Ecopetrol S.A. (EC) Q2 2019 Earnings Call Transcript

EC earnings call for the period ending June 30, 2019.

Motley Fool Transcription
Motley Fool Transcription
Aug 13, 2019 at 6:04PM
Energy, Materials, and Utilities
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Ecopetrol S.A. (NYSE:EC)
Q2 2019 Earnings Call
August 13, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Anna and I will be your conference operator today. At this time, I would like to welcome everyone to the Ecopetrol 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, Miss Maria Catalina Escobar, Manager of Corporate Finance and Investor Relations will begin the conference today. Miss Escobar, you may begin your conference.

Maria Catalina Escobar -- Manager of Corporate Finance and Investor Relations 

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 commitment as the 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.

The call will be led by Mr. Felipe Bayon, CEO of Ecopetrol. Other participants include Alberto Consuegra, Executive Vice President, Jaime Caballero, CFO, Jorge Calvache, Exploration, Vice President, Jorge Osorio, Vice President of Development and Production, Milena Lopez, CFO of Cenit, and Tomas Hernandez, Vice President of Refining and Industrial Processes.

We will begin the presentation with the main achievements of the second 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 second quarter 2019 results conference call. I am very pleased with the results we delivered yesterday to the market. Despite a challenging environment, the numbers for the second quarter reflect the sustainability of our results, thanks, among other things, to the operational and financial strength of the Ecopetrol group.

Net profit was 3.5 trillion pesos and EBTIDA was 3.3 trillion pesos -- again, this in spite of the decline of international prices for most of our valuable products and the scheduled maintenance in some of our fields and the refineries. We continued to deliver against our strategy, especially with the entry into the Permian Basin, the most prolific in the US, through our strategic JV with Occidental.

This is a transformational and high-value deal for Ecopetrol. It enables us to improve our research position, improve our production in the mid to long-term, and continue to deepen our knowledge in the development of unconventional hydrocarbons. Our expectation is to book around 160 million barrels of oil equivalent of proven reserves by deal close, which we anticipate before the end of the current year. And gradually, we also envisage increasing our production until around 2027, when we expect to have some 95,000 barrels of oil equivalent per day of Ecopetrol's production share.

Let me now move on to the next slide to see some aspects of the market environment. During the first half of 2018, we experienced a high-volatility environment with a continuous weakness trend of refining margins. However, our price basket continued to perform well. In particular, Brent prices fell by 7% compared to the first semester of 2018. Yet, we saw strengthening in heavy crudes due to their tighter supply in the region among other regions.

Our commercial strategy allowed us to take advantage of this market environment and achieve a spread of $6.4 per barrel on our crude basket versus Brent in the first six months of the year. Moreover, the crack spreads for gasoline and naphtha declined significantly. This was combined with rising prices of intermediate and heavy crudes fee stock, which reduced global refining margins.

The valuation of 12% on average for the exchange rate of the Colombian peso versus the US dollar vis-à-vis the first half of 2018 helped us mitigate somehow the impact of the lower Brent in the first half of 2019.

I will now hand over the floor to Alberto Consuegra, who will discuss our main operating milestones during the semester.

Alberto Consuegra -- Chief Operating Officer

Thank you, Felipe. In the first half of 2019, operating results were positive and strengthened our position against the 2019 targets. In spite of a challenging price environment, the impact of scheduled maintenances, and public order situations phased throughout the period.

The average production of the group for the second quarter 2019 was 723,000 barrels of oil equivalent per day, 2,000 barrels more compared to the second quarter of 2018. Despite having successfully executed the maintenance plan scheduled for the period. During the quarter, there were an average of 37 rigs in operation, 6 rigs more than the number used in second quarter 2018. The operation of these rigs led to the drilling and completion of 147 development wells. As of the first half of 2019, 311 development wells have been drilled, 17.4% more than in the first semester 2018.

On the exploratory front, during the second quarter, the presence of hydrocarbons in the Andina Norte-1, like crude and gas, and Boranda-2 sidetrack medium crude wells. The cumulative total during the first semester is 10 wells drilled in the Colombian onshore, expecting that by year end, we will have exceeded the target of 12 wells set in the plana. On another note, I am pleased to mention that the Ecopetrol Group obtained 5 of the 11 exploratory blocks awarded in Colombia by the ANH during the permanent area assignment process 2019.

On the international front, the MC 904 block, located in the Gulf of Mexico in the United States, was awarded to Ecopetrol in consortium with Fieldwood Energy as operator and Talos Energy. In the midstream, there was a good performance and contribution to the business group cash due to the production increase, the commercial strategy to transport higher volumes by pipelines, and more days of operation at Cano Limon pipeline.

During the quarter, there were 16 attacks on the pipeline infrastructure, 48% less than in 2Q 2018, resulting in a lower number of reversion cycles compared to the same period in 2019. It is important to mention that during the second quarter, the Ministry of Mines established the new crude transportation tariffs, which will be in effect from the second half of 2019 until June 30th, 2023. In the downstream segment, the Barrancabermeja Refinery achieved good operational performance as a result of the maintenance plans executed during the first quarter of the year.

