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Ecopetrol SA (NYSE:EC)
Q3 2020 Earnings Call
Oct 28, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Hilda, and I'll be your operator for today. Welcome to Ecopetrol's earnings conference call in which we will discuss the main financial and operational results for the third quarter 2020. [Operator Instructions] Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management include projections of the company's future performance.

These projections do not constitute any commitment as 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 from the projections shared on this conference call. The call will be led by Mr. Felipe Bayon, CEO of Ecopetrol. Alberto Consuegra, COO; and Jaime Calero, CFO. Thank you for your attention. Mr. Bayon, you may begin your conference.

Felipe Bayon Pardo -- Presidente

Good morning, everyone, and welcome to this conference call where we will discuss our operating and financial results for the third quarter of the year. We hope you and your families continue to be safe. Personal and social awareness continue to be key elements to overcome the health emergency that we have experienced during 2020. The third quarter of the year was characterized by a better operating and financial performance associated with the gradual increase in our operations and aligned with demand recovery.

This ramp-up has been reflected in higher operational activity levels. For example, in Eco Petroles, where we've had an increase of active drilling rigs from two rigs in April to 10 rigs by the end of September. Likewise, in order to preserve our employees' health and safety, our field personnel have progressively returned to their on-site work since June under strict biosafety protocols. To date, thanks to our digital transformation program, about 75% of our employees continue to work remotely. Although we will remain working remotely during 2020 to preserve social distancing measures a pilot plan was launched in October that will allow us to be prepared for a safe and stable return of our office employees to the company's facilities in 2021 and as part of our adaptation process to the new normal.

This pilot considers a flexible scheme of staff and infrastructure, which will allow operational optimizations and will generate efficiencies to the Ecopetrol group. Within this process, we highlight the crucial role that an increased digitalized operation during the year has played through the use, among others, of artificial intelligence and the implementation of analytical and self-management tools. Regarding the health emergency cost by COVID-19, through our social investment program, Apollo pays, we have executed 59% and of the approved investment in line with the Ecopetrol's group commitment to the well-being of Colombians as well as the recovery and reactivation and strengthening of the local economies. Let's move on to the next slide to discuss market conditions.

After coping with one of the most difficult quarters in recent years, during the third quarter, we witnessed a gradual recovery of the market, reflecting in a 30% increase in Brent prices which rose from $33 per barrel at the end of the second quarter to $43 per barrel by the end of the third quarter. Local demand for our main products improved when compared to the trend observed in the first half of the year, highlighting our recovery in sales volumes of around 110% by the end of September compared to the lowest levels observed in April.

The demand recovery allowed us to return to the sales level observed in early March and is a consequence of the easing of lockdown restrictions that have resulted in the activation of the economic activity. On the other hand, we also highlight a significant recovery to $38 per barrel of our crude sales basket compared to the second quarter when the basket stood around $20 per barrel. However, we still continue with price levels similar to those observed in the crisis of 2016. Let's move on to the next slide for a summary of our third quarter results.

Our operating and financial results performed better when compared to the second quarter, in line with the recovery in prices and better demand conditions. Ecopetrol's group production reached 681,000 barrels of oil equivalent per day. That is 3,000 barrels more when compared to the second quarter, a higher production, along with price recovery resulted in a 46% increase in revenues as compared to the second quarter of 2020. Despite some difficult security events that have impacted our operations year, Ecopetrol reached an EBITDA of COP5.3 trillion and a net income of COP855 billion in the third quarter.

I now give the floor to Alberto Consuegra, who will provide further details of our operational results for the quarter.

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Thank you, Felipe. During the third quarter, we saw a gradual recovery of our operating results aligned with domestic demand recovery and a higher price levels. On exploration, we drilled three wells, totaling 10 wells over the year. We expect to exceed our 2020 targets with 17 wells drilled, four more than originally planned due to the inclusion of three wells through joint operating agreements and the appraisal of the CHA CHA three well.

An extensive field test was carried out in the rec T1 sidetrack well, a gas discovery drilled by HOCOL in 2018. Sales began on October one and with a production of 3.5 million cubic feet of gas per day. I would like to highlight the commercial agreements achieved by HOCOL and Louis Energy for the exploration of natural gas in a frontier play in the pedesis block located in the Department of Alan. Currently, the assignment of Hocol's interest to Louis Energy is subject to the ANH approval. Abroad, we continue our progress in completing the appraisal phase of the Gato do Mato project. Ecopetrol Group's production reached a cumulative average of 699,000 barrels of oil equivalent per day.

