. Even after consolidating Brava, we estimate that the group's gross debt-to-EBITDA ratio will remain low our strategic threshold of 2.5x, supported by Brava's EBITDA generation, cash flow potential as well as future dividend contribution. In summary, we structured this acquisition with a clear objective, secure execution in the short term while preserving financial flexibility and sustainable capital structure over the long term. The success of these investments will be measured not only by reserves and production we have acquired by our ability to translate those assets into cash flow, returns and long-term shareholders' value. Please turn on to the next slide. Now let me conclude with 3 key messages. First, Brava provides Ecopetrol with an immediate operating platform in Brazil, adding meaningful production reserves, EBITDA contribution and future development opportunities. Second, the transaction brings a highly complementary asset base, expanding our exposure across onshore, shallow water and deepwater operations and strengthening the resilience of our portfolio. Third, it significantly enhances our geographic diversification increasing our presence in one of the most attractive energy markets in Latin America. Most importantly, this transaction has been executed with discipline, supported by a strong governance framework and a clear focus on long-term value creation. We may now move to the Q&A session.

[Operator Instructions] Daniel Govila from DTG is on line with a question.

I have a couple of topics I would like to touch on. One is on governance of Brava. It would be great if you can give us some thoughts or some additional information whether or not the Ecopetrol has formally requested that Brava calls for a shareholder meeting to appoint a new Board. And if so, what is the expected time line, how many seats is Ecopetrol planning to secure. And in line with that question of governance, I would also like to know if Ecopetrol is considering to review or to modify the management structure of Brava? And perhaps if you can share with us which functions do you see as most important to strengthen and perhaps better align with Ecopetrol broad strategy. That's on governance. And just a small one on the future of Brava perhaps, it would be great to know your thoughts on the independence of Brava and if Brava is going to maintain its own capital allocation framework and harder rates or will investment decisions be assessed using the Ecopetrol's return thresholds. Those are my questions, guys.

Julian and Camilo, please unmute your microphone. We can't hear you. Please give us a few minutes for resolving some difficulties. Just [Operator Instructions]

Daniel, thanks for your question. This is Julian Lemos, Vice President for Strategy and Business Development. Regarding your question about governance, let's start saying that this is one of the key and most important things for Ecopetrol, recognizing that Brava is a listed company in which we, as a major shareholder, has an obligation also to respect Brazilian rules and of course, the minority shareholders. We are conducting all the necessary analysis considering the current structure of management in Brava to define which are those positions that need to be secured to have more alignment with Ecopetrol. This is a business that we have in our mind, and this is our today -- sorry, our day-to-day business as well. And I would say that the first step for us was to appoint 3 board members last week. So far, we haven't request for a shareholders meeting. And once we do that, the market will know and that would be the proper timing to inform additional changes that are under discussion nowadays in Ecopetrol. For your second question regarding the degree of independence of course, and in line with what I mentioned just in the last question, we start to recognize that this is a company under the Brazilian regulation. And the capital allocation that Brava will require for future, of course, needs to compete or have some alignment with the investment plan that Ecopetrol has for the upstream in general for the businesses. So I would say that we will keep the proper independence and the proper control considering that this is an ongoing business outside of Colombia, but in type of business in which Ecopetrol is expert and a part of the core of the strategy. Thank you very much, Daniel.

The next question comes from Thiago Casqueiro from Morgan Stanley. Mr. Casqueiro you may ask your questions.

The first one is also related to capital allocation. I mean over the past 2 quarters, we have seen that Brava placed greater emphasis on growing the production offshore assets. While in the onshore, the approach was more on like a capital-light approach with lower CapEx and more of a focus on UR initiatives. So now as Ecopetrol comes in as a shareholder and also given your extensive experience in onshore operations, how do you view Brava's onshore portfolio? And should we expect a continuation of the current capital-light strategy in the onshore? Or do you see scope for greater investments in those type of assets? And then the second one is more on a modeling view. How do you plan to report Brava in your financial disclosures. We would like consolidated within the existing upstream segment? Or are you considering reporting like Brava as a separate segment?

Thank you, Thiago. This is Julian Lemos I will take your first question regarding the strategy. And I would say that we recognize so far that Brava has a midterm strategy in which they both onshore and offshore activities as a key role. Of course, from Ecopetrol side, we consider that the contribution we can put to the company is important and relevant in the offshore considering our good track record in Colombia, but any type of changes or adjustments at the strategy of the company be discussed at the Board level and in a consensus with the rest of the shareholders, define what would be the next step for that. Most important, as we mentioned in the presentation, Ecopetrol is a long-term investor and the criteria for us with this acquisition is to complement our portfolio and strengthen the capabilities of the company by adding the expertise of Ecopetrol has, but also to incorporate the good knowledge and the good practices that Brava has shown so far in the offshore operation in Brazil.