The increasing load compared to the second quarter of 2018 was 7,700 barrels per day and 33,000 barrels per day compared to the first Q of 2019 as a result of greater availability of light crudes. The Cartagena Refinery reached an average load of 150,000 barrels per day, with 82% of national crudes in the load composition, mainly because of the efforts in optimizing the crude oil diet and the strong focus on asset integrity management. The total load of the refineries for the quarter reached 379,000 barrels of oil per day, in line with the target included in the business plan.

In the petrochemical sector, Esenttia was awarded the Emerald Cross medal in the Highest Excellence category as the Colombian company with the best results in health, safety, and environment. Please go to the next slide.

During the first semester, our lifting costs grew 7.9% compared to the first half of 2018, due to the increase in well maintenance activity as well as the higher cost of subsurface services. There was an increasing energy cost, particularly associated with the enhanced oil recovery program, due to the greater volume of injected water and higher energy prices.

Ecopetrol has launched its new efficiency plan. These efficiencies are focused on reducing the cost per food drilled, reducing the trend of growing lifting costs, and continuing the effort to reduce the dilution factor in the evacuation of heavy crudes.

I will now pass to Jorge, who will tell you about the results of exploration.

Jorge Calvache -- Exploration Vice President Vice President

Thank you, Alberto. In the second quarter, the exploration campaign continues achieving good results. Along with our partners, we completed a drilling of six exploratory wells, totaling ten during the year. With these results, we are very close to achieving our target of 12 exploration wells for 2019.

During the quarter, we confirmed the presence of hydrocarbons in the Andina North-1 well, operated by partners with a 50% stake and Ecopetrol with the remaining 50%. Finding oil in the Guadalupe and Une formations. Initial tests in the Guadalupe formation confirmed a live oil crude of 40 degrees API and gas.

Additionally, the Une formation proved the presence of oil of 37 degrees API and gas. Likewise, the drilling of the Boranda-2 ST well was completed in May where initial production tests confirmed the presence of oil of 23 degrees API in the Emerald formation of Eocene. These discoveries benefit from being located close to existing infrastructure, allowing us to leverage our strategic target of increasing reserves and production through exploration in a short period of time.

On the other hand, I am pleased to inform that Ecopetrol obtained 5 out of the 11 exploration blocks awarded in Colombia by the National Hydrocarbon Agency during the 2019 bidding round process. Of those five, the Gua-Off 10 block on the Colombia Caribbean offshore corresponds to Ecopetrol and the other four to our subsidiary Hocol.

Internationally, we expanded our portfolio in areas of high potential. Ecopetrol Americas, with a working interest of 31.5% in consortium with Talos Energy with 9.56% and Fieldwork Energy as an operator with 58.94% working interest on the MC 904 block located in the Gulf of Mexico of the United States during the 252 Gulf of Mexico lease sale round process.

On the other hand, Ecopetrol Brazil purchased an additional 341 square kilometers of 3D seismic, which will allow us to evaluate the prospectively of Pau Brazil and 1,600 square kilometers of 3D hybrid solutions to evaluate the participation during the second semester. Additionally, Ecopetrol Hydrocarbon Mexico acquired a license of 88,015 square kilometers of 3D seismic from the Campeche program for the period of 24 months.

Finally, I would like to highlight that on July 17th, the Brazilian Ministry of Mines and Energy approved Ecopetrol's participation with 10% working interest in the Saturno block, located into the Santos Basin. In the new partnership, Ecopetrol keeps 10% of working interest, while Shell, as an operator, has 45%, and Chevron the other 45%.

I will now pass the floor to Jorge Osorio, who will talk about the production achieved during the quarter.

Jorge Osorio -- Vice President of Development and Production

Thanks, Jorge. During 2019, we have been in line with our plan to achieve production between 720,000 and 730,000 barrels equivalent per day. Our production in the second quarter was 723,000 barrels equivalent per day, 2,000 barrels more than the second quarter of the previous year. Of the total production, Ecopetrol's fields with recovery programs contributed 30% and its subsidiaries 8.3%, reaching 60,200 barrels per day.

Compared with the first quarter of the year, the oil and gas production decreased along with the planned maintenance activities for the period. This quarter highlights they got results of the drilling campaign of the Rubiales Field, compensating for the decline of the field and the drilling in the Akacias Field, block CP09, where production was tripled, reaching 2,000 barrels per day average for the quarter. This light also illustrates the production of the Castilla, Cupiagua, and Yarigui fields, which show an increase from the second quarter of the previous year.

Now, I turn to Milena Lopez, who will tell you about the results of the transport segment.

Milena Lopez -- Chief Financial Officer of Cenit

Thank you, Jorge. During the second quarter of 2019, the midstream segment continued achieving positive financial results, with an EBITDA reaching 2.5 trillion pesos. These represented an increase of 10.8% compared to the EBITDA for last year's second quarter and achieving a 78% EBITDA margin. During the second quarter of 2019, the segment transported higher volumes of crude and refined products, achieving 1,158,000 barrels per day, which represented 3.8% of growth compared to last year's second quarter figures.

The volume of crude transported increased 4.3%, mainly due to additional barrels captured from alternative transportation systems, and the injection of crude at Ayacucho from the Accordionero Oil Field. The transported volume of refined products increased 2.5% compared to the second quarter of 2018, mainly due to the inventory replenishment process that took place after the maintenance of the HDT unit at the Barrancabermeja refinery, which took place during the first quarter of 2019.

