Fitch Affirms GeoPark's Foreign & Local Currency IDRs at 'B'; Outlook Stable

Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDR) of GeoPark Latin America Limited Agencia en Chile (GeoPark) at 'B'. The Rating Outlook is Stable. In addition, Fitch has affirmed GeoPark's senior unsecured debt 'B' rating.

GeoPark's ratings reflect the company's small, but growing scale of production and relatively small reserve profile as well as its production concentration. Free cash flow (FCF) is expected to remain negative during the next couple of years due to the company's aggressive growth strategy, which could limit financial flexibility. Positively, GeoPark's ratings also reflect the company's improving financial and operating performance and its adequate leverage. The company's production and reserves diversification efforts via its Colombian and Brazilian market entries also augur well for its credit quality prospects.

KEY RATING DRIVERS

SMALL AND 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 19 blocks in Chile, Colombia, and Argentina, 96% of the current net production is concentrated in four of them. This limited diversification exposes the company to operational macroeconomic risks associated with small-scale oil and gas production.

ONGOING DIVERSIFICATION EFFORTS ARE POSITIVE STEPS; COMPANY RETAINS SOLID ACCESS TO CAPITAL MARKETS: Increasing geographic diversification is positive for the company's credit quality, which is why its foray into Brazil via the acquisition of Rio das Contas and winning nine concession licenses represent positive steps for GeoPark. Following GeoPark's US$160 - US$200 million IPO, the company will have enough cash on hand for further acquisitions in 2014-2015, with Peru representing an attractive target market (though GeoPark may also consider other targets in Brazil, Argentina, Colombia and Chile). However, execution risk will remain prevalent for the company given its rapid expansion plans.

STRATEGIC ALLIANCES ANOTHER KEY FOR RESPONSIBLE GROWTH: Since 2010, GeoPark and LG International Corporation (LGI, subsidiary of the Korean LG Group) agreed on a strategic alliance to build a portfolio of upstream oil and gas assets throughout Latin America through 2015. This partnership has targeted new project acquisitions in Brazil, Colombia, Peru and Chile. Fitch believes that this partnership is positive for GeoPark as it could provide additional cash resources to help fund the company's growth strategy and provide technical support and expertise.

In 2011, LGI acquired a 20% equity interest in GeoPark's Chilean business for US$148 million. LGI also committed US$31.6 million of new capital injections in Tierra del Fuego licenses over the next three years. In December 2012, LGI acquired a 20% equity interest in GeoPark's Colombian business for a consideration of US$20.1 million. Notably, in 2013, GeoPark announced the formation of another significant strategic alliance, this time with Tecpetrol S.A. This alliance will seek to jointly identify, study, and potentially acquire upstream oil and gas opportunities in Brazil.

NEGATIVE FCF DUE TO LARGE CAPEX: The company has reported negative annual FCF over the past six years, mainly as a result of its aggressive growth strategy. For the LTM ended Sept. 30, 2013, FCF was US-$81 million (above US-$66 million in 2012), mainly as a result of significant capital expenditures of US$238 million as GeoPark integrated its 2012 Colombia acquisitions (for which it paid US$105 million). GeoPark's significant investment plans over the next five years will involve developing and increasing production at existing operations as well as new acquisitions in the region, such as the US$140 million Rio das Contas acquisition which is expected to close in 1Q'14. This could continue pressuring FCF in the near term and reduce the company's financial flexibility. Fitch is forecasting negative FCF at GeoPark during the 2014 - 2015 period.

IMPROVING FINANCIAL METRICS: GeoPark's credit metrics have been improving over the past few years as a result of the company's growth strategy. As of the LTM ended Sept. 30, 2013, leverage ratio, as measured by total debt/EBITDA, reached 2.0x, down from 2.1x in 2012 and 2.6x in 2011. Fitch is forecasting for total debt/EBITDA in the 2x level for the next three years, as production increases more than offset continued aggressive capex spending. At this level, the company would remain below its debt covenants, which include: consolidated debt to consolidated EBITDA ratio not higher than 2.75x for the first two years, and 2.5x for the remaining life of the company's senior notes, and consolidated EBITDA to consolidated interest expenses over 3.5x.

RATING SENSITIVITY

Drivers for a negative rating action are either failure to reach and maintain leverage at 2.5x - 2.75x or below, or an overly aggressive growth strategy that could pressure credit metrics. In addition, 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.

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' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816990

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.

Fitch Ratings
Primary Analyst
Xavier Olave, [phone]
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Paula Garcia, [phone]
Director
or
Committee Chairperson
Daniel Kastholm, [phone]
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, [phone]
[e-mail]