Business Context and Reporting Period
Company: GeoPark Limited (Bermuda-incorporated independent oil and natural gas E&P company).
Reporting Period: Fiscal year ended December 31, 2014.
Operations: GeoPark operates in Chile, Colombia, Brazil, and Argentina, with a pending acquisition in Peru (Morona Block). The company focuses on exploration, development, and production of oil and natural gas. As of December 31, 2014, the company held net proved reserves of 43.7 million barrels of oil equivalent (mmboe) across its operating countries, with an additional 18.8 mmboe in the pending Peru acquisition.
Accounting Basis: International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric (in thousands USD) | 2014 | 2013 |
|---|---|---|
| Net Revenue | 428,734 | 338,353 |
| Operating Profit | 71,844 | 83,964 |
| Profit for the Year | 15,930 | 34,934 |
| Profit Attributable to Owners | 7,512 | 22,012 |
| Adjusted EBITDA | 220,077 | 167,253 |
| Adjusted EBITDA Margin | 51.3% | 49.4% |
| Cash from Operating Activities | 230,746 | 127,295 |
| Cash from Investing Activities | (344,041) | (208,500) |
| Cash from Financing Activities | 124,716 | 164,018 |
| Total Debt (Borrowings) | 369,593 | 317,087 |
| Cash and Cash Equivalents | 127,672 | 121,135 |
Note: Total debt includes non-current borrowings of $342,440 and current borrowings of $27,153.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 27% to $428.7 million, driven by a 16% increase in net oil sales and a 169% increase in net gas sales. This was primarily due to the acquisition of Rio das Contas in Brazil (closed March 31, 2014) and increased production in Colombia and Chile.
- Profit Decline: Despite revenue growth, profit attributable to owners decreased 66% to $7.5 million. This was caused by a significant increase in exploration costs ($43.4M vs $16.3M), administrative costs, and a $9.4 million impairment loss on non-financial assets. Additionally, financial results (interest expense) worsened to a loss of $50.7 million.
- Foreign Exchange Impact: The company recorded a $19.2 million exchange rate loss in its Brazilian subsidiary due to the devaluation of the Brazilian real against the U.S. dollar, impacting the $70.5 million credit facility used for the Rio das Contas acquisition.
- Capital Expenditures: Investing cash outflows increased significantly to $344 million, reflecting the $140 million acquisition of Rio das Contas and ongoing exploration/development drilling.
Guidance, Outlook, and Risks
2015 Strategy and Outlook: GeoPark has adopted a "Preserve Cash" strategy in response to the oil price crisis (WTI/Brent fell ~50% between August 2014 and March 2015).
- Capital Program: Targeting a fully-funded work and investment program of $60–$70 million for 2015, significantly reduced from prior years.
- Cost Cutting: Implemented a workforce reduction expected to save $12 million annually (excluding one-time termination costs of ~$6 million). Management and Board also voluntarily reduced salaries.
- Focus: Prioritizing lower-risk, higher netback projects, specifically the Tigana and Tua fields in Colombia.
Key Risks and Contingencies:
- Commodity Price Volatility: 86% of 2014 revenue was derived from oil. Sustained low prices threaten cash flow and debt capacity.
- Foreign Exchange: Significant exposure to the Brazilian real, which has depreciated substantially, increasing debt service costs and reducing the USD value of local revenues.
- Regulatory and Political: Operations in Latin America face risks of expropriation, tax reforms (e.g., Colombia's wealth tax and rising income tax rates), and social unrest (road blockades in Colombia).
- Acquisition Risks: The pending Morona Block acquisition in Peru is subject to regulatory approvals and environmental impact assessments. The PN-T-597 concession in Brazil is subject to a court injunction.
- Customer Concentration: Reliance on single customers in Chile (ENAP for oil, Methanex for gas) and Brazil (Petrobras for gas).
Investor Verification Checklist
- Debt Covenants: Verify compliance with the Notes due 2020 and the Rio das Contas credit facility covenants, specifically the Net Debt to EBITDA ratios, given the drop in profitability and oil prices.
- Foreign Exchange Exposure: Assess the impact of continued depreciation of the Brazilian real on the $70.5 million USD-denominated debt and future cash flows from Brazil.
- Peru Acquisition Status: Monitor the regulatory approval timeline for the Morona Block acquisition, which is critical for future reserve growth but carries execution risk.
- Cost Reduction Execution: Verify the realization of the projected $12 million annual cost savings from workforce reductions and operational efficiencies.
- Reserve Reclassification: Review if lower oil prices have caused any proved undeveloped reserves to be reclassified as non-proved due to economic viability thresholds.