During the second quarter of 2019, the number of attacks of our pipeline infrastructure decreased by 48%. As a result, there were 12 reversion cycles in the Bicentenario pipeline compared to the 18 cycles that took place during the same period last year, resulting in more operational base for the Cano Limon -- Covenas pipeline.

Lastly, it is important to highlight that during the second quarter, the Ministry of Mines and energy published tariffs that have been in place since July 2019 and will be valid through June 30th, 2023. This year, the Ministry set the negotiation process between producers and transporters who had a chance to negotiate directly. In some cases, agreements were reached and endorsed by the Ministry of Mines and energy.

In cases where an agreement was not reached, the Ministry set tariffs according to the existing regulatory framework. The new tariffs will result in aa moderate increase in revenues for the midstream segment and in tariff stability for the next four years.

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

Tomas Hernandez -- Vice President of Refining and Industrial Process

Thanks, Milena. In the first half of 2019, our refineries were impacted by challenging market conditions with international product price differentials versus Brent reaching historical minimums for naphtha and gasoline not seen in the last 20 years. In addition, the refineries experienced higher crude price differentials versus Brent as domestic crude prices strengthened. These conditions have resulted in weaker refining margins consistent with those seen in benchmark refineries in the US Gulf Coast.

Despite this difficult market environment, the Barrancabermeja refinery's stable operation allowed the second quarter gross margin to reach a similar level of that obtained in the same period last year, reaching $10.3 per barrel versus $10.5 per barrel in the second quarter of 2018 despite higher crude price differentials for the refinery feed slate.

The gross margin for the Cartagena refinery in the second quarter 2019 decreased by 41% compared to 2018, reaching $6.6 per barrel, mainly due to international market behavior and the high-level turnaround activity during this quarter. Please go to the next slide to highlight the planned maintenance activity executed at the Cartagena refinery in the quarter and crude throughput performance for the refining segment.

This turnaround activity at the Cartagena Refinery consisted of the execution of the first major turnaround of our hydrocracking unit since the start-up of the new refinery and a planned furnace decoking shutdown at our delayed coking unit. The hydrocracking unit catalyst was replaced as well as key pieces of equipment cleaned and inspected, ensuring availability of key assets for a new four-year operating cycle of the plant.

Even with the execution of this planned turnaround activity at the Cartagena refinery, crude throughput reached an average of 150,000 barrels per day, near the 153,000 barrels per day during the same period the year before, while increasing the percentage of domestic crudes in the feed slate to 82%, up from 79% in the second quarter of 2018.

The aforementioned was achieved thanks to the implementation of process optimization initiatives focused on crude slate improvements and plant reliability. During the second quarter of 2018, the Barrancabermeja refinery returned to stable and reliable operations after the heavy turnaround activity executed during the first quarter of 2019. The throughput in the second quarter of 2019 increased 33,000 barrels per day as compared to the previous quarter. The higher availability of light crude oil during the second quarter of 2019 versus the same quarter of 2018 allowed a throughput increase of 4%.

In our petrochemicals area, during the second quarter of 2018, Esenttia demonstrated excellent safety performance and stable operations, capturing better margins with a more stable behavior of its raw materials price. On the biofuels front, Bioenergy advances and 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, Tomas. In the first half of 2019, we continued to deliver solid financial results. We achieved an EBITDA of 15.7 trillion pesos and a net profit of 6.2 trillion pesos. The group's EBTIDA margin has shown a rising trend since 2016 and is now at 45.7%. Our main gearing metrics remain sound and are in line with many industry peers. The gross debt to EBTIDA and net debt to EBITDA ratios were at 1.2 times and 1 time respectively.

EBITDA per barrel was down slightly compared to 2018, largely due to lower international prices for crude oil and refined products, and the impact of scheduled maintenance, especially at the refineries. While Brent has fallen $5.5 per barrel in the first semester of the year, our EBITDA per barrel fell only $2.2, which in net terms leads us being $3.3 per barrel more profitable.

The net profit breakeven closed at $31.9 per barrel, showing a favorable trend versus previous periods, also with a larger spread against Brent. We highlight the results below the operational line due to a lower effective tax rate and a reduction in our financial expenses. Likewise, we also kept our road sheet above 13%, reflecting the efficiency and operational profitability of the capital allocated by the company.

The group's total EBITDA remained stable. It is worth it to highlight the rise of the midstream segment EBITDA to 5.1 trillion pesos, mainly as a result of the increase in volumes carried by pipeline that were previously carried by tanker trucks.

This increase helped mitigate the impacts of lower international prices of Brent, naphtha and gasoline and the effective of scheduled major maintenance at both refineries as well as in some producing fields during the first half of the year.

Now, let's move on to the next slide to see the business group's cash flow. In the second quarter, cash flow funded the payment of the first and second installments of dividends to shareholders declared over 2018 profits, totaling 6.5 trillion pesos. In the first half, free cash flow was positive at 6.7 trillion pesos, driven by operating cash flow generation of 6.3 trillion pesos and a variation in working capital, highlighted by the transfer made by the Fuel Price Stabilization Fund to both Ecopetrol and Reficar for 1.9 trillion pesos, corresponding to the outstanding balance of the first half of 2018.

