Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Ecopetrol S.A. (NYSE: EC)
Q1 2019 Earnings Call
May 7, 2019, 10:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Hilda and I will be your conference operator today. At this time, I would like to welcome everyone to the Ecopetrol first quarter 2019 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you for your attention.

Mrs. Maria Catalina Escobar will begin the conference call today. Mrs. Escobar, you may begin your conference.

Maria Catalina Escobar -- Head of Capital Markets 

Good morning, everyone and welcome to Ecopetrol's earnings conference call and webcast in which we will discuss the main financial and operational results of Ecopetrol for the first quarter of 2019.

Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management can include projections of the company's future performance. These projections do not constitute any commitments to future results, nor do they take into account risks or uncertainties that could materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different than the projections shared on this conference call.

10 stocks we like better than Ecopetrol SA
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Ecopetrol SA wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

The call will be led by Mr. Felipe Bayon, CEO of Ecopetrol. Other participants include Jaime Caballero, CFO, Alberto Conseugra, Executive Vice President, Milena Lopez, CFO of Cenit, Jorge Calvache, Exploraiton Vice President, Jorge Osorio, Vice President of Development and Production, and Tomas Hernandez, Vice President of Refining and Industrial Processes. We will begin the presentation with the main achievements of the first quarter of 2019 followed by the highlights by business segment and financial results under international finance reporting standards. We will close with a Q&A session.

I will now hand over the presentation to Ecopetrol's CEO, Felipe Bayon.

Felipe Bayon-- Chief Executive Officer

Thank you, Maria Catalina and welcome everyone to our first quarter 2019 results conference call. I am pleased to share with you what are the best first quarter financial results for the last four years. Ecopetrol's group net profit and EBTIDA amounted to 2.7 trillion pesos and 7.4 trillion pesos, respectively.

Throughout the quarter, we experienced a very favorable macroeconomic environment, the higher average exchange rate, greater financial savings, and a lower tax rate. All of these helped us offset the lower Brent price, which went from $67.2 per barrel in the first quarter of 2018 to $63.8 per barrel at the end of the first quarter in 2019.

The flexibility in our commercial strategy allowed us to focus on markets that generate greater value and hence maintain similar levels in the spread for crude oil and products versus Brent. At the end of the first quarter, the discount percentage of the crude oil spread versus Brent registered a -11.9%, similar to the 10.9% reached in the same period for 2018.

I would like to highlight the operational stability achieved during this quarter, leveraged by an adequate management of our operating environment, which allowed a continuous activity in all of the regions in which we operate. This contributed to the increase in production compared to the same period of 2018, a period affected by security problems.

I will now pass the floor to Alberto Consuegra, our COO, who will talk about the main operational achievements during the first quarter.

Alberto Consuegra -- Chief Operating Officer

Thank you, Felipe. First quarter operating results were solid and aligned with 2019 targets. This gives us a good basis to continue leveraging the profitable growth stage in the Ecopetrol Group segments. The business group's average production for the first quarter was 728,000 equivalent barrels of oil per day, in line with the production target for 2019, thanks to the continuity, the increase and results of the drilling campaigns, and the good response of the secondary and tertiary recovery programs that leveraged the production and reserves growth strategy.

The 2019 exploration campaign has produced satisfactory results. Ecopetrol and its business partners completed the drilling of three exploratory wells, of which one was declared successful, achieving a success rate of 33% to date. Additionally, with the signing of two exploration and production contracts, a new impetus is given to the reactivation of exploratory activities in the Columbian offshore by Ecopetrol.

On the international front, we are strengthening of portfolio through the revising of strategies in the Gulf of Mexico and Mexico and the execution of the approved plan to in Brazil to evaluate prospectivity.

In the transportation segment, we can highlight the increase in transported volumes of crude oil by 10.6% compared to the same period of 2018. Additionally, during this quarter, the attacks on the pipeline infrastructure decreased significantly, 49% compared to the same period of 2018, allowing more days of operation at the Cano Limon-Covenas Pipeline.

In the refining segment, scheduled maintenance program shutdowns were carried out at the Barrancabermeja refinery, which allowed us to ensure the operation to deliver clean fuels to the country. However, this maintenance impacted the refinery's throughput during the quarter. In the Cartagena refinery, there was a stable operation thanks to the implementation of initiatives that allowed eliminating bottlenecks, which is reflected in the refinery throughput and refined production.

Additionally, we achieved the highest level of national throughput composition with 87% in the quarter, maintaining the positive trend of the last periods. We reaffirm our commitment to safety, to the environment, and to the country. We continue working to maximize the creation of value on the renewed criteria of sustainability, competitiveness, and profitability.

Now, I hand it over to Mr. Jorge Calvache, who will comment about the results in exploration.

