The 3 blows Ecopetrol's profits will receive in 2025: it could report losses after 10 years.

With the financial results Ecopetrol revealed this week, the company has seen nine consecutive quarters of declining profits, a trend that began in the first three months of 2023.

Furthermore, the net profit it reported of 3.1 trillion pesos is the lowest since the first quarter of 2021, following a 22.1 percent drop due to the impact of inflation, the exchange rate, and a lower Brent oil price.

And expectations for the remainder of the year are not positive for Ecopetrol, as its profits could be seriously affected by several factors. One of them is the taxes imposed in the context of the internal unrest in Catatumbo.

The company estimates that the 1 percent tax on oil exports and the 1 percent stamp duty, which will be in effect until December 31 , will have an impact of 1.2 trillion pesos on its net profit.

In addition, Ecopetrol estimates it will have to make a payment of 3.6 billion pesos this year because, according to a new interpretation by the DIAN, imported gasoline and diesel must pay a 19 percent VAT.

However, the company assures that it will be able to recover approximately 3.3 billion pesos of this total through requests for refunds of tax credits.

But the DIAN is also charging Ecopetrol for what it didn't pay in the last three years (2022-2024). The three special customs requirements total 9.4 billion pesos: 6.3 billion pesos from Ecopetrol, 1 billion pesos from the Cartagena Refinery, and 2.1 billion pesos in interest.

Both Ecopetrol and the Cartagena Refinery disagree with the Dian's interpretation. Therefore, they will first exhaust administrative channels to respond to the requests made of them and resolve this dispute.

The DIAN will have to analyze these arguments and issue a ruling in the coming months. Based on this, it will have to confirm or adjust its special customs requirement through an administrative act.

Once this ruling is issued, Ecopetrol will decide whether to file an appeal with the DIAN, or even file a lawsuit directly with the Council of State.

This legal process could take between two and five years to resolve. "Our view, based on the opinions of the lawyers who have appeared, is that the probability of us prevailing in this case is high," said Camilo Barco, Corporate Vice President of Finance and Sustainable Value at Ecopetrol.

Ecopetrol's profits could also be affected by the drop in the price of Brent crude oil. It used a reference price of $73 to develop its financial plan for this year, and since April, it has been above $60.

According to Ecopetrol President Ricardo Roa, for every dollar the Brent price falls, 740 billion pesos in EBITDA are lost annually, while the impact on profits is 370 billion pesos.

However, an increase of 200 pesos per dollar in the exchange rate would offset the impact of lower oil prices.

We will surely have some fields under development that will require a stop.

Ecopetrol data indicates that the profit break-even point is close to $50 per barrel, and the EBITDA break-even point is around $44.

Furthermore, more than 99 percent of the company's wells are capable of operating with a break-even below $55. However, the possibility of shutting in some fields has not been ruled out.

"We're certainly going to have some fields under development that will require a shutdown, but we're not seeing a critical condition that would require halting production," Ricardo Roa said.

Faced with the potential impact that a lower Brent oil price could have on Ecopetrol's financial statements, the company is implementing a plan that will allow it to navigate this volatile environment and thus meet the operational and financial goals it set for 2025.

To protect the cash flow , an additional reduction in costs and expenses of approximately 1 trillion pesos will be made, accompanied by a working capital management effort of approximately 2 trillion pesos.

Additionally, the company's liquidity was strengthened with the advance payment of 7.6 billion pesos from the Fuel Price Stabilization Fund (Fepc) and the $500 million from the recently approved credit line.

"We constantly monitor market conditions and have protocols in place to adjust commercial actions, optimize expenses, renegotiate contracts, manage debt, and activate financial hedges when necessary," said the Ecopetrol president.

This plan also includes a $500 million Capex intervention flexibility, although it is not expected to affect this year's production target of between 740,000 and 750,000 barrels of oil equivalent per day (boed).

According to Ecopetrol's Corporate Vice President of Finance and Sustainable Value, investments that protect the company's hydrocarbon production and reserves will be prioritized.

Second will be investments in operating or brownfield projects that have positive EBITDA and the ability to generate revenue from the outset.

However, if the Brent price begins to average around $60 per barrel annually (in the first quarter, the average was $75 per barrel), Ecopetrol could also consider re-approve its 2025 investment plan.

As long as the price decline continues, we will be able to take more drastic measures.

This alternative would be evaluated "to the extent that we see that the deviations are sufficiently material to prevent us from meeting the objectives planned for this year," said Camilo Barco. If so, Capex would be reviewed across all business lines; "it would be a cross-cutting review."

"As long as the price decline persists, we may take more drastic measures aimed at protecting production and reserves. We could intervene based on the profitability and break-even point of the various wells. For this purpose, we have a detailed analysis by asset and an action plan," he added.

Given this situation facing Ecopetrol, César Pabón, Director of Economic Research at Corficolombiana, asserts that it is "very likely" that the company will report losses in this year's final balance sheet.

"The price drop is bad news, on top of other bad news we've had. That's why we say our outlook for the remainder of the year is even more negative," he commented.

Wilson Tovar, manager of Economic Research at Acciones & Valores, agrees with his colleague, pointing out that if the oil price remains at its current level, "net profit for the year could undoubtedly be negative."

Our outlook for the remainder of the year is even more negative.

But he also highlights that there are still seven months left in the year to see how the company's revenue will perform, which depends primarily on oil exports, which, in turn, depend on the price of Brent crude.

Estimates from Corficolombiana's Economic Research team indicate that for every dollar the price of a barrel of Brent crude oil drops, Ecopetrol loses 1.4 trillion pesos in revenue.

However, a lower Brent price could also free Ecopetrol from paying the income tax surcharge imposed by the 2022 tax reform on oil production.

According to César Pabón, at current and expected price levels, the 2025 average would be less than $70 per barrel, below the 30th percentile used to determine this surcharge. Therefore, it would no longer be charged.