Geopark Ltd
Annual Report 2011

Plain-text annual report

AnnuAl report 2011 eXecutIon rISk mAnAgement creAtIng opportunItIeS commItment CONTENTS 2 letter to Shareholders 6 Year in review 54 Directors’ report 59 corporate governance 62 Directors’ remuneration report 64 65 Statement of Directors’ responsibilities Independent Auditors’ report 66 consolidated Statement of Income 66 consolidated Statement of comprehensive Income 67 consolidated Statement of Financial position 68 consolidated Statement of changes in equity 69 consolidated Statement of cash Flow 70 notes to the consolidated Financial Statements 92 Directors, Secretary & Advisors Oil and Gas Production Oil and Gas Reserves BOTTOM LINE 8 7 6 5 4 3 2 1 0 ) d / e o b M ( n o i t c u d o r P y l i a D e g a r e v A 50 40 30 20 10 e o b M M 0I n 2006 2007 2008 2009 2010 2011 2006 2008 2009 2010 2011 Oil and Condensate Gas 2P Gas 2P Oil Oil Production Gas Production Total Revenues EBITDA 120 100 80 70 60 50 40 30 20 10 $ S U M M 0I n 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -5,000 $ S U f o d n a s u o h T n I 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Oil and Condensate Gas Dear Shareholders, For geopark, 2011 was again a year of delivery and growth – with our sixth consecutive year of key performance improvements. Importantly, • - Strategic Expansion: Asset portfolio was expanded by: Award of three new high potential hydrocarbon blocks in tierra del we progressed with new project acquisitions to expand our asset Fuego, chile; portfolio and set the foundation for step-change growth in 2012 with - entry by lg International (“lgI”) into geopark’s chile business via its a significant new investment programme. acquisition of a 20% interest; 2011 results key developments included: - Acquisition of two oil and gas exploration and production companies in colombia, with interests in ten hydrocarbon blocks, during the First Quarter 2012. • Organisational Strengthening: new experienced professionals • • Operational Improvements: oil production increased 27% with a 9% joined the company and Board to bring further depth and structure to increase in total oil and gas production. results were led by the drill bit our technical and management capabilities. with eighteen successful wells recorded out of twenty-five wells drilled. (current production is approximately 12,000 boepd.) chile continued to be our principal area of focus where geopark has established itself as the first and only private oil and gas producer – Financial Growth: revenues grew 40%, adjusted eBItDA increased today accounting for over 35% of chile’s total hydrocarbon 54%, net income increased 21% and year-end cash resources grew to production. our large acreage position in chile, with over 3.5 million uS$ 202 million. gross acres, contains a broad inventory of attractive production, 2 letter to Shareholders letter to ShAreholDerS development, high-impact exploration opportunities and high two acquisitions in colombia, completed in the First Quarter 2012, potential unconventional resources. As the only oecD country in latin created an attractive growth platform with a balanced mix of America, chile continues to provide an attractive base for investment production, development and exploration assets including: and an ideal platform for expansion throughout latin America. lg International growth partnership • Interests in 10 blocks (ranging from 5% to 100%) located in the llanos, magdalena and catatumbo basins, covering an area of approximately 220,000 gross acres, and with operatorship of four of the blocks. geopark and lgI cemented its strategic alliance by lgI acquiring a • crude oil production of approximately 2,800 barrels per day 20% interest in geopark’s chile business for uS$ 148 million in two (bopd) from three blocks and 2p oil reserves of approximately separate transactions. these transactions demonstrated the 10 million barrels. underlying value of the business geopark has built in chile and also lgI’s long-term commitment to our partnership to expand together • • prospective oil resources (unrisked) in excess of 25 million barrels. An active and on-going exploration and development drilling by building a portfolio of upstream assets throughout latin America. programme with a successful colombian operating and administrative team to support a smooth transition and start-up colombia Acquisitions by geopark in colombia. After proving our ability to convert under-performing projects into productive and economically attractive oil and gas assets, geopark successfully laid the groundwork for and initiated new project acquisitions to expand into new regions. letter to Shareholders 3 letter to ShAreholDerS 4 letter to Shareholders 2012 outlook Aided by our multi-year record of growth, geopark is strongly geopark has been able to develop a culture of continuous positioned for 2012 and beyond with attractive assets in chile, improvement, and, as we grow, efforts and adjustments are colombia and Argentina and secure cash flow streams. with continuously made to effectively manage our increasing scale and substantial cash reserves and the continuing support of partners scope. It is a vital and welcome challenge to successfully introduce and shareholders, we plan to accelerate capital investment on our the tools and structure necessary to run a larger company while properties and acquire new projects. we have an aggressive still maintaining and encouraging the original pioneering spirit and risk-balanced work programme, which provides a steady growth ideals which led us to be where we are today. platform and exposure to big growth opportunities. our technical and management team are built for expansion and ready to handle we express admiration for the geopark team for its important the increased activity. our low operating costs and discretionary achievements over the years and for an organisation which investment programme provide flexibility and security even in widely varying oil and gas price environments. continuously takes on new responsibilities and challenges to help make geopark better every day. we recognise and appreciate our team’s commitment to excelling in all that we do and in never For 2012, geopark has embarked on a uS$ 220-240 million capital giving-up. their professionalism, trust and kindness have made investment programmes (approximately uS$ 350 million including “working in the geopark way” mean something unique. new acquisitions) organised around the following priorities: • Execute to Grow: Drill 45-55 new wells to increase oil and gas for your continued support during 2011 and look forward production by 80-100% and grow oil and gas reserves; and increase with confidence to continuing to deliver and grow value in 2012 operating and investment efficiency to improve economic and beyond. we also express our gratitude to our investors and shareholders performance. • Manage Risk: continue to balance production profile between oil and gas; spread work programme exposure between production, development and high-impact exploration projects; expand funding exposure and capital sources; strengthen management and technical team; expand country footprint; and farm-out higher risk / non-core areas. • Expand the Business: Increase our portfolio of organic growth opportunities on existing properties and acquire new projects in latin America – targeting projects with proven reserves and production and with development and exploration upside. • Strengthen Commitment: continue to build the right kind of company – with a performance-driven culture, which values and protects our shareholders, employees, environment and communities and thereby supports and enhances our long-term business plan. Gerald E. O’Shaughnessy, chairman James F. Park, chief executive officer letter to Shareholders 5 2011 PERFORMANCE Key Operational Results Key Financial Results Key Strategic Results • • • • • • Oil Production Up 27%: Average oil production increased 27% to 2,510 bopd; total average oil and gas production increased 9% to 7,593 boepd in 2011. 72% Drilling Success: 18 wells drilled, completed and placed into production. 100% Reserve Replacement: DeGolyer and McNaughton certified 2P reserves increase of 6% to 49.5 mmboe and 3P reserves of 107 mmboe. Net Present Value of 2P reserves was assessed to be US$ 852 million and 3P reserves to be US$ 1,418 million. Fell Block Conversion to Exploitation Phase: 84% of the total area was converted into an exploitation phase valid up to 2032. (GeoPark exceeded the minimum investment commitment by over 75 times.) Seismic Operations: In Tranquilo and Otway Blocks completed 293 km of 2D seismic and 165 sq km of 3D seismic. A 3D seismic survey was started in first quarter 2012 on the Flamenco Block in Tierra del Fuego. Unconventional Resources Potential: Initiated a technical assessment of the oil and gas shale potential in Argentina (Vaca Muerta) and Chile (Estratos con Favrella). • • • • • • • Revenues Up 40%: Total revenues increased to US$ 111.6 million, led by 52% increase in oil revenues to US$ 73.5 million. EBITDA Up 54%: Adjusted EBITDA increased to US$ 63.4 million. Cash flow from operating activities increased 106% year-on-year to US$ 63.8 million. Netbacks Up 40%: Netbacks increased to US$ 22.90 per boe produced. Net Income Up 21%: Net Income increased to US$ 5.1 million. Capital Expenditures Up 70%: Capital expenditures increased to US$ 98.7 million due to increased drilling activity on the Fell and Tranquilo Blocks in Chile. Shareholders Equity Up 126%: Equity increased by US$ 116.6 million to US$ 208.9 million as a result of the transaction with LGI and improved financial performance. Year-End Positive Net Cash Position: Year-end cash resources were US$ 201.9 million. • • • • Entry by LGI into the Chilean Business: LGI acquired a 20% equity interest in GeoPark’s Chilean business for a consideration of US$ 148 million. Also committed to provide US$ 31.6 million over the next three years in Tierra del Fuego licences. Three New High Potential Blocks in Tierra del Fuego: GeoPark signed three participation agreements with ENAP to acquire the Campanario, Flamenco and Isla Norte blocks covering 460,000 acres in Tierra del Fuego, Chile. Acquisition of Ten Block Colombia Platform: In first quarter 2012, GeoPark acquired Winchester Luna and Hupecol – privately-held companies in Colombia. GeoPark acquired ten exploration and production blocks for a total consideration of US$ 105 million. Gas Purchase and Incentive Agree- ment: New commercial agreement with Methanex to incentivise gas development. Oil Gas 8 7 6 5 4 3 2 1 0 ) d p o e b M ( n o i t c u d o r P y l i a D e g a r e v A 2006 2007 2008 2009 2010 2011 6 performance • Year in review 2011 PERFORMANCE • • • • • • Key Operational Results Key Financial Results Key Strategic Results Oil Production Up 27%: Average oil production increased 27% to Revenues Up 40%: Total revenues Entry by LGI into the Chilean increased to US$ 111.6 million, Business: LGI acquired a 20% equity 2,510 bopd; total average oil and gas led by 52% increase in oil revenues to interest in GeoPark’s Chilean business production increased 9% to 7,593 boepd in 2011. US$ 73.5 million. EBITDA Up 54%: Adjusted EBITDA for a consideration of US$ 148 million. Also committed to provide US$ 31.6 million over the next three years in 72% Drilling Success: 18 wells drilled, increased to US$ 63.4 million. Cash flow Tierra del Fuego licences. completed and placed into production. from operating activities increased 100% Reserve Replacement: in Tierra del Fuego: GeoPark signed DeGolyer and McNaughton certified 2P Netbacks Up 40%: Netbacks increased three participation agreements with 106% year-on-year to US$ 63.8 million. Three New High Potential Blocks reserves increase of 6% to 49.5 mmboe to US$ 22.90 per boe produced. ENAP to acquire the Campanario, Flamenco and Isla Norte blocks Net Income Up 21%: Net Income covering 460,000 acres in Tierra del assessed to be US$ 852 million and 3P increased to US$ 5.1 million. Fuego, Chile. and 3P reserves of 107 mmboe. Net Present Value of 2P reserves was reserves to be US$ 1,418 million. Fell Block Conversion to phase valid up to 2032. (GeoPark exceeded the minimum investment commitment by over 75 times.) Exploitation Phase: 84% of the total to US$ 98.7 million due to increased GeoPark acquired Winchester Luna area was converted into an exploitation drilling activity on the Fell and Capital Expenditures Up 70%: Capital expenditures increased Acquisition of Ten Block Colombia Platform: In first quarter 2012, Tranquilo Blocks in Chile. Shareholders Equity Up 126%: Equity increased by US$ 116.6 million and Hupecol – privately-held companies in Colombia. GeoPark acquired ten exploration and production blocks for a total consideration of US$ 105 million. Seismic Operations: In Tranquilo and to US$ 208.9 million as a result of the Gas Purchase and Incentive Agree- Otway Blocks completed 293 km of 2D transaction with LGI and improved ment: New commercial agreement with seismic and 165 sq km of 3D seismic. A financial performance. Methanex to incentivise gas development. • • • • • • • • • • • 3D seismic survey was started in first quarter 2012 on the Flamenco Block in Year-End Positive Net Cash Position: Year-end cash resources were US$ 201.9 million. Tierra del Fuego. Unconventional Resources Potential: Initiated a technical assessment of the oil and gas shale potential in Argentina (Vaca Muerta) and Chile (Estratos con Favrella). Oil Gas 8 7 6 5 4 3 2 1 0 ) d p o e b M ( n o i t c u d o r P y l i a D e g a r e v A 2006 2007 2008 2009 2010 2011 Year in review • performance 7 8 Execution • Year in Review Execution VAluE DRIVER. Proven technical exPerience and excellence in finding and Producing oil and gas reserves – and the ability to Plan, execute, overcome obstacles, adaPt, seize oPPortunities and achieve results. Year in Review • Execution 9 YeAr In reVIew 10 execution • Year in review eXecutIon DrIllIng geopark’s growth continues to be led by the drill bit. most of the drilling activity occurred on the Fell Block in chile, where twenty- three wells were drilled and eighteen wells were successfully put on production. one well was unsuccessful and four wells are waiting for completion or are under evaluation. one well was drilled on the tranquilo Block in chile, targeting the esperanza prospect, which is currently under evaluation without commercial test results. In Argentina, Del mosquito Sur 1 was drilled on the Del mosquito Block and is currently producing minor oil amounts from the tobifera formation. the chart below summarises geopark’s drilling programme during 2011: Block Well Name Well Type Status nika Sur 2 exploration under evaluation monte Aymond 35 Development copihue 1 exploration on production on production williche 1 exploration waiting for completion monte Aymond 36 Appraisal produced / temporarily Shut-in konawentru 1 exploration on production Alakaluf 10 Development produced / converted to water Injector municion oeste 2 exploration guanaco 5 Development Alakaluf este 1 exploration guanaco 12 Development guanaco 7 Development punta Delgada norte 4 exploration guanaco Sur 1 exploration guanaco a-10 Appraisal guanaco a-9 Appraisal guanaco 21 Development guanaco 21 St Development guanaco 13 Development guanaco 8 Development copihue 2 D Yagan norte 3 Selknam 1A Appraisal Appraisal Appraisal on production on production on production on production on production on production Abandoned produced / converted to water Injector on production Side-tracked produced / converted to water Injector on production on production on production on production on production on production Del mosquito Del mosquito Sur 1 exploration tranquilo renoval 1 exploration under evaluation Year in review • execution 11 Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell Fell YEAR IN REvIEW OIL AND GAS RESERvES GeoPark has achieved consistent growth in oil and gas reserves from its investment activities since 2005. DeGolyer & MacNaughton, independent petroleum engineers, appraised a 6% increase in 2P Country Chile reserves (after allowing for production) to a total of 49.5 million barrels oil equivalent (mmboe) in its report dated 31 December 2011. This represented approximately 100% reserve replacement during the year. DeGolyer & MacNaughton’s report estimated, on four GeoPark blocks, a total of 16.5 mmboe of proved reserves, a total of 33.0 mmboe of probable reserves, and a total of 57.5 mmboe of possible reserves as shown in the chart on the right. Approximately 95% of the Company’s total oil and gas reserves are in Chile and approximately 5% in Argentina. In this appraisal, gas represents approximately 73% of total reserves and oil represents approximately 27% of total reserves. (Figures do not include recent 2P reserve additions from acquisitions in Colombia in the first quarter 2012.) OIL AND GAS PRODUCTION In 2011, GeoPark’s oil and gas production was generated from the Fell Block in Chile and the Del Mosquito Block in Argentina. During 2011, approximately 99% of the Company’s total oil and gas production was produced in Chile and approximately 1% in Argentina. During 2011, gas represented approximately 67% of the total production (72% in 2010) and oil represented approximately 33% of the total production volume (28% in 2010). With respect to revenues, gas production represented approximately 34% and oil represented approximately 66% of the total 2011 production revenues. (Current production is approximately 12,000 boepd.) Oil and gas production is shown in the chart on the right. Argentina Total 8 7 6 5 4 3 2 1 0 ) d / e o b M ( n o i t c u d o r P y l i a D e g a r e v A 12 Execution • Year in Review Reserve Type Oil (MMBBL) Gas BOE (BCF) (MMBOE) P1 P2 P3 P1+P2 P1+P2+P3 P1 P2 P3 P1+P2 P1+P2+P3 P1 P2 P3 P1+P2 P1+P2+P3 5.8 8.7 8.8 14.5 23.3 0.7 1.7 3.3 2.4 5.7 6.5 10.4 12.1 16.9 29.0 60.3 135.6 272.2 195.9 468.1 0.1 0 0 0.1 0.1 60.4 135.6 272.2 196.0 468.2 15.8 31.3 54.2 47.1 101.3 0.7 1.7 3.3 2.4 5.7 16.5 33.0 57.5 49.5 107.0 2006 2007 2008 2009 2010 2011 Oil and Condensate Gas eXecutIon Year in review • execution 13 Argentina Chile trAnQuIlo otwAY 14 execution • Year in review ASSetS GeoPark’s portfolio of oil and gas assets in 2011 consisted of nine hydrocarbon blocks totalling approximately 3.7 million gross acres – with oil and gas production, proven oil and gas reserves, operating licences, associated infrastructure and production facilities, an extensive technical database – and managed by a team with a track record of success in the region. The properties represent high potential blocks (with multiple play types and objectives that are offset by major oil and gas fields) with a large risk- balanced portfolio of opportunities including well reactivation, by-passed reservoirs, stranded and producing field development, medium to high impact exploration projects and unconventional resource plays. (Following the new acquisitions in Colombia in First Quarter 2012, GeoPark owns interests in nineteen hydrocarbon blocks totalling approximately 3.9 million gross acres.) Del moSQuIto Fell Strait of Magellan ISlA norte cAmpAnArIo FlAmenco Atlantic Ocean Year in review • execution 15 YeAr In reVIew chIle lIcenceS geopark became the first private-sector oil and gas producer in chile when it began production on the Fell Block in may 2006 and currently is producing approximately 65% of chile’s crude oil production and 25% of chile’s natural gas production. Its substantial acreage position with over 3.5 million gross acres (14,326 square kilometres) in chile represents an important platform for continued growth and expansion. geopark’s blocks in chile consist of: Block Area (sq km) Operator Working Basin Interest (%) Fell tranquilo otway Isla norte campanario Flamenco 1,488 4,986 5,965 527 778 582 geopark geopark geopark geopark geopark geopark 100 magellan / Austral 29 25 60 50 50 magellan / Austral magellan / Austral magellan / Austral magellan / Austral magellan / Austral the Blocks are located in the continental and tierra del Fuego magallanes region in a proven oil and gas producing basin (magellan or Austral Basin) and on trend with recent discoveries to the north in Argentina and to the south in tierra del Fuego. the magallanes region currently produces all of chile’s oil and gas production. Although it has been producing for over 50 years, the basin remains relatively underdeveloped with new exploration frontiers being opened in recent years. Substantial technical data (seismic, geological, drilling and production information), both developed by geopark and enAp (the chilean State oil company), provides an excellent base for new hydrocarbon exploration and development. log interpretations by engineers experienced in the region indicate by-passed oil and gas production zones in certain existing wells. Shut-in and abandoned fields also have the potential to be put back on production by constructing new pipelines and plants. geophysical interpretations by geopark suggest additional development potential in known fields and exploration potential in new undrilled prospects and plays – including opportunities in the Springhill, tertiary, tobifera, and estratos con Favrella formations. the estratos con Favrella shale formation is the principal source rock of the magellan/Austral Basin and represents a high potential unconventional resource play. 16 execution • Year in review chIle lIcenceS • ASSetS Year in review • execution 17 Fell Block the Fell Block has an area of approximately 368,000 acres (1,488 sq km) and its centre is located approximately 140 km northeast from the city of punta Arenas. the Fell Block’s northern border coincides with the international border between Argentina and chile and its southern limit is bordered by the magellan Straits. the first exploration efforts on the Fell Block began in the 1950’s and since then until 2005, enAp carried out 2,400 km of 2D seismic and 256 sq km of 3D seismic and drilled 146 wells. In 2006, geopark became operator and 100% interest owner of the Fell Block when the Fell Block had no oil and gas production. Since geopark has been operator, it has completed more than 860 sq km of 3D seismic and drilled over 80 exploration, appraisal and development wells resulting in current oil and gas production of approximately 28 million cubic feet per day of gas and 4,300 barrels of oil per day. In August 2011, the exploration period for the Fell Block was completed and resulted in the company converting approximately 84% of the total Fell Block area into an exploitation phase valid up to 2032. (geopark exceeded the minimum work and investment commitment on the Fell Block during the exploration period by over 75 times.) 