Fitch Affirms GeoPark at 'B'; Negative Watch Removed, Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed GeoPark Latin America Limited Agencia en Chile's (GeoPark) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B'. Simultaneously, Fitch has removed the ratings from Rating Watch Negative and assigned a Negative Outlook.

KEY RATING DRIVERS

The rating action reflects the company's stable production amid the downturn in the oil and gas industry, and its ability to implement an effective cost reduction plan. Including Fitch's new price deck expectations for Brent and WTI prices of USD35/bbl in 2016 and $45/bbl in 2017, Fitch believes the company has sufficient liquidity to withstand this level of prices in the short term if it is able to maintain production at around current levels.

GeoPark's ratings also reflect the company's relatively small size and low reserve life, and pressured financial metrics due to declining oil prices. GeoPark could face a negative rating action if it is unable to maintain its cost at levels seen during the past two quarters while maintaining or increasing production and minimizing its cash burn rates.

Lower Oil Price Assumptions

Operating cash flows for GeoPark have decreased significantly due to lower oil and gas prices. Fitch believes the company has sufficient liquidity to withstand this level of prices during 2016 if it is able maintain production levels at around current levels of 23,000 boed and keep production costs at levels observed during the last six months. Fitch assumes that oil prices will rebound from the current level in the long term. Fitch's base case scenario is for Brent and WTI Prices to average USD35/bbl in 2016, gradually recover to USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl over the long term.

Stable Production amid Downturn

During 2015, production levels and crude oil/natural gas mix remained stable, with oil production accounting for 73% of total reported production in 1Q16 (versus 72% in 1Q15), and 27% representing gas production. Fitch assumes under its base case scenario that 2016 production will average approximately 21,500 boed following the increase trend observed during the last six months.

During 2015, the company reported output of 20,367 boed up from 19,653 boed in 2014. Production during 4Q15 averaged 23,062 boed following the Tilo, Chacalaca and Jacana discoveries, and improved production performance of the Tigana and Tua fields in Colombia, and the start-up of the Ache facilities in Chile and the Manati gas field compression plant in Brazil. GeoPark's financial profile benefits from more stable cash flows from its natural gas business. Natural gas sales in Chile and Brazil have been more resilient to fluctuations in oil and gas prices due to the nature of its contracts.

Cost Reductions Plan

Given the decline in oil prices observed during the last year, the company has focused on preserving its cash position by reducing its capital expenditures by nearly 80%, operating expenses by 34% and drilling costs by 25%. Fitch assumes under its base case scenario that the company will be able to maintain these cost reduction efforts during the low oil price environment. The company has focused in lower risk projects and concentrated production in Colombia, specifically in the Tigana and Tua oil fields in the Llanos 34 block.

Low Reserve Life

The rating reflects the company's relatively small size and low reserve life. At end-2015, GeoPark had proved, developed and producing oil and gas reserves of 17.3 million barrels (MMboe). GeoPark proved (1P) reserves of 48.6MMboe considering only Brazil, Colombia, Chile and Argentina equates to a reserve life of seven years, which is relatively in line with the median for Fitch-rated speculative grade peers. Including the 1P reserves from Peru, this translates into a 1P reserve life of 9.6 years and proved and probable (2P) reserve life of 16.9 years.

Financial Metrics to Remain Pressured

GeoPark's credit metrics deteriorated significantly in 2015 pressured by the low global oil prices. In 2015, total debt/EBITDA increased to 7.18x (from 2.0x in 2014). Given expectations of an average oil price of USD35/bbl in 2016, Fitch forecasts EBITDA of approximately USD63 million for 2016. This would mean that the company's total debt/EBITDA would be slightly below 6.0x for the year. If production of 23,500 BOED is maintained during 2016-2018, Fitch would expect consolidated EBITDA to increase to the USD80 million-USD190 million level, which would mean leverage would importantly decrease below 3.0x by 2018 and in line with leverage metrics observed prior to 2014.