Jorge Calvache -- Exploration Vice President Vice President

Thank you, Alberto. The exploration strategy for 2019 is focused on the drilling of wells in the Colombian onshore close to existing fields with the aim of increasing reserves in the shortest timeframe possible to take advantage of the current crude oil price levels.

During the first quarter, three exploration wells were drilled and completed in the Colombian onshore. The appraisal well Jaspe8 was an exploration success close to the Quifa field. This success confirmed the extension of the Jaspe discovery in the basalt Carbonera Formation sand by finding crude oil of 12.5 degrees API.

The second well drilled was the exploration well Cira 7000 ST in the La Cira Infantas blocks, which was declared dry. The third exploration well, Provenza-1 drilled in the block CPO-8 was also declared dry.

Moving forward with this year's explanation campaign, two wells are currently being drilled and operated. Andina Norte-1, located close to the Capachos Field, and Boranda-2, located in the middle Magdalena Valley in the Playon Block. In both of them, Ecopetrol has a 50% working interest.

Following the near field exploration strategy in the second half of 2019, Ecopetrol plans to operate and drill three wells, Flamencos-1, situated [inaudible] field, Liria YW-12 situated near the [inaudible] Field, and Lorito-1, close to the [inaudible] Field. Additionally, our subsidiary, Hocol, plans to drill the [inaudible] well situated near to the [inaudible] oil field.

A significant milestone in the first quarter was achieved by being awarded new blocks in the Colombian Caribbean offshore. Exploration and production contracts were signed for Col-5, fully operated by Ecopetrol and Guajira OFF-1, operated by Repsol, with 50% working interest and Ecopetrol holding the remaining 50%. This is a positive sign of the reactivation of the exploration activities of Ecopetrol in the Colombian offshore.

For the Purple Angel, Fuerte Sur, and Col-5 blocks, we are in the process of preparing technical and commercial information with the aim to attract experienced partners who have the technical and financial capabilities to help develop the discoveries.

Let us please proceed to the next slide to see the exploration plan of our exploration discoveries. Taking into account last year's exploration successes and the recent results of this year, we are proceeding with the limitation of the discoveries through the [inaudible] of appraising wells and their corresponding evaluations in order to assess the commerciality of the Jaspe, Arrecife, Andina, Cosecha, and Lorito discoveries.

In Block Col-5, we are progressing with the procurement process for the acquisition of 2,000 square kilometers of 3D seismic, which is planned for the fourth quarter 2019. Likewise, for the discoveries in the Caribbean offshore, Kronos and Gorgon cluster, we are in the process of planning activities for the next five years with the aim to outline the total expansion of these fields through drilling of appraisal wells and formation testing.

Equally, for the Orca discovery, pre-feasibility studies are being undertaken for the development and commercialization of gas. These activities will allow us to determine the materiality and consolidated development of the gas discoveries in the Caribbean offshore.

Now, Jorge Osorio will talk about the production results of the group.

Jorge Osorio -- Vice President of Development and Production

Thanks, Jorge. We have started the year in line with our plans to reach production between 720,000 and 730,000 barrels per day. Our production in the first quarter was 728,000 barrels equivalent per day, 27,000 barrels more compared to the same quarter of the previous year. Of the total production, Ecopetrol's fields with the recovery program contributed 30% and the subsidiaries 9%, which is 63,000 barrels per day. Gas production increased 6.8% because of better availability of the Cupiagua processing plant and increased gas commercialization.

In the first quarter, we highlight the results of the drilling campaign in Rubiales Field and the increase in the Akacias Field production, which reached 20,000 barrels per day in the month of March, achieving 17,000 barrels per day as the average for the quarter. Akacias is a field in the new CPO-09 block and it's in a growing stage. We operate this field and hold 55% share.

This light also illustrates the production of the Castilla, Chichimine, and Yarigui fields, which have increased compared to the first quarter of the previous year after achieving normality in the social environments and positive results coming from projects.

Now, I turn to Milena Lopez, who will comment on the results of the transport segment.

Milena Lopez -- Chief Financial Officer of Cenit

Thank you, Jorge. During the first quarter of 2019, the midstream segment continued achieving positive financial results with an EBITDA reaching 2.5 trillion pesos. During the first quarter of 2019, the segment transported higher-volume crude and refined product, achieving 1,140,000 barrels per day, which represents a growth compared to the same period last year.

The volume of crude transported reached 880,000 barrels per day, representing 11% growth over the first quarter of 2019 due to higher oil production and additional barrels of oil captured from alternative transparency system. Approximately 73% of the volume of oil transported is owned by the Ecopetrol group.

Higher volumes of transported crude compensated for the lower volumes of transported refined products, which decreased 5% when compared to the first quarter of 2019, reaching 260,000 barrels per day due to the prolonged maintenance of the HDT unit of Barrancabermeja refinery. This situation generated operative challenges and significant efforts during the first quarter of this year.