18 Execution • Year in Review t r e s e D a m a c a t A s a p m a P Argentina Santiago Buenos Aires Chile Fell Strait of Magellan Chile i a n o g a t a P Argentina Fell chIle lIcenceS • ASSetS geologically, the Block is located in the cretaceous depocenter of the oil and gas potential in the Block. An important discovery in 2011 magellan Basin – in the northwest area comprising the structural relates to the konawentru 1 well, which initially tested in excess of platform (developing to the east) and the slope (developing to the 2,000 bopd from the tobifera formation (a non-conventional volcanic- west). the source rocks relate to the estratos con Favrella (cretaceous) clastic reservoir underlying the Springhill formation) and which has deposits. the principal producing reservoir is the Springhill formation opened up additional potentially attractive opportunities (workovers, sandstone (lower cretaceous) at depths of 2,200-3,500 metres. well-deepenings and new exploration and development wells) in the Additional reservoirs have been discovered and put into production tobifera formation throughout the Fell Block. the tobifera formation on the Fell Block – namely tobifera volcanic-clastic rocks (Jurassic) at is currently contributing over 50% of the oil production in the Fell Block. depths of 2,200-3,600 metres and the upper tertiary and upper cretaceous sandstones at depths of 700-2,000 metres. trap types in In the Santiago norte Field complex, geopark drilled the williche 1 the Fell Block are mainly structural traps defined by anticlines well with an inconclusive result. Further testing is being carried out developed in the basement and involving the cretaceous and tertiary and other approaches evaluated to develop the large potential gas sequences. Stratigraphic and combined traps are developed in the reserve in this field. southern and northern sector of the Block. geopark also initiated an evaluation of the estratos con Favrella shale geopark’s geoscience team is continuing to identify and expand an reservoir that represents a high potential unconventional resource attractive inventory of prospects and drilling opportunities on the Fell play. A broad area of the Fell Block (1,000 sq km) appears to be in the Block – both exploration and development projects – and the oil window for this play and geopark has begun work to reinterpret company will be continuing its aggressive drilling programme over core data, logs and well test information, evaluate cores and fluids the next years. the recent oil discoveries in the konawentru, copihue, and determine reservoir brittleness (for fracturing) through special municion oeste and punta Delgada fields have further opened up new field tests. Year in Review • Execution 19 trAnQuIlo AnD otwAY BlockS the tranquilo Block extends over an area of approximately 1,232,067 acres (4,986 sq km) and the otway Block extends over an area of approximately 1,473,984 acres (5,965 sq km). the Blocks are located approximately 100-120 km from punta Arenas. the first hydrocarbon exploration activities began in the 1920’s and during the 1930’s and 1940’s several wells were drilled with gas manifestations. historically, 52 wells have been drilled and approximately 2,303 km of 2D seismic have been carried out on the Blocks. the tranquilo gas field was discovered in 1958. the Blocks have tested and produced oil and gas; however, there is currently no oil or gas production. geopark is the operator of the tranquilo and otway Blocks. the partners in the tranquilo Block consist of geopark (29%), pluspetrol (29%), wintershall (25%) and methanex (17%). the partners in the otway Block consist of geopark (25%), pluspetrol (25%), wintershall (25%), International Finance corporation (12.5%), and methanex (12.5%). geologically, the tranquilo and otway Blocks are located in the magellan Basin’s northwest area, comprising the Folded Belt and thrust Front and the tertiary Foreland Basin. the source rock is related to the deep marine basin cretaceous deposits. the proven reservoirs with production history in tranquilo are related to the loreto Formation deltaic sandstones at depths of 700 to1, 000 metres. other potential reservoirs include the morro chico Formation (Basal tertiary sandstones) and the rocallosa Formation (upper cretaceous sandstones). the proven reservoirs with production history in otway relate to the Agua Fresca formations marine and/or deltaic sandstones at depths of 1,500-2,000 metres. other potential reservoirs include the sandstones of the loreto (upper tertiary), chorillo chico (lower tertiary) and rocallosa and rosa Formations (upper cretaceous). trap types are fundamentally structural defined by anticlines developed in the Folded Belt and thrust Front and they are involving the Basement, the cretaceous and the tertiary sequences. Stratigraphic traps are developed toward the Foreland Basin including upper tertiary sandstones (deltaic and turbiditic deposits of the loreto and Agua Fresca Formations). geopark’s current exploration focus in tranquilo is in the Folded Belt and in the transition zone to the Foreland area (esperanza, gales and kerber structures) in which the main reservoirs are the basal tertiary sandstones (morro chico Formation). In the southeast sector, marcou 20 execution • Year in review chIle lIcenceS • ASSetS area, there is the potential of gas accumulations in stratigraphic traps that are including the loreto Formation sandstones (fluvial- deltaic to marine marginal facies). In 2011, geopark completed a seismic programme consisting of 163 sq km of 3D seismic and 303 km of 2D seismic. A large gas prospect (unrisked mean resources of 715 BcF) in the esperanza-gales region was drilled by the renoval 1 exploratory well during 2011. the well was stimulated with three hydraulic fractures in three intervals in early 2012. During production testing, gas flowed at non-commercial rates, however the test appears inconclusive and the partners are evaluating the next steps. geopark’s current exploration focus in otway is in the Folded Belt (central and western areas of Isla riesco), where several structural traps, related to hanging wall anticlines, have been identified showing total potential unrisked mean resources of 1,570 BcF of gas (possibility of success: 18-30%). the Aracelis Anticline with the targeted turbidite sandstones of the Agua Fresca Formation has estimated potential gas resources of 130 BcF. In the Foreland Basin (north-eastern sector of peninsula Brunswick), potential gas accumulations in stratigraphic traps in the upper tertiary (loreto Formation), such as cabo negro norte with estimated unrisked mean gas resources of 100 BcF (possibility of success: 20-22%). otway’s seismic commitment programme was completed in 2011 and included 270 sq km of 3D seismic and 127 km of 2D seismic. and included 270 sq km of 3D seismic and 127 km of 2D seismic. and included 270 sq km of 3D seismic and 127 km of 2D seismic. Morro Chico, Tranquilo Block Morro Chico, Tranquilo Block Both the Aracelis and cabo negro norte prospects are expected to be drilled during 2012. t r e s e D a m a c a t A s a p m a P Argentina Tranquilo Chile Santiago Buenos Aires Chile i a n o g a t a P Argentina Otway Tranquilo Otway Year in review • execution 21 tIerrA Del Fuego BlockS In September 2011, geopark signed three participation agreements • Flamenco Block (582 sq km): geopark is the operator with a 50% with enAp, to acquire the campanario, Flamenco and Isla norte working interest and enAp owns a 50% working interest (with a carry blocks located in the centre-north of tierra del Fuego, chile. the for the first three year investment commitment). Fifteen oil and gas three blocks, which cover 460,000 acres (1,887 sq km), are similar leads have been identified by geopark. and geologically contiguous to the Fell Block and represent high potential and strategic acreage. Following its successful exploration in tierra del Fuego of the magellan Basin dates back to methodology employed on the Fell Block, the company will the 1940´s when the first surface exploration focused on obtaining also evaluate early production opportunities from existing stratigraphic and structural information. Anticlinal structural traps non-producing wells. geopark has committed to spend in excess with transgressive sandstone reservoirs (Springhill Formation) were of uS$ 101 million on these blocks over the next three years. outlined with refraction seismic lines and, in 1945, oil was discovered During 1Q2012 and 2Q2012, the State of chile and geopark on the flank of an anticline. executed Special operations contracts for the exploration and exploitation of hydrocarbons (“ceops”) for the three new blocks In the specific area of the acquired blocks, the first wells were in tierra del Fuego and 3D seismic operations were initiated drilled in 1951 resulting in the discovery of the Sombrero oil field (a on the Flamenco block in 1Q2012. the three blocks include: structural-stratigraphic trap). At the end of the 1950´s and early 1960´s, new fields were discovered to the east (catalina and cuarto chorrillo Fields) and, following seismic reflection data acquisition, • Isla Norte Block (527 sq km): geopark is the operator with a 60% new fields were discovered and existing fields were further working interest and enAp owns a 40% working interest (with a carry developed. for the first three year investment commitment). Fourteen oil and gas leads have been identified by geopark. During the past decade, geological studies in the magellan Basin • Campanario Block (778 sq km): geopark is the operator with a information, on the definition and distribution of facies of the 50% working interest and enAp owns a 50% working interest (with deltaic and/or turbiditic depositional systems of the late cretaceous- a carry for the first three year investment commitment). Seventeen tertiary period, and the evolution of the oil system in terms of oil and gas leads have been identified by geopark. generation/timing/expulsion and trapping. have focused on stratigraphic analysis, based on 3D and 2D seismic 22 execution • Year in review chIle lIcenceS • ASSetS geologically, the blocks are located on the eastern margin of the • Fractured tobifera play: volcanic reservoirs present in the margins of magellan Basin that remained relatively stable during its tectonic the late Jurassic rift basins, where intense secondary fracturing is evolution, except for the minor reactivation of normal Jurassic faults, superimposed on the primary reservoir porosity. and with a sedimentary column of cretaceous and tertiary rocks with a thickness of up to 2,000 metres. the basal sandstones of the • tertiary play: stratigraphic and/or structural traps related to deltaic neocomian (Springhill Formation) and the volcanic-clastic rocks and transgressive sandstones of the late cretaceous-tertiary, (Series tobifera) constitute the main reservoirs for the accumulation with reservoirs located at an estimated maximum depth of 1,000 to of oil and gas in the magellan Basin and have been the main targets 1,500 metres. of exploration in recent decades. A secondary target is defined by the tertiary sandstones (paleocene-miocene) deposited during Following the signing of the ceops, geopark initiated the the Foreland Stage. 1,500 sq km 3D seismic program. this programme is expected to be completed during the summer windows of 2012 and 2013. Source rocks are represented by continental lacustrine shales (type I and type II kerogen) deposited in late Jurassic continental basins that were developed as isolated depocenters (manantiales, oriental and gaviota grabens) and by the marine shales of the estratos con Favrella Formation (type II and type III kerogen), deposited during the early cretaceous marine transgression. Four main exploration plays of the tierra del Fuego blocks include: • Springhill play: combination stratigraphic-structural traps of shallow marine sands of the Springhill Formation generated by the Chile reactivation of old faults. • tobifera clastic play: fluvial to deltaic sandstones in structural and stratigraphic traps present in deeper part of the grabens. t r e s e D a m a c a t A s a p m a P Strait of Magellan Isla Norte Campanario Flamenco Santiago Chile Buenos Aires Argentina i a n o g a t a P Isla Norte Campanario Flamenco Year in review • execution 23 ArgentInA lIcenceS geopark has interests in the following blocks in Argentina: cerro DoÑA JuAnA & lomA cortADerAl BlockS Block Area (sq km) Operator Working Basin approximately 47,959 acres (195 sq km) and are located in the Del mosquito cerro Dona Juana loma cortaderal 485 80 115 geopark geopark geopark Interest (%) 100 100 100 Austral neuquén neuquén neuquén Basin (west-central Argentina) which represents the most prolific hydrocarbon producing basin in Argentina, accounting for over 40% of its total oil production and over 60% of its total gas the cerro Doña Juana and loma cortaderal Blocks cover an area of Del moSQuIto Block production. the Del mosquito Block has an area of approximately 120,000 acres proven producing fairway, where large hydrocarbon accumulations (485 sq km) and is located in the Austral basin in southern Argentina. exist. there are excellent source rocks, multiple reservoir objectives the Austral Basin produces nearly 10% of Argentina’s total oil and large structural traps. the oil potential on the blocks can be production and nearly 20% of its total gas production. (Although characterised as high risk with potentially high associated costs. the blocks are located in the Andean fold and thrust belt, along a the Fell and the Del mosquito Blocks are located in different countries, they are situated in the same geological basin and, at geopark is the operator of the cerro Doña Juana and loma cortaderal their closest point, are less than 20 kilometres apart.) Blocks and has a 100% working interest in each block. In 2007, geopark established oil production on the loma cortaderal Block the Del mosquito Block is surrounded by producing oil and gas after repairing an existing well. (well is shut-in waiting for a workover fields to the north, south, east and west. there is oil production and the Blocks are not currently on production). currently from one field and there is good infrastructure, nearby gas plants and pipelines and an easily accessible crude oil market After a revision of the potential resources of the block and new (40 kilometres by truck). 80% of the block is at an early stage available technologies for tight reservoirs and oil shales, a work of exploration with sparse well coverage. two 3D seismic surveys, programme has been designed to evaluate the Agrio Formation – totalling an area of 355 square kilometres, cover approximately including a 100 sq km 3D seismic programme and a two well drilling 73% of the block and geopark’s geoscience team has identified programme. In addition, the blocks contain the prolific potential hydrocarbon-bearing prospects. the potential of unconventional Vaca muerta shale formation and the company is the lower magellan and tobiferas geological formations has been currently assessing its potential and required investment. geopark underexplored. may consider inviting a partner to join this project. geopark is the operator of the Del mosquito Block and has a 100% working interest. geopark established oil production on the block in 2002 by rehabilitating the abandoned Del mosquito field. In 2004, geopark discovered a new field – Del mosquito norte – which currently is shut-in due to high water cuts. the discovery well on Del mosquito norte was the first well drilled on the block since the 1980’s. geopark is evaluating potential drilling opportunities on Del mosquito and the option of bringing a partner into the project to increase investment activity. During 2011, the company drilled the new Del mosquito Sur 1 exploration well, which resulted in minor oil production. 24 Execution • Year in Review Loma Cortaderal Cerro Doña Juana Argentina t r e s e D a m a c a t A s a p m a P Santiago Atlantic Ocean Chile Argentina Del Mosquito Chile Argentina i a n o g a t a P Loma Cortaderal Doña Juana Buenos Aires Del Mosquito ArgentInA lIcenceS • ASSetS Year in review • execution 25 YeAr In reVIew 26 execution • Year in review colomBIA lIcenceS In the First Quarter 2012, geopark acquired winchester oil and the Blocks acquired in colombia include the following: colomBIA lIcenceS • ASSetS Block Area (sq km) Operator Working Basin Interest (%) la cuerva llanos 34 llanos 62 * Yamu llanos 17 * llanos 32 * Arrendajo * Abanico * cerrito * Jagüeyes * 194 333 178 46 440 406 316 1019 41 247 geopark geopark geopark geopark ramshorn p1 energy pacific pacific pacific ramshorn 100 45 100 55-75 36.8 10 10 10 10 5 llanos llanos llanos llanos llanos llanos llanos magdalena catatumbo llanos (*) Subject to submission and approval by Anh gas S.A. and la luna oil company limited S.A. (”winchester luna”) – privately held exploration and production companies with eight exploration and productions blocks in colombia – and hupecol cuerva llc (“hupecol”) – a privately-held company with two exploration and production blocks in colombia. the combined hupecol and winchester luna purchases (acquired for a total consideration of uS$ 105 million, adjusted for working capital, plus certain possible contingent payments) provide geopark with the following in colombia: • • • • • Interests in 10 blocks (ranging from 5% to 100%), located in the llanos, magdalena and catatumbo basins, covering an area of approximately 220,000 gross acres. risk-balanced asset portfolio of existing reserves, low risk development potential and attractive exploration upside. current oil production of approximately 2,800 barrels per day (bopd) from three blocks. 2p oil reserves of approximately 10 million barrels and prospective oil resources (unrisked) of 25+ million barrels (company estimates). Successful colombian operating and administrative team to support a smooth transition and start-up by geopark in colombia. Panama Caribbean Sea Venezuela Pacific Ocean Cerrito Colombia Llanos 17 + Yamú Arrendajo Abanico Jagueyes La Cuerva Llanos 62 Llanos 32 Llanos 34 Ecuador Brazil Peru Year in review • execution 27 YEAR IN REVIEW Geological basins and settings of the Colombian Blocks include: Eastern Llanos Basin (La Cuerva, Llanos 62, Llanos 34, Llanos 17, Llanos 32, Yamu, Jagüeyes and Arrendajo Blocks) The Eastern Llanos Basin is a Cenozoic Foreland basin covering 153,000 sq km in the eastern region of Colombia and is the most prolific hydrocarbon basin in continental Colombia, with more than 1.5 billion barrels of recoverable oil. Two giant fields (Caño Limón and Castilla), three major fields (Rubiales, Apiay and Tame Complex), and approximately seventy minor fields have been discovered. The source rock for the basin is located beneath the east flank of the Eastern Cordillera, as a mixed marine – continental shaly basinal facies of the Gachetá Formation. The main reservoirs of the basin are represented by the Paleogene Carbonera (C-3, C-5 and C-7) and Mirador sandstones. Within the Cretaceous sequence, several sandstones have also excellent reservoirs. Porosity varies from 10-30% (decreasing from east to west), pay thickness varies from 5-180 feet, and oil gravity ranges from 17-42 degrees API. The main regional seal is the Carbonera Formation (C-8 and C-2 Units). Exploration drilling has been concentrated in normal, up-to-the basin (antithetic) faults. Hanging wall anticlines related to reversal faults, low-relief 4-way dip closures and stratigraphic traps are all high potential exploration targets. High potential areas for hydrocarbon accumulation are located in the southern and eastern part of the basin where pinch-outs of reservoir sandstones are affected by fresh water (meteoric) forming hydrodynamic traps. Catatumbo Basin (Cerrito Block) The Catatumbo Basin is a Cenozoic Foreland basin covering 7,350 sq km that is the Colombian portion of the Maracaibo Basin (Venezuelan giant basin with 2% of the world’s hydrocarbon reserves). The main source rocks are defined by Cretaceous-pelitic deposits (La Luna, Capacho, Tibú and Mercedes Formations) which are widely present throughout the Basin. The La Luna Formation is the principal source rock. The main reservoirs are the Cretaceous limestones and sandstones of the Uribante Group, Capacho and La Luna Formations. Deltaic sandstones of Paleogene age are also good reservoirs, such as the Catatumbo, Barco, Mirador and Carbonera Formations. 