Debt on a reserve basis should remain high, though stable, as Fitch estimates that total debt/total proved reserves stands close to USD7.2/BOE, (USD5.3/BOE with Peru) which is in line with its peers at the rating level. This does represent a significant improvement versus USD18.0/BOE in 2013. On a proved and developed reserves basis the company's debt per barrel stands high at USD22/BOE, which could rise further if the company is not able to add proved reserve levels as it moves to preserve cash. Given recent discoveries in Colombia, the company's reserves could increase for the year, despite a possible eventual reserve adjustment due to lower global oil prices.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GeoPark include:

--Fitch's revised price deck per barrel of WTI/Brent oil of: USD35 for 2016, USD45 for 2017, USD55 for 2018 and USD65 for 2019;

--Average realized oil price of USD20.2, USD31 and USD40 for 2016, 2017 and 2018;

--2016 production of approximately 21,500 in line with management work program indications for Brent of USD35;

--Annual production increasing by an average 5%-10% for the next four years, which could increase to 10%-15% if prices recover above USD65 per barrel.

--2016 revenues decreasing by 20% with annual revenues increasing an average of 25% per year as prices recover

--Half cycle costs between $16 and $20 with EBITDA per boe of $7-$30;

--Brazilian exchange rate of $4.2-$4.4 and Brazilian CPI of 6%-8%;

--Annual capex of USD25 million-USD90 million per year during the next four years.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--An inability to maintain operating costs and production levels observed during the past six months increasing the company's cash burn;

--A persistently weak oil & gas pricing environment that impairs the longer-term value of GeoPark's reserve base.

Long term, if current depressed oil prices are maintained beyond 2016 and/or average WTI prices decline significantly this could lead to significant harm to the company's credit profile. If current low oil prices persist beyond 2016, the company would remain above its incurrence covenant limitations, thereby pressuring the company's ability to raise additional indebtedness in the face of cash needs. Finally, if leverage does not rapidly decline when/if global oil prices recover; this could lead to a negative rating action.

Positive: No upgrades are currently contemplated given weakening credit metrics associated with low oil & gas prices. Future developments that may, individually or collectively, lead to a positive rating action include:

For an upgrade to 'B+':

--Maintenance of size, scale, and diversification of GeoPark's operations with some combination of the following metrics:

--Improvements in realized oil & gas differentials;

--GeoPark's ability to maintain operating costs and production levels observed during the past six months.

To resolve the Negative Outlook at 'B':

--Extension of the Itau loan coupled with improved netback that alleviates the company's near-term reliance on its cash on hand and Trafigura facility;

--Improving oil & gas price environment;

--GeoPark's ability to maintain operating costs and production levels observed during the past six months.

A sustained recovery of oil prices to USD60/bbl or more would help to improve the company's credit profile.

LIQUIDITY

Stretched, Though Sufficient, Cash Cushion

The company is rightly focusing on cash preservation during this period of relatively low oil prices. GeoPark has reported negative annual free cash flow (FCF) over the past nine years, mainly as a result of its aggressive growth strategy, though improvements had been seen as recently as 2014, when the company reported almost breakeven cash flow (FCF of -USD7 million).

Prior to the oil price decline, GeoPark was on pace to record positive FCF by 2016. Incorporating the company's capex and opex cut-backs in 2015, Fitch is still projecting that the company will generate negative FCF in 2016, achieving positive FCF in 2017-2018 as the price of oil rises and costs are reduced. The company has sufficient liquidity to meet its short-term debt obligations, as GeoPark reported cash on hand as of Dec. 31, 2015 of USD82 million, which is 2.3x its short-term debt obligations.

Interest expense for the company's USD300 million international bond and USD70 million Itau loan, should total USD25 million-USD30 million in 2016, and it faces principal repayments of $20 million per year associated to the Itau loan. A negotiation to extend these payments could assist the company with its liquidity needs, although this is not incorporated in Fitch's assumptions. Incorporating expectations of USD35/bbl WTI prices in 2016, Fitch is projecting that the company will end 2016 with USD60 million in cash on hand if capex is reduced to $25 million.

If GeoPark's liquidity becomes threatened by sustained oil prices below $35/bbl, the company can draw additional funds from an offtake agreement with commodity trading firm Trafigura Beheer BV (Trafigura) for up to $100 million in the form of prepaid future oil sales. Under Fitch's stress scenarios, this facility could protect the company from a default scenario until 2018

Manageable Debt Maturities

At Dec. 31, 2015, Geopark had approximately $378.6 million in debt outstanding. Fitch believes the company's debt maturities are manageable, with no significant maturities until 2020.

FULL LIST OF RATING ACTIONS

Fitch has affirmed GeoPark's ratings as follows:

--Long-Term Foreign and Local Currency IDRs 'B'; Outlook Negative;

--Senior unsecured debt rating at 'B/RR4'.

Date of Relevant Rating Committee: May 6, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004205

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004205

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings, Inc.
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Source: Fitch Ratings

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