Jan 25 - 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
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
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 level.
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 Colombia.
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
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