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GeoPark Ltd. First Quarter 2020 Results

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   |    Friday,May 15,2020

GeoPark Limited reported its Q1 2020 results.

Highlights:

  • Record consolidated oil and gas production of 45,731 boepd following 16% growth
  • Revenue of $133.2 million
  • Adjusted EBITDA of $77.7 million, or $20.1 per boe – and cash hedge gains of $5.6 million
  • Capital Expenditures of $33.7 million
  • Adjusted EBITDA to Capital Expenditures ratio of 2.3x
  • Non-cash accounting impairments in Chile, Peru and Argentina (of $97.5 million) resulting in a net loss of $89.5 million
Risk-Management
  • Immediate protocols and actions in place to protect health and safety of team
  • Over $280 million ongoing cost savings and capital investment reductions across regional platform
  • Temporary production shut-in of 6,500-7,500 boepd to preserve shareholder value and minimize contractor and employee activity and presence in the fields
  • 2020 work program reduced by 75% to $45-50 million targeting 40,000-42,000 boepd average production and operating netbacks of $200-220 million assuming Brent of $30 per bbl1
Tools and Safety Nets
  • $165.5 million of cash and cash equivalents
  • $75 million oil prepayment facility, with $50 million committed
  • Approximately $130.7 million in uncommitted credit lines
  • Extensive hedging position with 26,000 bopd hedged in 2Q2020, 17,500 bopd in 3Q2020 and 11,000 bopd in 4Q2020
  • Long-term financial debt maturity profile with no principal payments until September 2024
  • S&P and Fitch reaffirmed GeoPark’s long-term corporate credit rating at B+
Long Term
  • Successful operational takeover and full integration of high potential Amerisur Resources Plc (“Amerisur”) assets
  • Identifying and protecting critical people, tools and capabilities necessary for the short, medium and long-term
  • Streamlining and improving business across portfolio in all departments and capabilities
  • Ready to expand work program at Brent prices of $35-40 per barrel

James F. Park, Chief Executive Officer of GeoPark, said: “Any reflection on these strong first quarter results needs to begin by expressing profound gratitude and admiration for the GeoPark men and women who are working day and night pushing through this downturn and continuously making our Company perform, protecting our shareholders and positioning us for the new world on the other side. Across six countries, our team moved with quickness and agility to protect the health and safety of employees, contractors and communities and ensure that our hydrocarbons keep flowing to markets. Because of our risk-managed business model and track-record, our team simultaneously attacked every component and dimension of our Company to preserve cash and cut over $280 million in capital, operating and structure costs to be prepared for however long the pandemic, global economic shut-down and flooded oil markets endure. We worked with trusted partners and governments to adjust programs and secure additional financial support, if ever needed. As a long-term opportunity-driven company working in the most attractive hydrocarbon region today, we also are looking ahead with excitement and to take advantage of this time to streamline and improve our overall business - and more strongly position GeoPark for continued economic growth and success.”

Revised 2020 Program

As part of the Company’s ongoing cost savings and capital investment reductions with over $280 million implemented to date, GeoPark is adjusting its 2020 work program and investment plan to $45-50 million, with full flexibility to expand its capital investment program when oil prices recover.

GeoPark’s revised 2020 guidance reflects temporary production shut-ins and further improvements to the Company’s leading cost efficiencies with an operating netback to capital expenditures ratio of 3.5+ times even with Brent at $25-30 per bbl.

The Company has the ability to shut-in and quickly bring back production volumes to pre-shut-in levels with minimal cost and without negatively impacting reservoir conditions.

The table below provides further details about GeoPark’s revised 2020 guidance compared to its March 19,2020 revision guidance.

