Fitch Affirms GeoPark's IDRs at 'B+'; Outlook Stable
(The following statement was released by the rating agency)Fitch Ratings-New York-05 February 2021:
Fitch Ratings has affirmed GeoPark Limited's (GeoPark) Long-Term Foreign and Local Currency Issuer Default Ratings IDRs at 'B+'/Rating Outlook Stable. Fitch has also affirmed GeoPark's USD425 million senior notes due 2024 and $350 million note due 2027 at 'B+'/'RR4'.
GeoPark's ratings reflect the company's track record of increasing production, improving reserve life, and ability to implement an effective cost-reduction plan. Fitch's base case scenario expects that GeoPark will reach production of nearly 45,000 barrels of oil equivalent per day (boed) by 2023, and will have average pro-forma total debt/operating EBITDA of below 3.0x over the rate horizon.
Despite strong operating metrics, the ratings remain constrained by the company's relatively small size and the low diversification of its oil fields. Increasing production levels while maintaining its reserve life and capital structure at existing levels bodes well for GeoPark's credit quality. The rating also reflects Fitch's expectations that GeoPark will continue to strengthen its capital structure following a deleveraging process that could result in gross leverage of at least 2.0x by 2023, but Fitch expects the company will likely repay debt over the rated horizon.
Key Rating Drivers
Small Production Profile: GeoPark's ratings remain constrained by its relatively small size of operations and the low diversification of its oilfields, despite its growing production profile. Fitch expects GeoPark's daily production to increase yoy, reaching close to 45,000 boed by 2023. During 2020, the company reported flat production compared to 2019 due to the coronavirus pandemic and a challenging price environment. Fitch expects that Geopark will increase production by 7% in 2021 and grow through the rating horizon as Brent prices are expected to recover.
Effective Cost Producer: Fitch expects that the company will continue to maintain its cost-efficient production profile in the low oil price environment. GeoPark's competitive advantages are derived from its operations in onshore and growing oilfields, which results in lower exploration costs, partially driven by its low transportation costs by selling at the wellhead, than big players in the region. In 2020, Fitch estimates GeoPark reduced its half cycle cost by nearly 7% yoy to $14.3/boe and full-cycle costs to USD18.9/boe. Since 2015, the company has focused on lower risk projects and concentrated production in Colombia, specifically in the Tigana and Jacana oil fields in the Llanos 34 block. In 2020, the company continued its focus on preserving a solid cash position by reducing capex, drilling costs and operating expenses.
Adequate Reserve Life: GeoPark maintains an adequate reserve life, and Fitch does not currently consider it a constraining factor for the company's ratings. As of Dec. 31, 2019, GeoPark had proved, developed and producing (PDP) oil and gas reserves of 52.4 million barrels of equivalent (mmboe), while its proved reserves (1P) totaled 130 mmboe; this translates into a 1P reserve life of 9.0 years when applying 2019 average production. Fitch estimates the company's reserve pro-forma reserve life will decrease modestly to 7.5 years in 2020, which incorporates Amerisur's reported 15 million of 1P reserves in 2019 and assumes less 19mmboe of reserves due to the company exiting its Morona project in Peru.
Strong Capital Structure: Fitch estimates GeoPark's leverage increased to 3.5x in 2020 from 1.3x in 2019 explained by the $350 million issuance to finance its acquisition of Amerisur and a lower price environment. Over the rated horizon, Fitch expects the company will maintain an average gross leverage, defined as total debt to EBITDA ratio of 3.0x through 2023. Fitch expects the company will maintain an EBITDA to interest expense ratio of 6.0x in 2020 and will increase to 7.1x by 2023. Geopark's total debt to 1P increased to $6.00 in 2020 from $3.35boe 2019, but Fitch expects this will decrease to $4.55boe in 2023, which assumes a reserve replacement ratio annual average of 116%.