We expect the production near to 700,000 barrels of oil equivalent per day by year-end, line up with our target for the year. Additionally, the Ecopetrol group launched Ronda Campus 2020, an initiative to offer its entire stake in nine development and production assets, six of them owned by Hocol and three by Ecopetrol. This asset divestment process is part of the company's portfolio turnover and supports the CO Petrols Group's strategic pillars. During the quarter, we tested transporting heavy crude of 650 to in some of our main pipeline systems, which will allow us to have greater dilution efficiencies.

Currently, we are analyzing the economic feasibility of the skin. The downstream segment presented operational stability along its business units. The refineries reached a combined gross margin of $7.4 per barrel and a consolidated throughput of 324,000 barrels per day. Looking into these figures, it is worth noting that as of September, the refineries reported a 50% recovery of the throughput levels versus April, our most critical month in 2020. For year-end, we expect the consolidated throughput within the range set for 2020 between 300,320 thousand barrels per day. The Cartagena refinery achieved two monthly records during this quarter. A full capacity throughput exclusively with domestic crudes in September and an average distillate yield of over 65% in July. In our petrochemical business, Ascentia continues to exceed a remarkable operational performance.

During the quarter, it reported historical polypropylene production highs and sales volume records. Please continue to the next slide to review our gas initiatives. Our gas operations posted an EBITDA margin of 55% and contributed close to 34% of the upstream segment's EBITDA. Gas and NGL production reached 141,000 barrels of oil equivalent, an increase when compared to the same period of the previous year, mainly due to the effect of the acquisition of Chevron's interest in the Guajira fields and the commercial management for gas surpluses due to the decrease in demand. Ecopetrol maintains its social investment in natural gas, aiming to connect at least 18,000 new users by 2024. Through this initiative, 692 new users have connected as of September this year.

During the third quarter, we completed the 2020 natural gas commercialization process from major fields. Our commercial strategy allowed us to contract 100% of the clients' needs in contracts with the duration ranging from one to seven years. Please, let's move on to the next slide. In Colombia, the regulatory framework to develop the comprehensive research pilot projects is in place. So we may move forward with the ANH contractor selection process for the assignment of the special research projects contracts setting. If we are awarded with the contract, we will begin the process of obtaining environmental licensing before the authorities. Regarding our business in the Permian Basin in Texas.

As you may recall, we resume activities in late July with two rigs currently in operation, together with our partner, Oxy. During the third quarter, we drilled five new wells. By the end of 2020, we expect to have 22 wells in production, 22 wells drilled to be completed during the first quarter of 2021 and and an estimated average net production for Ecopetrol in a range of 5,000 to 5,500 barrels of equivalent per day before ride out. Let's move on to the next slide in order to disclose our efforts in terms of costs. For 2020, we have incorporated COP3.5 trillion in savings into our annual plan. Which have been gradually reflected in the company's financial results.

During the third quarter, the total unit cost was $24.5 per barrel, a significant decrease compared to the same period in 2019. This is explained by a 28% reduction in costs, mainly purchases and imports as well as a 10% reduction in fixed costs. The lifting cost was $7.1 per barrel for the year, a decrease of 19% versus the same period of the previous year. Explained mainly by the renegotiation of tariffs, decrease and shift of activities and the exchange rate effect. For the fourth quarter, we foresee an increase in costs associated with the reopening of wells, which will enable profitable production. Notwithstanding the above, I wish to reiterate our commitment to achieving greater efficiencies in order to reach a more profitable and sustainable operation over time.

I now give the floor to Jaime Caballero, who will share information on the group's financial results.

Jaime Caballero Uribe -- Vicepresidente

Thank you, Alberto. EBITDA for the quarter was COP5.3 trillion, reverting to the level reached in the first quarter of this year despite lower Brent reference levels, lower production and sales. Thanks to improved realization prices, operating performance and opex optimizations, which contributed toward an EBITDA margin of 43% comparable to 2019 levels. I'd like to highlight the turnaround in EBITDA generation across the upstream and downstream segments, which are once again showing positive results, some even higher than those experienced in the first quarter. And generating an EBITDA per barrel of $22.5, the best year-to-date. Cash indicators exhibited a major improvement during the quarter. The business reached a positive free cash flow reversing the trend of the first semester.

