The capital-draining, production-boosting shale boom in North America and the bust playing out worldwide today may be holding the attention of oil and gas investors.
North America’s shale boom has basked in the oil and gas spotlight for so long that other regions continue to be overlooked.
Some believe potential in another region—Latin America— is being treated as an also-ran despite a strong balance sheet and operation success.
That’s OK with companies such as GeoPark Ltd. (NYSE: GPRK) that are building on positions in hydrocarbon-rich areas with few independent competitors.“It’s a region that has been dominated by major oil and gas companies and NOCs, but we’ve grown from scratch,” GeoPark CEO Jim Park told Hart Energy. “We have systematically built ourselves to a production of about 24,000 barrels a day, 120 million barrels of 2P reserves and about a billion barrels of exploration resources that are in proven hydrocarbon basins.”
With assets in 32 blocks in 12 basins covering more than 6 million acres in five countries, the Santiago, Chile-based company has “grown by the drill bit” sinking nearly 200 wells in the last six years with a success rate of more than 70%.
Exploration successes in 2015 included several discoveries in Colombia, where the Jacana 1 and the Chachalaca 1 exploration wells hit oil on the GeoPark-operated Llanos 34 Block.
“We also have two exploration projects in Brazil in the Reconcavo Basin that we may be drilling on this year,” Park added. “We are also expanding a gas field in Chile, Ache Este, which is a step-out well that we are hoping to bring online.”
As GeoPark looks to grow its production—the extent of which depends on oil price—it also wants to expand its portfolio.
GeoPark’s strategy involves targeting assets offered by NOCs and corporate M&A deals for assets that fit its existing platforms. GeoPark has acreage in basins across Chile, Colombia, Brazil, Peru and Argentina.“We start from a technical approach, looking at all of the basins across Latin America, and decide which ones we want to go into based on risk, infrastructure, regulatory issues then we work to get a presence in those areas,” Park said. “We’re always moving on those different basin areas.”
In 2010, GeoPark partnered with LG International Corp., a subsidiary of Korean conglomerate LG Corp., to grow its position. Two years later the company acquired Winchester Oil & Gas and La Luna Oil for $30 million, expanding in Colombia’s Llanos, Magdalena and Catatumbo basins.
“We did that to give us the right balance of production and exploration,” Park said. “We’ve been able to take those assets and grow them from about 2,000 bbl/d to over 34,000 bbl/d gross, about 16,000 bbl/d net, with more growth coming. Incidentally, during this low-price environment, we’re still able to grow that production over 35% in Colombia.”
Mexico is also on GeoPark’s radar. After years of declining production, Mexico opened its doors to foreign investors in December 2013.
The country is believed to have about 9.8 Bbbl of proved oil reserves and about 17 Tcf of proved natural gas, U.S. Energy Information Administration data show.
“It fits our skill set perfectly,” Park said. “We think there are great opportunities.”
In addition to participating in bid rounds, GeoPark is eyeing service contract opportunities and wants to form a joint venture with Pemex. GeoPark also already partnered with Mexican conglomerate Grupo Alfa.
The push to enter Mexico comes after GeoPark gained acreage in Argentina, where it is working with Wintershall on a conventional oil project in the Neuquén Basin and with Pluspetrol on a heavy oil project. The hydrocarbon and acreage pursuit also come amid a continued downturn.
E&P spending in Latin America fell by 19% in 2015 and is expected to fall another 18% in 2016 mainly on reduced spending from the region’s largest NOCs, according to Barclays. Companies of all sizes have been forced to cut back as supply outweighs demand. GeoPark is no exception.
In late 2014, as oil prices began to tumble, “We took our medicine quickly and got ready for at least a 2-plus-year timeline of low oil prices,” Park said. “We kept our eye on cash and then attacked every single line item. Even our New York lawyers took a pay cut.”
By year-end 2015, the outcome, partly attributed to efficiency gains and innovation, included a:
- 75% year-over-year reduction in capex;
- 56% drop in operating costs;
- 30% reduction in drilling costs; and a
- More than 45% reduction in cash costs—opex, G&A and sellingper barrel of oil equivalent.
Combined, the cuts make more than 85% of GeoPark’s production cash flow positive if prices fell between $25 and $30 per barrel. Most of the company’s production is from conventional oil.
“Our agility and our big diversified asset base allow us to pivot quickly,”Park added, noting new cost-savings ideas keep coming. “Our team and our model have been proven by our consistent track record of being able to grow production, reserves and cash flow over the last nine years.”
The company’s liquidity includes about $90 million in cash and another $150 million in credit lines.
Given the volatility of oil prices, GeoPark’s 2016 work and investment program is based on three oil price scenarios—$25-$30, $35-$40 and $45-$50—each with a different set of production and capex figures.
“The difficult annual budgeting process is sort of out of the window since agility and flexibility are so necessary today,” he continued.
Only the best projects will move forward under today’s tough market conditions.
Results in the 82,000-acre Llanos 34 Block illustrate GeoPark’s capabilities, he said.
Numerous discoveries have led to more than 100 MMbbl of oil there. The block is anchored by the Tigana Field, which has 3P reserves of more than 60 MMbbl and is apparently connected to a 15-km area rich in hydrocarbons to the north and south.
“It’s an attractive complex,” he said. “Ten wells have been drilled on it and there are another 40 to 50 opportunities to drill there. It’s also an interesting area in that at about a $40 oil price a well still has a payback in less than 12 months and an IRR of close to 100%.”
GeoPark’s latest quarterly report shows that its oil production rose by 19% to 17,123 bbl/d compared to the same time in 2014. Gas production also increased, rising 6% to 35.6 MMcf/d. The biggest gain was in Colombia, where the Llanos 34 Block saw its 14th consecutive quarter production increase, reaching 34,000 bbl/d.
After 10 years of growth, the company’s assets, financing and business model should carry the company through the downturn.
“We are ready for 2016,” Park said.
Velda Addison can be reached at email@example.com.