In order to attend the demand for refined product in the south of the country, Cenit enabled the import of two ships using [inaudible] port, loaded with approximately 100,000 barrels of gasoline and 140,000 barrels of diesel. Approximately 35% of the volume transported by pipelines corresponded to Ecopetrol-owned product.

During the first quarter of 2019, operational expenses decreased compared to the first quarter of 2018 as a result of the recognition of a long recurring income [inaudible] associated with a favorable ruling of a litigation process related to the pipeline's lines fee. During the first quarter of this year, the number of attacks caused by third parties on our pipeline infrastructure decreased by 49% compared to the same period of 2018.

As a result, there were eight revision cycles in the Bicentenario pipeline compared to the 12 that took place during the same period of last year. Thus, more operational days in the Cano Limon-Covenas pipeline during the same period.

With this, I hand over the call to Tomas Hernandez, who will comment on the refining segment results.

Tomas Hernandez -- Vice President of Refining and Industrial Process

Thanks, Milena. During the first quarter of 2019, the Cartagena refinery maintained stable and reliable operations, while at the Barrancabermeja refinery, several plants underwent planned major maintenance turnarounds, which reduced crude throughput and low sulfur diesel production. The most significant turnarounds in the quarter were associated with one of our crude units and the diesel hydrotreating unit. The latter was performed in order to replace catalyst as well as to inspect equipment after more than eight years of continuous operation.

With this intervention, another extended run of a key asset is expected, enabling the delivery of clean fuels to our domestic market and to allow taking advantage of new regulation requirements such as IMO 2020. Please go to the next slide to see operational results of the refining segment.

It is important to mention that the refining segment results were impacted by an unfavorable international product price environment, mainly concerning gasoline and NAFTA prices. In the first quarter of 2019, the Cartagena refinery reached an average throughput of 155,000 barrels per day versus an average of 145,000 barrels per day in the same period in 2018, which represents a 7% growth while increasing the percentage of domestic crudes in the feed slate to 87% compared to 71% in the first quarter of 2018.

The aforementioned was achieved thanks to the sustainable efforts toward process optimization focused on crude slate improvements and plant reliability initiatives. The gross margin in the first quarter of 2019 decreased compared to 2018, reaching $11.00 per barrel, mainly due to lower gasoline and NAFTA price differentials, in line with international market behavior. This negative impact was partially offset by stable operation, throughput optimization, and plant reliability initiatives.

The throughput of the Barrancabermeja refinery in the first quarter of 2019 decreased by 9%, reaching an average of 196,000 barrels per day as a result of the already mentioned scheduled turnarounds and the navigability of the Magdalena River, which affected fuel oil evacuation. The margin in the first quarter of 2019 was lower, reaching $11.50 per barrel versus $13.50 per barrel in the same quarter of 2018, mainly due to the lower product price differentials versus Brent, in line with international market behavior, primarily in gasoline price differentials.

During 2019 in our petrochemicals area, Esenttia demonstrated excellent safety performance and stable operations, capturing better margins with more stable behavior of its raw material prices. On the biofuels front, Bioenergy completed the second harvest period since its initial observations and started activities related to industrial maintenance during the sugarcane growing season.

Now, I turn the presentation over to Jaime Caballero, who will comment on the financial results for the period.

Jaime Caballero -- Chief Financial Officer

Thank you, Thomas. The financial results achieved in the first quarter of 2019 continue along a profitable growth path in line with the business plan announced a couple of months ago. This past quarter, we reached an EBITDA of 7.4 trillion pesos and a net profit of 2.7 trillion pesos, a positive trend versus the first quarter of the previous year.

I would like to highlight the significant contribution of the upstream to the EBITDA, which contributed 62% compared to 60% in the first quarter of 2018. EBITDA margin continues at very competitive levels, standing at 46.1%, higher than the 45.4% recorded for 2018. This margin was achieved despite a challenging price spread environment for refined products, primarily gasolines given market conditions and scheduled maintenance at the diesel hydrotreatment unit at the Barrancabermeja refinery, which will allow us to produce cleaner fuels going forward.

In terms of the soundness of our balance sheet, our main leverage ratios remained healthy, with gross debt to EBITDA stable at 1.2 times while net debt to EBITDA reduced to 0.9 times. These levels were the result of solid EBITDA generation and debt repayments made in 2018, which as of this quarter, allow us to capture significant savings in financial expenses.

Likewise, I would like to highlight the solid cash generation during the quarter, as reflected in a closing cash position of 16.3 trillion pesos. EBITDA per barrel declined slightly, mainly due to higher spread on the crude oil and refined products basket versus Brent and higher imported volumes of refined products, given the scheduled maintenance of hydrotreatment unit, partially offset by higher production.