Cash breakeven, which is the brent price necessary to fulfill the commitments of the period considering all inflows and outflows, was $26.6 per barrel. Thanks to increasing cash flow from operational activities, we prepaid short-term obligations for the amount of COP1.6 trillion equivalent. If current market conditions remain, we anticipate a strengthened gross debt-to-EBITDA year-end closing position versus our previous estimates. Net income breakeven was $38 per barrel, the lowest year-to-date demonstrating the increasing impact of the interventions carried out to guarantee the group's resilience to the new market conditions. Please, let's move on to the next slide to discuss the income for the quarter.

Net income for the third quarter of 2020 increased compared to the second quarter, mainly due to a COP1.9 trillion increase in revenues due to a higher sales basket price which grew 23% more than the Brent referenced, supported by a commercial strategy that captured the improvement in demand conditions for both crude oil and products. Second, the positive effect associated to the increase in sold gas and products; third, improving operating costs and expenses, thanks to the austerity plan and higher valuation of inventories, which were partially offset by higher expenses associated to the reactivation of operations and wells reopened. Fourth, the net financial expense showed an increase of COP420 billion mainly due to a lower mark-to-market valuation of the securities portfolio linked to volatility as well as the premium paid in the make of the Ocensa bond which allowed the extension of its maturity profile from 2021 to 2027.

Fifth, during this quarter, we did not recognize material nonrecurring events as those observed in the previous quarter. The most relevant being the business combination revenue of COP1.2 trillion associated with the acquisition of offshore gas assets in Lala Jira fields. Finally, the income tax provision for the third quarter was higher as a result of income increase during the period with an effective tax rate for the quarter of 33.3%. Net income reached COP855 billion, the highest year-to-date. Let's please continue to the next slide.

Operating cash flow, including variations in working capital, amounted to COP3.5 trillion. capex outflows during the quarter reached COP2.1 trillion, underpinning a positive free cash flow for the quarter. During the period, the dividend outflow amounted to COP2.9 trillion, of which COP2.4 trillion were paid to the nation as majority shareholder and the balance to noncontrolling shareholders of our transport subsidiaries and invercolsa. During the fourth quarter, we expect to pay the remaining balance due of COP3.2 trillion to the majority shareholder. Net debt related disbursements for the quarter totaled COP1.9 trillion. Highlighting among these the repayment and refinancing operation of Ocensa's 2021 bond as well as the prepayment of Ecopetrol's short-term obligations.

Our cash position closed at COP12 trillion, reflecting the group's ability to deliver the business plan while maintaining cash management discipline. It's please continue to the next slide to view the execution of our investment plan. capex execution as of September totaled $1.8 billion, with 71% directed toward growth opportunities, mainly to the drilling campaigns carried out in the Permian, CATIA, Trialis and Danita fields, among others. The execution rate has been lower-than-expected due to, firstly, measures implemented to decrease the spread of COVID-19 cases, which required the postponement of activities mainly a rubiales and Kansu fields and the Cartagena and Barrancabermeja refineries. Secondly, community blockades resulting from the current situation in certain territories.

And thirdly, operational factors that affected execution schedules and extended project maturity time lines. On the other hand, efficiencies have been achieved due to lower project costs in Astea saving antigo fields, among others. Although execution challenges remain, we expect a strong acceleration in terms of capex execution during the fourth quarter as compared to the previous two quarters. Maintaining the growth trend observed in September. The capex execution increase in the fourth quarter is underpinned by the reactivation of facilities investments an increase in workovers, drilling and completion in the main fields and the operational continuity projects in all segments, leaving the total execution for 2020 is in a range of $2.5 million and $3 billion.

I now give the floor to our President, Mr. Felipe Bayon for his closing remarks.

Felipe Bayon Pardo -- Presidente

Thank you, Jaime. During the third quarter, we continued to move forward in our commitment to technology, environment, social and governance, ESG, in our social front, by the end of September, Ecopetrol has allocated some COP192 billion to social and environmental investment compared to an investment of COP60 billion for the first nine months of the past year. As a milestone, for the quarter, we joined the viable 500, a global movement made up of companies committed with the inclusion of people with disabilities within their operations.