 

May 13, 2020 Revision

March 19, 2020 Revision

Brent Crude Oil Price2

$25 per bbl

$30 per bbl

$25 per bbl

$30 per bbl

2020 Average Production (boepd)

39,000-41,000

40,000-42,000

43,000-44,000

43,000-44,000

2020 Operating Netback3

$160-180 million

$200-220 million

$150-170 million

$200-220 million

2020 Capital Expenditures

$45-50 million

$45-50 million

$70-80 million

$70-80 million

Operating Netback to Capital Expenditures Ratio4

3.6 times

4.4 times

2.1 times

2.8 times

Production volumes for 2020 are expected to average 39,000-42,000 boepd at $25-30 per bbl, depending on different timing assumptions to restart temporarily shut-in production.

G&A Cuts / Salary Reductions

GeoPark is also taking decisive steps to reduce its 2020 G&A and G&G expenses, which are expected to decrease by 35-40% versus the Company's original budget to approximately $50 million, including company-wide cost-cutting initiatives and voluntary salary and bonus reductions by management, Board of Directors and employees (20-50% reductions). Other initiatives to preserve cash include the temporary suspension of quarterly cash dividends and share buybacks.

Q1 Summary

Production: Overall oil and gas production grew by 16% to 45,731 boepd in 1Q2020 from 39,557 boepd in 1Q2019, due to increased production in Colombia, including 5,812 bopd from the recent Amerisur acquisition. To a lesser extent, the production increase was also due to higher production in Chile and Argentina, partially offset by lower production in Brazil. Oil represented 89% of total reported production compared to 87% in 1Q2019.

For further details, please refer to the 1Q2020 Operational Update published on April 20, 2020.

Reference and Realized Oil Prices: Brent crude oil prices averaged $50.8 per bbl during 1Q2020, $12.9 per bbl lower than 1Q2019 levels whereas GeoPark’s consolidated realized oil sales price averaged $37.0 per bbl in 1Q2020, $11.7 per bbl lower than the $48.7 per bbl in 1Q2019, reflecting lower commercial and transportation discounts in Colombia, partially offset by a higher Vasconia marker differential.

In Colombia, commercial and transportation discounts improved by $2.7 per bbl and averaged $9.3 per bbl in 1Q2020, compared to $12.0 per bbl in 1Q2019, resulting from further improvements achieved for production in the Llanos 34 block plus the addition of the Platanillo (GeoPark operated, 100% WI) and CPO-5 blocks as part of the Amerisur acquisition, with lower commercial and transportation discounts. The Vasconia marker discount averaged $5.2 per bbl in 1Q2020, compared to $3.5 per bbl in 1Q2019.

Consolidated revenue decreased by 11% to $133.2 million in 1Q2020, compared to $150.1 million in 1Q2019 reflecting lower oil prices that were partially offset by higher deliveries.

Sales of crude oil: Consolidated oil revenue decreased by 10% to $123.8 million in 1Q2020, driven by a 24% decrease in realized oil prices, partially offset by 17% higher deliveries. Oil revenue was 93% of total revenue compared to 92% in 1Q2019.

  • Colombia: In 1Q2020, oil revenue decreased by 10% to $113.5 million following lower oil prices, partially offset by higher oil deliveries. Realized prices decreased by 25% to $36.2 due to lower Brent oil prices and a higher Vasconia differential, partially offset by lower commercial and transportation discounts. Oil deliveries increased by 18% to 35,888 bopd, reflecting the recent acquisition of Amerisur and continued development of the Llanos 34 block. Colombian earn-out payments decreased to $4.6 million in 1Q2020, compared to $6.1 million in 1Q2019, in line with lower oil revenue in the Llanos 34 block.
  • Chile: In 1Q2020, oil revenue decreased by 36% to $2.1 million, due to lower volumes sold and lower oil prices. Oil deliveries decreased by 29% to 474 bopd due to the natural decline of the fields whereas realized oil prices decreased by 11% to $48.8 per bbl, in line with lower Brent prices, partially offset by lower discounts.
  • Argentina: In 1Q2020, oil revenue decreased by 2% to $7.8 million due to lower oil prices, partially offset by higher deliveries. Realized oil prices decreased by only 6% to $51.6 per bbl due to local oil price controls, whereas oil deliveries increased by 2% to 1,653 bopd due to optimization activities focused on enhancing base production levels.

