Fitch Ratings has affirmed the foreign and local currency Issuer Default Rating (IDR) of GeoPark Latin America Limited Agencia en Chile (GeoPark) at 'B'. These rating actions affect USD300 million of outstanding international bonds due on February 2020. The Rating Outlook is revised to Negative from Stable.
KEY RATING DRIVERS
GeoPark's ratings reflect the company's small scale of production and relatively small reserve profile as well as its production concentration, in the face of depressed global oil prices. The Negative Outlook reflects expected pressure to the company's liquidity and credit profile. The company has sufficient liquidity to withstand a short-term oil price shock, however if current prices are sustained and/or prices decline below USD45/bbl in the near term, the company's credit profile could be significantly harmed.
Negative Outlook on Oil Price Declines
The revision of GeoPark's Outlook to Negative primarily reflects the negative pressure on GeoPark's credit profile due to expectations for sustained low oil prices in 2015. Since June 2014, WTI spot prices have declined by more than 50%, which has negatively impacted the global oil & gas industry throughout its value chain. In December 2014, Fitch revised the sector outlook for Latin American Oil & Gas to Negative from Stable. The revision was due to expectations that pressure from lower crude prices should continue to negatively affect equity prices and credit spreads for integrated, exploration and production (E&P), and drilling and service companies. The Ratings Outlook revision for GeoPark is consistent with Fitch's belief that this pricing pressure will more negatively affect high-yield E&P issuers.
Capex Step-back
Given the decline in oil prices seen during the last four months, the company plans to significantly scale back its capex program for 2015. The goal is to align 2015's capex with GeoPark's EBITDA generation. Previously, assuming USD80/bbl prices, the company was considering budgeting 85 projects as part of its 2015 work program and budget. The company scaled back its capex plan to accommodate 20-25 projects at USD65/bbl prices and five to 10 projects at USD45-50bbl prices.
The company's base budget assumes USD45-50/bbl prices and the fully funded capex program would be USD60-70 million with flat to 5% production growth over 2014. The USD60-70 million capex plan represents approximately a roughly 70% decrease in capex on a year-on-year basis. As part of this plan, the company is focusing on the Tigana and Tua oil fields in the Llanos 34 block in Colombia where USD15-20/bbl netbacks can be expected at the projected oil prices. Capex could be increased to USD100-120 million (10-15% production growth) if prices recover to USD65/bbl and USD200-220 million (20-25% production growth) if prices increase further to USD80/bbl.
Reserve Life Stressed
The capex reduction is an appropriate step for the company to preserve liquidity. Negatively, given the company's small scale operations, the step-back in capex will significantly lower the company's ability to replenish and/or grow its reserves. Based on Fitch's estimates and current production trends, the company has a reserve life of approximately six years. GeoPark's reserve life is relatively small but could be enough to absorb a one-year capex decline. However, a significant, multi-year sustained step-back in Capex may lead to the rapid depletion of the company's reserves.
Small, Concentrated Production Profile
GeoPark's ratings reflect the company's production concentration and relatively small reserve base. Although the company has exploration and production interest in 30 blocks in Colombia, Chile, Brazil, and Argentina, 93% of the company's 2013 net production was concentrated in four blocks (Fell in Chile, La Cuerva, Llanos 34 in Colombia and the Manati field in Brazil). This limited diversification exposes the company to operational macroeconomic risks, such as the current global price declines, associated with small-scale oil and gas production.
Increasing geographic diversification is positive for the company's credit quality. For this reason, GeoPark's foray into Brazil via the acquisition of Rio das Contas, winning new concession licenses in Brazil and Colombia, and the recently announced Peruvian investment, which Fitch is not including in its forecast, have represented positive steps for GeoPark. Negatively, the company's diversification efforts will have to be stepped back in the near to medium term if current oil prices persist, and this will pressure the company's reserve life.
Cash Flow Preservation Focus
The company has reported negative annual FCF over the past seven years, mainly as a result of its aggressive growth strategy, though improvements had been recently evident. For the LTM ended Sept. 30, 2014, FCF was -USD4M (above -USD88M in 2013), as the company's 2012 Colombian asset acquisitions and its 2014 Brazilian acquisition have proved to be FCF accretive fairly quickly. Prior to the oil price decline, GeoPark was on pace to record positive FCF by 2016. Fitch is projecting that based on the company's capex and opex cut-backs in 2015, the company should be break-even in terms of FCF for the year. This should help the company slow-down its cash burn during 2015 in the face of oil price shocks.
The company has sufficient liquidity to meet its short-term debt obligations. GeoPark reported cash on hand in January 2015 totaling USD130 million, which is 6x its short-term debt obligations. Interest expense for the company's USD300 million international bond and USD70 million Itau loan, should total USD25-USD30 million in 2015. Despite GeoPark's aggressive capex program and corresponding cash burn, the company's liquidity was helped by the 2014 IPO which raised USD95 million in cash. Furthermore, the Brazilian acquisition, which closed in 1Q'14, was FCF accretive in the first year.
Financial Metrics to Deteriorate
GeoPark's credit metrics had been improving over the past few years as a result of the company's growth strategy. As of the LTM ended Sept. 30, 2014, leverage ratio, as measured by total debt/EBITDA, reached 1.8x, down from 2.1x in 2013 and 2012. Given expectations of an average oil price of USD45/bbl and a stepped back capex plan, Fitch is forecasting capex of USD70 million in 2015, which is down 70% versus the LTM September 2014 level. Incorporating lower oil prices and the stepped back capex plan, EBITDA for 2015 should total USD50-USD60 million, which is down approximately 80% YoY. Based on the lower forecast, total debt/EBITDA for the year would spike to above 6x with EBITDA coverage ratio declining to 2x versus 6x in 2013.
Debt on a reserve basis remains high and will rise. Fitch estimates that total debt/total proved reserves stands close to USD8/barrel of oil equivalent (boe), which is an improvement versus USD18.0/boe in 2013. On a proved and developed reserves basis the company's debt per barrel stands high at USD24/boe, and Fitch expects this to rise further in 2015 as the company is not able to add reserve levels as it moves to preserve cash.
Expected Covenant Breach
At expected leverage levels of 6x, the company would record financial leverage metrics above its international bond's debt covenants, which include: consolidated debt to consolidated EBITDA ratio not higher than 2.5x for the remaining life of the notes, and consolidated EBITDA to consolidated interest expenses over 3.5x. This is an incurrence covenant, that would prevent the company from raising additional debt, though the bond's covenants do have exceptions for lines of credit or working capital facilities up to 8% of total assets (approximately USD80 million). Given current trends, the company is on pace to breach the covenant by the third quarter of 2015.
RATING SENSITIVITIES
Drivers for a negative rating action could be if current, depressed oil prices are maintained for more than one year and/or prices decline below USD45/bbl in the short-term, thereby leading to significant harm to the company's credit profile. If current low oil prices persist for 2015, the company's potential covenant breach of its international bond could be a negative rating trigger. Long-term, a significant increase in leverage, driven by an increase in debt for exploration combined with a low success rate of discoveries could lead to a negative rating action.
In the short-term, a recovery of oil prices to USD80/bbl or more would help to improve the company's credit profile and stabilize the company's negative outlook. Long-term, drivers 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. A substantial reduction in the debt/proved-reserves ratio would also be viewed favorably.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978316
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