In terms of governance, the company will report again to the Dow Jones Sustainability Index and to the carbon disclosure project, and it formalized its adhering to the international petroleum industry Environmental Conservation Association, IPA to promote environmental and social improvements within the performance of oil and gas industry. Likewise, we continue to make progress in evaluating the adoption of the sustainability accounting standards as and the tax force on climate-related financial disclosure, TCFD recommendations.

On the environmental front, we highlight achievements in four times of our strategy. First, we increased our water reuse percentage from 62% in 3Q 2019 to 64% at the end of the third quarter 2020. The secondly, regarding our strategy in QGT formations, around 20% of the total facilities of the production vice Presidency have been monitored, identifying 752 leaks. As of September, we have already repaired and closed 66% of them. That equates to some 496 fleets, and we have a plan for the definitive closure of the remaining mix. Thirdly, leverage on technology progress is being made in the analysis of satellite images from the European space agency, performing in order to identify the areas with the highest methane concentrations in our operations in Colombia.

We expect this analysis to be concluded by December 2020. Finally, in August, we signed a contract for the construction of the San Fernando Solar Park with a capacity of 59 megawatts which will be the largest self generation Solar park in Colombia and this construction schedule to begin in November 2020. To meet our target of 300 megawatts of generation capacity from renewable sources by 2022, we have launched the competitive processes of a new wave of projects 4, a total of 112 megawatts in different regions in Colombia. Let's move on to the next slide. Ecopetrol has demonstrated its resilience, adaptability and the commitment of its employees to an efficient operation that is safe, ethical and responsible.

For the year-end, we remain committed to our main operational, financial and technological, environmental, social and governance, key ESG metrics, of our new 2020-2022 business plan presented to you in the last quarter, which protects the main pillars of our corporate strategy, guaranteeing the group's sustainability and ratifying our commitment to climate change action energy transition and social development in the regions where we operate. Before moving on to the Q&A session, I invite you to download the TST dashboard from our website. This is a new report designed for you, includes historical data on the main environmental, social and governance indicators as well as the Ecopetrol's targets to move toward a sustainable future. Thank you all. Again, for joining us in this conference call.

Now I would like to open the call to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] We have a question from Gabriel Barra from UBS.

Gabriel Barra -- UBS -- Analyst

Hi. If you. Alberto, thanks for the presentation.I have two questions from my end here. The first regarding the development of the conversion in Colombia. With this new part framework, the country has now the guidelines you're quite advanced toward the execution of those pilot tests, right? As you have mentioned competed interest in these new development opportunity? And my question is, after the result as I sat launched by the National Hydrocarbon selected contract next month.

What would be the next steps here? And how should we think about the time line of the condition development in Colombia? And I mean when should we expect the first production coming from these developments? And how the company is I decide of this new market? On lifting costs, looking to the figures that the company has reported year-to-date, very much lower than what the company were running in 2019 around $8.50 per barrel. And my question here is if this is the Nomasad letter going forward. And if you should expect any effect from the maintenance delays in 2020 to 2021 lifting costs or in the fourth quarter results.

If I may, I have just one more here on the domestic demand. And we saw during the presentation that the company expects expectation we drive improvement in fuel sales for the last quarter. But this is still below the levels pre cove, right? And my question is regarding the company's estimates in relation to the return of this demand to the next year? And how do you see the base case for 2021? So that's our question here.

Felipe Bayon Pardo -- Presidente

I'm going to take the first part on unconventionals, talk a little bit about demand. And I will ask Alberto translated to talk about lifting cost. In terms of the unconventional, again, the regulation, the norms around how the development of the pilot projects will be conducted out. Has been presented by government, and we hope that by the end of November, we will sign the contracts with the ANH. As you know, Ecopetrol has been prequalified already, and we've stated publicly that we want to be operators in this area.

So what comes next? We want or we need to conduct all the work related to the environmental impact assessment space that will inform the request for the licenses of the pilot projects. So that's some work that will start by year-end this year. They did people work around the licensing and the support for the license request. In parallel, we will start all the preparation work to do the site works, construction works for the well pads, all the proprietary work for the contracting of bricks and logistics and everything else. And once we have the licenses in place, we will be able to start construction and then operations.