Sales of gas: Consolidated gas revenue decreased by 25% to $9.4 million in 1Q2020 compared to $12.5 million in 1Q2019. Gas revenue dropped due to a 22% decrease in gas prices and a 3% decrease in gas deliveries. Gas revenue was 7% of total revenue compared to 8% in 1Q2019.

  • Chile: In 1Q2020, gas revenue decreased by 10% to $4.9 million reflecting lower gas prices, partially offset by higher gas deliveries. Gas prices were 23% lower, or $3.7 per mcf ($22.3 per boe) in 1Q2020 due to lower methanol prices. Successful development of the Jauke gas field and the recent discovery of the Jauke Oeste gas field increased gas deliveries by 15% to 14,445 mcfpd (2,408 boepd).
  • Brazil: In 1Q2020, gas revenue decreased by 47% to $2.8 million, due to lower gas deliveries and lower gas prices. Gas deliveries fell by 39% in the Manati gas field (GeoPark non-operated, 10% WI) to 6,425 mcfpd (1,071 boepd) due to lower gas demand in Brazil. Gas prices decreased by 14% to $4.7 per mcf ($28.4 per boe), due to the impact of the local currency devaluation, which was partially offset by the annual price inflation adjustment of approximately 7%, effective January 2020.

    The natural gas produced in the Manati gas field is sold to Petrobras under a long-term contract that provides for minimum monthly and annual take or pay levels. Petrobras recently notified its partners in the Manati consortium that the COVID-19 pandemic could be considered a force majeure event that could temporarily reduce its offtake commitment. GeoPark considers that the COVID-19 pandemic does not constitute a force majeure event under the contract and is currently evaluating next steps to avoid the effects of such notice.
  • Argentina: In 1Q2020, gas revenue decreased by 17% to $1.1 million, resulting from lower gas prices, partially offset by higher deliveries. Gas prices decreased by 31% to $2.8 per mcf ($16.5 per boe) due to local market conditions while deliveries increased by 20% to 4,551 mcfpd (758 boed) due to optimization activities focused on enhancing base production levels and the successful development of the Challaco Bajo gas field.

Commodity Risk Management Contracts: Consolidated commodity risk management contracts amounted to a $32.0 million gain in 1Q2020, compared to a $21.3 million loss in 1Q2019.

Commodity risk management contracts have two different components, a realized and an unrealized portion.

The realized portion of the commodity risk management contracts registered a cash gain of $5.6 million in 1Q2020, compared to a $1.8 million gain in 1Q2019. Realized gains in 1Q2020 resulted from hedges in place covering 18,000 bopd with put spreads of $55-45 per bbl that were higher than prevailing oil prices during March 2020.

The unrealized portion of the commodity risk management contracts amounted to a $26.4 million gain in 1Q2020, compared to a $23.1 million loss in 1Q2019. Unrealized gains during 1Q2020 resulted from a decrease in the forward Brent oil price curve compared to December 2019.

GeoPark recently added new oil hedges for 15,000 bopd in 2Q2020 and 6,500 bopd in 3Q2020, further increasing its low-price risk protection over the next six months. After adding these new hedges, the Company has 26,000 bopd, 17,500 bopd and 11,000 bopd of its oil production hedged in 2Q2020, 3Q2020 and 4Q2020, respectively. Please refer to the “Commodity Risk Oil Management Contracts” section below for a description of hedges in place as of the date of this release.

Production and Operating Costs: Consolidated production and operating costs increased by 6% to $41.1 million resulting from a 15% increase in overall oil and gas deliveries, partially offset by lower production and operating costs per boe.

