OPIS notes that Ecopetrol (NYSE: EC) reports financial results entirely in Colombian pesos (COP). All financial quantities have here been converted to dollars (USD) at average exchange rates for applicable quarters. Those were 2,909 pesos per dollar in 1Q17, 3,026 pesos in 4Q16, and 3,230 pesos in 1Q16. Because the number is dropping, the peso realized a 4% gain in value over 4Q16 and 11% gain over 1Q16.

The main explanation for the greatly improved results since 1Q16 is not far to seek. Crude oil prices hit bottom in the year-ago quarter as Brent averaged $35.20 per bbl. Average Brent gained 55% YOY to reach $54.60 in 1Q17.

Added to this, Ecopetrol is steadily improving its performance in closing the gap between Brent and its average realized price for crude. The majority of Ecopetrol crude comes from the Eastern plains (los Llanos) and is very heavy 8-15 degrees API gravity. To get this crude flowing in pipelines going over the Andes and down to the Caribbean sea requires the use of C5+ diluent (naphtha).

In his opening comments on results, Ecopetrol Chairman Juan Carlos Echeverry said that “structural savings” during the quarter totaled $51.6 million. Of that amount, $18 million came from savings in “the lower dilution cost for heavy crudes.” This initiative is of critical importance to Ecopetrol as it directly affects its realized price of crude.

At the bottom of the present oil price trough, 1Q16, average Brent was $35.20/bbl. But Ecopetrol’s average realized price was $25.10, a deadly 29% discount to Brent at the bottom of the market. In 1Q17, average Brent was $54.60, Ecopetrol’s average was $46.30, and the discount to Brent had shrunk to $8.30, a 15% discount to Brent.

Work is proceeding on two fronts to lower the cost of transporting crude and in effect raise the realized price. One is the “Higher Viscosity Crude Transport Initiative.” The main pipelines from the Llanos Basin, Ocensa and Cano Limon, operate at a flow viscosity of 300 centistokes (cSt). During 1stQtr, Ecopetrol carried out successful tests to flow at 600 cSt. If it can adjust pipeline operating parameters to allow continuous operation at 600 cSt, it will greatly reduce diluent costs going forward.

They are also at work on a “crude dilution center” at the Covenas oil port on the coast near Sincelejo, Sucre. The dilution center is one of the first steps in developing a major mixing center at Covenas that will enhance value generation. Ecopetrol says the dilution center “will allow for the delivery of crude at viscosities and densities specified by our customers.” It expects to complete both the higher viscosity program and the dilution center during this second quarter.

The year-on-year (YOY) comparisons between 1Q16 and 1Q17 look good across the board when talking about financial results. The only wrench in the works is a nettlesome item that appears in Table 6 of the earnings release, “Financial Income (Loss).” In 1Q17, the financial loss was $350 million, pretty close to the $388 million financial loss for all of 2016. The magnitude of the amount puts a sizable ding in operating profit of $1,134 million, on the way down to net income of $369 million.

The earnings release also explains that much of the loss is related to currency translation effects. In 1Q16, the peso declined 5.1% in value, from 3,070 to 3,230 pesos per dollar, and Ecopetrol realized an exchange rate gain of $194 million. In 1Q17, the peso appreciated 3.9% in value, from 3,026 to 2,909 pesos, which produced a loss of $154 million because Ecopetrol’s net liability position is in dollars.

Looking past financial results, the main factor that clouds Ecopetrol’s horizon is declining production. Crude oil was down 2% YOY from 601,000 b/d (601 kbd) to 590 kbd. Natural gas took a serious hit, down 10% from 813 MMcfd to 734.4 MMcfd.

Colombia continues to pursue various initiatives to increase LNG regasification capacity on the Caribbean coast (Cartagena) and on the Pacific coast at Buenaventura. Electric companies running their power generation on gas, or seeking to convert from oil, want an assured supply of gas, and it appears that Ecopetrol will not be able to fill the need.

However, the earnings release highlights major exploration success on the coast in the general area of Riohacha, site of the Ballena gasfield that has been Colombia’s baseload gas supply for 30 years. Ecopetrol is 50% partner with Anadarko (operator) in the 2015 discovery well 1 Kronos. The new well, 1 Purple Angel, achieved total depth of 15,700 feet in water depth of 6,000 feet and found gas pay estimated to be 70-110 feet in thickness.

It then moved the state-of-the-art drilling vessel, Bolette Dolphin, to reenter 1 Gorgon, 27 km north of the Purple Angel-Kronos gas area, a well first drilled last year. By May 3, it had found gas pay zones between 12,000 and 14,500 feet, and net pay of 260-360 feet across the formation.

Ecopetrol says these wells, Purple Angel and 1 Gorgon, prove the existence of gas in a structure located in the same geological system as the Kronos field (well drilled in 2015). Through the three successful offshore wells, Kronos, Purple Angel and Gorgon, Ecopetrol has demonstrated the possible existence of a major, new gas province.

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