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Bear of the Day: Ecopetrol (EC)

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Key Takeaways

  • Ecopetrol (EC) is a Colombian-based integrated oil and gas company with a Zacks Rank #5 (Strong Sell).
  • Recent acquisitions in renewable energy have led to a soaring debt-to-equity ratio.
  • Ecopetrol faces and ongoing debate about balancing its traditional fossil fuel business with renewables.

Ecopetrol Company Overview

Zacks Rank #5 (Strong Sell) stock Ecopetrol ((EC - Free Report) ) is a Colombian-based integrated oil and gas company with global operations in areas including the United States, Brazil, and Peru. The company is focused on identifying energy extraction opportunities primarily within the easter Llanos Basin of Colombia, and in other areas in Colombia and Northern Peru. EC’s operations include extracting, collecting, treating, storing, and pumping or compressing hydrocarbons. In addition, Ecopetrol has over 160 production fields concentrated in Magdalena, the eastern Caribbean, and the provinces of Putumayo, Cesar and Norte de Santander. Recently, Ecopetrol began purchasing renewable energy assets as the company looks to diversify beyond its traditional oil and gas operations.

Trump Administration Seeks to Roll Back Alaska Oil Restraints

A hot political point of contention in the United States has been whether to allow oil drilling in Alaska. Environmentalists on the left have argued against drilling to preserve wildlife and the environment, while conservatives have pushed for an easing of restrictions. Monday, the Trump administration announced that it will be removing the Biden-era ban on oil drilling (as promised and expected). Though Alaska’s ~9 billion barrels of recoverable oil pale in comparison to oil-rich countries like Saudi Arabia and Canada, the news will help Donald Trump deliver on his promise to let companies “Drill, baby, drill.” More oil supply on the global market will increase oil supply and pressure prices.

EC Exhibits Relative Weakness Versus Stock Market and Oil

The most straightforward way to determine whether a stock is a winner is to monitor its relative price action versus the general market and the industry. EC shares have flushed 30% over the past year. Meanwhile, the Global X MSCI Colombia ETF ((GXG - Free Report) ) is up 7%, and the United States Oil Fund ETF ((USO - Free Report) ) is essentially flat. Zooming into the short-term, and the technical picture does not get any brighter. On Monday, crude oil jumped by 3.5%, and EC mustered a gain of just 0.35%. To make matters worse, the stock is carving out a dangerous-looking bear flag chart pattern.

Zacks Investment Research
Image Source: Zacks Investment Research

Ecopetrol Acquisitions Lead to High Debt

The debt-to-equity ratio measures a company’s long-term debt divided by total shareholder equity. While Ecopetrol’s renewable energy acquisitions have yielded little in the way of earnings thus far, they have led to a soaring debt-to-equity ratio.

Zacks Investment Research
Image Source: Zacks Investment Research

Ecopetrol's Governance & Social Impact Cause Issues

Several shakeups within the EC management team have occurred in recent months, which is never a welcome sign for investors. In addition, the company faces an internal debate about how much it wants to balance its legacy fossil fuel energy business with its new and costly renewable energy transition efforts.

Bottom Line

Given Ecopetrol’s Zacks Rank #5 (Strong Sell) and the numerous headwinds it faces – from underperforming the broader market and oil prices to mounting debt from its renewable energy ventures and recent management instability – investors should exercise extreme caution.


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