Ecopetrol: it’s not repo financing

It is one of the more peculiar corporate stories in Latin America.

How in the world can a company like Colombia’s Ecopetrol boast a bigger market capitalisation ($128.6bn as of Monday) than its Brazilian counterpart Petrobras ($126.1bn) which produces three times as much oil and gas?

One conspiracy theory that has been doing the rounds is that Ecopetrol’s shares are being used in repo trades – where brokers and investors use the stocks as collateral to borrow money and buy even more shares, artificially inflating the price.

One hedge fund manager that has taken a short position in the company went as far as to say to beyondbrics, that Ecopetrol “is part of a gigantic house of cards which is building in the local stock market.”

Support for this theory gathered pace following last year’s collapse of Interbolsa, Colombia’s biggest brokerage firm, as a result of a repo trade gone bad.

But do the numbers stack up? As the chart from Casa de Bolsa below shows there isn’t a clear relation between the amount of Ecopetrol shares out on repo (light green line) and share price movements (blue line).

And indeed, there are plenty of people who disagree with the repo theory.

Instead, many think Ecopetrol’s lofty valuation has more to do with pension fund flows looking for a place to invest than market shenanigans.

“Ecopetrol is just too large and too liquid,” one private equity boss in Colombia who specialises in the energy sector told beyondbrics. “In the case of Interbolsa, it was able to corner the market for Fabricato shares and manipulate the prices through repo financing because the stock was small and illiquid.”

“Local pension funds are big players in the Colombian stock market,” the person added. “The funds are getting more and more inflows every year and they need to invest this money. There are restrictions on investing abroad so a lot of this money is being put into the local stock market, which is relatively small. Ecopetrol is the biggest stock on it so that is why you are seeing so much demand for the shares.”

As the chart below from Super Financiera shows, there is an noticeable correlation between the total amount that Colombian pension funds have in Ecopetrol (blue line) and Ecopetrol’s share price movements (purple line). Note when inflows spike, so do share prices and vice versa.

But there could be yet a simpler reason for Ecopetrol’s superstar status.

As beyondbrics noted earlier on Monday, the real relative movement between Ecopetrol and Petrobras has come from the falling price of shares in Petrobras. While shares in Ecopetrol have risen some 30 per cent over the past 12 months, shares in Petrobras have fallen by nearly 26 per cent.

Just check out this chart from Nomura’s Aloisio Teles, comparing the two companies’ normalised share price movements. Food for thought.

Related reading:
Ecopetrol passes Petrobras – again, beyondbrics
Ecopetrol overtakes Petrobras by market cap, FT
Colombia’s Ecopetrol: aiming high, beyondbrics
Ecopetrol: peace and growth, beyondbrics
Ecopetrol: bigger than Petrobras?, beyondbrics