Our growth remains profitable. Net profit break even close at $33.60 per barrel, showing a favorable trend compared to previous periods, partly enabled by lower financial expenses a lower tax rate. ROACE increased from 13.1% in 2018 to 14.1% in the first quarter of 2019, demonstrated our disciplined capex execution. Let us now move on to the next slide to see the evolution of profit.

Net profit for the quarter totaled 2.7 trillion pesos, 5% higher than the first quarter of the previous year. Revenue increased 1.3 trillion pesos, largely driven by higher sales volumes in line with the production increase and the favorable effect of the exchange rate despite a lower Brent price.

On the other hand, cost of sales without including depreciation and amortization increased 1.2 trillion pesos, mainly due to the net effect of higher imports of diesel to meet domestic demand and variable costs associated with the increase in production. Depreciation and amortization were up 0.2 trillion pesos, primarily as a result of higher production and higher capex associated with the drilling campaigns.

Non-operating performance improved thanks to lower financial costs of the debt associated with pre-payments made the previous year totaling the equivalent of $2.5 billion and a lower tax rate due to the decline of 4 percentage points in the nominal rate set in the Colombian financing law, approved in late 2018.

Let's move on to the next slide to examine the cost detail of the business group. In line with the strategy of cost efficiency and profitable growth, we have maintained stable unitary costs consistent with the levels reported in 2018.

The dilution factor has declined structurally since 2014 from 20% to 14.2%, thanks to the higher viscosity transport strategy. Thus, the dilution costs totaled $3.70 per barrel, lower than the one reported in 2018, thanks to lower purchases of NAFTA. Lifting costs remain stable versus 2018, even with increase in secondary recovery activity.

As we announced in the business plan update with regards to energy consumption, one of the main components of lifting costs, the company is working on a number of initiatives. Firstly, increased self-generation. Second, optimize energy purchases through self-commercialization, and lastly, a number of efficiency initiatives on energy consumption.

On the other hand, transported costs per barrel declined due to higher transported volumes through our systems. The ratio of costs of sales to revenue increased slightly compared to 2018, due to lower spreads and higher purchases of refined products made during the quarter.

Let's move on to the next slide to see the capex performance. Capex execution in the first quarter had a robust performance. It grew 59% versus the same period of the previous year. With this investment pace, we maintain the 2019 investment plans target between $3.5 billion and $4 billion.

81% of capex was concentrated in the upstream, mostly in the drilling campaign at our main fields, Castilla, Rubiales, Chichimene, Casabe, and La Cira-Infantas, investments that will contribute significantly to the production levels and profitability in the short and medium term.

Growth investments represented 77% of execution during the quarter. In terms of emerging investments, which leveraged the company's long-term growth, we highlight the beginning of studies geared toward the project maturing stage of unconventional pilots in the [inaudible] and Magdalena Basin as well as investments in digital transformation.

As for capex in operational continuity, we executed $150 million, allowing us to ensure reliability, integrity, performance standards, and efficient operations. I will now hand the floor over to the CEO for his final conclusions.

Felipe Bayon-- Chief Executive Officer

Thank you, Jaime. Our financial and operational results were good. We have shown resilience and have capitalized on our technical and operational strengths. We are going in the right direction to meet our objectives. The production guidance for the year remains in the range between 720,000 and 730,000 barrels of oil equivalent per day.

Our priority is to maintain a safe operation that protects our workers, our contractors, and the environment. All of these with operational excellence, generation of value for our shareholders, and shared prosperity in those regions in which we operate.

I will now open the question and answer session. Thank you.

Questions and Answers:


At this time, I would like to remind everyone in order to ask a question, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. We will pause for just a moment to compile the Q&A roster.

We have a question from Frank McGann from Bank of America.

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Good day and thank you. Two questions, if I could, one just in refining -- looking out over the next couple of quarters, now that the maintenance is completed at Barrancabermeja, how do you see profitability there? Should we be looking at a better environment now that things will be back to normal and you'll have everything operating normally? Then secondly, in terms of the Ocensa ruling, perhaps you could just go through details on that and how much did that help the expense line?

Tomas Hernandez -- Vice President of Refining and Industrial Process

Thanks for the question, Frank. Tomas Hernandez, Vice President of Refining. I'll tell you a little bit about the Barrancabermeja refinery and what happened in the first quarter. We had two major turnarounds in the first quarter.

We had one of our largest crude units that was down for 44 days and we had our hydrotreater for diesel that was down for 41 days. Extended turnarounds, major turnarounds, much more activity than any other quarter in the last couple of years. Obviously, that impacted not only crude throughput, but also margins because we weren't able to produce the high-value products.