Diversifying Away from Main Asset: Fitch believes GeoPark is diversifying away from its principal asset (Llanos 34), which represented 85% of total production with the acquisition of Amerisur Resources, new blocks in the Llanos basin and its expansion into Ecuador and Argentina. In 2019, GeoPark was awarded 1 million acres by the Agencia Nacional de Hidrocarburos (ANH) bid rounds in Colombia, which surround its core Llanos 34 block. Fitch expects the company will develop this asset in the next 1-2 years. Also in 2019, the company announced its entry into Ecuador through the acquisition of the Espejo and Perico blocks 50/50 with Frontera Energy (B/Stable). The Oriente basin is one of the most prolific petroleum systems in Latin America, currently producing more than 500,000 boepd. In 2018, GeoPark acquired Aguada Baguales, El Porvenir and Puesto Touquet Blocks in Argentina, which are located in the Neuquen Basin for USD52 million. Lastly, in 2020, Geopark announced the sale of its 10% working interest in the Manati gas field, which Fitch assumes will result in a cash inflow of $27 million by year-end 2021.
GeoPark's credit profile is comparable with other small independent oil and gas companies in the region. The ratings of Gran Tierra Energy International Holdings Ltd. (CCC), Frontera Energy Corporation (B/Stable) and Compania General de Combustibles S.A. (CGC; CCC) are constrained to the 'B' category or below, given the inherent operational risks associated with small scale and low diversification of their oil and gas production profiles.
GeoPark's production size compares favorably with other 'B' rated oil and gas exploration and production companies. Over the rated horizon, Fitch expects GeoPark will average 45,000 boed of production, in line with Frontera at 45,000 boed and higher than Gran Tierra at 35,000 boed and GCC at below 40,000 boed. GeoPark's 1P reserve life is highest among peers at 7.6 years, compared with Gran Tierra's at 5.0 years over the rated horizon and Frontera at 7.0 years, and in line with CGC at 5.0 years.
GeoPark has a strong capital structure. Fitch expects gross leverage to decline to approximately 3.3x in 2021 as a result of higher Brent prices. GeoPark's leverage is strong and compares favorably to CGC at 2.2x, Gran Tierra at 7.8x and Frontera at 2.3x. The company's total debt to 1P of reserves is USD6.03 boe, higher than Frontera's USD3.00 boe, but lower than Gran Tierra at USD10.00 boe and CGC at USD7.00 boe.
Fitch's Key Assumptions Within the Rating Case for the Issuer
--Fitch's revised price deck for Brent per barrel (bbl) flat for 2020 through 2023;
--Production average of 44,000 bbld from 2021 through 2023;
--Effective tax rate of 25% from 2020-2023;
--Average annual dividends of $6 million from 2020-2023;
--Annual capex of $120 million when Brent is below $60bbl;
--Royalties per boe of $4.0 over between 2021-2023;
--Production cost per boe of $7.00 between 2021-2023;
--Exploration cost per boe of $1.25 between 2021-2023;
--SG&A cost per boe of $4.00 between 2021-2023;
--$26 million received from divestment of Manati in 2021;
--Reserve replenishment ratio annual average of 1P of 116%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Net production rising consistently to 75,000 boed on a sustained basis while maintaining a total debt to 1P reserves of USD8.00 barrel or below;
--Reserve life is unaffected as a result of production increases, at approximately 10 years;
--The company's is able to maintain a conservative financial profile, with gross leverage of 2.5x or below;
--Cash flow generated from take-or-pay contracts from high-quality off-takers covering interest expense by 1.0x;
--Diversification of operations and improvements in realized oil and gas differentials.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Sustainable production falls below 30,000 boed;
--Reserve life declines to below 7.0 years on a sustained basis;
--A significant deterioration of total debt/EBITDA to 3.0x or more.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: GeoPark had cash on hand of USD201 million as reported in year-end 2020. The company has additional funding available through a USD75 million oil prepayment facility, with USD50 million committed, which has not been drawn, and a USD140 million of uncommitted credit lines.
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GeoPark Limited; Long Term Issuer Default Rating; Affirmed; B+; Rating Outlook Stable
; Local Currency Long Term Issuer Default Rating; Affirmed; B+; Rating Outlook Stable
----senior secured; Long Term Rating; Affirmed; B+
----senior unsecured; Long Term Rating; Affirmed; B+
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