28 Execution • Year in Review••CoLoMBIA LICENCEs • AssETs The main seals are thick marine and non-marine shales in the Cretaceous and Cenozoic sequences. The basin shows a wide variety of traps: normal faults partially inverted, subthrust structures, triangle zones and structures associated to inversion system are important structural traps. The western zone of the Catatumbo Basin is a fold belt and recent studies indicate potential exploration plays along thrust zones. The basin has been moderately explored and has an attractive potential which has been delayed due to security issues in the area. Middle Magdalena Basin (Abanico Block) The Middle Magdalena Basin is a rift to broken foreland, located along the central reaches of the Magdalena River Valley between the Central and Eastern Cordilleras of the Colombian Andes. The basin areas covers 34,000 sq km with a history of approximately 296 wildcat wells and 41 discoveries, including the first giant in Colombia: La Cira-Infantas Fields. The source rocks in the basin are defined by the Cretaceous limestones and shales of the La Luna and the simiti- Tablazo Formations. Most of the proven oil in the basin comes from continental Paleogene sandstones (Paleocene-Miocene), Lisama, Esmeraldas- La Paz, and Colorado-Mugrosa Formations. Lightly explored reservoirs are fractured systems of the Cretaceous limestones (Basal Limestone Group) and La Luna Formation. The main traps identified are structural closures form by major asymmetric anticlines, including: 1. Contractional fault-related folds hidden beneath surface thrusts; 2. 4-way dip closures related to duplex systems; 3. Fault-dependent closures; and 4. Traps on the low side of sealing faults. Despite being one of the most explored basins in Colombia, the Cretaceous carbonate plays remains a high potential under-explored target. Year in Review • Execution 29 •30 Risk Management • Year in Review Value DriVer. Understanding and continUally bUilding to accommodate risk among the sUbsUrface, fUnding, organisational, partner/ shareholder, oil and gas market, and regUlatory/political environments. Risk Management Year in Review • Risk Management 31 YeAr In reVIew Since its founding, GeoPark has approached building its business • Subsurface / Geological: Invest in best people and balanced projects with a long-term view and a keen appreciation of the inherent (proven production plus development and exploration upside). uncertainties associated with the oil and gas industry – both above • Regulatory / Political: Multi-country footprint; local knowledge and and below ground. Its business model is to build a large diversified ownership; IFC shareholding; SPEED initiative. portfolio that will allow the Company to sustain continuous and • Capital / Balance Sheet: Multiple capital sources (funders and profitable growth – and to also participate in higher risk step-change regions); creative and inexpensive financing. growth opportunities. Efforts are consistently made to balance asset • Partners: Associating with long-term strategic partners which types, geographic locations, work programmes and capital support. understand the business. GeoPark’s consistent and strong record of growth over the last six • Market / Infrastructure: Areas with high market demand and years reflects the Company’s success in balancing uncertainties and infrastructure in place; financially strong market clients. seizing opportunities it has encountered during its history. • Project Economics: Balanced work programme of production, development and exploration; invest in technology and operational Examples of key risk management elements addressed by efficiency. GeoPark include: • Organisation / Management: Build good demographics (seasoned professionals with new recruits); local organisations; all employees are shareholders. 32 Risk Management • Year in Review rISk mAnAgement BuSIneSS plAn geopark’s management believes shareholder value is increased most geopark’s opportunity portfolio includes multiple in-house projects economically by consistently pursuing a strategy of discovery and and an asset foundation from which to pursue a targeted acquisition development of oil and gas deposits in areas in or nearby known plan, which is expected to include both asset and corporate targets. reserves. geopark implements this strategy through a business plan Its full-cycle exploration and production work programme allows the which emphasises: company to move forward along different lines simultaneously and independently. this available mix of rehabilitation, development, 1. technical strength in economically finding, developing and exploration and acquisition opportunities allows geopark to balance producing new and bypassed oil and gas reserves; its risk exposure and ensure continuous growth. 2. commercial capabilities in acquiring high potential assets at attractive prices; 3. risk-management in expanding the portfolio, increasing options and protecting against uncertainties; and 4. Strategic mix of partners and allies to facilitate organic and inorganic growth. Year in review • risk management 33 YeAr In reVIew oIl AnD gAS mArket natural gas crude oil geopark has continued to benefit from the major changes crude oil markets in the region are both accessible and secure. In undergoing the regional gas markets. In particular, the supply of gas chile, geopark’s crude oil and condensate production are sold to from Argentina to chile has been severely limited and, as the only enAp and delivered by truck from the geopark wells to enAp’s private-sector gas producer currently in chile, this market shift has refining facilities or pipeline access. the sales price is equivalent to substantially increased the value of geopark’s chilean gas reserves. wtI less quality adjustments (based on degrees ApI and mercury located approximately 140 kilometres from geopark’s Fell Block, built truck reception, metering and storage facilities at the enAp content). to accommodate increased oil deliveries, geopark has also methanex operates one of the world's largest methanol plants which San gregorio refinery. has the capacity to consume 350 million cubic feet per day of gas and produce over 10 per cent of the world’s methanol supply. over In Argentina, geopark’s oil production is sold to oil m&S at wtI less 60% of the methanex gas supply, which historically has originated in quality and Argentina retention tax adjustments. geopark’s crude Argentina, was cut-off by Argentina export duties and restrictions oil is trucked to a local facility located 40 km from the Del mosquito in 2007, thereby creating an important market opportunity. geopark field. Argentina prices fluctuate in relatively minor amounts as a captured this opportunity by entering into a strategic alliance with result of prevailing retention taxes which cap crude oil prices. During methanex providing for a ten year gas purchase and supply 2011, crude oil prices in Argentina averaged uS$ 59.40 per barrel. contract at an improved gas price (linked to the international price of methanol) and with the opportunity to pre-sell gas to generate crude oil prices in chile increased 15% during 2011 in line future work programme funding and to jointly acquire new with world petroleum markets to average uS$ 83.80 per barrel hydrocarbon blocks in chile. this marketing alliance has substantially (after discounts). de-risked geopark’s chile gas investment activities. In march 2011, a new commercial agreement was signed with methanex designed to increase gas production volumes by improving the relative economics of gas exploration and development for 2011. In First Quarter 2012, geopark further improved this arrangement by agreeing with methanex for additional incentives to explore and produce gas on the Fell Block. During 2011, in line with a global increase in commodity prices, international methanol prices increased by 32% which resulted in a corresponding 26% increase in natural gas prices for geopark in chile. 34 risk management • Year in review rISk mAnAgement Year in review • risk management 35 YeAr In reVIew 36 risk management • Year in review rISk mAnAgement cApABIlItIeS geopark deems it critical to continuously develop creative and • the kimiri Aike production facility, which originated in Bolivia and is long-term solutions to build its capabilities and acquire the capital, tools, being leased from the exterran compression company under a and people necessary to achieve its growth plans. the company’s long-term contract, was put into operation during 2007 after an record of performance demonstrates that its attention to and investment investment (including the construction of associated tank batteries) in these basics are creating an important differentiating factor and a of uS$ 8 million. the plant provides direct access to the main competitive advantage over the longer term. regional gas pipeline and allows rapid commercialisation of new tools and Infrastructure wells. current plant capacity is 47 million cubic feet per day. • An additional gas delivery point at municion, with a capacity of 30 million cubic feet per day, was opened in 2010 allowing gas In new regions such as chile where oilfield services are scarce or in production from the north eastern area of the Fell Block to be tight oilfield equipment supply markets (as recently experienced), transported and sold through an alternative pipeline system. this geopark works to develop solutions to ensure the availability of increased total Fell Block gas production delivery capacity to needed services and equipment – including drilling and workover 77 million cubic feet per day. rigs. In order to quickly commercialise its oil and gas reserves, geopark also invests in and builds the infrastructure (plants and • Built new oil and gas production gathering centres in guanaco and pipelines) necessary to produce, process, store and transport its Alakaluf fields (processing and storage facilities) and constructed an hydrocarbon reserves to market. additional 6 kilometres of gas pipelines on the Fell Block to connect new oil and gas fields to production. Approximately 151 kilometres examples of these projects in 2011 include: of gas pipelines have been built on the Block since 2006. • operated a drilling rig with a new state-of-art hydraulic rig from • Built a new storage tank at the enAp San gregorio refinery to receive petreven in Italy – which began drilling march 2011. the petreven rig and market new crude oil deliveries. rehabilitated and leased an was used to drill eleven wells in 2011: ten wells in Fell Block and one existing enAp oil treatment and storage facility at Faro este to well in the tranquilo Block. handle the increased crude oil production until a new facility will be constructed on the Fell Block in 2012. • operated a drilling rig with a depth capacity of 10,000 feet contracted from San Antonio International under a one year contract • During 2011, the engineering of three new Fell Block infrastructure – and which was used to drill nine wells in 2011. projects was carried out in preparation for construction in 2012: - An oil treatment plant (adjacent to kimiri Aike plant) with a capacity • operated a drilling rig with a depth capacity of 10,500 feet of 10,000 bpd; contracted from Quintana wellpro (uS/Argentine drilling contractor) - two water treatment plants (located in Alakaluf and guanaco under a three-year contract. this rig, which was imported from china fields) for water flooding to increase oil recovery. as a result of the tight local rig market in 2006/7, was used to drill four wells in 2011. • operated two workover rigs operated by petreven and San Antonio. the company’s Southern cross service subsidiary rig was subcontracted to petreven and replaced by a petreven rig. Year in review • risk management 37 38 Creating Opportunities • Year in Review VAluE DRIVER. initiating and creatively building an attractive high-imPact Portfolio of organic and new Project oPPortunities – couPled with the commercial skills to buy right and to close. Creating Opportunities Year in Review • Creating Opportunities 39 YeAr In reVIew 40 creating opportunities • Year in review creAtIng opportunItIeS A strategic pillar of geopark’s long-term business plan is based on creatively initiating and developing growth opportunities – both organically on existing assets and by acquiring new economically- attractive projects. there is a strong competitive environment for new project acquisitions and geopark is working to differentiate itself by ensuring it has the foundation, capabilities and capital necessary to successfully acquire new economically-attractive projects. latin America is the focus of geopark’s growth and represents an attractive region for geopark because of the following fundamentals: • resource Base – vast under-explored areas and opportunity for expansion • • • • • • • regulatory environment – competitive regulatory and fiscal framework Infrastructure – existing oil and gas services, transportation and markets human resources – availability of qualified and experienced personnel Security – negligible and/or improving security concerns economics – easy access and low cost operating environment hedge – multi-country position provides political balance market – substantial immediate and long-term regional energy requirements • trends – regional industry reorientation favours smaller technically- proficient companies latin America’s economic future is dependent on the development of secure energy supplies – and oil and gas will be the chief contributor to this mix. with its experience in the region, strong technical team and committed financial resources from strategic partners, geopark is well positioned to participate in this growing opportunity. Year in Review • Creating Opportunities 41 YeAr In reVIew orgAnIc growth with over 3.9 million gross acres and a large and balanced prospect inventory on its nineteen hydrocarbon blocks in chile, Argentina, and colombia, geopark has an attractive land position and high growth potential from its existing properties. Aided by its successes in 2011, geopark is well positioned for 2012 and beyond. the company has a secure production base and positive cash flow stream capable of supporting continued growth on the company’s assets. In addition, geopark has substantial cash reserves to accelerate capital investment and to acquire new projects. the company is targeting important performance gains throughout 2012 and following an ambitious investment plan which will include: - risk-balanced production, development and exploration work programmes. - capital expenditures of uS$ 220-240 mm. - Drilling of 45-55 new wells – with approximately 35% representing exploration. 42 Creating Opportunities • Year in Review CREATING OPPORTUNITIES new proJectS After proving the business model and team’s ability to convert under-performing assets into productive and economically attractive oil and gas projects, geopark is now working to expand its asset base and project portfolio into new areas where suitable opportunities arise. Acquisition initiatives are now underway in chile, Argentina, Brazil, ecuador, peru, and colombia. In march 2010, geopark entered into a strategic partnership with lgI to jointly acquire and develop upstream oil and gas projects throughout latin America. this alliance provides geopark with a long-term financially strong partner to facilitate and expand its access to acquisition opportunities. During 2011, the company and lgI executed two agreements by which lgI acquired a 20% interest in geopark’s chilean business for a total consideration of uS$ 148 million plus certain funding obligations. these agreements further cement the strategic relationship and demonstrate the value of the business that geopark has built in chile. In September 2011, geopark signed three participation agreements with enAp, in respect of the campanario, Flamenco and Isla norte blocks located in tierra del Fuego, chile. the three blocks, covering 460,000 acres, represent high potential and strategically attractive acreage which is geologically contiguous to the Fell Block. In the First Quarter 2012, geopark completed two upstream oil and gas acquisitions in colombia consisting of winchester luna – with interests in eight exploration and production blocks – and hupecol – with interests in two exploration and production blocks. the combined acquisitions provide geopark with an attractive platform in colombia of ten hydrocarbon blocks with production, development and exploration opportunities and new acquisition opportunities. Year in Review • Creating Opportunities 43 cApItAl to successfully participate in the capital-intensive oil and gas business, geopark is continuously developing potential funding sources to ensure the efficient development of its assets. to date, more than uS$ 475 million has been raised by geopark – demonstrating its ability to attract the capital and strong shareholders needed to facilitate its future growth. every year, geopark has made progress in strengthening its balance sheet through new funding, increased revenues and debt repayments. key financings include: 2006 • International Finance corporation of the world Bank (“IFc”) equity investment in February 2006 for uS$ 10 million following a thorough technical, financial and environmental review of the group. • - - - - Admission to the london Stock exchange Alternative Investment market (AIm) in may 2006 which resulted in: uS$ 35 million for new capital investment Access to the capital markets A base of strong institutional shareholders Improvement in geopark’s ability to attract, recruit and retain key employees - potential acquisition currency • IFc loan in December 2006 for uS$ 20 million to accelerate the development programme and which reconfirmed the IFc’s long-term support for geopark. 2007 • methanex gas pre-Sale loan Facility for uS$ 40 million. this agreement provided uS$ 40 million from methanex in order to increase development of the Fell Block. conditions include: pay back in gas production over six years in variable instalments An interest rate paid on borrowed funds of lIBor flat - - 2008 • new equity funding of approximately uS$ 24 million (3,080,000 shares at gBp 3.94) in may 2008 from a strategic block of chilean investors and pension funds, the IFc and certain london institutional investors. the placing, which was limited to 10% of the current issued share capital of the company, was significantly oversubscribed. 