So I wouldn't put a specific date on when that activity will start specifically drilling and then completing of the wells and tracking of the wells because it's largely dependent on the licenses themselves. In terms of the time line for the development, as you know, we've concentrated right now as a country on doing the project or in also investigating the pilot projects. And once the pilot projects give the result, we can, as a countries decide based on the science and the technical data on the potential impacts of the activity and how to mitigate those impacts, we will have clarity on the timings.

But one thing I would stress though is that if you look at the, again, probably a proxy for this, if you look at the experience we've had in the Permian in Midland, in Texas, from November when we started production in that area of operations, we've ramped up quickly to close to 18,000 barrels by the end of June. So in short cycle, it's activity that you can very quickly deploy and very quickly bring into production and into the market. But again, the final answer will depend on how the pilot projects advance and the results of those. In terms of domestic demand, if you look at gasoline and diesel mainly and ballpark numbers, pretty cobi, we were at 120,000 barrels per day. For each one of those, so diesel and gasoline, and jab was at 30,000 roughly.

What we're seeing right now in ballpark numbers are 110,000 for T cell on gasoline jet is still below. And you can imagine that as flights have resumed, but very limited in terms of the numbers of flights and plans that would probably take a bit more time in terms of recovery of demand. But we do expect these in and gasolines to come back to pre-COVID Repeti numbers and levels, Jeff, I think, will have some uncertainty. Alberto, please go ahead with the question around lift cost.

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Gabriel, thank you with regard to listing cost sales. And you have to remind that during this during the second quarter, we had to stop activities and basically operate with a minimum viral, that took out the vesting cost $107 per barrel. As we have been -- we ultimately fields reoffering wells, the lifting cost has slightly increased.

When you see the third to you look at a listing cost of 7.2%. And what we see by year-end is a right increase and will be ending the year, probably in the range of $7.4 to $8 per barrel. And that will be because of ensure that we open close production because of our price and also because we have been able to cope with some operating close downs associated with social unrest.

Felipe Bayon Pardo -- Presidente

Thank you so much.

Gabriel Barra -- UBS -- Analyst

Thank you.

Operator

Our next question comes from Bruno Montanari from Morgan Stanley.

Bruno Montanari -- Morgan Stanley -- Analyst

I have two questions. Philippe, if I may, a follow-up from the Spanish Co. I believe you mentioned that reserves could potentially decline between 15% to 20% to the information available to date. I just wanted to check that this is purely based on the oil price movement only or if it also accounts on any other technical aspects that the company might have revised in the process of start building up the reserve report. And my second question is about gas.

And first, thanks very much for providing more granularity on the gas results. It's very useful for us. And you show that your gas margins are actually quite attractive, especially while oil prices remain depressed. So with that in mind, would it make sense perhaps to increase investments in gas versus Rio in the coming years.

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Bruno, thanks for the question. In terms of reserves, I'll take the last question, and I'm going to ask Jamie is a gas Vice President to take the second one, but I'll provide some context. So in terms of the guidance that we see right now, the 50% to 20% decline in reserves is a number that we see factoring everything in so it does have a view on prices. It just have a view of our level of activity, our level of investment, some of the difficulties that we're mentioning in the call in terms of the ability to go back to higher levels of activity.

So even though we've gone back to over 350 work fronts around the country, that guidance, so does reflect our view on how the deals are performing, how the the price we look and our level and our ability to do activity. And it also has a view on the next five years plus. As we see investment. Remember that we've revised our capex down from close to BRL17 billion in the next three years. This is when we talk about the line in early March, to later when came back and said that we see ourselves investing between -- somewhere between $11 million and $13 billion in the next three years. So it's a combination of everything. And it takes into account the things that we will need to book, but also takes into account the additions that we make to the books. And one of the the comments I was making this morning was the fact that we de book reserves doesn't mean that they don't exist anymore.