[indiscernible] Arco, CFO, and I will refer to your second question. about the way that we are expecting to or that we are planning to consolidate the financial statements in the different segments. Important to say that we are still finalizing our assessment, the rules of IFRS, typically IFRS 8, so we will determine very soon, which will be the most appropriate segment reporting approach for Brava. At this stage, what we could say is that we will probably consolidate that on our upstream segment, but important to take into account that Brava make a difference between the 2 subsegments, upstream and downstream. So there is also a probability that at the end, we will reflect those account separately in each subsegment that, as you know, we also have them, both of them, some assets at the upstream and some others at the downstream. So we will find the best way to to report the segment very, very soon, and we will do it, of course, in line with what the rule of IFRS determined.

We continue with Andres Cardona from Citibank. Mr. Cardon, you may ask your question.

I have 2 questions on my end. The first one is, as you mentioned during the presentation, you already have some assets in Brazil, or and some others. At some point, you have considered to merge these assets and create one single platform in Brazil, if there are any synergies on doing so? And the second question is, as of today, you have considered to take Brava private or if you see any merit in keeping it as a public asset in the capital markets.

Andreas, thank you very much for your question. I will reply to your one. This is Julian Lemos again. As part of the strategy analysis, we are exploring different scenarios. Of course, we recognize the complementary features of both assets or both portfolios, Ecopetrol, and gas to Brazil with an exploration portfolio and an ongoing project which is operated by Shell and is expected to be in operation by 2029. And on the other hand, Para asset portfolio that we just acquired. So I would say to your question that we are run those analysis running different scenarios and through the conversation, we will have internally and of course, with the with the consideration of the minority shareholders in Baba, we will define which would be the best scenario on the most efficient for Ecopetrol. But so far, no decision at all regarding that matter.

This is Camilo again. Regarding your second question, your second question about the alternative or if we have considered to take Brava private or delisted. I can only say so far that we haven't think about that option. We feel comfortable with Brava listed in the Brazilian market, and we haven't considered that alternative so far.

The next question comes from Leonardo Marcondes from Bank of America. Marcondes, you may ask your question.

I have actually 2 follow-ups from my side. The first one is regarding the company's capital allocation strategy, right? I mean, how do you see the alignment between Ecopetrol and the minority shareholders of a I mean, is there any plan to return capital to investors with Bravas free cash flow generation? Or should Brava focus on increasing production and reserves in the short to midterm. That's my first question. My second question is regarding the due diligence process that you guys had on Brava. I mean, how did you assess Brava's reserves. You showed a slide with Bravas 1P reserve, but part of this reserve and a very relevant part of this reserve incorporates a strong growth in the onshore production, right, which is something that the market does not believe much in, right? So I would like to know if you guys could provide some color on how was your due diligence process? And also what do you expect from the onshore assets in the midterm?

And I'll talk about the minorities -- minority shareholders, right? And how are we planning to to handle those rights in terms of capital criteria. And important to say that the capital discipline criteria will be exactly the same that we have currently in Ecopetrol at Ecopetrol level. So what I would say is that we are very much focused on creating value regardless the shareholders, majority or minority shareholders. So it is important to say that this is the pillar of our capital discipline is returning value and having the the right returns depending on risk associates. And of course, there would be same levels of hurdle rates that will be required for those investments in Brazil. I could only add that those projects from Brava will, as Julian mentioned before, those will be part of our portfolio that we carefully monetize on a daily basis. So those will have to compete in terms of returns, but also in terms of paybacks maybe we have to speak about that in our previous conference calls. But it is very important for Ecopetrol, currently, the paybacks and the capacity of those assets to return on the short-term cash generation. So it will be basically the same for Brazil or Brava assets in line with the criteria and policy for Ecopetrol.

Thank you, Leonardo. This is Julian. I will take your second question regarding the due diligence. I would start saying or remarking that Brava is a public company, public-listed company -- so the due diligence process and all the approach that Ecopetrol did for the last 12 months was always respecting the access to public information that only shareholders would have. Because as you may imagine, we were not in a position to request information that the market shouldn't have. So basically, our due diligence started with a public data that Brava has published in which the annual report of reserves is available Brava released a report back in April. Of course, internally, we made all the necessary analysis and challenges to that numbers to result in a compelling and comfortable investment case for Ecopetrol, which was the base for the internal valuation and all the approval matters. Other than that, I would say that we will follow the reserves standard process that Ecopetrol has. And as part of the integration, we will assess from now on any possible consideration regarding that. But I wanted to insist that the due diligence was with a highly strict protection standards for the confidentiality and securing that Ecopetrol didn't get any information that the market didn't have.

[indiscernible] from UBS, Vascon joins us with a question.

Two questions here. First, what happens in case Brava lose the arbitration process that was started in Atlanta? Did you guys have any discussions? Or do you have any kind of discussions included in the deal in the contract? And then a second question here more related to the timing of this transaction. It occurred in a very fast pace after you first announced the deal, and it all happened right before the presidential elections in Colombia. And we have seen the recent elected President in Colombia being very vocal about improving the sector dynamics in the country in Colombia. Can you let us know how the full process worked and why this transaction now right before the election? And why wouldn't make sense to maybe wait the outcome of the election and maybe take this decision after it? Those are my 2 questions.