44 creating opportunities • Year in review creAtIng opportunItIeS 2009 • new equity funding of approximately uS$ 11.8 million (3,437,000 America in side-by-side acquisitions. this partnership enables geopark shares at gBp 2.25) in may 2009 from a block of geopark’s founders, to both accelerate and expand its current efforts to acquire new directors and shareholders and including the IFc and certain london projects with initial projects targeted in the uS$ 100-500 million range. and chilean institutional investors. the placing, which was limited to 10% of the current issued share capital of the company, was • uS$ 133 million reg S note. In December 2010, geopark successfully significantly oversubscribed. completed the private placement of a uS$ 133 million reg S note with a coupon of 7.75% per annum and maturity on 15 December 2015. • new equity funding of approximately uS$ 20.5 million (3,784,000 the notes are guaranteed by geopark and secured with the pledge of shares at gBp 3.23) in november 2009 from a new strategic investor in 51% of the shares of geopark chile. In addition, the note agreement the uSA, a uk institutional investor, the IFc and a director of the allows for the placement of up to an additional uS$ 27 million of notes company. the placing was limited to 10% of the current issued share under the same indenture subject to the maintenance of certain capital of the company and was oversubscribed. financial ratios. • methanex gas pre-Sale loan Facility for uS$ 15.0 million. this facility 2011 provided uS$ 15.0 million from methanex in order to increase • uS$ 70 million from lgI. As a step towards cementing the long-term development of the Fell Block. the facility, which was repayable in gas growth partnership with lgI, geopark agreed in may 2011 for lgI to with an interest rate adjustable to the gas deliveries, was repaid in full acquire a 10% interest in the chilean business (participation in Fell, with the proceeds from the 2010 notes (see below). otway and tranquilo blocks) for uS$ 70 million. • methanex loan for uS$ 3.3 million. this facility provides • uS$ 78 million from lgI. In october 2011, geopark and lgI signed a uS$ 3.3 million, interest-free, from methanex in order to finance second agreement by which lgI acquired an additional 10% in the the exploration, development and production of natural gas chilean business for a total consideration of uS$ 78 million. In from the otway Block. addition, lgI committed to provide additional equity funding of • IFc loan rescheduling of uS$ 14.0 million. In november 2009, the IFc work programme of the three tierra del Fuego licences. agreed to reschedule until 2015 the outstanding uS$ 14.0 million from its 2006 loan to geopark. Following proceeds received from the 2010 • performance Bond contribution. As part of the october 2011 notes (see below), this facility was repaid in full. transaction, lgI agreed to provide Stand-by letters of credit (SBlc) for uS$ 31.6 million over the next three years for its share of the minimum approximately uS$ 84 million to guarantee the performance Bond • chile Stock exchange listing. Following the approval of the chilean required for the new tierra del Fuego blocks (equal to approximately Superintendencia de Valores y Seguros (SVS), geopark’s stock was 83% of the total committed three year investment). admitted to trade on the Santiago offshore Stock exchange in chile in october 2009. this development strengthens geopark’s foundations • Four stock market oil and gas analysts cover geopark and provide in the region and ties to the chilean financial community which is valuations on the company. these include (as of April 2012) two becoming an increasingly active supporter of the company’s efforts. analysts in london, one analyst in Argentina and one analyst in chile – with all four analysts maintaining “Buy” or “outperform” 2010 recommendations. • Strategic partnership with lgI. In march 2010, geopark and lgI agreed to jointly acquire upstream oil and gas assets throughout latin International Finance Corporation World Bank Group Year in review • creating opportunities 45 VAluE DRIVER. an in-house Performance- driven culture which values and Protects our shareholders, emPloyees, environment and communities and suPPorts our long-term business Plan. Commitment 46 Commitment • Year in Review Year in Review • Commitment 47 people the underlying principle of geopark’s long-term strategy is to attract and invest in the best people and support those people with the proper tools and financial resources necessary to achieve success. geopark’s management, professional and field operation teams provide an unusual mix of experience and depth for a company of its size – bringing with them the diverse range of tools and technical know-how necessary to create success and endure in an international oil and gas venture. geopark’s team has a history of proven technical and commercial performance in frontier and complex projects in latin America and around the world, as well as in the specific geological basins where the company operates. most of geopark’s employees joined from other larger companies with the ambition to help build geopark into a successful and unique company – incorporating the best they had learned over their careers. All of geopark’s employees are shareholders of the company. the continuing successful results of the company reflect the commitment, persistence, unique spirit and performance- driven nature of the geopark team. 48 Commitment • Year in Review YeAr In reVIew S.p.e.e.D. (Safety, prosperity, employees, environment, community Development) long-term success for international resource companies depends our long-term well-being requires us to properly fit within our upon solving complex logistical and operational challenges, natural surroundings. overcoming competition for new opportunities and good people, and meeting a broadening set of demands and standards from local • geopark is committed to being the preferred neighbour and partner governments and core constituencies. meeting these challenges by creating a mutually beneficial exchange with the local and performing to these new standards are what differentiate a communities where we work. unlocking local knowledge creates successful company from the rest of the pack. and supports long-term sustainable value in our projects. Simply put, if our efforts enhance local goals and customs, we will be invited to “Creating Value and Giving Back” represents geopark’s integrated do more. and market-based approach for meeting these challenges by aligning our business objectives with our core values and geopark’s specific methodology is focused on undertaking realistic responsibilities. geopark’s overall business plan is to create long- and practical programmes based on best world practices. our term value by finding and producing energy, based on good science emphasis is on building key principles and company-wide ownership and efficient operations, and to return that value to our core and then expanding programmes from within as we continue to constituencies, which we define as our Shareholders, employees, grow. our comprehensive in-house designed ehSS management communities and environment. programme, entitled S.p.e.e.D. (for Safety, prosperity, employees, environment and community Development), is being developed in • geopark is committed to delivering significant bottom-line financial accordance with: ISo 14001 for environmental management issues; value to our shareholders. only a financially healthy and transparent oShAS 18001 for occupational health and safety management company can continue to grow, attract needed resources and create issues; SA 8000 for social accountability and worker rights issues; the real long-term benefits. Development Standards of the world Bank; and the Quoted companies Alliance standards for good corporate governance. • geopark is committed to creating a safe and motivating workplace for employees. with today’s shortage of capable energy “Creating Value and Giving Back” represents geopark’s underlying professionals, the company which is able to attract, protect, retain value system which provides us the leadership, confidence and and train the best team with the best attitude will always prevail. foundation required for long-term success. It is our competitive • geopark is committed to minimising the impact of our projects on mission in the right way. If we are the true performer, the best place the environment. As our footprint becomes cleaner and smaller – to work, the preferred partner and the cleanest operator – our future more areas and opportunities will be opened up for us to work in. is bigger, better and more secure. advantage. And, it reflects our pride in achieving an important 50 commitment • Year in review Above: participants in BmX championship in punta Arenas in october 2011 which was organised and sponsored by geopark and which included local and international competitors. In 2010 in chile, geopark created the “club Deportivo geopark” [geopark Sport club] to provide a supporting environment to young people as a way to improve their life quality and personal skills through sports and teamwork. Sports offered include volleyball, basketball, badminton, athletics, rugby, table tennis and BmX and currently more than 450 people between ages of 6 and 65 are members of club Deportivo geopark. "Private Company and Social Commitment" …The company Geopark has been organising this [BMX Contest] event Unfortunately, nowadays many companies prefer to focus only on their own over the last few years, with the important cooperation of the Municipality business, avoiding any contact with the community. Or if they do have such of Punta Arenas. The event has grown in importance over the period, as evidenced contact, they act without any conviction, accepting it as mere imposition that is by the fact that this edition was sponsored by 27 companies. difficult to evade considering the circumstances. This contest is an additional evidence of the relevant role private companies can Therefore, a company like Geopark that bucks the trend must be congratulated… play in the communities where they are located, above and beyond their own business. However, this social involvement requires an effective, long-term commitment that exceeds the specific actions companies are invited to participate in. Such involvement must be based on a real conviction about the importance of interacting with society on a constant basis. Year in review • commitment 51 Financial Statements 52 Financial Statements Financial Statements 53 Directors’ Report The Directors submit their report together with the audited consolidated 2. Year-End Cash and Debt Position financial statements of GeoPark Holdings Limited (“GeoPark” or “the Company”) for the year ended 31 December 2011. The Company and its The Group’s year-end cash position was US$ 193.7 million. Also, the Company subsidiaries together are referred to herein as the Group. had cash in escrow of US$ 3.0 million for the acquisition of the Colombian Addresses The Registered office address is Cumberland House, 9th Floor, 1 Victoria business completed during the first quarter of 2012 and US$ 5.2 million in a cash collateral account required under the terms of the Bond issued in 2010. Therefore, year-end cash resources amount to US$ 201.9 million. Year-end Street, Hamilton HM 11, Bermuda. The Company has a representative office debt was US$ 165.3 million. at 35 Piccadilly, London, United Kingdom. 3. Principal Risks and Uncertainties Principal Activity The principal activity of the Group in the period under review was to explore, Given the nature of the upstream oil and gas business, effective operational develop and produce for oil and gas reserves in Chile and Argentina. The and financial risk management is a principal focus of the Group. Efforts Group owns and operates six hydrocarbon blocks including the Fell, Otway are continuously made to balance and manage long-term work programme, and Tranquilo Blocks in Chile and the Del Mosquito, Cerro Doña Juana and capital sources, regulatory issues, oil and gas markets and organizational Loma Cortaderal Blocks in Argentina. issues in order to achieve continuous growth. During 2011, the Government of Chile announced the successful farm-in by A description of the principal risks to which the Group are exposed and a GeoPark TdF S.A. to three new prospective exploration blocks in Tierra description of financial risk management objectives and policies of the Group del Fuego under a private process organised by ENAP. The three blocks of are included in: Isla Norte, Flamenco and Campanario cover more than 460,000 acres and are geologically contiguous to the Fell Block. GeoPark TdF S.A. has committed a. Year in Review (Risk Management section); and to invest in excess of US$ 101.4 million on the three new blocks over the next b. Note 3 to the Financial Statements (Pages 75 to 76); three years accounting from the CEOPs signing date. Business Review The Business Review is intended to provide a balanced and comprehensive The Group seeks to ensure that its operations are conducted in a safe manner analysis of the development and performance of the business of the and to minimise any impact on the environment. The Group’s specific Company during the year and its position at the year end. Key elements methodology is focused on undertaking realistic and practical programmes of the Business Review are contained within the Annual Report and based on best world practices, with an emphasis on building key principles accompanying documents. The Business Review has been divided in the and company-wide ownership and then expanding the programme from 4. Health, Safety, Environment and Community Development: SPEED following areas: 1. Development and Performance The Group has successfully improved and strengthened its business during within as the Group continues to grow. The Group’s comprehensive in-house designed EHSS management programme, entitled S.P.E.E.D. (for Safety, Prosperity, Employees, Environment and Community Development), is being developed in accordance with: ISO 14001 for environmental management issues; OSHAS 18001 for occupational health and safety management issues; 2011. The Group achieved increases or improvements in oil and gas SA 8000 for social accountability and worker rights issues; the Development production, reserves, revenues, adjusted EBITDA, profitability, balance sheet, Standards of the World Bank; and the Quoted Companies Alliance standards organization and safety performance. for good corporate governance. During 2011, the Group continued to improve its SPEED Programme by establishing objectives, increasing the A detailed review of the operations, development and performance of the safety training of all its employees, effective monitoring of all incidents and Group’s business is included in this report and in: the benchmarking against global industry standards. The SPEED Programme is described in further detail in the section titled “Commitment”. a. Chairman’s and Chief Executive’s Letter to Shareholders (Pages 2 to 5); and b. Year in Review (Pages 6 to 51). Directors’ Report 46 Directors’ Report 54 Key Performance Indicators The Group uses a number of financial and non-financial key performance The Group directed most of the drilling efforts towards the development of oil reserves, which increased the production. Investments in gas wells indicators to measure performance, which are set out below: resulted in an increase in production which was offset with higher internal consumption in the operations that resulted in lower volume gas sold. Oil and Gas 2P Reserve Growth (1) (millions of barrels 2011 2010 2011 vs. 2010 Net Revenues 2010 vs. 2011 of oil equivalent - boe) 49.5 49.6 +6% 120,000 Oil and Gas Production Growth (boe per day) Average Realised Sales Price (Chile) Oil (US$ per bbl) Gas (US$ per mcf) Total Net Revenues (US$ million) Adjusted EBITDA (2) US$ million US$ per boe Operating Costs US$ per boe Gearing Ratio (3) 7,593 6,947 +9% 100,000 18,104 (1,302) 80,000 79,550 7,212 111,580 8,016 83.8 3.93 111.6 63.4 22.9 7.9 26% 72.8 3.13 79.6 41.1 16.3 6.9 43% +15% +26% +40% +54% +41% +14% -40% ’ 0 0 0 $ S U n i 60,000 40,000 20,000 0 31.12.10 Increase in oil deliveries Decrease in gas deliveries Increase in gas price Increase in oil price 31.12.11 (1) As of 31 December 2011 and 31 December 2010; % change adjusted for production during the period of 2.77 million of boe. The revenue growth was due to a rise in prices (both oil and gas) and the (2) As defined in Note 6. increase in oil production. (3) Calculated as total borrowing less cash and cash equivalent over total capital [(borrowings - cash) / capital]. The Group does not consider the cash that has been allocated for future M&A activities (purchase price, adjusted for working capital, of the two Colombian acquisitions). 1. Production, Prices and Revenue During 2011, oil and gas production increased as a result of the Group’s successful drilling programme, which resulted in eighteen productive wells out of twenty five wells drilled (four of them are awaiting for completion or under evaluation). The drilling programme represented a balance between exploration, appraisal and development prospects. Production Oil (in thousand of bbls) Gas (in thousand of mcf) 2011 916 11,135 2010 719 10,901 2011 vs. 2010 27% 2% Directors’ Report 55 2. Reserves 3. Production Costs DeGolyer and McNaughton (“D&M”), independent reservoir engineers, Production costs in 2011 increased to US$ 54.5 million from US$ 43.9 million certified 2P reserves of 49.5 million barrels of oil equivalent (mmboe) at in 2010 - resulting from an increase in depreciation charges and an increase 31 December 2011 composed of 34% oil. Allowing for production of in production volumes, of which a larger proportion represented oil. 2.78 mmboe during 2011, additions of 2P Reserves represent an increase of 6% in respect of 2P Reserves at 31 December 2010. 2P Reserves a. Depreciation charges replacement ratio was 100%. Reserves Capitalised costs of proved oil and gas properties are depreciated on a block-by-block basis, using the unit of production method and based on proved and probable reserves - as defined in chapter 19 of the listing rules of the United Kingdom Listing Authority (UKLA). Oil and gas reserves 50 40 30 20 10 0 E O B M M 49.6 2.7 49.5 for this purpose are determined in accordance with Society of Petroleum Engineers definitions and were estimated by DeGolyer and MacNaughton, the Group’s independent reservoir engineers. The 2011 depreciation charge of US$ 25.8 million represented a 16% increase compared to 2010 (US$ 22.3 million) resulting principally from the increase in production volumes. The average depreciation charge in 2011 was US$ 8.4 per barrel of oil equivalent (boe) - (US$ 7.5 in 2010). This increase in cost is the result of the change in the estimation of future drilling cost, associated mainly to (2.8) higher oil and gas prices. b. Operating expenditures 2P DEC 2010 (D&M) Production Net additions 2P DEC 2011 (D&M) Operating expenditures (OPEX) per producing unit (boe) is a key indicator measuring the efficiency of the producing process. In 2011, OPEX per boe rose to US$ 7.9 from US$ 6.9 in 2010. This variance was driven by the continuous change in production mix from gas to oil, which has higher production costs than gas. In 2011, the production mix was split 33% oil and 67% gas, whereas in 2010, it was 27% and 73%. 4. Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation and certain non-cash items such as write-offs, impairments and share-based payments. This measurement excludes the effects of non- recurring expenditures from the operating segments, such as impairments if it is a result of an isolated non-recurring event. Adjusted EBITDA for 2011 of US$ 63.4 million represented an increase of 54% from US$ 41.1 million in 2010. In terms of producing units, the 2011 Adjusted EBITDA equalled US$ 22.9 per boe, compared to US$ 16.3 per boe in 2010, representing an increase of 40%. This significant increase in the adjusted EBITDA was achieved by the increase in production, coupled by the change in production mix and also higher oil and gas prices. 56 Directors’ Report 5. Net Result During 2011, the Group recognised write-offs of exploration and evaluation assets in the Fell Block for an amount of US$ 5,919,000. The charge includes The Group generated a net profit of US$ 5.1 million in 2011 compared to the cost of an unsuccessful exploratory well amounting to US$ 2,331,000 and US$ 4.2 million in 2010. The chart below shows the reconciliation in 2011 of also in accordance with the Group’s accounting policy and considering that the Adjusted EBITDA to the Net Result. no additional work will be performed, wells from previous years have been written off for an amount of US$ 3,588,000. In addition, an impairment charge Net Result and Adjusted EBITDA Reconciliation of US$ 1,344,000 was recognised in relation to exploration assets in Del Mosquito Block. 