Ecopetrol: A Buy from Bogota

06/17/2014 10:00 am EST

Focus: GLOBAL

John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

We've enjoyed tremendous success with numerous past recommendations of foreign integrated oil companies; our new recommendation takes us back to the oil patch, this time south of the Panama Canal, observes income expert John Dobosz, editor of Forbes Dividend Investor.

Based in Bogota, Ecopetrol (EC) is the largest oil and gas company in Colombia, operating in Colombia, Peru, Brazil, and exploring in the United States Gulf Coast.

It has proved reserves of 1.97 billion barrels of oil equivalent in crude oil and natural gas, plus nearly 4,200 miles of pipeline.

Because of steep discounts to historical valuations and a track record of increasing production and revenue, now looks like a good time to get into Ecopetrol.

Revenue has been climbing steadily for the past five years, and analysts forecast sales of $37.4 billion in 2014. Earnings are expected to come in at $3.37 per share.

Operating cash flow over the past 12 months of $4.23 per share exceeds earnings and comfortably covers the $2.65 per share in dividends paid. Dividends are paid once per year, with the most recent payout hitting shareholders last month.

Dividends have been paid without fail since October 1987 and the amount has never decreased. At the current quarterly payout of $0.175 per share, Ecopetrol yields nearly 4.6%.

Over the past five years, Ecopetrol has traded for an average of 15.9 times earnings, 32% higher than its present P/E ratio.

Using that multiple and $3.37 per share in expected 2014 earnings produces a stock price of $53.60. The stock also shows big discounts to historical multiples of sales and book value.

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