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The Globe and Mail

Colombia's titan gives oil giants a run for their money

Oil pumps at work on an oilfield in Los Angeles on May 12, 2009.

Global oil majors can only sit back and admire Colombia's titan. State-controlled Ecopetrol just reported a 37 per cent jump in first-quarter earnings and a 50 per cent EBITDA margin that exists in the dreams of the likes of Exxon Mobil. Replacing reserves will be tricky for Ecopetrol going forward, but the company, now worth a whopping $135-billion (U.S.), still looks like the best oil play in Latin America.

The numbers tell an engaging story. Ecopetrol oil extraction costs are at least 40 per cent cheaper than the industry norm. It managed to increase production by 11 per cent in the latest quarter, while Exxon's volume dropped. Ecopetrol's replacement rate, at 1.6 barrels for every barrel produced, and 38 per cent return on equity also far exceeded those of its larger U.S. rival.

It won't be news to Ecopetrol's existing shareholder base, which enjoys the 70 per cent payout ratio and a 5.5 per cent dividend yield. Its U.S.-listed certificates are up by over 50 per cent this year. Healthy growth is also priced in, as Ecopetrol trades at nearly eight times trailing EBITDA, miles ahead of its larger cousins. Even Brazil's Petrobras, widely considered the region's benchmark oil producer, only fetches a multiple of a little over six.

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The company's secret sauce is its rock-bottom on-shore extraction costs. It's a luxury not afforded to most listed companies that spend large amounts of cash seeking new reserves around the world, including expensive ones located deep beneath the ocean. Ecopetrol has been replacing reserves on the cheap, but their lifespan, at six to seven years, is the company's one noticeable lag among peers. Ongoing guerrilla attacks on its infrastructure are another significant risk.

Ecopetrol says it hopes to triple reserves by 2020. With so much unexplored territory in Colombia, it just might get there. The company now commands the same market value as BP. If Colombia's government can keep Marxist rebels at bay, Ecopetrol could also give other industry giants a run for their money.

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