63.4 70 60 50 40 30 20 10 0 $ S U f o n o i l l i m n i (26.4) (11.6) (7.3) Dividends The Directors do not recommend the payment of any dividend for the period ended 31 December 2011 (2010: nil). The Group is currently re-investing all cash generated by its operations and intends to continue to re-invest these funds for the near future. Cumulative losses for the Group are US$ 18.5 million. Net free available equity reserves amount to US$ 95.7 million. Events since the Balance Sheet Date In February 2012, GeoPark acquired two privately-held exploration and production companies operating in Colombia, Winchester Oil and Gas S.A. and La Luna Oil Company Limited S.A. (“Winchester Luna”). (7.2) (5.8) In March 2012, a second acquisition occurred with the purchase of Hupecol 5.1 Cuerva LLC (“Hupecol”), a privately-held company with two exploration and production blocks in Colombia. EBITDA Depreciation Interests Impairment & write-off Income tax Non cash adjustments Net profit The combined Hupecol and Winchester Luna purchases (acquired for a total consideration of US$ 105.0 million, adjusted for working capital, plus certain Non-cash adjustments include a US$ 5.3 million charge incurred by the possible contingent payments) provide GeoPark with interests in 10 blocks Group due to stock awards programmes. (ranging from 5% to 100%), located in the Llanos, Magdalena and Catatumbo During 2011, the Company transferred 20% of its Chilean business to LGI (see Note 34). Therefore the non-controlling interest on the profit of the year corresponds to the profit generated by the Chilean operations. The profits Community Development Efforts, Charitable and Political Donations For its community development efforts, the Group encourages the of the Chilean operations that are attributable to the owners of the Company development of new local businesses by contracting services and people were offset by losses incurred by the Company in its Corporate and Argentine operations. for its needs and work programme where it operates. The Group uses over 150 local contracting companies in its activities in Chile and has been Basins, covering an area of approximately 220,000 gross acres. Oil and gas exploration and production activities are accounted for in a manner similar to the successful efforts method on a field by field basis. The Total charitable donations in 2011 amounted to US$ 27,551 (2010: Group accounts for exploration and evaluation activities in accordance with US$ 221,330 of which US$ 200,000 relates to the earthquake relief efforts). IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalizing exploration and evaluation costs until such time as the economic viability of In addition, the Group contributes to the GeoPark Sports Club in Punta producing the underlying resources is determined. Arenas, Chile to provide founded and a supporting environment to young credited with assisting in the start-up of 14 small businesses. people and to improve their quality of life and personal skills through sports and team efforts. A total of US$ 315,897 was contributed in 2011. This amount is recognised under Administrative costs. No political donations are made by the Group. Directors’ Report 57 Directors’ Interests The Directors who served the Company during the year and subsequently, together with their (and their families’) beneficial interests in shares in the Company, were as follows: Name Re-Appointment Audit Nomination Remuneration 31 December 2011 Committees Ordinary share of US$ 0.001 each at Gerry O’Shaughnessy Executive Chairman James F. Park Chief Executive Officer 3 August 2011 (*) 3 August 2011 (*) Sir Michael R. Jenkins Non-Executive Director 3 August 2011 (*) Christian M. Weyer Non-Executive Director 3 August 2011 (*) Peter Ryalls Non-Executive Director 3 August 2011 (*) Juan Cristóbal Pavez Non-Executive Director 3 August 2011 (*) Carlos Gulisano Non-Executive Director 3 August 2011 (*) Steven J. Quamme Non-Executive Director 3 August 2011 (*) 8,172,793 6,983,068 37,344 Committee Member Committee Chairman 216,824 (*) Most recent reappointment date. 36,758 (1) Carlos Gulisano holds 50,000 IPO Stock options 2,165,437 vested and unexercised and 100,000 stock (1) 1,469 awards which will vest on 15 December 2012. 4,326,708 Directors’ Remuneration Executive and Non-Executive Directors remuneration is discussed in the reflect latest expectations of expenditures, oil and gas prices and other factors to enable the Group to manage the risk of any funding short-falls and/or Director’s Remuneration Report (Pages 62 to 63). potential loan covenant breaches. Auditors PriceWaterhouseCoopers LLP has completed the audit of the 2011 Financial Considering macroeconomic environment conditions, the performance of the operations and Group’s cash position, the Directors have formed a Statements, as appointed in the Annual General Meeting held in August 2011 judgement, at the time of approving the financial statements, that there is and offer themselves for reappointment. a reasonable expectation that the Group has adequate resources to NOMAD Oriel Securities Limited is the Company’s Nominated Advisor under the AIM rules of the London Stock Exchange. continue with its investment programme in order to increase oil and gas reserves, production and revenues and meet all its obligations for the foreseeable future. For this reason, the Directors have continued to adopt the going concern basis in preparing the consolidated financial statements. Annual General Meeting At the Annual General Meeting of the Company, resolutions will be proposed On behalf of the Board to re-elect the Directors, according to the Company’s Bye Laws. Other resolutions may be proposed in accordance with the circular to be sent out. Further details will be set forth in the formal Notice of Meeting. Going Concern The Directors regularly monitor the Group’s cash position and liquidity risks James F. Park throughout the year to ensure that it has sufficient funds to meet forecast Chief Executive Officer operational and investment funding requirements. Sensitivities are run to 19 April 2012 58 Directors’ Report Corporate Governance GeoPark is committed to maintain high standards of corporate governance which it defines as managing the Group in an efficient, effective and Board Members The composition of the Board is a key factor in ensuring that the right mix of entrepreneurial manner for the benefit of all shareholders over the longer skills and experience are in place to lead the Group. Chairman and Chief term. The Directors strongly intend, as it is feasible given the Group’s size Executive roles are not exercised by the same individual and the Company and the constitution of the Board, to comply with the guidelines on corporate has at least two independent Non-Executive Directors. All Directors submit governance of the Quoted Companies Alliance for AIM companies. themselves for re-election at the Annual General Meetings each year - a GeoPark’s good corporate governance goals include: shareholders for election are accompanied by a biography and a description practice the Group has followed since 2006. All Directors proposed to • Efficiency: Creating a governing body of an appropriate size to permit efficient decision-taking with transparency for major decisions, clear The Chairman is responsible for the effective running of the Board, ensuring definition of responsibilities and performance targets, and procedures in that the Board plays a full and constructive part in the development and place to protect and ensure protection of the Company’s assets. determination of the Group’s strategy, and acting as guardian and facilitator of the skills and experience that the Group feels are relevant. of the Board’s decision-making process. • Effectiveness: Assembling a governing body with the required skills, provided with the proper information and collectively involved to make the The Chief Executive is responsible for managing the Group’s business, best decisions for the Company. proposing and developing the Group’s strategy and overall commercial objectives in consultation with the Board and, as leader of the Executive • Entrepreneurial: Defining a vision for the Company with an understanding team, implementing the decisions of the Board and its Committees. of goals, timing and necessary resources. In addition, the Chief Executive is responsible for maintaining regular dialogue with shareholders as part of the Group’s overall investor relations • Shareholder Common Good: Taking decisions which consider the good of programme. all shareholders and which, if they involve management, major shareholders and other related parties, are reported in a transparent manner. The Board comprises: Board Matters The Board sets the Group’s strategic aims, ensuring that the necessary Executive Directors: Gerald E. O’Shaughnessy - Chairman resources are in place to achieve those aims, and reviews management James F. Park - Chief Executive Officer and financial performance. It is accountable to shareholders for the creation and delivery of strong, sustainable financial performance and long-term Non-Executive Directors: shareholder value. Sir Michael R. Jenkins Christian M. Weyer To achieve this, the Board directs and monitors the Group’s affairs within Peter Ryalls a framework of controls which enable risk to be assessed and managed Juan Cristóbal Pavez effectively through clear procedures, lines of responsibility and delegated authorities. The Board also has responsibility for setting the Group’s Carlos Gulisano Steven J. Quamme core values and standards of business conduct and for ensuring that these, together with the Group’s obligations to its stakeholders, are widely On 3 August 2011, following Shareholder’s approval at the Annual understood throughout the Group. General Meeting Steven J. Quamme joined GeoPark’s Board as a Non-Executive Director. Mr. Quamme has an extensive and recognised experience as securities lawyer, private equity investor and investment banker. He is a recognised expert in corporate governance. Together, the Executive and Non-Executive Directors bring a broad range of business, commercial and other relevant experience to the Board, which is vital to the management of an expanding company. Corporate Governance 59 Board Meetings The Board meets at least quarterly and when issues arise and has a schedule Internal Control Review Directors review on an ongoing basis, inter alia, financial, operational, of matters reserved for decisions of the Board. In addition to those formal compliance matters and risk management, and approve the annual budget matters required by relevant local laws to be set before a Board of Directors, and monitor performance. The Board has the responsibility to establish and the Board will also consider strategy and policy, acquisition and divestment maintain the Group’s system of internal controls and review its effectiveness. proposals, approval of major capital investments, risk management policy, The procedures are reviewed on an ongoing basis. significant financing matters and statutory shareholder reporting. The Board met eight times during 2011 and maintains regular communication with The Group has defined an approval system for capital expenditures and Management. expenses. This system includes different levels of authorisation based on functions and position of individuals. The Board has approved the annual The Directors also regularly visit the Group’s operations. These field visits budget and performance against the budget is monitored and reported. provide important perspective and expose the Directors directly to the quality and depth of the Group’s operations and workforce. In these visits, The internal control system can only provide reasonable and not the Directors are also able to make recommendations regarding absolute assurance against material misstatement or loss. The Board has improvements of the Group’s operations. considered the need for an internal audit function but does not consider it necessary at the current time. During 2010, with the assistance of Independence The Board reviews annually the independence of all Non-Executive Directors PricewaterhouseCoopers, the Group initiated a thorough review of the key administrative processes. As a result, all the administrative and finance and has determined with the exception of Carlos Gulisano that all current procedures have been reviewed and formalised. During 2011, the effort Non-Executive Directors are independent and have no cross-directorships or continued to improve and update the procedures in place. significant links which could materially interfere with the exercise of their independent judgment. Induction All new Directors receive an induction as soon as practicable after Board Support Mr. Pedro Aylwin Chiorrini is currently the Company Secretary and is available appointment. This includes meetings with senior management, functional and business unit heads and where appropriate, visits to the Company’s to advise all Directors and ensure compliance with Board procedures. main properties. The Company Secretary also provides new Directors The Board has the power to appoint and remove the Company Secretary. with an overview of their duties as Directors, corporate governance policies A procedure is in place to enable Directors, if they so wish, to seek and established Board procedures as part of the induction process. Insurance The Company maintains Directors’ and Officers’ liability insurance cover, the level of which is reviewed annually. independent professional advice at the Group’s expense. Timely Information Directors have access to a regular supply of financial, operational, strategic and regulatory information to assist them in the discharge of their duties. Much of this information is provided as part of the normal management reporting process. Board papers are circulated in time to allow Directors to be properly briefed in advance of meetings. In addition, Board meetings generally include a review of the history, performance and future potential of a material individual asset or business unit. This is designed to ensure that all material assets are considered on a cyclical basis and to enable Board members to familiarise themselves with the key assets and operations of the Group. 60 Corporate Governance Audit Committee The Audit Committee is comprised of three independent Non-Executive The Committee’s specific responsibilities are: • Determining and agreeing with the Board the remuneration policy for Directors (currently being Sir Michael Jenkins, Mr. Peter Ryalls and the Chief Executive Officer, Chairman, Executive Directors and other members Mr. Juan Cristóbal Pavez). The Committee is chaired by Sir Michael Jenkins of the Executive Management; and meets to approve the Financial Statements, as required during the year. • Reviewing the performance of the Executive Directors and other members The Committee’s specific responsibilities to the Board are: • Reviewing the design of the share incentive plans for approval by the Board of the Executive Management; • Reviewing financial statements and formal announcements relating to the and shareholders. Group’s performance; • Assessing the independence, objectivity and effectiveness of the external The Director’s Remuneration report on pages 62 to 63 contains further details auditors; of the role and activities of the Remuneration Committee. • Making recommendations for the appointment, re-appointment and removal of the external auditors and approving their remuneration and terms of engagement; Shareholder Relations Communication with Shareholders is given high priority and there is • Implementing and monitoring policy on the engagement of the external regular dialogue with institutional investors, as well as general presentations auditor to supply non-audit services to the Group. to analysts at the time of the release of the annual and interim results. Nomination Committee The Nomination Committee is comprised of three Directors (currently being Mr. Christian M. Weyer, Sir Michael Jenkins and Mr. Gerald O’Shaughnessy), Throughout 2011, Executive Directors and Senior Management met with institutional investors and Shareholders in Europe, North America and South America and conducted field trips to the Group’s operations. the majority of whom are independent Non-Executive Directors. The The Company maintains regular contact with analysts to ensure that the Committee is chaired by Mr. Christian M. Weyer and meets as required. information regarding the business status and strategy is communicated to Shareholders. Analysts also visit the Company’s field operations and have The Committee’s specific responsibilities to the Board are: access to management and technical staff to ask questions. • Reviewing the structure, size and composition of the Board and making recommendations to the Board with regard to any changes required; Press releases have been issued throughout the year and the Company • Identifying and nominating, for Board approval, candidates to fill Board maintains a website (www.geo-park.com) on which all press releases are vacancies as and when they arise; posted and which also contains major corporate presentations and the • Making recommendations to the Board with regard to membership of the Financial Statements. Regular updates to record news in relation to the Group Audit and Remuneration Committees in consultation with the Chairman of and the status of exploration and development programmes are also each Committee; included on the website. Additionally, this Annual Report, which is sent to all • Reviewing the outside directorship/commitments of the Non-Executive registered Shareholders, contains extensive information about the Group’s Directors; activities. Enquiries from individual Shareholders on matters relating to their • Succession planning for Directors and other senior executives. shareholdings and the business of the Group are welcomed. Shareholders are Remuneration Committee The Remuneration Committee is comprised of three independent Non- also encouraged to attend the Annual General Meeting to discuss the progress of the Group. Notice of the Annual General Meeting is sent to Shareholders at least 20 working days before the meeting and includes Executive Directors, who currently are Mr. Peter Ryalls, Mr. Steven J. Quamme further information on how to vote by proxy. and Mr. Juan Cristóbal Pavez. The Committee is chaired by Mr. Peter Ryalls and meets as required during the year. Financial Accounts A statement of Director’s responsibilities in respect of the accounts is set out on page 64. Corporate Governance 61 Directors’ Remuneration Report The following information is not subject to audit. IPO Stock Options to Executive Directors Remuneration Committee The Company has a Remuneration Committee. The members of the Committee during 2011 were Peter Ryalls, Chairman, and Steven J. Quamme Name and Juan Cristóbal Pavez, who are Non-Executive Directors. Gerald O’Shaughnessy The Remuneration Committee agrees with the Board the framework for the James F. Park remuneration of the Chief Executive, the Chairman of the Company and such other members of the Executive Management as it is designated to consider. Nº of Underlying Common Shares 153,345 306,690 153,345 306,690 Exercise Price (£) Earliest Exercise Date Expiry Date 3.20 4.00 3.20 4.00 15 May 2008 15 May 2013 15 May 2008 15 May 2013 15 May 2008 15 May 2013 15 May 2008 15 May 2013 No Director plays a part in any discussion about his own remuneration. the GeoPark Employee Benefit Trust for use in the settlement of the exercise In accordance with the programme, 601,235 common shares were issued to of stock options granted to certain Executive Directors and employees at the Executive remuneration packages are designed to attract, motivate and time of the Company’s IPO. retain Directors of the calibre required to grow the business and enhance value to Shareholders. The performance measurement of the Executive Directors and the determination of their annual remuneration package are undertaken by the Committee. Stock Awards to Management, Employees and Executive Directors During 2011, the Remuneration Committee and the Board of Directors approved the granting of 500,000 performance share awards to employees and Management under the Plan. The 2011 awards also encompass new The Company’s policy is that a substantial proportion of the remuneration of employees that have joined the Company since the 2010 awards. The awards the Executive Directors should be performance related. will vest on the fourth anniversary of the grant date and will be subject to the award holder remaining in employment during that period (following Performance-based Employee Long-Term Incentive Programme - Key Terms In order to align the interests of its Management, employees and key advisors the rules set out in the Plan). with those of the Company and its Shareholders, the Directors have Stock Awards to Management and Employees established a Performance-based Employee Long-Term Incentive Programme (“the Plan”). At the Annual General Meeting held on 19 November 2007, Nº of % of Issued Shareholders voted to authorise the Board to use up to 12% of the issued Underlying Common share capital of the Company at the relevant time for the purposes of the Common Employee Long-Term Incentive Plan. GeoPark’s Shareholders authorised the Board of Directors to implement this plan and determine the specific Shares (1) Share Capital Approxi- conditions for each programme within some broadly-defined guidelines. 1,000,000 mately 2.4% IPO Award Programme and Executive Stock Option plan On admission to AIM, the Executive Directors, the Management and key employees of the Company received the following options over common shares of the Company granted under the Executive Stock Options Plan. Approxi- 1,000,000 mately 2.4% Approxi- 500,000 mately 1.2% Grant Date 15 Dec 2008 15 Dec 2010 15 Dec 2011 Exercise Price (US$) Earliest Exercise Date Expiry Date 15 Dec 15 Dec 0.001 2012 2018 0.001 0.001 15 Dec 15 Dec 2014 15 Dec 2015 2020 15 Dec 2021 IPO Stock Options to Management and key employees Nº of % of Issued Underlying Common Common Shares Share Capital Grant Date Exercise Price (£) Earliest Exercise Date (1) Dr. Carlos Gulisano holds 100,000 of these Stock awards. Considering the previously issued IPO Awards, plus the 12% limit established for the Plan, the total share capital awarded and to be awarded to employees, Management and Executive Directors represents approximately 14.8% of the Expiry shares issued. Date Approxi- 15 May 15 May 15 May 545,000 mately 1.4% 2006 4.00 2008 2013 Dr. Carlos Gulisano holds 50,000 of these IPO Stock Options. 