Ecopetrol: bigger than Petrobras?

Ecopetrol, the Colombian national oil company with proven reserves of about 1.8bn barrels, has a bigger market capitalisation than Petrobras, the Brazilian giant with 18bn barrels of reserves and, potentially, multiples of that in its vast new pre-salt oil fields.

That, at least, is what a São Paulo consultancy announced this week. And even if the boffins’ numbers don’t quite add up, something remarkable is going on.

Economática, the consultancy, said that based on prices at Tuesday’s close Petrobras had a market capitalisation of $123.86bn – it’s lowest for more than a year. Ecopetrol, on the same day, had a market cap of $126.72bn, making it the largest company in Latin America.

Now, according to the infallible people at ft.com/marketsdata, Ecopetrol on Thursday had a market cap of $123.21bn while Petrobras was actually worth a bit more at R$256.57bn, or $128.51bn. But never mind the facts. Let’s get on with the story.

Here is Ecopetrol’s share price over the past 12 months:

Source: ft.com/marketsdata

And here is the same chart for Petrobras:

Source: ft.com/marketsdata

(You can click through the charts to the ft.com tearsheets.)

Whatever the dollars and cents, Ecopetrol is on a roll this year, while Petrobras isn’t.

As Dow Jones reported for the Wall Street Journal:

Divergent foreign-exchange rates in the two countries explain a large part of the change, but government policies that directly affect the two oil companies have also tilted investor sentiment. While Petrobras shares have languished because of government interference and an inability to pass along higher oil prices to consumers, investors have rewarded Ecopetrol for Colombia’s hands-off approach.

“There is very limited political interference [in Colombia],” Nathan Piper, an oil analyst at RBC Capital Markets, said in an email. Colombia, for example, doesn’t impose the same demands for locally produced goods and services in oil exploration and production as Brazil, which boosts costs and could slow down development, Piper noted.

Both companies are majority-owned by their governments but have big free floats. While investors in Ecopetrol have been reaping the rewards of good governance, many investors in Petrobras are furious that its board has overseen such huge destruction of value at a time when it is preparing to exploit what industry executives have described as the most significant offshore discoveries since the North Sea.

One of the things that most bothers investors is the adoption of a new regime for Brazil’s oil industry, moving from a risk-sharing concessions system – adopted as part of market-friendly deregulation in the late 1990s – to one of greater state involvement, including mandatory public participation in all consortia operating in the pre-salt fields, which will be run under production sharing agreements.

Interestingly, one of the things that has helped the Colombian oil industry move on in leaps and bounds is that it has been able to hire top-flight talent away from PDVSA, the Venezuelan national oil company with huge reserves and experience, currently wasting away under the burden of ever greater state interference.

Related reading:
Risks worth investment in exploration of virgin territory, FT
National champions shine in EM value hunt, FT
Rising costs cut Petrobras profits, FT
Local supply policy tests Petrobras, FT
Offshore challenge looms for Petrobras, FT