The table below provides a breakdown of production and operating costs in 1Q2020 and 1Q2019:

(In millions of $)

1Q2020

1Q2019

Operating costs

28.3

25.3

Royalties

12.7

13.3

Share-based payments

0.1

0.3

Production and operating costs

41.1

38.9

Consolidated operating costs increased by $3.0 million to $28.3 million in 1Q2020 compared to $25.3 million in 1Q2019, mainly resulting from a 15% increase in oil and gas deliveries.

Consolidated operating costs per boe amounted to $7.9 in 1Q2020, almost unchanged from $7.8 per boe in 1Q2019.

The breakdown of operating costs is as follows:

  • Colombia: Operating costs per boe increased to $6.1 in 1Q2020 compared to $5.5 in 1Q2019. Total operating costs increased by 22% to $18.3 million, in line with 19% higher volumes delivered and to a lesser extent due to the addition of the Platanillo block as part of the Amerisur acquisition, which has higher costs per boe than the Llanos 34 block.
  • Chile: Operating costs per boe decreased to $12.7 in 1Q2020 compared to $18.1 in 1Q2019, due to lower well intervention activities. Total operating costs decreased by 27% to $3.3 million in 1Q2020 from $4.5 million in 1Q2019, despite an increase of 5% in oil and gas deliveries.
  • Brazil: Operating costs per boe increased to $13.5 in 1Q2020 compared to $9.6 in 1Q2019, mainly due to the impact of fixed costs over lower production and deliveries in Manati gas field, which decreased by 39%. Total operating costs decreased by 9% to $0.9 million in 1Q2020 from $1.0 million in 1Q2019.
  • Argentina: Operating costs per boe increased to $26.7 in 1Q2020 compared to $24.3 in 1Q2019. Total operating costs increased to $5.7 million in 1Q2020 from $4.8 million in 1Q2019. The 1Q2020 costs were relatively unchanged compared to $26.0 per boe in 4Q2019.

Consolidated royalties fell by $0.6 million to $12.7 million in 1Q2020 compared to $13.3 million in 1Q2019, resulting from lower oil prices, partially offset by higher deliveries.

Selling Expenses: Consolidated selling expenses decreased by $1.5 million to $2.0 million in 1Q2020 (of which $1.6 million, or $0.5 per bbl, correspond to Colombia), compared to $3.5 million in 1Q2019.

Administrative Expenses: Consolidated G&A costs per boe decreased by 15% to $2.85 in 1Q2020 compared to $3.3 in 1Q2019. Total consolidated G&A increased to $12.7 million in 1Q2020 compared to $11.7 million in 1Q2019.

Geological & Geophysical Expenses: Consolidated G&G costs per boe decreased by 26% to $1.2 in 1Q2020 versus $1.6 in 1Q2019. Total consolidated G&G expenses increased to $4.5 million in 1Q2019 compared to $4.3 million in 1Q2019.

Adjusted EBITDA: Consolidated Adjusted EBITDA6 decreased by 16% to $77.7 million, or $20.1 per boe, in 1Q2020 compared to $92.3 million, or $27.4 per boe, in 1Q2019.

  • Colombia: Adjusted EBITDA of $76.3 million in 1Q2020
  • Chile: Adjusted EBITDA of $2.9 million in 1Q2020
  • Brazil: Adjusted EBITDA of $0.8 million in 1Q2020
  • Argentina: Adjusted EBITDA of $2.1 million in 1Q2019
  • Corporate and Peru: Adjusted EBITDA of negative $4.5 million in 1Q2020

Depreciation: Consolidated depreciation charges increased by 54% to $39.3 million in 1Q2020, compared to $25.5 million in 1Q2019, due to 15% higher volumes delivered and due to the Amerisur acquisition, which has higher depreciation costs per boe.

Write-off of Unsuccessful Exploration Efforts: The consolidated write-off of unsuccessful exploration efforts was $3.2 million in 1Q2020 compared to $0.3 million in 1Q2019. Amounts recorded in 1Q2020 refer to unsuccessful exploration costs incurred in Chile in the Huillin exploration prospect in the Isla Norte block (GeoPark operated, 60% WI).