62 Directors’ Remuneration Report Executive Directors’ Contracts It is the Group’s policy that Executive Directors should have contracts of an b) Committee Chairman fee: annual remuneration of £ 5,750 payable quarterly in arrears in cash. indefinite term providing for a maximum of one year’s notice. The details c) Notice for contract termination: 2 months. of the Director’s contracts are summarised below: Gerald O’Shaughnessy Gerald O’Shaughnessy has a service contract with the Company which provides for him to act as Executive Chairman of the Company at a salary of US$ 200,000 per annum. The agreement is stated to continue indefinitely, subject to it being terminable by either party by giving not less than 12 months’ notice in writing at any time. The payment of any bonus to Mr. O’Shaughnessy is at the Company’s discretion. Mr. O’Shaughnessy’s service agreement contains restrictive covenants which restrict him, for a period of 12 months following the termination of employment, from The following chart summarises the detail of payments made to Non-Executive Directors: Sir Michael Jenkins (1) Peter Ryalls (2) Christian Weyer (3) Juan Cristóbal Pavez 2011 Cash Payment Stock Payment Director Fees Non-Executive Committee Paid in Shares Directors’ Fees Chairman Fees No. of Shares £ 17,500 £ 17,500 £ 17,500 £ 17,500 £ 35,000 £ 8,750 £ 5,750 £ 5,750 £ 5,750 - - - 2,633 2,633 2,633 2,633 - 1,496 soliciting senior employees of the Company and, for a period of 6 months Carlos Gulisano following the termination of employment, from being involved in any Steven J. Quamme competing undertaking. James F. Park James F. Park has a service contract with the Company which provides Additionally Dr. Carlos Gulisano received US$ 138,000 for technical consultancy during 2011 (US$ 410,000 in 2010). for him to act as Chief Executive Officer of the Company at a salary of (1) Audit Committee Chairman. US$ 400,000 per annum. The agreement is stated to continue indefinitely, (2) Remuneration Committee Chairman. subject to it being terminable by either party by giving not less than (3) Nominations Committee Chairman. 12 months’ notice in writing at any time. The payment of any bonus to Mr. Park is at the Company’s discretion. Mr. Park’s service agreement contains restrictive covenants which restrict him, for a period of 12 months Approval This report was approved by the Board of Directors on 19 April 2012 and following the termination of employment, from soliciting senior employees signed on its behalf by: of the Company and, for a period of 6 months following the termination of employment, from being involved in any competing undertaking. No bonuses were awarded in 2011 to the Executive Directors. Non-Executive Directors Contracts In August 2011 at the Annual General Meeting, the Shareholders re-elected Peter Ryalls the Non-Executive Directors. Chairman, Remuneration Committee 19 April 2012 The remuneration package approved for Non-Executive Directors, which is detailed in the corresponding service contracts, contains the following components: a) Annual salary of £ 35,000; the fees payable shall be made up, at the option of the Company, of an issue of new shares in the Company on the basis determined by the Board and/or cash consideration payable quarterly in arrears. The share price to determine the quantity of share is the simple average to the daily closing price of the stock in the quarter prior to the payment date. Directors’ Remuneration Report 63 Statement of Directors’ Responsibilities The Directors are responsible for preparing the financial statements in accordance with applicable laws and regulations in Bermuda. The Directors have elected to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group’s financial positions, financial performances and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standard Board’s “Framework for the preparation and presentation of Financial Statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. The Directors are also required to: • select suitable accounting policies and apply them consistently; • make judgments and estimates that are reasonable and prudent; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume the Group will continue in business. The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. In so far as each of the Directors is aware: • there is no relevant audit information of which the Group’s auditors are unaware; and • the Directors have taken all steps that they ought to have taken to be aware of any relevant audit information and to establish that the auditors are made aware of that information. 64 Statement of Directors’ Responsibilities Independent Auditors’ Report To the Members of Geopark Holdings Limited Opinion on financial statements In our opinion the financial statements: We have audited the Group financial statements (the “financial statements”) of GeoPark Holdings Limited for the year ended 31 December 2011 which • give a true and fair view of the state of the Group’s affairs as at 31 December comprise the consolidated statement of income, the consolidated statement 2011 and of the Group's profit and cash flows for the year then ended; of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement • have been properly prepared in accordance with IFRSs as adopted by the of cash flow and the related notes. The financial reporting framework European Union; and that has been applied in their preparation is applicable law in Bermuda and International Financial Reporting Standards (IFRSs) as adopted by the • have been prepared in accordance with the requirements of the Companies European Union. Act 1981 (Bermuda). Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out Other matters a. The maintenance and integrity of the GeoPark Holdings Limited website on page 64 the Directors are responsible for the preparation of the financial is the responsibility of the Directors; the work carried out by the auditors statements and for being satisfied that they give a true and fair view. Our does not involve consideration of these matters and, accordingly, the auditors responsibility is to audit and express an opinion on the financial statements accept no responsibility for any changes that may have occurred to the in accordance with applicable law in Bermuda and International Standards financial statements since they were initially presented on the website. on Auditing (UK and Ireland). Those standards require us to comply with the UK Auditing Practices Board’s Ethical Standards for Auditors. b. Legislation in Bermuda and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other This report, including the opinion, has been prepared for and only for jurisdictions. the company’s members as a body in accordance with Section 90 of The Companies Act 1981 (Bermuda) and for no other purpose. We do not, in giving the opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures PricewaterhouseCoopers LLP Chartered Accountants in the financial statements sufficient to give reasonable assurance that London, United Kingdom the financial statements are free from material misstatement, whether 19 April 2012 caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Independent Auditors’ Report 65 Consolidated Statement of Income Amounts in US$ ’000 Note 2011 2010 Net Revenue Production costs Gross Profit Exploration costs Administrative costs Selling expenses Other operating costs Operating Profit Financial income Financial expenses Profit before Income Tax Income Tax Profit for the Year 7 8 11 12 13 14 15 16 Attributable to: Owners of the Company Non-controlling interest Earnings per share (in US$) for profit attributable to owners of the Company. Basic 18 Earnings per share (in US$) for profit attributable to owners of the Company. Diluted 18 Consolidated Statement of Comprehensive Income Amounts in US$ ’000 Income for the year Other comprehensive income: Total comprehensive Income for the year Attributable to: Owners of the Company Non-controlling interest 111,580 (54,513) 57,067 (10,066) (18,169) (2,546) (502) 25,784 162 (13,678) 12,268 (7,206) 5,062 54 5,008 0.0013 0.0012 2011 5,062 - 5,062 54 5,008 The notes on pages 70 to 91 are an integral part of these consolidated financial statements. 79,550 (43,923) 35,627 (5,482) (13,764) (2,027) (1,130) 13,224 239 (4,427) 9,036 (4,856) 4,180 4,180 - 0.1000 0.0944 2010 4,180 - 4,180 4,180 - 66 Consolidated Statement of Income Consolidated Statement of Financial Position Amounts in US$ ’000 Note 2011 2010 Assets Non Current Assets Property, plant and equipment Prepaid taxes Other financial assets Deferred income tax asset Prepayments and other receivables Total Non Current Assets Current Assets Other financial assets Inventories Trade receivables Prepayments and other receivables Prepaid taxes Cash and cash equivalents Total Current Assets Total Assets Total Equity Equity attributable to owners of the Company Share capital Share premium Reserves Retained losses Non-controlling interest Total Equity Liabilities Non Current Liabilities Borrowings Provisions and other long-term liabilities Deferred income tax liability Total Non Current Liabilities Current Liabilities Borrowings Current income tax liabilities Trade and other payable Provisions for other liabilities Total Current Liabilities Total Liabilities 19 21 24 17 23 24 22 23 23 21 24 25 26 27 17 26 28 224,635 159,717 2,957 5,226 450 707 2,655 5,601 374 183 233,975 168,530 3,000 584 15,929 24,984 147 193,650 238,294 472,269 43 112,231 115,164 (18,549) 208,889 41,763 250,652 134,643 9,412 13,109 157,164 30,613 187 28,535 5,118 64,453 221,617 - 252 13,071 3,158 1,341 99,411 117,233 285,763 42 107,858 3,919 (19,527) 92,292 - 92,292 143,824 3,153 6,014 152,991 25,564 - 12,710 2,206 40,480 193,471 Total Equity and Liabilities 472,269 285,763 The financial statements were approved by the Board of Directors on 19 April 2012. The notes on pages 70 to 91 are an integral part of these consolidated financial statements. Consolidated Statement of Financial Position 67 Consolidated Statement of Changes in Equity Amount in US$ ’000 Capital Premium Reserve Reserve Losses Interest Total Attributable to owners of the Company Non- Share Share Other Translation Retained controlling Equity at 1 January 2010 Comprehensive income: Profit for the year Other comprehensive income: Currency translation differences Total Comprehensive Income for the Year 2010 Transactions with owners: Share-based payment (Note 29) Total 2010 42 107,524 3,056 894 (26,034) - - - - - - - - - - - 334 334 (31) (31) - - - - - 4,180 - 4,180 2,327 2,327 Balances at 31 December 2010 42 107,858 3,025 894 (19,527) - - - - - - - 85,482 4,180 - 4,180 2,630 2,630 92,292 Comprehensive income: Profit for the year Other comprehensive income: Currency translation differences Total Comprehensive Income for the Year 2011 Transactions with owners: Proceeds from transaction with Non-controlling interest (Notes 25 and 34) Share-based payment (Note 29) Total 2011 - - - - 1 1 - - - - - - - 111,245 4,373 - 4,373 111,245 - - - - - - 54 - 5,008 5,062 - - 54 5,008 5,062 - 924 924 36,755 148,000 - 5,298 36,755 153,298 Balances at 31 December 2011 43 112,231 114,270 894 (18,549) 41,763 250,652 The notes on pages 70 to 91 are an integral part of these consolidated financial statements. 68 Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flow Amounts in US$ ’000 Note 2011 2010 Cash flows from operating activities Income for the year Adjustments for: Income tax for the year Depreciation of the year Loss on disposal of property, plant and equipment Write-off of unsuccessful efforts Impairment loss Accrual of borrowing’s interests Amortisation of other long-term liabilities Unwinding of long-term liabilities Accrual of share-based payment Exchange difference generated by borrowings Changes in working capital Cash flows from operating activities - net Cash flows from investing activities Purchase of property, plant and equipment Deferred income Purchase of financial assets Cash flows used in investing activities - net Cash flows from financing activities Proceeds from borrowings Proceeds from the issue of bond Bond emission expenditures 16 9 11 11 27 15 10 5 27 24 Proceeds from transaction with Non-controlling interest 25 Principal paid Interest paid Cash flows from financing activities - net 5,062 7,206 26,408 2,010 5,919 1,344 11,130 (1,038) 350 5,298 (15) 89 63,763 (98,651) 5,000 (2,625) (96,276) 9,668 - - 142,000 (9,150) (10,779) 131,739 4,180 4,856 22,700 115 3,033 - 2,758 - 259 2,630 55 (9,688) 30,898 (58,025) - (3,387) (61,412) 1,853 130,296 (3,162) - (36,171) (1,666) 91,150 Net increase in cash and cash equivalents 99,226 60,636 Cash and cash equivalents at 1 January Currency translation differences relating to cash and cash equivalents Cash and cash equivalents at the end of the year Ending Cash and cash equivalents are specified as follows: Cash in bank Cash in hand Bank overdrafts Cash and cash equivalents 84,396 - 183,622 193,642 8 (10,028) 183,622 23,760 - 84,396 99,408 3 (15,015) 84,396 The notes on pages 70 to 91 are an integral part of these consolidated financial statements. Consolidated Statement of Cash Flow 69 Notes Note 1 General Information New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2011 and not early adopted GeoPark Holdings Limited (the Company) is a company incorporated under IFRS 9, 'Financial instruments', addresses the classification, measurement and the laws of Bermuda. The addresses of its registered office and principal recognition of financial assets and financial liabilities. IFRS 9 was issued in places of business are disclosed in the introduction to the Directors’ Report. November 2009 and October 2010. It replaces the parts of IAS 39 that relate The principal activities of the Company and its subsidiaries (the Group) are to the classification and measurement of financial instruments. IFRS 9 described in the Directors’ Report. requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortised cost. The The Company is quoted on the AIM London Stock Exchange. Also its shares determination is made at initial recognition. The classification depends on are authorised for trading on the Santiago Off-Shore Stock Exchange, in the entity’s business model for managing its financial instruments and the US$ under the trading symbol "GPK". contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is These consolidated financial statements were authorised for issue by the that, in cases where the fair value option is taken for financial liabilities, the Board of Directors on 19 April 2012. Note 2 part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period Summary of significant accounting policies beginning on or after 1 January 2015. The principal accounting policies applied in the preparation of these IFRS 10, 'Consolidated financial statements’' builds on existing principles by consolidated financial statements are set out below. These policies have been identifying the concept of control as the determining factor in whether an consistently applied to the years presented, unless otherwise stated. entity should be included within the consolidated financial statements of 2.1 Basis of preparation The consolidated financial statements of GeoPark Holdings Limited have the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group is yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than been prepared in accordance with International Financial Reporting the accounting period beginning on or after 1 January 2013. Standards as adopted by the European Union (IFRS). The consolidated financial statements are presented in United States dollars by entities that have an interest in arrangements that are controlled jointly. and all values are rounded to the nearest thousand (US$ ’000), except where IFRS 11 defines joint control and requires an entity that is a party to a joint IFRS 11, 'Joint arrangements', establishes principles for financial reporting otherwise indicated. arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations and to account for those The consolidated financial statements have been prepared on a historical rights and obligations in accordance with that type of joint arrangement. cost basis. The Group is yet to assess IFRS 11’s full impact and intends to adopt IFRS 11 no later than the accounting period beginning on or after 1 January 2013. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management IFRS 12, 'Disclosures of interests in other entities' includes the disclosure to exercise its judgement in the process of applying the Group’s accounting requirements for all forms of interests in other entities, including joint policies. The areas involving a higher degree of judgement or complexity, arrangements, associates, special purpose vehicles and other off balance or areas where assumptions and estimates are significant to the consolidated sheet vehicles. The Group is yet to assess IFRS 12’s full impact and intends financial statements are disclosed in this note under the title “Accounting to adopt IFRS 12 no later than the accounting period beginning on or after estimates and assumptions”. 1 January 2013. 2.1.1 Changes in accounting policy and disclosure IFRS 13, 'Fair value measurement', aims to improve consistency and reduce New and amended standards adopted by the Group There are no IFRSs or IFRIC interpretations that are effective for the first time complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. for the financial year beginning on or after 1 January 2011 that would be The requirements, which are largely aligned between IFRSs and US GAAP, expected to have a material impact on the Group. do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. The Group is yet to assess IFRS13’s full impact and 70 Notes to the Consolidated Financial Statements intends to adopt IFRS 13 no later than the accounting period beginning on 2.5 Foreign currency translation or after 1 January 2012. There are no other IFRSs or IFRIC interpretations that are not yet effective a) Functional and presentation currency The consolidated financial statements are presented in US dollars, which is that would be expected to have a material impact on the Group. the Group’s presentation currency. 2.2 Going concern The Directors regularly monitor the Group’s cash position and liquidity risks Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in throughout the year to ensure that it has sufficient funds to meet forecast which the entity operates (the “functional currency”). The functional currency operational and investment funding requirements. Sensitivities are run of Group companies incorporated in Chile and Argentina is the US dollar. to reflect latest expectations of expenditures, oil and gas prices and other factors to enable the Group to manage the risk of any funding short falls and/or potential loan covenant breaches. b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign Considering macroeconomic environment conditions, the performance of exchange gains and losses resulting from the settlement of such transactions the operations and Group’s cash position, the Directors have formed a and from the translation at period end exchange rates of monetary assets judgement, at the time of approving the financial statements, that there is and liabilities denominated in foreign currencies are recognised in the a reasonable expectation that the Group has adequate resources to continue Statement of Income. Transaction gains and losses that arise from exchange with its investment programme to increase oil and gas reserves, production rate fluctuations on transactions denominated in a currency other than the and revenues and meeting all its obligations for the foreseeable future. functional currency are included in other operating profit or other operating For this reason, the Directors have continued to adopt the going concern expenses. basis in preparing the consolidated financial statements. 2.3 Consolidation The consolidated financial statements consolidate those of the Company 2.6 Joint ventures The Company’s interests in oil and gas related joint ventures and other agreements involved in oil and gas exploration and production, have been and all of its subsidiary undertakings drawn up to the Balance Sheet date. consolidated line by line on the basis of the Company’s proportional share Subsidiaries are entities over which the Group has the power to control the in their assets, liabilities, revenues, costs and expenses. financial and operating policies so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. 2.7 Revenue recognition Revenue from the sale of crude oil and gas is recognised in the Statement of Income when risk transferred to the purchaser, and if the revenue can be measured reliably and is expected to be received. Revenue is shown net Intercompany transactions, balances and unrealised gains on transactions of VAT and discounts related to the sale. between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of 2.8 Production costs Production costs include wages and salaries incurred to achieve the net subsidiaries have been adjusted where necessary to ensure consistency with revenue for the year. Direct and indirect costs of raw materials and the accounting policies adopted by the Group. consumables, rentals and leasing, property, plant and equipment depreciation and royalties are also included within this account. 