A seldom mentioned emerging market country is nurturing a future
Few are aware that Colombia is a growing and dynamic
. Many people think of Colombia as a violent and lawless place
dominated by drug cartels, or perhaps even confuse it with
socialist Venezuela. But, the truth is Colombia has come a long
Forget BRIC: Buy These Emerging Economies
After nearly 30 years of drug-related violence, a new pro-business
government and a U.S.-supported crackdown have vastly improved
conditions in the past decade. Since 2002, terrorist acts are down
-84%, kidnappings have dropped -88% and the homicide rate is the
lowest in 22 years. Colombia's crime rate is now lower than that of
many U.S. cities.
As a result, Colombia is attracting more investors and domestic
spending is on the rise. In fact,
has grown +5% in the first half of 2010 (compared to +1.6% in the
second quarter in the U.S.) and the market has reacted. The
exchange-traded fund (
Global X/InterBolsa FTSE Colombia 20
, has soared +48% so far in 2010 and was the No. 1 performing
country specific ETF for the year as of July 30th.
Colombia is rich in natural resources, including one of the largest
deposits of oil and gas in Latin America. There are just two
trading on the New York Stock Exchange, but luckily, one of them
has been on fire…
is Colombia's largest integrated oil company, and is also the
fourth largest oil major in Latin America. The company focuses on
exploration and production, but is also involved in refining and
transportation. About 90% of the firm is owned by the state.
Ecopetrol explores for oil and gas across Colombia and is expanding
internationally through exploration partnerships in Brazil, Peru,
and the United States (Gulf of Mexico). As of the end of the first
quarter, Ecopetrol had reserves of 1.9 billion barrels of oil
), 71% of which is oil and 29% gas. The company's production for
the quarter was 83% oil and 17% gas.
The company, like the country, is looking to the future.
Ecopetrol has hyper-aggressive plans to expand and become a major
international oil giant. It plans to invest a whopping $80 billion
on expansion in the next 10 years and forecasts dramatic production
and reserve gains in a relatively short period of time. The company
is targeting daily production growth of +27% in 2011 (from Spring
2010 levels) and reserve growth of +68% by 2015 and more than +200%
The market apparently likes the growth of the company, as well as
the Colombian growth story: Ecopetrol's stock has returned more
than +70% so far this year. This is no small feat considering
Morningstar's Independent Oil and Gas category has returned a
paltry +2% year-to-date.
The company should be able to afford the grand $80 billion
expansion plans. Most of it (62% to 67%) will be financed with cash
, and the rest from debt and new issuances. The company had
virtually no debt and about $2 billion in cash and short term
investments at the end of the first quarter.
However, this company is extremely vulnerable to the price and
demand for oil and gas. In 2009,
fell -43% from 2008 as energy demand and prices plummeted amidst
the financial crisis and recession. But, as world economies have
recovered, so have Ecopetrol's earnings. Profits in the second
quarter of 2010 rocketed an amazing +137% compared to the year ago
quarter, and first half profits increased +64% compared to a year
Ecopetrol also pays a solid
. There are usually several payments every year, and dividends
during the past 12 months have totaled $1.36, translating to a
even after the run up in the stock's price. Dividends are paid in
Colombian Pesos and converted to dollars for American investors, so
there is some
risk. However, the superior economic growth in Colombia bodes well
for the Colombian Peso, which has already soared +16% against the
dollar in 2010.
Despite its expansion plans and the emergence of the Colombian
economy, Ecopetrol's performance will be tied to energy prices. The
long term growth in worldwide demand for oil and gas as well as
oil's increasing scarcity portend well for the longer term.
However, a slowdown in world economies and falling energy prices
could hurt Ecopetrol's performance and stock price just like any
major oil company.
Action to Take -->
At this point, Ecopetrol encompasses several likely trends going
forward. It is an aggressive way to play growing demand and higher
prices for energy. It is also a
and a falling dollar that provides exposure to a fast growing
The stock is selling at a relatively high 28 times 2010 forecasted
earnings. However, the possibility of significantly higher
energy prices in the future combined with rapid expansion of
production add to the possibility of explosive earnings growth and
make the stock worth it.
-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
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Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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