Thank you, Tasso. This is Julian Lemos. I will reply to your 2 questions. First of all, regarding Atlanta, this is an ongoing process in which both Westlaw and Brava has their own legal independent analysis and opinion. We consider Atlanta as a key asset for the portfolio, and we are following closely this kind of procedures. But our understanding is that the legal claim process recently started, and this is not a matter that it's normally solved in a very short term. So we will be following up that through our presence in the Board of Directors and all the proper channel that are under Brava's management control. And for the second question, I will start saying that Ecopetrol has an existing strategy, the 2040 strategy that is in place since 2021, in which the hydrocarbon business is a core area for Ecopetrol is the central part of the strategy and also in which we define the necessity of diversification, not only in businesses, but also geographically. That is why we made important investments in the U.S. with Oxyford unconventionals. And now after 20 years of presence in Brazil, we found a good opportunity to increase our presence there with an M&A process that took more than a year of internal analysis, challenges and approval processes. So I would say that at the end, the closing date being after the new President taking over seems to be confidential. Remember that the authority in Brazil suspended the auction for a month. So several things happened in between. And I would clarify that the team worked based on a very strict schedule, and we were not targeting any decision or any date based on a political criteria. Thank you very much.

We continue with Vicente Falanga from Bradesco.

IR team for putting this together. I had 3, if I may. It seems like you're definitely seeing Barava as a growth vehicle in Brazil. But with the current government and if it's reelected, there might not be so many opportunities Ecopetrol can have much more investment opportunities in oil assets in Colombia and Venezuela. So my question is, can this growth strategy in Brazil change depending on how opportunities present themselves? I mean why not use Brava as a cash cow for dividends, right, and investments in other countries? My second question is, you also mentioned in your presentation exploration opportunities in Brazil that could fall under Brava's new strategic guidelines. Where do you think exploration could become attractive to the point that Brava could invest on? And then my last, in terms of financial metrics, what sort of leverage do you see as optimal for Brava over the long term in terms of net debt to EBITDA? And do you see any potential G&A redundancies to be addressed with Ecopetrol's corporate structure in Brazil or any other cost or tax synergies?

Vicente, thank you very much for your question. Please let me take your first one and then pass to Julian maybe to go over the second one. I would say that there must be a balance between long-term returns and dividend payment. Important to say, like Julian did in the last question that in Ecopetrol, we have a long-term view and strategy. Brazil has been our target since a long time ago. As long as it is -- you can imagine it is even now that Venezuela arises, Brazil is still one of the most important markets in oil and gas in Latin America. So definitely, Brazil will become a very interesting platform for growth for Ecopetrol. We will keep on going on exploration, as you just mentioned, but we will also implement our knowledge in terms of enhanced recovery and increasing production onshore in Brazil as well. So I would say that to put it in a nutshell, there must be a balance between those 2 things as acquisition, it is important for us to receive dividends and cash flows from the company, but it will also work as a platform for growth.

Okay. Vicente, thanks for your second question, Juan will reply to that. I would say that the strategy or the appetite of Ecopetrol in Brazil remains, of course, we need to balance both the exploration portfolio and the ongoing operation that we have with Brava. But it doesn't mean that we are going to quit from doing what we have been doing in Brazil. We need to consider from now on a wider and complementary portfolio in which both Ecopetrol, Oleander needs to be assessed to identify the qualities of it and, of course, pursuing opportunities in Brazil. And in general, that opens the second point that I wanted to touch a -- under the current strategy of Ecopetrol, again, hydrocarbon is the core of our company strategy, we need to focus and analyze potential investments in those countries, in those geographies in which we have good opportunities, materiality, as and where Ecopetrol can add value through the knowledge or gain value and knowledge for future developments. So I would say that in general, -- we will focus in Brazil, in U.S., Colombia, of course, certainly, what is happening in Venezuela, invite us to pay attention closely -- and depending on the maturity of the opportunity, this will be analyzed and whether the case is positive informed to the market that this is what we have been doing from an M&A standpoint for the last 5 years -- thank you. And again, Vincente , Camilo to take your third question about the optimum capital structure and leverage for Brava. What we could say about that is that Brava has performed a strategy of deleveraging for the last 5 quarters. And we find that very positive. Also, we definitely are aligned with that strategy and with the decision -- but important to say that we also see very interesting opportunities to optimize that capital structure in terms of cost and chances for Brava to have a lower cost due to the fact that Ecopetrol is backing Brava now as a major shareholder. So we will keep on monetizing those opportunities. Definitely, we think that there might come some in the short term to again -- to optimize and lower the cost of financing in Brava and why not to have a better maturity profile. Those will be the components that will be taken into account at the time to make any decisions regarding the capital structure. Thank you very much.

The next question comes from Jon Filipe from Credicorp Capital.