Operating cash flow also covered the 3.8 trillion pesos income tax payment and capex totaling 4.1 trillion pesos. The financing flow of 8.8 trillion pesos included the aforementioned payment of dividends to Ecopetrol S.A.'s shareholders and the payment of dividends to non-controlling shareholders in the midstream segment totaling 0.5 trillion pesos. The six-month period ended with a cash balance of 12.7 trillion pesos.

Let's now move on to the next slide to review the business group's investment plan. During the first half of the year, capex execution increased 38% versus the same period the previous year, reaching a total of $1.4 billion. 81% of investment were deployed into the upstream segment. Growth investment accounted for 73% of the semester's execution. $0.5 billion were allocated to drilling and well completions that support short and medium-term goals. $0.2 billion to build facilities and $0.1 billion for studies required to progress opportunities that support long-term development plans.

Investments in continuity were primarily related to major maintenances undertaken in some downstream, upstream, and midstream assets. This year, we expect to initiate payments related to the joint venture with Occidental in the Permian, announced earlier this month. Ecopetrol's participation in the future joint venture development investments is estimated at $6.4 billion plus $750 million of carry to be deployed mainly between 2022 and 2027.

From 2024 onwards, the project is self-sufficient in terms of cash. In 2019, expected payments amount to around $900 million, out of which $750 million are allocated to the initial payment between $50 million and $60 million to the carry with Occidental and between $65 million and $75 million to Ecopetrol's share in the development capex.

We reiterate our organic investment guidance between $3.5 billion and $4 billion that added to the inorganic investment plan for this year would bring our 2019 capex to a range of $4.4 billion to $4.9 billion.

I will now turn the floor over to the CEO for his final remarks.

Felipe Bayon-- Chief Executive Officer

Thank you very much, Jaime. We believe that long-term growth demands a clear commitment to sustainability. It is for these reasons that I would like to share with you some of the many initiatives that we are working on specifically around sustainability.

First of all, we are contributing to improve the air quality in the cities in Colombia, this by supplying natural gas and low-sulfur diesel to the mass transportation systems. We're supplying to the new fleet of Bogota's TransMilenio ultra low-sulfur diesel with less than 10 parts per million of sulfur.

Secondly, we have achieved the independent verification of a reduction of over 1 million tons of CO2 equivalent in our production processes between 2013 and 2017. Finally, in the first half of 2019, we recycled over 44 million cubic meters of water. This is 4% more than what we did in the same period of 2018, thereby reducing disposal into water streams.

Now, let's go to the next slide to see the progress on our business plan. To conclude, I would like to mention some of the results of our business plan. In the international arena, we achieved two very important milestones that point out to the growth of reserves and production. First, our entry into the midland in the prolific Permian Basin in a JV with Occidental. With this JV, we will further deepen our knowledge in the development of unconventional hydrocarbons.

Secondly, the recent approval by the Ministry of Mines and Energy in Brazil for the transfer of 10% stake in the Saturno block to Ecopetrol. This is located in the central region of the Santos Basin in the pre-salt in the Brazil.

In the midstream segment, recently, the new transportation tariffs were set and this provides a key signal of stability for the next four years. We continue to meet the operational goals of our plan and remain committed to improve structural efficiencies across our operations to accomplish sustainable and profitable growth.

Finally, I want to highlight the solid financial results achieved amid a highly uncertain market and the multiple challenges imposed by the environment in which we operate.

With this, I want to thank you again and open it for Q&A.

Questions and Answers:

Operator

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

And we have a question from Carlos Rodriguez from Ultraserfinco. Please go ahead.

Carlos Rodriguez -- Ultraserfinco -- Analyst

Good morning, everyone. Thank you for the conference call. I have two questions. The first one is related to the cost. If we still see this behavior for the rest of the year, what is the rationale for the costs that are rising faster than revenues that are in dollars and are boosted by the quickness of the currency? My second question is regarding the Saturno Block that you currently have 10% of stake. I want to know the terms of intellectual property and if it's similar to the agreement reached in the Permian in order to bring this know-how with you to start operating the offshore.

Jaime Caballero -- Chief Financial Officer

Thanks for the questions, Carlos. With regard to the first question around cost, the framework of thinking about cost and its link to currency -- around 60% to 65% of our revenues are straight dollar-based and around 40% of our cost structure is peso-based. Obviously, there are some natural balances between them, but it does create an overall effect, whereby a peso devaluation actually benefits the group. So, broadly speaking, a change of 100 pesos in the representative exchange rate has an effect of around 400 to 600 billion pesos in EBITDA.

Now, when you think about the outlook for the remainder of the year, I think you need to go back to the fundamentals of the guidance we have provided. When you see our integral cost structure, there are actually two places you're seeing changes in costs. One, you're seeing costs related to the product imports we've made associated to the maintenance in refineries over the second quarter of the year. That's very episodic. That's something we don't see as a sustained effect over the coming six months.

Secondly, when you see the lifting cost structure in EMP, Alberto has spoken about the increase that we've seen going from $8.50 per barrel to $9.10 per barrel. We see that as a result of the increased activity levels associated with maintenance. We believe that's not going to fundamentally change over the coming months. We believe that our year end position around this is going to be anywhere around $8.50 to $9.50 per barrel, which is in line with the guidance we have provided in the business plan.