Those turnarounds were completed in the first quarter. Going forward, we see reestablished throughputs at the refinery. As a matter of fact, we forecast 220,000 barrels per day for the average for the year. In the last three quarters, we're going to pick up the charge for the plants. Basically, that was the big impact that we had in the first quarter. We also had low navigability of the Magdalena River, which impacted throughput.

So, going forward, we see a price environment that should be improving because of the closer we get to Marpol in 2020, we see diesel prices improving. We see gasoline prices tending to improve based on our forecasts. So, that would suggest that we were going to recover in both crude throughput and also margins for the refiners.

We also have been taking actions in improving optimization of Barrancabermeja, looking for the optimum crude slate, and also looking at improving the internal routing of intermediate streams to allow us to maximize margin in the second half of the year. Also, we'll be fully recovered for the turnarounds that we had in the first quarter of the year.

Milena Lopez -- Chief Financial Officer of Cenit

So, on to the Ocensa ruling -- the Ocensa ruling was regarding the line fill of the Ocensa pipeline. At Ocensa, which is different from the rest of the pipelines in the midstream segment, the line fill belongs to the investment that is remunerated by [inaudible]. What happens is the line fill over time changes in quality as remittance takes the crude at expert facilities and no crude comes into the system. The difference in the qualities of the crude within the pipeline have to be compensated to Ocensa who has this authority as part of the assets that it remunerates?

When you look at the ruling, it's important to realize that the ruling is between Equion and Ocensa. So, when you look at this from an Ecopetrol group on a consolidated basis, you have a 50 billion-peso net income -- this is after taxes and after minority interest. When you look at it on a segment-per-segment basis, what you're basically seeing is in the midstream in particular after taxes, you have approximately $41 million as extraordinary net income, but on a group level, it's important to realize that these two net out because of the two different participations.

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Thank you very much. Very clear.


We have a question from Pavel Molchanov from Raymond James.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking my question. I saw headlines a few weeks ago that there was a new offshore exploration partnership with Repsol. Can you talk about how those exploration opportunities are different or perhaps if they are similar to what you were drilling with Anadarko in the deep water two or three years ago?

Felipe Bayon-- Chief Executive Officer

Good morning. This is Felipe. I'll start the answer and then I'll pass on to Jorge. If you can imagine the map of Colombia, the northern coast, the Caribbean coast, Anadarko's activity with Ecopetrol was in what we call the Gulf of the [inaudible], which is closer to the boundary with Panama. So, it's on that side of the country.

If you look at the activity we've done on Guajira, which is what we've normally done with Repsol, historically, it's near the border with Venezuela, if you will. It's two different areas. The latter is more shallow to the intermediate water depths and the ones that we did with Anadarko is the 1,500 to 2,500-meter water depth.

The second thing I'd like to add is that for some time, we had been waiting for the ANH, the regulator, to come out with the minute so the formal text of the EMP contract for offshore activities. This is something that was done recently. In light of that happening, we moved forward and we signed the contracting partnership with Repsol.

I'll pass on to Jorge who can tell us a bit more about some of the technical details and what we're actually looking for. Jorge?

Jorge Calvache -- Exploration Vice President Vice President

Thank you, Felipe. Thank you, Pavel, for your question. Yes, indeed, what we have with Repsol is just part of the strategy of Ecopetrol of exploring several basins in the offshore Colombia. As Felipe mentioned before, we and Repsol, we are focusing more in the exploration of our interior basin in front of the Guajira area, where as you know, the previous discoveries in the 70s, [inaudible], but together, we have identified several opportunities in that area. Also, what you see is with Repsol, it's close to the blocks that were awarded to Shell and Novo.

So, this is an area that has been explored not only by Ecopetrol but also by other companies, like Shell and Novo. On top of that, we have a very aggressive campaign with [inaudible], which is south of the [inaudible] Block. One of the plans is to drill a well next year in that area. Also, not only looking for gas, but also looking for liquid in that area.

So, we are basically after the [inaudible] to publish the new contract for the offshore areas. I think there is a huge reactivation of the exploration activities in this area and part of this reactivation is not only by Ecopetrol but by other companies.

Pavel Molchanov -- Raymond James -- Analyst

Can you just clarify in addition to Repsol, what other offshore partners do you currently have? So, Anadarko was in the past. That's finished. Who are you working with now?

Jorge Calvache -- Exploration Vice President Vice President

So, as I mentioned before, we have currently partnered with Petrobras in the Tayrona block. We have Repsol in the Guajira Offshore-1. Basically, these are the partners we have in the offshore at the moment.

Pavel Molchanov -- Raymond James -- Analyst

Okay. Very clear. Thank you.

Felipe Bayon-- Chief Executive Officer

Pavel, if I may, this is Felipe, just building on what Jorge was mentioning -- two more things on the areas you were referring to, which we had with Anadarko. We've now actually committed to hold those areas at 100% equity and will be, as Jorge was talking during the presentation, we're going to be opening day rooms to ensure that we bring one or two partners to help us one, continue to appraise and decide how to develop those areas. So, those were the Anadarko areas.