So we're just pushing them out into a different category. I think that the challenge for us is how do we get back quickly to a reserve replacement ratio of over 100%, and that will depend largely on -- again, our ability to deploy capex, our understanding of the fields, the use of technology. So it's again, I think, a very, very holistic view of things. In terms of cash, we signaled that in the next three years, $780 million of investment to $870 million. Clearly, a big focus in our strategy. And I do believe there's opportunity for us to accelerate some of these investment. So Jamie, if you can go ahead and give us a bit more detail and color around our gas outlook, please go ahead.

Jaime Caballero Uribe -- Vicepresidente

Sure. Bruno, thank you very much for your questions. First, I would like to emphasize that gas has a strategic priority position within the Ecopetrol business plan being an essential fuel in the energy and economy transition. As we have said, and Felipe just mentioned that, we will invest about $800 million in the 2020, 2022 period in projects related to exploit potential in the Colombian foothills, Caribbean, onshore and offshore and unconventional basins.

Of course, to be consistent with our strategic intent, we are actively looking for opportunities to create optionality and deliver growth. In particular, I would like to highlight resources of opportunities to increase our investment outlook. First, in the footings, we are in the process to mature debottlenecking projects to maximize the production and deliver the full potential of that basin. Second, if we are successful in exploring the Fortios and Caribbean place, the investment will significantly increase to develop those resources.

Also we continue pursuing new exploration opportunities by matching new prospects within our current portfolio. And finally, I would say that we are committed also with a sustainable business. And therefore, we are planning also to increase the investments in social projects to provide access to gas and LPG to the most vulnerable communities in Colombia. And from an environmental perspective, we are striving to increase users of gas in transportation and to become the supporting import electricity generation. I hope I answered your question, Bruno.

Bruno Montanari -- Morgan Stanley -- Analyst

Thank you all for the detailed explanation. Thank you once again

Operator

[Operator Instructions] We have a question from Jan San from HSBC.

Lili -- HSBC -- Analyst

This is Lili. Just a quick question, please. I wonder why the midstream business was weak quarter-over-quarter. I don't know if you addressed that in the beginning, but volumes came up, right, in the third quarter versus fourth quarter. And I think that the TIRF discounts that you are giving to the producers, they also were already lifted. So can you explain how I could see the business going forward?

Felipe Bayon Pardo -- Presidente

Thanks for being on the call again. Appreciate your question. I'm going to ask Millen and Office on the Midstream segment, to take your question around the performance in the quarter. Milena please go ahead.

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Thank you, Felipe. Lily. Thank you for your question. When you look at second quarter numbers versus third quarter numbers. At the midstream level, you basically have three sources of revenue. We have refined product cyclines where volume was up and consequently, revenue group. Basically, we go from approximately COP438 million to COP529 million. So you have COP98 billion increase in terms of the refined product pipeline. However, at the same time, when you look at production and volumes that are transported to a crude oil pipeline, there's an impact in the change of the way volumes are routed. The big difference between second quarter and third quarter, if you remember the results from the refining segment is that when we look at the volume that will be used at Ibarra Carrera refinery.

This was up by approximately 40,000 barrels when you compare second quarter to third quarter. So when you look at the impact of this in the transportation segment, as we are yielding approximately 40,000 barrels per day more in volume to the Barranca refinery. These are volumes that no longer continue through the rest of the past that takes on to Corina and port. So barrels are part of our total volume because they are delivered to refinance, but they no longer go to a segment -- potential third segment, and they don't pay the export feed port. Or they do longer got meat Daco Corene segment and don't say export Seaport. So basically, what you see is while evacuated volumes are the same.

There are 40,000 barrels that are no longer making a support because they go to the refinery. And they pay a total overall tariff in the system that is lower when you compare second quarter to third quarter. Going forward, you should continue to expect to see this behavior as we continue providing transportation services to Arana and the barrels no longer needed to point ecovision by the refine. Another 10-year compensates the increase in refined product pipeline.

Lili -- HSBC -- Analyst

Okay, got it. We have clear Excellent. Thank you so much.

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Thank you.

Operator

We have a follow-up question from Bruno Montanari from Morgan Stanley.

Bruno Montanari -- Morgan Stanley -- Analyst

I joined again for two more questions. First one on the oil price basket. It was very interesting to see that you return basically back to the same level of discount before the crisis at around $5 a barrel. Should we expect this to remain stable at those levels? Or do you see an opportunity to capture even better realizations going forward on the back of your oils late? And then the second question is about the capex range for the fourth quarter. I fully understand that you had the budget for the year with a variance of $500 million. But it strikes a little bit odd that we're already in November, and there's still such a big variance of $500 million. So are you more inclined to be on the bottom end of the range or the top end of the range for the capex in the year.