I think exchange rate is going to be a factor on this to the extent that the exchange rate remains where it is right now. It's actually going to leverage overall group results and that's something we need to monitor through the coming months.

Felipe Bayon-- Chief Executive Officer

Thanks, Carlos. This is Felipe and I'm going to talk about Saturno and more broadly around the offshore. If you think about the two business, the joint venture we announced with Occidental for the Permian and the confirmation from the Ministry of Mines and Energy in Brazil of our 10% stake in Saturno -- the nature of the two businesses is a little bit different. The Permian we announced precisely a joint venture. We're both with Occidental forming a company and we'll have some of our staff seconded into the operation.

If you think of Saturno, it would be the equivalent of an unincorporated joint venture. We have three partners. We have Chevron. We have Shell. And we have Ecopetrol. We'll be working within the remits and the frame of the JOA, which has very specific clauses around the usage of information and how we share things, how we discuss things, and how we actually take decisions.

Having said that, our objective is to strengthen our knowledge in the offshore. We've recently opened up a new office in Brazil with the latest in terms of technology and having everything in the cloud. We've brought some more expertise so people with a lot of experience in the offshore, some veterans from industry from Petrobras and other companies.

Clearly, our intent is to deepen our knowledge in the offshore and the work we're doing in Brazil, not only in Saturno, but Brazil, combined with the work we've done in Colombia and Houston, also our presence in Mexico, it's all with the longer-term aim of improving our capabilities around the offshore. We've discussed in prior conversations that ultimately we would like to merge or evolve into an offshore operator.

Clearly, as you rightly point out, one of the bigger goals it to bring all that expertise back into Colombia. I think it's working very closely with partners in Brazil. There are very clear rules in terms of information and technology transfer and how we deal with the JOA with the end objective of bringing that expertise back into the country.

Operator

We have a question from Luis Carvalho from UBS. Please go ahead.

Luiz Carvalho -- UBS -- Analyst

I have basically three questions, if I may. The first one, we acknowledge to the recent movements that you made on the reserve part of the business, which was part of our concern. So, how can we see these movements looking forward in terms of reserve level? Is there any internal target that you could share with us you would be more comfortable in terms of production sustainability in the long-term?

The second one is more on downstream part of the business -- recently, the government announced some changes on the stabilization funds because of the deficit. How does the company see these looking forward? Now understanding there's not an easy solution in terms of reducing the deficit, someone has to pay for that, either the corporation or the government.

And the third one is about potential for acquisitions. When we look at the balance sheet of the company, you're still in a comfortable situation. I was wondering if you were looking to acquire potentially some companies or even more assets looking forward. Thank you very much.

Felipe Bayon-- Chief Executive Officer

I'll take the first one and the third one and I'll ask Jaime to talk about the stabilization fund. If you think about the recent announcements we made, particularly with the JV in the Permian, a few things worth putting into the context of the conversation -- the first thing, we estimate we will be able to add around 160 million barrels of reserves before year end. This is in line with closing of the transaction. We will be able to book those reserves.

If you think about how much we produce in a year -- I'm giving you ballpark numbers -- we produce around 240 million barrels. So, 160 million barrels that we would add through the JV is equivalent to 0.7 years of reserves. I think that's very good news. Historically, we've said that we want to be able to book in the order of 100% of our production every year. So, from an organization point of view, we want to replace every single barrel that we've produced.

If you look at 2015-2016, those were not good years. We added nothing. 2017-2018, 126% and 129% -- so, I think the trend is being reverted. The announcement we made with the JV clearly is very accretive. It's substantially accretive in terms of reserves. It gives me 0.7 more years. This will be in addition to our objective of adding 100% reserves organically. The trend is something we will not be able to change in one quarter, but directionally, we're delivering on what we've told the market.

You ask us if we're comfortable. We've said we would love to be in the eight years to production range or reserve to production range. Clearly, this year will move us in the rigth direction. Remember, only 80%-85% of the JV in the Permian is liquid, where we have lower reserve life. So, clearly, we're making very good moves in terms of creating a better reserve life. I think that's how we actually view it.

I'll link this to number three. Rightly again, you've signaled we have a very strong balance sheet. We've managed to reduce our leverage. We've reduced the overall level of our debt. We're generating good cash. We're very resilient in terms of prices. We continue to have a very strong transformation program. Having said all of that, we are assessing quite a few opportunities.

As I said before, when these opportunities are reality, we will announce them to the market, which is exactly what we did two weeks ago with the JV in the Permian. We think it's extremely accretive. It's good in terms of production and reserves, but it's extremely important in terms of EBITDA and the impact it will have on our financials mid to long-term.

Jaime Caballero -- Chief Financial Officer

As for your question with regard to the stabilization fund for fuels, there have been a number of announcements lately, but it's important we start with the facts. What the government has stated and our understanding is that what the government seeks is the sustainability of this system. It's not about eliminating the system. It's about how do you make it sustainability and how do you lower the fiscal burden associated to the system? I think when it was designed, it had contemplated some compensation mechanisms that due to recent market dynamics -- by recent, I mean the last couple of years -- it has actually created an increasing burden for the government.