It's probably worth putting in the rater that it will be a coming exercise by the ANH to lease or to offer some additional offshore blocks in the next weeks or so. So, we'll be also looking at that in detail, some things that we have today on our plate and some things that will be happening in the next few weeks or months.


We have a question from Adres Duarte from Corficolombiana.

Andres Duarte -- Corficolombiana -- Analyst

Good morning. Thank you for taking my call. I have two short questions. The first one is I wanted to know if there is a limit for the percentage of local crude oil that can be processed by the Reficar or Barrancabermeja according to their diets. The other question is related to taxes. Have you considered a mechanism in order to compensate part of the accumulated fiscal losses from [inaudible] and other companies, at least the ones that are located in Colombia? Those are the two questions. Thank you very much.

Felipe Bayon-- Chief Executive Officer

Thank you, Andres for the questions. In terms of the national or the local crude that we can take in the refineries -- I'll start with the answer and then I'll ask Tomas to give us a further technical view on that and I'll ask Jaime to talk about taxes.

So, in terms of the refineries, if you think about Barrancabermeja traditionally or historically, it has been receiving a diet which is 100% local crudes. That's the history of Barrancabermeja refinery that soon will be turning how many years? 96 years. So, for the last 95 years and a bit, it's been taking mostly local crudes. Having said that, we've already done some testing with imported crudes into Barrancabermeja just to understand the flexibility and further opportunities to generate margin. So, we're looking at that.

In terms of Reficar, when we started the plant back in '15, we basically started with 40% local crudes. At some stage, when we did the performance test, we used 100% imported crudes. We've actually taken the refinery to 100% local crudes. So, as you can see, we've tested the operational capability of Reficar with different loads and different diets for Reficar. Clearly, there's a lot of benefit when we increase the level of local crudes as we can get more of the value extracted by being integrated ourselves. But I'll ask Tomas to talk a bit about the technical side of the loads and the refineries.

Tomas Hernandez -- Vice President of Refining and Industrial Process

Thank you, Felipe. When we look at diets and throughputs of national crudes versus imported, we look at the optimum balance of imported versus national crudes. The way we do that is we look at what are the production of the different high-value products from the crude slate that we're charging. We look at the prices, the product prices and the crude prices in that particular run.

What we're seeing in that sweet spot in Cartagena, we're seeing it between 80% and 90% based on the current prices. As you saw this quarter, we were at 87%. That was a record. But really, that's really set by the economic optimum of the refinery, which was done on a planning basis every month and we look at the right balance of crudes based on which plants are available in the units and the different limitations that we may have in the refineries. That's Cartagena. So, we're looking at 80%-90%, but that varies obviously with the economic optimum.

In Barrancabermeja, obviously, we're limited to the availability of crudes in the area, but as the President mentioned, we have imported crudes now. They have become economic to import some crudes and we're looking at about a 3% mix in the Barrancabermeja crude slate. But again, that is determined by an economic optimum for the refinery. Obviously, one of the economic advantages for Barrancabermeja is the proximity of the crudes to the refinery, which tend to be heavier, so, we look for lighter, intermediate crudes in what we import.

Jaime Caballero -- Chief Financial Officer

Hi, Andres. With regard to the taxes question, as a matter of context, we have four relevant entities that have accumulated fiscal losses, primarily Reficar. We have other three, Bioenergy, Ecopetrol America and Brazil -- these accumulated fiscal losses are a reflection of where they are. In the case of Brazil and Ecopetrol America, it's a reflection of the exploration stage in which they've been over the last number of years primarily. In the case of Reficar, it's a reflection of their start-up and optimization process.

Really, the biggest lever to compensate for these accumulated fiscal losses is performance. To that regard, all of these entities have business plans that take them to profitability and to the extent that that profitability is achieved, we start capturing those fiscal benefits.

Now, having said that and thinking about optionality, what we have looked into is, I would say, two or three considerations. The first one is are there mechanisms that can allow us to retain the fiscal stability contracts that these entities have? That's important. To the extent that we haven't done them, that's why we haven't done anything about them. It's very important that these entities retain those fiscal stability contracts.

The other consideration here is when we think about inorganics, particularly with regard to Ecopetrol America and Brazil. As we look into inorganic options, we have factored in those accumulated fiscal losses. They have become part of the analysis and hopefully as eventual transactions materialize, we will accelerate the capture of that benefit.

Thirdly, there is something about a good structure, which I think it's in the backburner. It's not a priority, but over time, we make sure that the structure that we have in the group is one that allows us to compensate for this.

