GeoPark’s $1 billion plan in its return to Argentina

GeoPark reached an agreement with Phoenix Global Resources in May. The company, which had left Argentina in 2021, had decided it had to enter Vaca Muerta “no matter what.” Exxon’s “catalyst,” the “perfect fit” with its partner and why it will seek local financing.

By: Juan Manuel Compte
Chief Business Editor, El Cronista
First published in El Cronista.com

Last week, Pluspetrol emerged as the winner of ExxonMobil’s assets in Vaca Muerta. The news ended a process that took more than a year, and which in successive rounds had left several interested parties by the wayside. One such company GeoPark, an independent Latin American energy company that registered for the sale right from the start, almost immediately after having defined that to support its growth plan it needed a presence in Vaca Muerta, the fourth largest reserve of unconventional oil in the world.

In hindsight, GeoPark CFO Jaime Caballero says he is “grateful” for that tender, which the Bogota-based company was part of until March. “That process led us to Phoenix. Without them, we wouldn’t be where we are today,” he said.

What Caballero refers to is the deal that GeoPark closed just two months later with Phoenix Global Resources, a subsidiary of Swiss company Mercuria Energy Trading, from which it bought stakes in four blocks: 45% of Mata Mora Norte and Mata Mora Sur (in Neuquen province) and 50% of Confluencia Norte and Confluencia Sur (in Rio Negro province). The price was agreed at $190 million, which according to experts was the highest valuation per acre paid in Vaca Muerta ($9,000 in the case of Mata Mora Norte).

GeoPark furthermore committed to finance exploration over the next two years, for investment reported at that time of up to $113 million, plus $11 million in acquiring transport capacity and $10 million in a “contingency bond” dependent on the results of the Confluencia exploration campaign.

By “where we are today” Caballero means the ongoing investment. At end-October, the National Securities Commission (CNV) authorized GeoPark to issue debt up to $500 million. Phoenix (which operates the blocks) and GeoPark want to scale up production at Mata Mora Norte, the only block currently in production with an anticipated 14,000 barrels per day by end-2024, to 40,000 barrels per day by 2028, and GeoPark is already talking about an additional 20,000 barrels per day from the development of Confluencia. And that, Caballero dreams, will only be the start.

“We see Vaca Muerta as very attractive, and we will continue to analyze alternatives. We want to do it. The Vaca Muerta formation offers further opportunities, and the partnership with Phoenix allows us to look at things together,” said Caballero, who until August last year was CFO of Ecopetrol, Colombia’s largest company.

Founded in 2002, GeoPark started operations in Argentina in 2006, investing $80 million in conventional wells in Mendoza and Santa Cruz before exiting the country in 2021. GeoPark returned because, as part of its expansion plan, it decided to get into shale. And in South America, shale is Vaca Muerta.

“In our sector, everyone has monitored the development of Vaca Muerta in the last 10 years, whether it fits with their strategy or not. For GeoPark, this interest in seeing it in detail began a couple of years ago, when the basin was already a little more derisked and offered different investment characteristics,” Caballero said. “It was one thing to get involved 8-10 years ago, when there were many doubts, and another to do it now, when there are success stories, information, geological data, and greater understanding of the subsoil” he added.

“We see Vaca Muerta as very attractive,” GeoPark CFO Jaime Caballero said.

“What we did was proactive, not opportunistic, and is in response to one of the company’s strategic premises,” Caballero continued. “Since the company started 22 years ago, we have held the view that Latin America has world-class petroleum systems, and we want to be part of them. In that sense, a Latin American company has that as a strategic premise. At the very least, Vaca Muerta had to be a known play. The consideration of getting in or not came later. But we’ve wanted to understand its potential for some time,” he added.

For Caballero, the Exxon process was an “accelerator” of GeoPark’s entry strategy, in terms of technical analysis, financial structuring and entering into what he calls “mature conversations” about an acquisition.

“It was a concrete operation on the table at a very significant scale and with a growth tendency, and the competitive dynamics exposed us to an entry cost that, quite possibly, did not make sense for us,” he said. “When we surveyed the entire basin, based on geological and commercial information, we saw that there were other opportunities. That’s where the process with Phoenix came about,” he explained.

With the new partner [Phoenix], on the other hand, there was a “fit,” Caballero continued. “In terms of the size of the transaction, in that it was an operator, also in the corporate culture. We saw a very strong fit where we felt more comfortable.”

One detail that GeoPark valued most was Phoenix’s track record: it started in Vaca Muerta in 2021 and went from zero to 10,000 barrels per day at the time of the transaction. “It was an interesting growth story in a very short time: two, three years.”

The asset, of course, was also attractive. “It is in production, geologically derisked, it has certified reserves and a development plan taking it from 10,000 barrels per day to 14,000 barrels per day today and, eventually, to 40,000 barrels per day in two or three years. That offers a tremendously attractive growth curve with very few risks,” Caballero outlined.

“And that is only Mata Mora Norte,” he emphasized. “There is a lot of visibility on the number of wells that can be drilled. We saw in that asset that there were 200 possible drilling locations, and that leverages a highly predictable development plan. You can know what you’ll be doing in five years. That is the alignment we had with the operator,” he added.

GeoPark plans to invest between $170 million and $200 million a year in capex in Mata Mora over the next three years, and has also started to explore Confluencia. “We have already drilled three of the seven wells in our commitment,” Caballero said. Including Confluencia, production could increase to 60,000 barrels per day. “The capital intensity continues over time. Four, five, six years, until 2032,” he said, in an initial investment package expected to be $1 billion through 2028.

“Our own cash generation is an important component of the financing. These projects soon become cash flow positive. The surplus will be done with financing, which in principle will be local. We want to take advantage of the current conditions of the Argentine capital market. There is a lot of appetite for debt instruments in dollars and we want to take advantage of that,” Caballero said.

“In the next two or three years, we could issue about $300 million of debt to support this. The rest comes from the generation of the business’s own cash,” he said.

The timing was also right. “We built the investment base case according to the circumstances of the time. And back then, there was a lot of uncertainty about how certain regulatory development was going to play out,” he recalled, thinking back to a year ago when the company decided to return to Argentina.

“In the oil industry, decisions have to transcend political periods. We made our decision from a very conservative perspective. But without a doubt, from that moment on we have seen favorable winds that we love. More recent regulatory developments have given an additional boost to the sector,” Caballero concluded.