I think the way we look at it in Ecopetrol, there are three or four key principles in the way we engage with that conversation. Firstly, when you look at the market outlook, that deficit that the government is, in a way, taking care of, should reduce over time. it should not become more ample. It should actually reduce. I think that's going to help. That's one consideration. The second consideration is the government has already taken some steps in that regard, such as the change we discussed in the previous call with VAT associated to the fuels value chain. We spoke of that change from the 19% to the 5%, which is reducing the burden the government needs to carry.

As we look forward, I think there are two or three principles the government is taking into account in this conversation or as we plan ahead, we think are key planning principles. The first one is the formulas associated to fuels will remain tied to international prices. There are several mechanisms around this, but that fundamental view that it's tied to international prices will remain.

Secondly, we believe there is not going to be any negative impact to the prices that are recognized to the producers. I think that's important to. In any scenario that you cover, whether we move to a flat price or import parity, the prices recognized to producers will remain unharmed. I think that gives us some view that from a planning standpoint, while there is some uncertainty around what road the government will take, it does not represent downside to Ecopetrol. That's how we're looking at it.

Lastly, a couple of developments we think are interesting -- I just want to recognize about there not being an easy solution for this -- the government, as you know, in the National Development Plan included an article that makes references specific to hedging to allow management of this. We believe and have been in conversations with the government, that those sorts of instruments could have a material impact in lowering the fiscal burden the government has. All this to say that we remain cautiously optimistic about how this is going to develop, but certainly in the near and medium-term, we don't see any negative effects for the group.

Luiz Carvalho -- UBS -- Analyst

Thank you very much. If I can come back to the first question -- we acknowledge the great efforts the company made over the last couple of months and we believe it is in the right direction. But despite the liquidity of the stock, are there any plans from a capital markets perspective that you might consider to increase the free flow of the company?

Felipe Bayon-- Chief Executive Officer

Let me take that one. In terms of what we've said before and this hasn't changed in the last few quarters or so -- we understand there may be appetite for increased liquidity in the market, which is good. It's an acknowledgement of what the company is doing, what it's done in terms of the value it can provide. At this stage, we're in a very good position in terms of our leverage and how much depth we have in terms of our ability to generate cash in terms of us being able to continue to be self-funded, which is fundamental. From that point of view, there's no immediate action we would take in this arena or in this area. No changes to what we've said before.

Operator

And we have a question from Pavel Molchanov from Raymond James. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking my questions. My first one is about the shale pilot that you had in the [inaudible] area that I believe was recently blocked by the court and by the environmental regulator. Can you give us an update on what happened and what the next steps are for you to begin drilling operations there?

Felipe Bayon-- Chief Executive Officer

Yeah, Pavel. I'm assuming you wanted to have a couple questions. The first thing -- when we presented to the market to yourselves the 2019-2021 business plan, we highlighted that as part of our forward investment, we had included $500 million to do the pilots for the unconventional. That has not changed. We continue to view that as something we will do, but you're rightly pointing out there are a few things that happened.

Recently, there was a commission of experts that was put together by basically the Ministry of Mines and Energy and the Ministry of the Environment. So, government created this group of 13 efforts, both national and international in many different fields. The experts provided a report and the report is saying there's something [speaking Spanish]. So, it's pilot projects for unconventionals that would allow us to do research in a way that's holistic. That's basically the intent.

And they said those can be done but there are some caveats. The caveats are around the relationships with the communities in those areas, how we would deal with things like water management, chemicals, emissions, noise, inflation, potential inflation that would be an effect of us bringing that level of activity in the area. That's the first thing, the Expert Commission, which I think was very helpful. It provided us a lot of light in terms of what we need to do.

The second point is we've actually continued to develop through the planning and design of the pilots are work inside the company. That hasn't stopped. We continue to do that. We've mentioned we will eventually be doing pilots in Middle Magdalena Valley. That's where [inaudible] is, but that's just one of the options we're looking at. There are several opportunities in terms of pilots in Middle Magdalena.

We're also looking at Cesar Rancheria, which is further north, if you look at the maps. That would be a gassier play. There are a lot of conversations in country about the need to bring more gas molecules into the system quickly. There are actually conversations around the potential for unconventionals in El Atlantico, which is further north. So, from a geological point of view, there's more than one geography we're looking at.

In terms of the two things that happened recently, one, the [Speaking Spanish], which is like the highest administrative court in country, said they would study in detail the exploration of unconventionals and the regulation and the technical regulation around doing unconventionals. They're going to take some time to do that. While they're doing their assessment, there shouldn't be any activity.

Based on that, the ANLA said given that the regulation is froze, we don't have a regulation against which we can test the request for a permit by Ecopetrol. So, it's not been cancelled. It's just been put on hold. Until the [Speaking Spanish] decides around [Speaking Spanish], we cannot do anything in terms of activity, the ANLA will not study our request for a permit.

We've said a few things. We're extremely respectful of the work the [Speaking Spanish] is doing. It's going to take some time, but we remain committed to do the unconventional pilots. The description we've used is like operating inside a fishbowl so everyone can look into communities -- the regulators, communities, academia, NGOs, everybody will look into in terms of how we're operating.

This is a mid to long-term transformation of opportunity not for Ecopetrol, but for the country. We've said that currently, the country has around 2 billion barrels of reserves. What we've assessed is that in liquids, there could be 4 billion to 7 billion barrels. So, instead of having six years of reserves, we could have 25-30 years. In gas, where we currently hold as a country 10 years of reserves, if we look at Cesar Rancheria alone, we could have 50, 60, or 70 years of reserves.