Felipe Bayon Pardo -- Presidente

Thanks, Bruno. I'll give you some context, and I'll ask them pedal on the oil price price for base crudes. And Alberto to add any comments on capex. So in terms of the basket from our -- our exports, please bear in mind that normally, we sell our crude two months in APAC. So crude for November, December have been place to varying markets, and we are actually seeing a good behavior in that sense. And again, we estimate the year should finish in good shape. And as you know, we saw a very dramatic drop in 2Q. Very, very difficult.

But our crudes are considered part of the base run or the base load for the summer hires in China, and you saw that we've expanded some of our destinations to India and Korea. So I think that's part of how we should view the question. Obviously, there's still uncertainty around the top line and which is the price for Brent. In terms of capex, as I said, I'm going to ask Alberto Highcom Ent. So Berlo, if you can give us some more color around the discounted price basket, that would be greater than and therefore, Jaime, on the capex?

Jaime Caballero Uribe -- Vicepresidente

Thank you, Felipe, and thank you, Bruno, for your question. Yes, certainly, because of the market conditions in the third quarter, what we are seeing is the demand is recovering and as demand recovered, our discounts were much lower compared to the second quarter. And -- but they're coming back to levels that we had in the first quarter and the average discounts that we saw last year. And this is basically due to the commercial strategy that we have been working on for quite some time because as Felipe mentioned, most par crude has been able to be placed in customers that use it in the base runs of the refineries. And most of the crude is going into end users.

And the other thing is that we're very active in looking for the best markets to place our barrels. And then we have been able to sign long-term contracts with end users, refineries in specific markets like Asia, the U.S. Gulf region based third part of the United States as well in Europe. So what we're doing commercially is that we basically place our barrels whatever we can have the best realization for the barrels. And basically, our business combined to the focus that we've been giving to our crudes for exports regarding quality because quality has been very stable, and we are -- we have a very competitive edge with our caspida because of the no sulfur and the stability of the quality and also because we deliver paris on time.

So there's a lot of reliability from our side. And that's why we can recognize by the market and our customers as one of the best crude -- heavy crudes from Latin America. So what we foresee and also is that we already were done for the year, our production program has already been placed in the market. And actually, next week, we're going to start showing barrels in key markets for the beginning of the year. So we already -- we're seeing that because of all these conditions together, the discounts are very good and real estation prices will be being optimized and maximized over time going forward. Thank you. Ben, with regards to capex, we feel very comfortable with the capex deployment in terms of the midstream and the refining segments as well as in exploration.

But the uncertainty comes with capex associated with development. And specifically because we are going to -- although we are ramping up activity, and we feel that the power has been kind of a good month I have to remind you that we still are facing the dynamic. And there is uncertainty in the degree of the pandemic during the months of November and December, how is going to affect our operations. Specifically in regions like Vanos and Macarena, the middle Mark so that's why we still maintain the range. Hopefully, in November, we can have a better view on how the capex will go.

Operator

[Operator Instructions] We have no further questions at this time. Now I will turn the call back to Mr. Bayon for final remarks.

Felipe Bayon Pardo -- Presidente

Thank you, and thanks again, everyone, for being here today for participating in the 3Q conference call for a we value your insight, to buy your persons, we value that you follow the company, and we will continue and strive to work to ensure that we can provide timely, transparent and relevant information that can help your analysis. 3Q shows signs of recovery after a very, very tough, very difficult second quarter.

We're seeing different aspects of the operational side of the business that are improving that are showing the resilience of the company and that are then transferred into the financial side of the business and the results that we've shared with you today. Thanks, again, for your participation. We hope that use as safe. And hopefully, we'll be able to chat again very soon in the near future. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Felipe Bayon Pardo -- Presidente

Alberto Consuegra Granger -- Presidente Ejecutivo Operativo

Jaime Caballero Uribe -- Vicepresidente

Gabriel Barra -- UBS -- Analyst

Bruno Montanari -- Morgan Stanley -- Analyst

Lili -- HSBC -- Analyst

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