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating 2.9 Financial costs Financial costs include interest expenses, realised and unrealised gains and decision-maker, who is responsible for allocating resources and assessing losses arising from transactions in foreign currencies and the amortization performance of the operating segments, has been identified as the strategic of financial assets and liabilities. The Company has capitalised borrowing steering committee that makes strategic decisions. This committee consists of cost for wells and facilities that were initiated after 1 January 2009. Amounts the CEO, Managing Director, CFO and managers in charge of the Exploration, capitalised totalled US$ 597,127 (US$ 397,164 in 2010). Development, Drilling, Operations and SPEED departments. This committee reviews the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the operating segments 2.10 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation, based on these reports. and impairment if applicable. Historical cost includes expenditure that is Notes to the Consolidated Financial Statements 71 directly attributable to the acquisition of the items; including provisions for with Society of Petroleum Engineers definitions and were estimated by asset retirement obligation. DeGolyer and MacNaughton, the Group’s independent reservoir engineers. Oil and gas exploration and production activities are accounted for in a Depreciation of the remaining property, plant and equipment assets (i.e. manner similar to the successful efforts method on a field by field basis. The furniture and vehicles) not directly associated with oil and gas activities has Group accounts for exploration and evaluation activities in accordance been calculated by means of the straight line method by applying such with IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalizing annual rates as required to write off their value at the end of their estimated exploration and evaluation costs until such time as the economic viability useful lives. The useful lives range between 3 years and 10 years. of producing the underlying resources is determined. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income Depreciation is allocated in the Statement of Income as production, statement. exploration and administrative expenses, based on the nature of the Exploration and evaluation costs may include: licence acquisition, geological associated asset. and geophysical studies (i.e.: seismic), direct labour costs and drilling costs An asset’s carrying amount is written down immediately to its recoverable of exploratory wells. No depreciation and/or amortization are charged during amount if the asset’s carrying amount is greater than its estimated the exploration and evaluation phase. Upon completion of the evaluation recoverable amount (see Impairment of non financial assets in Note 2.12). phase, the prospects are either transferred to oil and gas properties or charged to expense (exploration costs) in the period in which the determination 2.11 Provisions and other long-term liabilities is made depending whether they have found reserves or not. If not developed, exploration and evaluation assets are written off after three years unless, it can be clearly demonstrated that the carrying value of the investment is recoverable. 2.11.1 Asset Retirement Obligation Provisions for asset retirement obligations and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to A charge of US$ 5,919,000 has been recognised in the Statement of Income settle the obligation; and the amount has been reliably estimated. within Exploration costs (US$ 3,033,000 in 2010) for write-offs in Chile (see Restructuring provisions comprise lease termination penalties and employee Note 11). termination payments. Provisions are not recognised for future operating All field development costs are capitalised within oil and gas properties, and losses. subject to depreciation. Such costs may include the acquisition and Provisions are measured at the present value of the expenditures expected installation of production facilities, development drilling costs (including dry to be required to settle the obligation using a pre-tax rate that reflects current holes, service wells and seismic surveys for development purposes), project- market assessments of the time value of money and the risks specific to the related engineering and the acquisition costs of rights and concessions obligation. The increase in the provision due to passage of time is recognised related to proved properties. as interest expense. Workovers of wells made to develop reserves and/or increase production are capitalised as development costs. Maintenance costs are charged to income The Group records the fair value of the liability for asset retirement obligations in the period in which the wells are drilled. When the liability when incurred. is initially recorded, the Group capitalises the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted Capitalised costs of proved oil and gas properties are depreciated on a to its present value at each reporting period, and the capitalised cost is licenced area by the licenced area basis, using the unit of production method, depreciated over the estimated useful life of the related asset. According to based on commercial proved and probable reserves. The calculation of the interpretations and application of current legislation and on the basis of the “unit of production” depreciation takes into account estimated future finding changes in technology and the variations in the costs of restoration necessary and development costs and is based on current year end unescalated price to protect the environment, the Group has considered it appropiate to levels. Changes in reserves and cost estimates are recognised prospectively. periodically re-evaluate future costs of well-capping. The effects of this Reserves are converted to equivalent units on the basis of approximate recalculation are included in the financial statements in which this relative energy content. recalculation is determined and reflected as an adjustment to the provision and the corresponding property, plant and equipment asset. Commercial reserves are proved and probable oil and gas reserves as defined in chapter 19 of the listing rules of the United Kingdom Listing Authority (UKLA). Oil and gas reserves for this purpose are determined in accordance 2.11.2 Deferred Income Relates to contributions received in cash from the Group’s clients to improve 72 Notes to the Consolidated Financial Statements the project economics of gas wells. The amounts collected are reflected as The current income tax charge is calculated on the basis of the tax laws a deferred income and recognised in the Consolidated Statement of Income enacted or substantially enacted at the balance sheet date in the countries via amortization. The depreciation of the gas wells that generated the where the Company’s subsidiaries operate and generate taxable income. deferred income is charged to the Statement of Income simultaneously with the amortization of the deferred income. 2.12 Impairment of non-financial assets Assets that are not subject to depreciation and/or amortization (i.e.: Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or exploration and evaluation assets) are tested annually for impairment. Assets substantially enacted by the balance sheet date and are expected to apply that are subject to depreciation and/or amortization are reviewed for when the related deferred income tax asset is realised or the deferred impairment whenever events or changes in circumstances indicate that the income tax liability is settled. carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s tax credits to the Group are assessed for recognition as deferred tax assets. carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the Deferred tax liabilities are provided in full, with no discounting. Deferred tax purposes of assessing impairment, assets are grouped at the lowest levels for assets are recognised only to the extent that it is probable that the underlying which there are separately identifiable cash flows (cash-generating units), deductible temporary differences will be able to be offset against future In addition, tax losses available to be carried forward as well as other income generally a licenced area. Non-financial assets other than goodwill that taxable income. suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.16 Financial assets Financial assets are divided into the following categories: loans and No asset should be kept as an Exploration and Evaluation asset for a period receivables; financial assets at fair value through the profit or loss; available- of more than three years, except if it can be clearly demonstrated that the for-sale financial assets; and held-to-maturity investments. Financial assets carrying value of the investment will be recoverable. are assigned to the different categories by management on initial recognition, A charge of US$ 1,344,000 has been recognised within Exploration costs as The designation of financial assets is re-evaluated at every reporting date at a result of the impairment test performed regarding operating fields in which a choice of classification or accounting treatment is available. depending on the purpose for which the investments were acquired. Argentina in 2011 (No impairment loss was recognised in 2010). 2.13 Lease contracts All current lease contracts are considered to be operating leases on the basis that the lessor retains substantially all the risks and rewards related to the All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. All financial assets are initially recognised at fair value, plus transaction costs. ownership of the leased asset. Payments related to operating leases and other Derecognition of financial assets occurs when the rights to receive cash flows rental agreements are recognised in the Income Statement on a straight line basis over the term of the contract. The Group’s total commitment relating from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for to operating leases and rental agreements is disclosed in Note 31. impairment is undertaken at each balance sheet date. 2.14 Inventories Inventories comprise crude oil and materials. Interest and other cash flows resulting from holding financial assets are recognised in the Income Statement when receivable, regardless of how the related carrying amount of financial assets is measured. Crude oil is measured at the lower of cost and net realisable value. Materials are measured at the lower between cost and recoverable amount. Cost is Loans and receivables are non-derivative financial assets with fixed or determined using the first-in, first-out (FIFO) method. The cost of materials determinable payments that are not quoted in an active market. They are and consumables is calculated at acquisition price with the addition of included in current assets, except for maturities greater than 12 months after transportation and similar costs. 2.15 Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in the Statement of Income. the balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise trade receivables, prepayments and other receivables and cash and cash equivalents in the balance sheet. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are subsequently Notes to the Consolidated Financial Statements 73 measured at amortised cost using the effective interest method, less Direct issue costs are charged to the Statement of Income on an accruals provision for impairment. Any change in their value through impairment or basis using the effective interest method. reversal of impairment is recognised in the Statement of Income. All of the Group’s financial assets are classified as loan and receivables. 2.22 Share capital Equity comprises the following: 2.17 Other financial assets Non current other financial assets relate solely to the cash collateral account • “Share capital” representing the nominal value of equity shares. required under the terms of the Bond issued in 2010 (see Note 26). This • ”Share premium” representing the excess over nominal value of the fair investment is intended to guarantee interest payments and will be recovered value of consideration received for equity shares, net of expenses of the once the borrowing is fully paid. share issue. • ”Other reserve” representing: Current other financial assets relate solely to the cash down escrow payment - the equity element attributable to shares granted according to IFRS 2 but that has been released on closing of the purchase of Colombian assets (see not issued at year end or Note 35). - the difference between the proceeds from the transaction with non-controlling interest received over the book value of the shares acquired 2.18 Impairment of financial assets Provision against trade receivables is made when objective evidence is in the subsidiary GeoPark Chile S.A. (see Note 34). • ”Reserve for exchange adjustment” representing the differences arising received that the Group will not be able to collect all amounts due to it in from translation of investments in overseas subsidiaries. accordance with the original terms of those receivables. The amount of • ”Retained earnings” representing retained profits and losses. the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. 2.19 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities 2.23 Share-based payment The Group operates a number of equity-settled, share-based compensation plans comprising share awards payments and stock options plans to certain employees and other third party contractors. of three months or less, and bank overdrafts. Bank overdrafts, if any, are Fair value of the stock option plan for employee or contractors services shown within borrowings in the current liabilities section of the Statement received in exchange for the grant of the options is recognised as an expense. of Financial Position. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted calculated using the Black- 2.20 Trade and other payable Trade payables are obligations to pay for goods or services that have been Scholes model. acquired in the ordinary course of the business from suppliers. Accounts Non-market vesting conditions are included in assumptions about the payable are classified as current liabilities if payment is due within one year number of options that are expected to vest. At each balance sheet date, the or less (or in the normal operating cycle of the business if longer). If not, entity revises its estimates of the number of options that are expected to they are presented as non-current liabilities. vest. It recognises the impact of the revision to original estimates, if any, in the Statement of Income, with a corresponding adjustment to equity. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. The fair value of the share awards payments is determined at the grant date by reference of the market value of the shares and recognised as an expense 2.21 Borrowings Borrowings are obligations to pay cash and are recognised when the Group over the vesting period. becomes a party to the contractual provisions of the instrument. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs Borrowings are recognised initially at fair value, net of transaction costs are credited to share capital (nominal value) and share premium when the incurred. Borrowings are subsequently stated at amortised cost; any difference options are exercised. between the proceeds (net of transaction costs) and the redemption value is recognised in the Statement of Income over the period of the borrowings using the effective interest method. 74 Notes to the Consolidated Financial Statements Note 3 Financial Instruments-risk management Price risk The price realised for the oil produced by the Group is linked to WTI (West Texas Intermediate) which is settled in the international markets in US dollars. The Group is exposed through its operations to the following financial risks: The market price of these commodities is subject to significant fluctuation • Currency risk • Price risk • Credit risk - concentration • Funding and Liquidity risk • Interest rate risk • Capital risk management but the Board does not consider it appropriate to manage the Group’s risk to such fluctuation through futures contracts or similar because to do so would not have been economic at the achieved production levels. In Chile, the oil price is based on WTI minus certain marketing and quality discounts such as, inter alia, API quality and mercury content. In Argentina, the oil price is also subject to the impact of the retention tax on oil exports defined by the Argentine government which limits the direct correlation The policy for managing these risks is set by the Board. Certain risks are to the WTI. managed centrally, while others are managed locally following guidelines communicated from the corporate office. The policy for each of the above The Company has signed a long-term Gas Supply Contract with Methanex in risks is described in more detail below. Chile. The price of the gas under this contract is indexed to the international methanol price. Currency risk In Argentina and Chile the functional currency is the US dollar. The If the market prices of WTI and methanol had fallen by 10% compared to actual fluctuation of the Argentine peso and the Chilean peso does not impact the prices during the year, with all other variables held constant, post-tax profit loans, costs and revenues held in US dollars; but it does impact the balances for the year would have been lower by US$ 9,501,000 (US$ 6,619,000 in 2010). denominated in local currency. Such is the case of the prepaid taxes. As currency rate changes between the US dollar and the Argentine peso or The Board will consider adopting a hedging policy against commodity price the Chilean peso, the Group recognises gains and losses in the consolidated risk, when deemed appropriate, according to the size of the business and Statement of Income. market implied volatility. In both countries, most of the balances are denominated in US dollars, and since it is the functional currency of the subsidiaries, there is no exposure Credit risk - concentration The Group’s credit risk relates mainly to accounts receivable where the credit to currency fluctuation except from receivables originated in local currency risks correspond to the recognised values. There is not considered to be any mainly corresponding to VAT credits for US$ 3,630,000 in Argentina significant risk in respect of the Group’s major customers. Substantially all oil (US$ 2,661,000 in 2010). During 2011, the VAT position in Chile is a payable production in Argentina is sold to Oil Combustibles. US$ 955,000 (US$ 646,892 credit in 2010). The Group minimises the local currency positions in Argentina and Chile by Corporation, a Canadian public company (34% of total revenue). All the oil seeking to equilibrate local and foreign currency assets and liabilities. However, tax receivables (VAT) are very difficult to match with local currency produced in Chile is sold to ENAP (65% of total revenue), the State owned oil and gas company. Both companies have a very good credit standing and liabilities. Therefore the Group maintains a net exposure to them. despite the concentration of the credit risk, the Directors do not consider In Chile, all gas production is sold to the local subsidiary of the Methanex that this would give rise to a significant collection risk. Most of the Group’s assets are associated with oil and gas productive assets. Such assets in the oil and gas industry even in the local markets are usually See disclosure in Note 24. settled in US$ equivalents. During 2011, the Argentine peso weakened by 8% (5% in 2010) against Funding and Liquidity risk Following its successes in 2011 and 2010, the Group is in the fortunate the US dollar and the Chilean peso weakened by 11% (strengthened by position of having a secure production base and cash flow stream - coupled 8% in 2010). If the Argentine peso and the Chilean peso had weakened an with a strong cash position that enables the Group to fully fund the additional 5% against the US dollar, with all other variables held constant, committed work programmes of the new Blocks. Producing Blocks combine post-tax profit for the year would have been lower by US$ 41,000 low operating costs and the flexibility of a discretionary investment (US$ 127,000 in 2010). programme that can be maintained, reduced or increased in the short-term depending on the environment economic conditions. Notes to the Consolidated Financial Statements 75 The Group has strong support from its financial partners and significant and cash equivalent. Total capital is calculated as 'equity' as shown in the flexibility in adjusting the programme to ensure the development of the consolidated balance sheet plus net debt. key properties. During 2011, the Group was able to secure US$ 148,000,000 from the disposal of 20% of the Chilean business. The existing cash position is held in Particularly, in 2011 the gearing ratio has been affected by the transactions Banks with good credit ratings where immediate access is available if required with non-controlling interests, by which the Group received