Despite that fact that Colombia’s equity market has been one of the best performing in the world over the past two years, its valuations still remain well below those of Brazil, Chile and Mexico. That’s surprising, because the country sports one of the most advanced banking systems in the region. Moreover, oil production is growing rapidly, thanks to fewer attacks on infrastructure by guerrilla groups.

Colombia is one of just five countries globally that’s expanding its oil production, currently producing about 1 million barrels per day. Not only is it the third-largest economy in South America, it’s now also the third-largest oil producer behind Venezuela and Brazil.

As Colombia’s political situation stabilizes, several oil companies have been setting up shop in Colombia, taking advantage of the fact that much of the country has yet to be thoroughly explored. Colombia is home to proven reserves of 2.3 billion barrels located in six basins; many oil firms believe those reserves could be vastly increased with proper exploration and mapping.

Political and military stability is the key to the growth of Colombia’s oil industry because, as you can see from the map below, most of the oil produced in the country is transported via six main pipelines.



Source: Ecopetrol

Those pipelines make for easy targets for the Revolutionary Armed Forces of Colombia (FARC), but attacks have become less frequent thanks to peace negotiations. This emerging stability has also helped Colombia grow to become one of the top ten exporters of oil to the US, sending more than 300,000 barrels of oil per day to American refineries.

Ecopetrol (NYSE: EC) is Colombia’s state-run oil company and the largest producer in the country. The company has made three significant oil discoveries in the Gulf of Mexico over the past few years. It also has exploration and production (E&P) operations in Peru and Brazil. Last year, it was briefly the largest company in South America by market cap.

Thanks to an increasingly positive outlook for Colombia and the company’s continuing E&P operations, Ecopetrol expects to produce at least 1 million barrels of oil per day by 2015. To achieve that goal, it is investing about USD9.5 billion this year, with about USD3.5 billion earmarked for boosting its existing production and nearly USD1 billion for E&P work. Most of the remainder will be dedicated to upgrading its current operations.

Ecopetrol has been extremely good for its investors in recent years, running an average net profit margin of about 23 percent and a return on equity close to 50 percent.

The company has also outperformed other Latin American oil companies, thanks to the Colombian government’s pro-business approach to managing the country’s economy. While the Brazilian government has taken a very interventionist approach to business and industry, Colombia has adopted a hands-off approach to even its state-owned companies, allowing professionals to run their businesses using pure, market-based approaches.

A huge potential upside catalyst for Ecopetrol is the recent death of Venezuelan president Hugo Chavez. While Colombia’s free market politics are basically the polar opposite of socialist Venezuela’s, the two countries have maintained relatively friendly relations. As a result, Ecopetrol is in the running to be one of the first foreign oil companies granted access to Venezuela’s massive oil reserves. The Venezuelan government that will arise in the wake of Chavez will work to improve the degraded efficiency of the country’s oil production; Ecopetrol is poised to benefit.

Ecopetrol, the newest addition to our Long-Term Portfolio, is a buy up to 60.

Colombia also has one of the best banking systems in Latin American, with Bancolombia (NYSE: CIB) serving as the country’s largest bank.

With a market capitalization of just USD8 billion, Bancolombia is smaller than most US banks, but it’s a bastion of stability.

Last year, the bank grew its mortgage loan portfolio by 24 percent, while expanding its consumer and commercial loans in the mid-teens, for total loan growth of 15 percent. It has consistently grown shareholder’s equity by an average of 26 percent annually, while maintaining one of the strongest capital adequacy ratios of any Colombian bank.

Delinquent loans 30-days overdue ran at just 2.6 percent of all loans; loans overdue 90-days or more were just 1.5 percent and were covered by reserves more than twice over. That’s in keeping with the banks falling delinquency rates over the past several quarters, as the Colombian economy continues its strong multi-year growth.

The bank’s balance sheet strength allowed it to maintain its dividend in 2008, when most other banks were cutting theirs. As a result, its dividend has maintained a compound annual growth rate of 29 percent since 2001, steadily growing as many other banks are still trying to regain prerecession payout levels.

Buy Bancolombia up to 68.