Lastly, we've said this is something we don't want to do quickly. This is something we want to do right. We want to do it as it has to be done, precisely because it can be a transformational opportunity for the company. Pavel, not sure if you had a follow-up question or second question?

Pavel Molchanov -- Raymond James -- Analyst

I do. Thank you for that. On offshore exploration, you've talked quite a bit about the Brazilian opportunity, but of course, the domestic opportunity in Colombia on the Caribbean seems to have been sidelined or not as central for you as maybe two or three years ago. I'm curious what the next steps are to continue or revive offshore exploration around the Caribbean coast.

Felipe Bayon-- Chief Executive Officer

Great question. I think it's important to mention a few things. We remain committed to Colombia. I think that's the first thing. We've made some very important discoveries next to the border with Panama. It's an area that we've now retained 100% as Ecopetrol. Recently, you may have followed this in the news, but we signed the transition from a study area to an EMP contract. I think that all is in line with our continuous commitment to find the right way to develop those resources.

So, we're actually currently conducting a data room exercise around those discoveries. We want to bring one or two partners that can bring expertise. Remember, these are large gas reservoirs that have a water death of between 1,500 and 2,500 meters of water. It will require expertise, technical knowledge. Some of this could be at least complicated from a technical point of view. We're finding through this process the right partner to bring those molecules to the market.

That hasn't changed. We recently signed another offshore contract next to [inaudible]. That's in the other side of the country. That's something we will pursue and we continue to look at our opportunity. Caribbean and Colombia, clearly a focus area and very important in terms of developing additional resources.

In parallel, we continue to do our activities in Brazil. As we rightly point out, we've talked quite a bit about that. We continue with our presence in Mexico. We continue with a good presence in the Gulf of Mexico in the US, where we're producing 14,000 to 15,000 barrels a day and also very importantly, we continued to develop a lot of expertise around offshore exploration and development. Thanks, Pavel.

Operator

We have a question from Andres Cardona from Citigroup. Please go ahead.

Andres Cardona -- Citigroup -- Analyst

Good morning. My first question has to do with the dilution factor. What drives it up in the second quarter to something around 50%? The second question has to do with the advancement of some non-core assets at the upstream segment. Are you targeting to sell the asset or are you pursuing [inaudible]? That's it, guys. Thank you very much.

Felipe Bayon-- Chief Executive Officer

Thanks, Andres. I'll ask Alberto to talk a bit more about dilution. If you look at our dilution factor, I think we did include a graph in the material we shared today, it's moved from 20% in 2014 to 14.6% in the first six months of the year. So, dilution factors stays in line with what we envisage.

Clearly, a fundamental area of focus in terms of what we want to do. It's allowed us to continue to transform the company. We're transporting much heavier crude and it's given us an edge, an expertise that it's valued outside of Colombia as well. We're working with some NOCs outside Colombia to develop our expertise on heavy crudes. I'll ask Alberto to comment on that.

The second thing -- in terms of divestments of non-core assets, we've said before that over the last two or three years, we've strengthened our muscle around acquisitions and divestments. A couple weeks ago, we announced the JV with Occidental, which demonstrates we've managed to take across the finish line substantial important and transformational opportunities from the acquisition point of view. And we continue -- I've just mentioned this Kronos, Purple Angel, Gorgon opportunity that we're data roaming as we speak, where we have several companies interested in looking at the development of these gas discoveries. That will continue.

In terms of divesting things from the upstream, we permanently and on a continuous basis review how competitive all of our assets are in terms of their own merits, in terms of how they actually compare and stock up or how they actually look in terms of portfolio. We did some exercise like this back in 2016, which was, I think, relatively successful. It was good. It's something that we'll continue to look and assess.

There's no announcement in this front in terms of something we will be doing very soon or quickly. I think important, we that now have been able to strengthen the company to where we are, we like to keep our options open in terms of looking at things going forward. In due course, should we decide to do something, we'll communicate it properly to the market. Alberto?

Alberto Consuegra -- Chief Operating Officer

Good morning, Andres. Thanks for your question. What we are seeing is a reduction in the dilution factor, mainly attributed that we are transporting the crudes with higher viscosity throughout our pipelines. Secondly, we are substituting dilutant with lighter crudes we have available locally. Thirdly, we have cheaper costs of the naphtha imported. In total, we are seeing a reduction in our dilution factor.

Andres Cardona -- Citigroup -- Analyst

Alberto, if I may, I know the long-term trend is the one you are describing, but it seems to me in the second quarter in particular, there was an increase in this dilution factor. I want to understand if it affects the long-term trend. I get the trend is very positive. My question is more about the second quarter.

Alberto Consuegra -- Chief Operating Officer

No, in reality, we don't see any effect on our long-term view on dilution factor. On the contrary, we are seeing a steady reduction through the implementation of the co-dilution strategy, which is actually substituting the naphtha with propane. We will see that effect probably in 2020 or 2021.

