Buy Ecopetrol (EC)   12 comments

I was reading what Trader had to say in the comments about oil being at the bottom of it’s trading range, so I started playing with a screener for oil companies, and came across a Colombian oil company, Ecopetrol (EC).

In thinking about Colombia, I was reminded of the Wall Street Journal article posted by Ojunker over the weekend, which happened to mention Colombia as one of the free market countries of South America. Ecopetrol is a growing oil company in Colombia, where they already have the dominant market share. Add in the fact they are trying to expand into Brasil (good luck against state-owned Petrobras), Peru, and the Gulf Coast of the U.S, and there is additional growth potential on top of the Colombian market.

On top of this, Ecopetrol has clean financials, low debt, good margins, positive levered free cash flow, and they have paid a hefty dividend over the past few years, albeit a very up and down yield (but averaging an 8.5% yield). The payout ratio is a little hefty at 63%, so the dividend has some risk.

But all is not golden in Ecopetrol land, as they are a living reminder of the classic quote from Peter Lynch:

“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.”

I won’t say that any idiot can run an oil company, although the idiots running Ecopetrol seem to be doing ok in spite of themselves. For example, how many companies wait until December to announce their capex plans for the next year? Specifically, how they plan to pay for their capex? Admittedly, they just hired a new CFO in November, so hopefully that will help.

But I don’t plan on holding Ecopetrol for their dividend, or even for an extended period of time. This is an oil play on a company which will benefit from rising prices, especially since they export a fair amount of their oil. While I could play an oil etf here, EC also has the virtue of being near their 52 week low.

I added EC to my IRA at $36.80 today, and I would like to see a decent 10% or better return in the coming weeks or couple of months.

UPDATE: I fixed the misspelling of Colombia.


Posted January 7, 2014 by edmcgon in Portfolio Moves, Stocks

12 responses to “Buy Ecopetrol (EC)

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  1. When it comes to playing oil, I like to trade the commodity itself. By doing that I avoid the stock specific risk. I may miss some of the good things that can happen to an individual company but I also don’t have the risk of something bad that may happen. I’m not saying you shouldn’t play individual stocks. Just be aware of the additional risk. As I have previously stated, I see oil (UCO/SCO) as a very conservative play. If you have patience and work with the tools that are available, you should be able to make money with this play. Having said that, all bets are off on the long side if we have a major economic hit.

    • Trader,
      The selling point for me on EC was the 52 week low. Normally, I’d agree with you, but it’s hard to walk away from a decent stock in a macro environment set to go up, when that stock is already at a low.

  2. Hi Ed,
    What say you on below?

    “Flowserve is my pick for what to own on changes in Mexico’s energy laws.” Jim Jubak.

    • George,
      FLS is a pretty good-sized company already, with nearly $5 billion in revenue. Even if FLS is building a manufacturing plant in Mexico, or already has one there, they won’t be ringing up huge margins with Mexico sales. The companies exporting oil will be the ones getting the big margins.

      I just don’t see FLS as a growth play. They won’t double $5 billion in revenue with Mexico sales. However, if you’re looking for a safe dividend, go for it.

  3. Many thanks as always Ed.

    And D?

  4. How about FTK instead?

    • FTK is alright, although not necessarily as a play on Mexico (but that would be some nice icing on that cake). They aren’t obscenely overpriced, and the financials look clean. They are a small company, so they have plenty of room for growth.

  5. I assume you misspelled the country of Colombia, but given that, how are the politics and security of an investment in Colombia? There has been some instability and lawlessness these days as well as in the past, just not sure of the local situation. Happy New Year to you Ed and thanks for the daily posts.

    • I work with several people from Colombia. I think it is a pretty stable place now a days.

    • dragonfly,
      Yes, guilty of that typo.

      As for Colombia, while everything I’ve read about it supports what Marshall said, I am still a little reluctant to go into a Colombian stock on a long-term basis, which is why I am viewing EC as a mid-term hold (no more than a few months). Another thing to consider: Colombia has been very chummy with Venezuela.

      But as a rule of thumb, I tend to view any “south of the border” stocks with long-term skepticism. You won’t see them in my 401k. Banco Santander’s South American exposure is as close as I want to get to that powder keg in any kind of “buy and hold” scenario.

  6. This is why I like this blog. New ideas and free flow of opinions. I’m going to take a look tomorrow. Thanks Ed and all.

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