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sebastoro (27.77)




September 09, 2010 – Comments (2) | RELATED TICKERS: EC

We will begin a series of simple comparisons of multiples at the companies that we believe are highly overvalued in the colombian market, not to say the colombian bubble.

Ecopetrol (EC) will be the first to analyze because it is the most important and although a valuation should include much more material, this is just a simple exercise to compare Ecopetrol with the world's major oil and get an idea of the premium paid for this title, which I think makes no sense.

Let's look at three indicators even if they do not tell the whole history, they are the most important and used worldwide and give us a view of stock market price of a title compared with their profits and assets. In the table we have the PE or RPG  thar compares the earnings per share associated with price. The P / BV, Tobin's Q or price to book, that relate the price with the equity of the company and finally the Yield, annual dividend yield compared with the price.

You can take a look at the comparison table at:

A PE of 10 means that current profit in 10 years would recover the investment or rather the profits would reach 10 years the stock market price.
A P / VL of 1 means that stock its trading at their book value, and 2 means that twice their listed book value.
A YIELD 5 would mean that current prices would be the dividend yield of 5% per year. 

What we find in Ecopetrol is surprising ..... if not scary.
The world average in terms of PE is at 12.5 while Ecopetrol is in 19, ie there is a difference of 34%.
According to this Ecopetrol is overvalued 34% against the world average in this indicator and the right price would be found around 2475 pesos.

Looking at the equity, it borders on the absurd ...
the world average is trading at two times their book value while crazed with the bubble here are paying 4.9 times the book value of Ecopetrol ...  4.9 times!! ...... below this indicator Ecopetrol is 59% above the world average .... and this is just absurd.
The target price for ecopetrol given the international average should be about 1540 pesos.

Finally, in terms of Yield Ecopetrol has a yield of 2.4%, while the average is around 3.8%.
Here is a premium of 38% and a target price of 2325 pesos for Ecopetrol.

This is not to say that Ecopetrol necessarily have to trade at  the international average, the company well may be slightly above the international average because they has an interesting and good growth potential, however the premium paying for Ecopetrol is ridiculously absurd. ... makes no sense that this company is trading as unrealistic, and any person with this title should think seriously about selling and rotation to other oil company that are trading at better prices.

just to put a case in point, Petrobras is trading at 9 times earnings, vs. 19 times for Ecopetrol, book value is listed 2 times, vs. 4.9 times.... as you can see Ecopetrol is a clear case of a bubble .. ....

Exxon, Chevron and PetroChina do not exceed 12 times earnings, while Ecopetrol's have 19 times 2 times book value not exceeded, while Ecopetrol approximately is trading at five times ... doesnt make any sense

Personally, I do not think that Ecopetrol is 2500 pesos stock as shown in the exercise, but never do I believe that is a title of 3800 pesos as it reaches today.
I would think that between 2800 and 3000 levels according to the market would be "tolerable" in Macondo dynamics, but the current price is out of all base and has no reason to be more than a collective euphoria in the market.

Now I want to finish saying that ecopetrol is a great company, is a company to be proud of, and is doing very good job, however,that a  good company that is well managed, does not mean that their stock value reaches to levels that border on irrationality and dooesnt make any financial logic.

Maintain a sell recomendation for EC

greetings and good luck those who buy at these prices.

2 Comments – Post Your Own

#1) On September 09, 2010 at 5:00 PM, Melaschasm (65.13) wrote:

A good analysis and you may be right. 

It should be noted that EcoPetro has very low debt compared to many in the oil & gas industry.  EC has recently made a nice gas discovery, that has the potential to have a very big impact on their total operations. 

EC is tied to the Columbian government.  As long as Columbia continues to move towards free market capitalism, this may not be a huge problem, but as we have recently seen at PBR, the government could suddenly decide to make a big dilutive share issuance, for the sake of political benefits, rather than to benefit current shareholders. 

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#2) On September 15, 2010 at 2:37 PM, sebastoro (27.77) wrote:

The bubble is slowly exploding

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