Felipe Bayon-- Chief Executive Officer

Andres, if I may, this is Felipe again -- if you look at the report, our dilution cost has gone down. If you look at the second quarter 2018 to the second quarter 2019, there's a 4.9% reduction in the cost. Maybe there's a follow-on. You can reach out to the IR team. I'm sure they'll be able to provide more context around specifics. Thanks, Andres.

Operator

We have a question from Christian Audi from Santander. Please go ahead.

Christian Audi -- Santander -- Analyst

Thank you. Hello, Felipe and Ecopetrol team. I had three questions. The first one, Felipe -- if you could talk a little bit given your continued growth in Brazil, we have the important auction coming up related to the transfer of rights. How interesting is that to you or do you currently have too much, particularly with the Occidental joint venture to participate in growth in that country?

The second question, Felipe, with regard to unconventional, given how attractive this JV with Occidental has been and how time-consuming and lengthy the development of unconventionals in Colombia is bound to be for reasons you explained earlier, would it make more sense to continue to grow your unconventional presence in the US rather than focus on Colombia because you may have to overcome so many barriers there?

The third and final question had to do with refining margins. Given what we saw in the second quarter, in July and August, have you see an improvement or difficult refining margin situation? Has that changed at all vis-à-vis what we saw in the second quarter?

Felipe Bayon-- Chief Executive Officer

Thanks for the question. I'll take the Brazil one first. Our strategy has been that we will operate in the Americas. We'll operate in the continent. That hasn't changed. Clearly, I think we've demonstrated recently with our two entries in the pre-salt in Brazil that we are able to compete and we're able to be part of the very competitive consortiums with top-notch and world class partners, which is great. I mentioned earlier in the call that we've developed a lot of expertise in house in Brazil. We feel very comfortable in terms of a technical point of view our ability to assess opportunities.

In terms of things going forward, as you mentioned, there are quite a few things in the next few months, round 16, round 6 -- we're assessing things and we'll hopefully be able to inform the market in due course. We don't want to get ahead of the game. We'll be looking at that. We do have some other things on the pipeline in terms of potential acquisitions.

I think we've shown the market that with the recent JV announcements, we're able from a technical operation or financial point of view to incorporate these opportunities into the portfolio of Ecopetrol, which is great news. We've talked about transfer of knowledge, transfer of technologies into the operation in the JV.

In terms of unconventionals -- I'll follow-up with that and ask Tomas to talk about refining margins in a bit. I agree with you -- this is not only attractive but it's value-accretive. It provides us with the opportunity to deepen our understanding of unconventionals. I think we view this as the opportunity in the Permian and opportunities in Colombia are complementary to each other.

We need to look at them as a set of things we can do that one can help leverage the other in terms of operational practices, in terms of expertise, developing the capabilities of our own staff. So, we haven't said -- I spent quite a bit on some things that have happened in Colombia. We'll continue to do our work in the Permian and continue to pursue the opportunities in Colombia. One doesn't exclude the other.

We are fully convinced that unconventionals is something that would be transformational for the country. Never mind Ecopetrol, it would be transformational for us, but for the country, it's one of these once in a lifetime opportunities in terms of ensuring there's more potential to underpin especially economic growth. We don't see these two things as exclusive or one cancelling the other. They are actually two things that complement each other very well. Tomas?

Tomas Hernandez -- Vice President of Refining and Industrial Process

Thank you, Christian. Talking about margins, as we know and as we've been talking about the market environment and challenging conditions, that's been the largest effect in the first semester of 2019. Both the impact on product prices and strengthening of crude prices to our refineries. What we see going forward is we see a lot of uncertainty in the prices in the second half continuing with crudes and products.

We do see and expect an improvement in the environment in the second semester, especially in the fourth quarter, with the impact of Marpol in refining, which is a positive impact. We don't have any major turnarounds planned for the second semester, which helps. That's a strength. We took the two large turnarounds in the first semester to take advantage in the second semester. We do expect margins to be in the double-digits in refining for the year.

The other important thing is if you look at the performance from an operating point of view, the crude throughput to refining was the third-largest crude throughput in the quarter over other quarters. It's the third largest in the history. Our cost of opex continues to reduce. We think that has a positive impact on everything we're doing around improving the margins in both Reficar and Barrancabaermeja.

Christian Audi -- Santander -- Analyst

Great. Thank you.

Operator

We have no further questions at this time. I will now turn the call to Felipe Bayon for final remarks.

Felipe Bayon-- Chief Executive Officer

Thank you. Thanks again to everyone who participated in today's call. It's always great to be able to understand some of the lenses and some of the things you are interested in, some of the things we need to further continue to assess and understand and deepen in terms of not only the assessments, but the way in which we communicate and some other focus areas. We value that. We value your insights and we value your questions and the reports as well. Thanks again for participating today.

As Ecopetrol, we continue to demonstrate that we are delivering against the plan that we've shared in the past. We continue to deliver very strongly against strategy. We've had some good news around our international operations and opportunities in the past few weeks and months and hopefully, we'll be able to spend more time in the next quarters or so. So, thanks and have a great day.

Operator

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

Duration: 74 minutes

Call participants:

Maria Catalina Escobar -- Manager of Corporate Finance and Investor Relations 

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

Carlos Rodriguez -- Ultraserfinco -- Analyst

Luiz Carvalho -- UBS -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Andres Cardona -- Citigroup -- Analyst

Christian Audi -- Santander -- Analyst

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