Fitch Expects to Rate GeoPark's Proposed Notes 'B'
CHICAGO -- January 25, 2013
Fitch Ratings has assigned foreign and local currency Issuer Default Ratings
(IDRs) of 'B' to GeoPark Latin America Limited Agencia en Chile (GeoPark). In
addition, Fitch has assigned an expected rating of 'B' to the company's
proposed debt issuance of up to USD300 million The Rating Outlook is Stable.
GeoPark expects to use the proceeds from the issuance to refinance most of its
existing debt, partially fund its 2013 capital expenditures, and for other
general corporate purposes, including possible new acquisitions. The issuance
will be secured by a pledge of approximately 80% of the shares of its
operating companies in Chile and Colombia (GeoPark Chile S.A. and GeoPark
Colombia S.p.A.) and by a pledge on inter-company loans granted by the issuer
to its operating companies.
GeoPark's ratings reflect the company's small scale of production and
relatively small reserve profile as well as its production concentration. Free
cash flow (FCF) is expected to remain negative during the next couple of years
due to the company's aggressive growth strategy, which could limit financial
flexibility. Positively, GeoPark's ratings also reflect the company's
improving financial and operating performance and its adequate leverage. The
company's production and reserves diversification efforts also augur well for
its credit quality.
Small and Concentrated Production Profile:
GeoPark's ratings reflect the company's production concentration and
relatively small reserve base and production. Although the company has
exploration and production interest in 19 blocks in Chile, Colombia and
Argentina, the current net production of approximately 13.2 thousand barrels
of equivalent per day (boed) is mainly concentrated in four fields. Fell Block
in Chile, and Llanos 34, La Cuerva and Yamu blocks in Colombia. These four
blocks account for approximately 95% of current production. This limited
diversification exposes the company to operational as well as economical risks
associated with small-scale oil and gas production. Going forward, increasing
geographic diversification would be positive for the company's credit quality.
The ratings also consider as positive the growing diversification efforts made
by the company in the last years. Until March 2012, the company's production
was almost completely concentrated in the Fell Block in Chile, which
represented 99% of total production. After the acquisition of two oil
companies in Colombia in March 2012, GeoPark increased its diversification
with three additional productive blocks, and almost doubled its production to
11,300 boed from 7,800 boed; proved reserves (P1) increased from 16.5 MM boe
to 30.1 MM boe, 66% of which are oil.
Negative Free Cash Flow Due to Large Capex:
The company has reported negative FCF (defined as cash flow from operations
less capital expenditures and dividends) over the past five years, mainly as a
result of its aggressive growth strategy. For the last 12 months (LTM) ended
Sept. 30, 2012, FCF was negative USD175 million mainly as a result of
significant capital expenditures of USD183 million during the same period, in
addition to the acquisitions made in Colombia for USD105 million. Capex in the
past has been funded by a combination of financial debt, cash flow from
operations and capital contributions from strategic partner, LG International
Corporation. Historically, GeoPark has not paid dividends.
GeoPark's significant capital expenditure plans over the next few years will
involve high capex related to developing and increasing productions at
existing operations as well as new acquisitions in the region. This could
continue pressuring FCF in the near term and reduce the company's cash flow
flexibility to face a downturn in international commodity price scenarios.
Improving Financial Metrics:
GeoPark's credit metrics have been improving over the past few years as a
result of the company's growth strategy. As of the LTM ended Sept. 30, 2012,
the company's leverage ratio, as measured by Total Debt-to-EBITDA, reached
1.7x, down from 2.6x in 2011 and 4.1x at the end of 2010. The company's
interest coverage has also improved, reaching 6.5x for the LTM ended Sept. 30,
2012. Leverage measured as total debt-to-total proved reserves decreased to
USD6.3 per boe from USD10.0 per boe in 2010-2011, yet still remains at a high
On a pro forma basis after the proposed issuance, leverage is expected to
increase to 2.3x (assuming annualized pro forma EBITDA as of Sept. 30, 2012)
and should decline over time as the company increases production.
Debt-to-proved reserves ratio would stand around USD10 per boe assuming
existing P1 reserves, and should decline as the company adds new proved
reserves. EBITDA generation as of LTM Sept. 30, 2012 reached USD118 million
(USD63.4 million in 2011), 62% generated in Chile and the remaining 38% in
Going forward, the company's indebtedness should be limited by the proposed
notes' covenants, which include: consolidated debt to consolidated EBITDA
ratio not higher than 2.75x for the first two years, and 2.5x for the
remaining life of the notes, and consolidated EBITDA to consolidated interest
expenses over 3.5x.
Gas Production Declines: Business Growth Focus on Oil
GeoPark has been successful in developing its growth strategy towards the oil
business while the importance of its natural gas business in Chile decreases.
In 2011, gas represented 34% of total revenues and is currently estimated to
account for approximately 10% of total revenues in 2012. Also, P1 composition
shifted to 33% gas and 67% oil in 2012 from 63% gas and 37% oil in 2011. This
becomes more important and supports the company's cash generation capacity
going forward as the gas production in southern Chile has declined
significantly in the last year, with GeoPark's production level falling to
2,500 boed in 2012 from 5,100 boed in 2011. GeoPark will continue to develop
its natural gas business with Methanex Corporation in Chile, although its
growing strategy for the future is oriented toward the oil business.
Strategic Alliance with LGI
In 2010, GeoPark and LG International Corporation (LGI, subsidiary of the
Korean LG Group) agreed on a strategic alliance to build a portfolio of
upstream oil and gas assets throughout Latin America through 2015. This
partnership is currently targeting new project acquisitions in Brazil,
Colombia, Peru and Chile in addition to 16 existing exploration, development
and production blocks in Chile and Colombia. Fitch believes that this
partnership is positive for GeoPark as it could provide additional cash
resources to help fund the company's growth strategy and provide technical
support and expertise.
In 2011, LGI acquired a 20% equity interest in GeoPark's Chilean business for
USD148 million. LGI also committed USD31.6 million of new capital injections
in Tierra del Fuego licenses over the next three years. In December 2012, LGI
acquired a 20% equity interest in GeoPark's Colombian business for a
consideration of USD20.1 million.
Factors that could lead to a negative rating action are: failure to reach and
maintain leverage at 2.75x or below, or an overly aggressive growth strategy
that could pressure credit metrics. Still, these risks should be somewhat
mitigated by the proposed issuance's covenants.
Key considerations for a positive rating action or Outlook include: increased
diversification of the company's production profile and consistent growth in
both production and reserves while maintaining adequate financial metrics. The
debt-to-proven reserves ratio should also be reduced.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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