Obviously, I think the most important thing in this conversation is that we make sure that we account properly for this. We spend a lot of time making sure that a proper accounting treatment is made of these accumulated fiscal losses. It relates to deferred tax. It also relates to some of the impairment conversations that we have at the end of the year and that's an area we put a lot of attention. Hopefully this addresses your question.


As a reminder, if you have any questions, please press * and then 1 on your touchstone phone. The next call comes from Pedro Medeiros from Citigroup.

Pedro Medeiros -- Citigroup -- Analyst

Good morning, guys. Thank you so much for taking my questions and congratulations on the results. I have three questions. The first one is if you can give some extra color on the pipeline tariff review process and what management expects for the adjustments for 2019.

My second question is if you could comment on potential hedging strategies for prices or any attempt to lock in the improvement fee realization spreads for the [inaudible] that we saw here today. I understand there had been a debate about creating a hedge policy in the past months. So, any update on that would be welcome. Considering the higher oil price we see on the screen right now, does the company consider accelerating development capex further?

My last question is if it's possible to disclose Ecopetrol's oil production exit or average levels for the month of April, just to understand the trend for production after the number is reported on the first quarter. Thank you so much.

Felipe Bayon-- Chief Executive Officer

Thanks, Pedro. This is Felipe. I'll start with the last couple questions and then I'll ask Milena and Jaime to talk about the other ones. So, in terms of April production, we do not provide any data on that. We'll talk around the second quarter results in due time.

In terms of considering any acceleration or increasing capex, if you remember, we've given the guidance of $3.5 billion to $4 billion. We want to remain very disciplined. We want to remain focused. We want to make sure that as we sanction our investments we've done all the technical work that underpins those decisions.

From that point of view, there may be some room in terms of that range, the $3.5 billion to $4 billion. I think the first quarter was good in terms of our expenditure or investment, almost $650 million. So, I think we're in a good trend for the year. We don't want to rush ourselves and we don't want to then start investing without having all the right technical assurances underpinning those investments.

Milena, do you want to talk about tariffs?

Milena Lopez -- Chief Financial Officer of Cenit

Hi, Pedro. This is Milena Lopez, the CFO for Midstream. Regarding tariffs, the current tariff period was set in 2014 with the last resolution that was issued by the Ministry of Mines and Energy. This period ends on the 30th of June. As such, we have already proceeded to provide the ministry with our tariff filing, which basically gives the Ministry of Mines and Energy all the information in terms of our forecast of crude production, investment, and cost, with which they will make all the necessary tariff calculations.

In addition to that, in mid-April, the ministry published for comment a draft resolution that would open a negotiation period between all the oil transporters and the refined product pipeline transporters and the ministry of finance. This would potentially open a negotiation period for tariffs that would take place between the time this resolution is fully issued and would end on the first of July. We expect tariffs to remain at levels at which we have them today and we will be informing you as this process evolves.

Jaime Caballero -- Chief Financial Officer

Pedro, this is Jaime. With regards to potential hedging strategies, the update that I would give you at this time is actually, we have been looking at this over the last year or so. I think we've spoken about this in previous calls. There is some news in that we have actually updated our group policy with regards to hedging with the board. We've had a number of conversations with the board in that regard. Essentially, we now have a framework that allows us to engage in hedging if we see a business case for it.

I think the key principles associated to that policy are firstly that we do have a bias for natural coverage. We have natural hedges given our integrated nature. Secondly, hedging that we do is focused on risk management rather than speculative or profit seeking. And thirdly, we think about hedging in two dimensions. There is strategic hedging, which would be on a group level seeking basically coverage to Brent exposure. Then we have transactional tactical hedging, which is on our day to day transactions that we do on the commercial and trading arm.

So, that's where we are. To this date, we haven't engaged in such. We are looking at a number of options. It is possible that throughout the course of this year, we implement something on this regard. To the extent that we do, we will share that with you guys.

Pedro Medeiros -- Citigroup -- Analyst

Very good. Thank you so much for the color and all the explanation. Thank you so much.


Thank you. The next question comes from Lisa Chua from Man Group.

Lisa Chua -- Man Group -- Analyst

Yes, thank you for the call. I just wanted to follow-up on the last question specifically with regard to reserve replacements and production and run rate capex, how to think of this. I know you've reiterated the capex guidance at $3.5 billion to $4 billion for this year. I think your three-year plan was kind of $12 billion to $15 billion that you gave at the end of last year. So, maybe the potential to kind of increase it closer to $5 billion over the next couple of years.

When I think about reserve replacements, a lot of the improvements of the last couple of years has come from revisions and improved recoveries. How do we think about a potential run rate capex going forward and how this translates to the production guidance as maybe based on what your three-year plan was, maybe 2% improvements per year or so for target.

How do we think about when to see the positive impact from the higher capex? What do you think about run rate capex going forward, thinking about the need for more ENP discoveries and also kind of run rate targets of production?