Impairment of Non-Financial Assets: Consolidated non-cash impairment of non-financial assets amounted to $97.5 million in 1Q2020 ($50.3 million recorded in Chile, $31.0 million in Peru and $16.2 million in Argentina), representing costs incurred in prior years and resulting from the significant decrease to current and forecasted crude oil prices caused by the COVID-19 pandemic and its effect on global energy prices. A non-cash impairment loss is recognized for the amount by which an asset’s carrying amount exceeds its recoverable amount. Revisions to forecasted crude oil prices could result in reversals to previously recorded impairment charges.

Other Income (Expenses): Other operating expenses were $0.2 million in 1Q2020, compared to a $1.3 million gain in 1Q2019.

Financial Results

Financial Expenses: Net financial expenses increased to $13.3 million in 1Q2020, compared to $8.8 million in 1Q2019 due to higher interest expenses related to the issuance of the $350 million notes due in 2027 (“2027 Notes”).

Foreign Exchange: Net foreign exchange charges added a $10.8 million loss in 1Q2020 compared to a $1.0 million gain in 1Q2019. Net losses in 1Q2020 mainly reflect unrealized losses in currency risk management contracts to mitigate the impact of fluctuations of local currency in Colombia.

Income Tax: Income tax expenses were $30.3 million in 1Q2020 compared to $18.5 million in 1Q2019, in line with higher taxable income in 1Q2020 and the effect of the devaluation of local currencies over deferred income taxes.

Profit: Loss of $89.5 million in 1Q2020 compared to a $19.7 million profit recorded in 1Q2019, mainly due to the effect of non-cash impairment charges, higher financial expenses, foreign exchange losses and income taxes.

Balance Sheet

Cash and Cash Equivalents: Cash and cash equivalents totaled $165.5 million as of March 31, 2020 compared to $111.2 million as of December 31, 2019. Cash generated from operating activities equaled $38.0 million and cash generated from financing activities equaled $323.2 million, partially offset by cash used in investing activities of $306.0 million.

Cash generated from operating activities of $38.0 million in 1Q2020 included income tax payments of $17.0 million.

For the remainder of 2020, the Company expects to pay $40-45 million related to tax obligations of the fiscal year 2019 and $8-10 million of tax pre-payments of the current fiscal year, that will offset cash taxes payable in 2021.

Cash generated from financing activities of $323.2 million included net proceeds from the issuance of the 2027 Notes of $342.5 million, partially offset by interest payments of $13.8 million, lease payments of $2.8 million and share repurchase payments of $2.7 million.

Cash used in investing activities of $306.0 million included the acquisition of Amerisur of $272.3 million (net of cash received), and organic capital expenditures of $33.7 million.

Financial Debt: Total financial debt net of issuance cost was $775.3 million, including the 2024 Notes, the recently issued 2027 Notes and other short-term bank loans totaling $7.6 million. Short-term financial debt was $12.3 million as of March 31, 2020.

For further details, please refer to Note 12 of GeoPark’s consolidated financial statements as of March 31, 2020, available on the Company’s website.

Covenants in 2024 Notes: The 2024 Notes include incurrence test covenants that require the net debt to Adjusted EBITDA ratio to be lower than 3.25 times and the Adjusted EBITDA to interest ratio to be higher than 2.25 times until September 2021. The Company is compliant with all covenants.

Issuance of 2027 Notes: In January 2020, the Company issued $350 million of 5.5% notes due in 2027 (“2027 Notes”) in accordance with Rule 144A under the United States Securities Act, and outside the United States to non-U.S. persons in accordance with Regulation S under the United States Securities Act. Funds were used for the Amerisur acquisition and for general corporate purposes. The indenture governing the 2027 Notes includes incurrence test covenants that provide, among other things, that Net Debt to Adjusted EBITDA ratio should not exceed 3.25 times and the Adjusted EBITDA to Interest ratio should exceed 2.5 times. As of the date of this release, the Company is well within both covenants.


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