Felipe Bayon-- Chief Executive Officer

Thanks, Lisa. This is Felipe. I'll take the question. A couple things -- if you think about the contextual envelope, rightly so we're talking about $12 billion to $15 billion organic capex. That's the first point I would make. So, these would not include any inorganic activity. I can make some reference to that in a bit. Please bear in mind that all of this is at $65.00 per barrel. So, that's how we've laid out the 2019-2021 plan, $12 billion to $15 billion.

The second point is that if you look at the last four years, particularly 2015-2016, we did not replace any reserves. '17 and '18, we were at 126 to 129. Mostly all of that came from EOR. So, improvements in recovery factors, operational optimization, but basically, from the production side of the business.

So, what are the couple things that we have not incorporated into our view of the 2019-2021 plan, which we intend to grow production. So, we have not incorporated potential in 2021. It's probably out of the level of production we have. We've talked about 9,000 to 10,000 barrels which can come from exploration and some production that we may see from unconventional.

So, in terms of additional potential growth, I think there are a few things. One, exploration -- clearly, we need to ramp up and sort of increase the stakes in terms of ensuring that exploration can do its share. Last year, if you remember, we actually drilled some exploration wells in Arauca, particularly, and we tied those wells very quickly into production. I think that was to the tune of 3.5 MBD production that we actually attributed to exploration, but we need to do more than exploration.

The second thing is unconventional -- we've talked a bit about how we've progressed on the pilot projects that we want to do to test both the technicalities, but also the economics of doing unconventionals in Colombia. That could bring some additional not only production volumes, but reserves.

The third point, which is one that I've mentioned before, is this plan does not include any inorganics or any M&A activities. We've done a lot of assessments and in-depth reviews. As you can well understand, whenever we have something to communicate, we'll communicate, but we will stay in the boundaries of the Americas and in the countries where we have a presence today.

In terms of capex, we've mentioned for '19 the $3.5 billion to $4 billion and 1Q was roughly $650 million, which is almost 60% higher than last year. We've seen an increase in the level of activity. All of this is sort of framed by discipline, by ensuring that we sanction our projects with a lot of rigor. The good news is that most of our projects that will end up in the capex numbers for this year have been sanctioned.

So, we have a level of comfort in terms of where we are spending the money. We don't want to allow the engine to accelerate itself. A tendency in industry is that when you see prices go up a bit, you try to invest a bit more and you may lose focus and discipline. So, we want to remain very, very focused. So, in terms of higher capex, we'll move in the range of $3.5 billion to 4 billion. We're off to a good start. I think at the end of second Q, we'll have a better view of where we end up. But at this stage, we don't see a need to review or change our guidance.

In terms of reserves -- this is where I'll end up -- we've said that we want to replace at least 100% of our production without taking any benefit from price. That's what we did last year. You rightly pointed out that a lot of the work was due to the optimizations and better operating standards and just the whole use of EOR techniques that actually led to some good results. That's probably how I would give a bit of color around your question.

Clearly, as we progress in the year, we'll probably have not only more footing in terms of where we are in terms of guidance, but also, I think it's worth saying good start for the year and we'll remain confident in terms of both capex and production guidance.

Lisa Chua -- Man Group -- Analyst

Thank you. Appreciate it.


There are no further questions at this time. I'd like to turn the call over to Mr. Bayon for closing remarks.

Felipe Bayon-- Chief Executive Officer

Thanks. I want to thank each and every one of you for taking part on the call today, especially thank you for you constantly following the company, doing the reviews, providing us with your views on how we should think about how the external world, the analysts, the shareholders look at a company such as ours. We value that. We appreciate the insights. It helps us look at things that we need to look at in more detail.

That's very good and that's very helpful. We started this year, I think, on the right foot in terms of our plan for the year and our business plan for '19-'21. We're off, I think, to a good start. We're committed to conducting safe operations, ethical operations, efficient operations that provide value to shareholders and the areas and communities in which we operate. So, thanks again for being here today with us. I hope you'll have a great day.


Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 60 minutes

Call participants:

Maria Catalina Escobar -- Head of Capital Markets 

Felipe Bayon-- Chief Executive Officer

Alberto Consuegra -- Chief Operating Officer

Jorge Calvache -- Exploration Vice President Vice President

Jorge Osorio -- Vice President of Development and Production

Milena Lopez -- Chief Financial Officer of Cenit

Tomas Hernandez -- Vice President of Refining and Industrial Process

Jaime Caballero -- Chief Financial Officer

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Andres Duarte -- Corficolombiana -- Analyst

Pedro Medeiros -- Citigroup -- Analyst

Lisa Chua -- Man Group -- Analyst

More EC analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Ecopetrol SA
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Ecopetrol SA wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019