proceeds of The Group’s strategy is to keep the gearing ratio within a 40% to 55% range. to pay for an acquisition. See disclosure in Note 24. US$ 142,000,000. The gearing ratios at 31 December 2011 and 2010 were as follows: Interest rate risk As the Group has no significant interest-bearing assets, the Group’s profit and operating cash flows are substantially independent of changes in market interest Amounts in US$ ’000 Net Debt (a) Total Equity rates. The Group’s interest rate risk arises from long-term borrowings issued Total Capital at variable rates, which expose the Group to cash flow to interest rate risk. Gearing Ratio The Group does not face interest rate risk on its US$ 133,000,000 Reg S Notes 2011 86,768 250,652 337,420 26% 2010 69,977 92,292 162,269 43% which carry a fixed rate coupon of 7.75% per annum. (a) For the calculation of the gearing ratio, the Group does not consider the cash that has been allocated for future M&A activities. Excluding the The loan from Methanex Corporation accrues variable interest rates which purchase price, adjusted for working capital, of the two Colombian depend on the LIBOR rate. For the period covered by these financial acquisitions, the gearing ratio for 2011 was 26%. statements, the Group has decided not to buy any coverage for this risk. At 31 December 2011 the outstanding long-term borrowing affected by variable rates amounted to US$ 15,229,000, representing 10% of total long- Note 4 term borrowings. Accounting estimates and assumptions The Group analyses its interest rate exposure on a dynamic basis. Various Estimates and assumptions are used in preparing the financial statements. scenarios are simulated taking into consideration refinancing, renewal of Although these estimates are based on management’s best knowledge existing positions, alternative financing and hedging. Based on these scenarios, of current events and actions, actual results may differ from them. Estimates the Group calculates the impact on profit and loss of a defined interest rate and judgements are continually evaluated and are based on historical shift. For each simulation, the same interest rate shift is used for all currencies. experience and other factors, including expectations of future events that The scenarios are run only for liabilities that represent the major interest- are believed to be reasonable under the circumstances. bearing positions. The key estimates and assumptions used in these consolidated financial At 31 December 2011, if interest rates on currency-denominated borrowings had been 1% higher with all other variables held constant, post-tax profit for statements are noted below: the year would have been US$ 144,267 lower (US$ 448,992 in 2010), mainly as • The Group adopts an approach similar to the successful efforts method a result of higher interest expense on floating rate borrowings. of accounting. The Management of the Company makes assessments and estimates regarding whether an exploration asset should continue to be Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s carried forward as an exploration and evaluation asset not yet determined or when insufficient information exists for this type of cost to remain as an asset. ability to continue as a going concern in order to provide returns for In making this assessment the Management takes professional advice from shareholders and benefits for other stakeholders and to maintain an optimal qualified independent experts. capital structure to reduce the cost of capital. Consistent with others in the industry, the Group monitors capital on the about two primary elements - future prices and reserves. Estimates of future basis of the gearing ratio. This ratio is calculated as net debt divided by total prices require significant judgments about highly uncertain future events. capital. Net debt is calculated as total borrowings (including 'current and non- Historically, oil and gas prices have exhibited significant volatility. Our current borrowings' as shown in the consolidated balance sheet) less cash forecasts for oil and gas revenues are based on prices derived from future • Cash flow estimates for impairment assessments require assumptions price forecasts amongst industry analysts and our own assessments. 76 Notes to the Consolidated Financial Statements Our estimates of future cash flows are generally based on our assumptions and judgments because most of the obligations are many years in the of long-term prices and operating and development costs. future. Technologies and costs are constantly changing as well as political, environmental, safety and public relations considerations. The Company Given the significant assumptions required and the possibility that actual has adopted the following criterion for recognizing well plugging and conditions will differ, we consider the assessment of impairment to be a abandonment related costs: The present value of future costs necessary for critical accounting estimate. well plugging and abandonment is calculated for each area on the basis of a cash flow that is discounted at an average interest rate applicable to The process of estimating reserves is complex. It requires significant Company’s indebtedness. The liabilities recognised are based upon judgements and decisions based on available geological, geophysical, estimated future abandonment costs, wells subject to abandonment, time engineering and economic data. The estimation of economically recoverable to abandonment, and future inflation rates. oil and natural gas reserves and related future net cash flows was performed based on the Reserve Report dated December 2011 prepared by DeGolyer and MacNaughton, an international consultancy to the oil and gas industry Note 5 based in Dallas. It incorporates many factors and assumptions including: Statement of Cash Flow - expected reservoir characteristics based on geological, geophysical and The Cash Flow Statement shows the Group’s cash flows for the year for engineering assessments; operating, investing and financing activities and the change in cash and cash - future production rates based on historical performance and expected equivalents during the year. future operating and investment activities; - future oil and gas prices and quality differentials; Cash flows from operating activities are computed from the results for the - assumed effects of regulation by governmental agencies; and year adjusted for non-cash operating items, changes in net working - future development and operating costs. capital, and corporation tax. Tax paid is presented as a separate item under Management believes these factors and assumptions are reasonable based operating activities. on the information available to us at the time we prepare our estimates. The following chart describes non-cash transactions related to the Cash Flow However, these estimates may change substantially as additional data from Statement: ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs 31 December 2011 change. As part of its impairment analysis in 2011, management has carried out an impairment test on the oil and gas assets within property, plant and equipment of the Argentine subsidiary. This test compares the carrying Balance Sheet Items value at the balance sheet date with the expected discounted cash flows from the relevant projects (value in use). For the discounted cash flows to be calculated, management has used a production profile based on its Property, plant and equipment Prepaid taxes best estimate of proven and probable reserves and a range of assumptions Inventory including a 10% pre-tax discount rate and an estimated oil price profile. Trade receivables Prepayment and other receivables • Oil and gas assets held in property plant and equipment are mainly Other financial assets depreciated on a unit of production basis at a rate calculated by reference to Cash and cash equivalents proven and probable reserves and incorporating the estimated future cost Borrowings of developing and extracting those reserves. Future development costs are Trade accounts payable estimated using assumptions as to the numbers of wells required to produce Deferred tax those reserves, the cost of the wells, future production facilities and operating Current income tax liabilities costs together with assumptions on oil and gas realisations. Other liabilities Equity • Obligations related to the plugging of wells once operations are terminated may result in the recognition of significant obligations. Estimating the future abandonment costs is difficult and requires management to make estimates Movements derived from Movements Other from Consolidated Non-Cash Consolidated Financial Movements Cash Flow Position (*) Statement 64,918 (892) 332 2,858 22,350 2,625 99,226 (855) (15,825) (7,019) (187) (9,171) (158,360) (1,948) - - - (6,000) - - - - (187) 187 1,948 6,000 62,970 (892) 332 2,858 16,350 2,625 99,226 (855) (15,825) (7,206) - (7,223) (152,360) Notes to the Consolidated Financial Statements 77 31 December 2010 Movements derived from Note 6 Movements Segment information Other from Balance Sheet Items Position (*) Statement decisions. Consolidated Non-Cash Consolidated Management has determined the operating segments based on the reports Financial Movements Cash Flow reviewed by the strategic steering committee that are used to make strategic Property, plant and equipment 34,050 (1,873) 32,177 The committee considers the business from a geographic perspective. Prepaid taxes Inventory Trade receivables Prepayment and other receivables Other financial assets Cash and cash equivalents Borrowings Trade accounts payable Deferred tax Other liabilities Equity 363 1,214 7,163 1,578 3,387 60,636 (93,963) 213 (4,856) (2,975) (6,810) - - - - - - - - - 1,873 - 363 1,214 7,163 1,578 3,387 The strategic steering committee assesses the performance of the operating segments based on a measure of adjusted earnings before interest, tax, depreciation, amortization and certain non-cash items such as write-offs, impairments and share-based payments (Adjusted EBITDA). This 60,636 measurement basis excludes the effects of non-recurring expenditure from (93,963) the operating segments, such as impairments when it is result of an isolated, 213 non-recurring event. Interest income and expenses are not included in the (4,856) (1,102) (6,810) result for each operating segment that is reviewed by the strategic steering committee. Other information provided, except as noted below, to the strategic steering committee is measured in a manner consistent with that in the financial statements. (*) Mainly transfers, increase in the asset retirement obligation and deferred tax. The movement amounting to US$ 6,000,000 relates to the difference Segment areas (geographical segments): between the proceeds from transactions with Non-controlling interest and the total consideration of these transactions (see Notes 25 and 34). Amounts in US$ ’000 Argentina Chile Corporate Total Cash flows from investing activities include payments in connection with the purchase and sale of property, plant and equipment and cash flows relating to the purchase and sale of enterprises to third parties. 2011 Net revenue Gross profit Adjusted EBITDA (1) Cash flows from financing activities include changes in Shareholders’ equity, Depreciation and proceeds from borrowings and repayment of loans. Impairment and write-off Cash and cash equivalents include bank overdraft and liquid funds with a Total assets 1,477 179 (1,081) (1,083) (1,344) 10,895 110,103 56,888 70,421 (25,297) (5,919) (2) 453,384 - - (5,949) (28) - 7,990 111,580 57,067 63,391 (26,408) (7,263) 472,269 term of less than three months. Employees (average) 83 98 1 182 Change in working capital shown in the Statement of Cash Flow is disclosed as follows: Amounts in US$ ’000 Argentina Chile Corporate Total Amounts in US$ ’000 Change in Prepaid taxes Change in Inventory Change in Trade receivables Change in Prepayments and other receivables Change in Current liabilities 2011 892 (332) (2,858) (16,350) 18,737 2010 Net revenue Gross profit Adjusted EBITDA (1) Depreciation 2010 (363) (1,214) (7,163) (1,578) 630 Impairment and write-off 89 (9,688) Total assets 1,119 180 (905) 78,431 35,447 49,973 (798) (240) 10,806 (21,900) (2,793) (2) 273,450 - - (7,976) (2) - 1,507 79,550 35,627 41,092 (22,700) (3,033) 285,763 Employees (average) 70 111 1 182 (1) Corporate expenses included in the Adjusted EBITDA are allocated within the Statement of Income as Exploration costs for an amount of US$ 1,001,000 78 Notes to the Consolidated Financial Statements (US$ 1,093,000 in 2010), Production costs for an amount of US$ 1,261,000 Note 9 (US$ 1,012,000 in 2010) and the remaining amount corresponds to Depreciation Administrative costs. (2) Includes cash received from bond issuance in 2010 and disposal of 20% of Amounts in US$ ’000 the Chilean business in 2011. Over 95% of CAPEX is allocated to Chile in 2011 and 2010. A reconciliation of total Adjusted EBITDA to total profit before income tax is Oil and gas properties Production facilities and machinery Furniture, equipment and vehicles Buildings and improvements Depreciation of property, plant and equipment Recognised as follows: provided as follows: Amounts in US$ ’000 Adjusted EBITDA for reportable segments Depreciation Accrual of stock options and stock awards Impairment and write off of unsuccessful efforts Others (a) Operating profit Net finance cost Profit before tax (a) Includes internally capitalised costs. Note 7 Net Revenue Amounts in US$ ’000 Sale of crude oil Sale of gas Note 8 Production costs Amounts in US$ ’000 Depreciation Royalties Staff costs (Note 10) Gas plant costs Transportation costs Facilities maintenance Well maintenance Consumables Share-based payments (Notes 10 and 29) Vehicle rental and personnel transportation Pulling costs Field camp Landowners Insurance costs Other costs 2011 63,391 (26,408) (5,298) (7,263) 1,362 25,784 (13,516) 12,268 Production costs 2010 Administrative expenses Other operating costs Depreciation total 41,092 (22,700) (2,630) (3,033) 495 Note 10 Staff costs 13,224 (4,188) 9,036 Average number of employees Amounts in US$ ’000 Wages and salaries Shared-based payment Social security charges 2011 73,508 38,072 2010 48,186 31,364 Board of Directors’ and key managers’ remuneration 111,580 79,550 Salaries and fees Other benefits 2011 20,096 5,767 343 202 2010 16,171 6,209 185 135 26,408 22,700 25,844 22,301 501 63 290 109 26,408 22,700 2011 182 9,914 5,298 2,228 2010 182 7,665 2,630 1,446 17,440 11,741 2011 2010 4,045 2,257 6,302 2,786 1,422 4,208 2011 25,844 4,843 4,568 3,242 2,541 2,302 1,692 1,687 1,447 1,404 1,086 1,009 344 316 Note 11 2010 Exploration costs Amounts in US$ ’000 Staff costs (Note 10) Share-based payments (Notes 10 and 29) Impairment loss (a) Write-off of unsuccessful efforts (b) Amortisation of other long-term liabilities (Note 27) Other services 2011 2,292 985 1,344 5,919 (600) 126 10,066 2010 1,749 299 - 3,033 - 401 5,482 (a) The 2011 impairment charge relates to exploration assets in Del Mosquito Block based on an impairment test performed. 22,301 3,940 2,936 3,067 1,876 2,206 1,293 1,319 372 870 614 955 239 312 2,188 54,513 1,623 43,923 Notes to the Consolidated Financial Statements 79 (b) The 2011 charge corresponds to the write off of exploration and Note 15 evaluation assets in the Fell Block. The charge includes the cost of Financial expenses an unsuccessful exploratory well amounting to US$ 2,331,000 and also in accordance with the Group’s accounting policy and considering that Amounts in US$ ’000 no additional work will be performed, wells from previous years have been Bank charges and other financial costs written off for an amount of US$ 3,588,000. The 2010 charge corresponds to Exchange difference the write off of exploration and evaluation assets amounting to US$ 2,793,000 Unwinding of long-term liabilities and US$ 240,000 in the Fell Block and Del Mosquito Block, respectively. Interest and amortization of debt issue costs Less: amounts capitalised on qualifying assets 2011 1,856 496 350 11,573 (597) 13,678 2010 534 921 259 3,110 (397) 4,427 2011 187 7,019 7,206 2010 - 4,856 4,856 Note 16 Income Tax Amounts in US$ ’000 Current tax Deferred income tax (Note 17) 2010 3,826 1,959 2,499 974 696 822 242 454 290 2,002 The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: 13,764 Amounts in US$ ’000 Profit before tax Tax losses from non-taxable jurisdictions Taxable profit 2011 12,268 8,565 20,833 2010 9,036 11,134 20,170 Income tax calculated at statutory tax rate 5,473 2,230 2010 Tax losses where no deferred income tax 109 is recognised 1,021 1,130 Difference between functional currency and tax currency Non-taxable profit Income tax 2,560 1,454 (761) (66) 7,206 1,228 (56) 4,856 Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on income or capital gains. The Company has received an 2010 undertaking from the Minister of Finance in Bermuda that, in the event of 237 any taxes being imposed, they will be exempt from taxation in Bermuda until 2 March 2016. Income tax rates in those countries where the Group operates 239 range from 15% in Chile to 35% in Argentina. The Group has significant tax losses available which can be utilised against future taxable profit in those countries as set out below: Note 12 Administrative costs Amounts in US$ ’000 Staff costs (Note 10) Share-based payments (Notes 10 and 29) Consultant fees New projects Office expenses Director fees Travel expenses Communication and IT costs Depreciation Other administrative expenses Note 13 Other operating costs Amounts in US$ ’000 Depreciation Other expense Note 14 Financial income Amounts in US$ ’000 Exchange difference Interest received 2011 5,282 2,866 1,896 1,726 1,025 903 686 539 501 2,745 18,169 2011 63 439 502 2011 32 130 162 80 Notes to the Consolidated Financial Statements Amounts in US$ ’000 Argentina Total tax losses at 31 December 2011 18,656 18,656 2010 18,095 18,095 At the balance sheet date deferred tax assets in respect of tax losses in Argentina have not been recognised as there is insufficient evidence Amounts in US$ ’000 Deferred tax liabilities Difference in depreciation rates of future taxable profits before the statute of limitation of these tax losses Taxable losses (*) causes them to expire. Expiring dates for tax losses accumulated at 31 December 2011 are: Expiring date Amounts in US$ ’000 Borrowings Other Total 2011 Total 2010 (Charged) / At the credited beginning of year to net profit At end of year (13,340) 332 (13,008) 7,971 (948) 303 (6,014) (1,086) (7,971) 177 367 (7,095) (4,928) - (771) 670 (13,109) (6,014) 2012 2013 2014 2015 2016 Note 17 Deferred income tax 5,336 3,827 725 5,743 3,025 (*) In Chile, taxable losses have no expiration date. Note 18 Earnings per share Amounts in US$ ’000 Numerator: Profit for the year Denominator: The gross movement on the deferred income tax account is as follows: Weighted average number of shares Amounts in US$ ’000 Deferred tax at 1 January Income statement charge Deferred tax at 31 December used in basic EPS Earnings after tax per share (US$) - basic 2011 (5,640) (7,019) (12,659) 2010 (784) (4,856) (5,640) 2011 2010 54 4,180 41,912,685 41,673,256 0.0013 0.1000 The breakdown and movement of deferred tax assets and liabilities as of 31 Weighted average number of shares December 2011 and 2010 are as follows: used in basic EPS 41,912,685 41,673,256 Amounts in US$ ’000 2011 2010 Effect of dilutive potential common shares (Charged) / At the credited Stock award at US$ 0.001 Stock option at £ 4.00 beginning of year to net profit At end of year Executive Directors stock option at £ 3.20 Weighted average number of common shares for the purposes 2,004,482 1,101,414 - - 1,218,380 306,690 (936) 1,310 374 302 (490) 566 76 72 (1,426) of diluted earnings per shares 43,917,167 44,299,740 1,876 Earnings after tax per share (US$) - diluted 0.0012 0.0944 450 374 Amounts in US$ ’000 Deferred tax assets Difference in depreciation rates Taxable losses (*) Total 2011 Total 2010 Notes to the Consolidated Financial Statements 81 Furniture, Production Buildings Exploration Oil & gas equipment facilities and and Construction and evaluation properties and vehicles machinery improvements in progress Note 19 Property, plant and equipment Amounts in US$ ’000 Cost at 1 January 2010 Additions Disposals Write-off / Impairment Transfers Cost at 31 December 2010 Additions Disposals Write-off / Impairment Transfers Cost at 31 December 2011 Depreciation and write-down at 1 January 2010 Depreciation Disposals Depreciation and write-down 82,906 2,129 (141) - 41,732 126,626 2,318 (227) - 43,239 171,956 (17,382) (16,171) 45 989 418 (43) - 81 1,445 825 (177) - 82 2,175 (690) (185) 24 29,970 379 - - 7,793 38,142 1,261 (1,852) - 9,551 47,102 (7,099) (6,209) - at 31 December 2010 (33,508) (851) (13,308) Depreciation Disposals Depreciation and write-down (20,096) - (343) 71 (5,767) 447 at 31 December 2011 (53,604) (1,123) (18,628) 1,803 199 - - 74 2,076 156 - - 205 2,437 (379) (135) - (514) (202) - (716) 14,475 32,344 - - (30,622) 16,197 56,570 (272) - (39,599) 32,896 - - - - - - - assets 21,074 24,429 - (3,033) (19,058) 23,412 39,469 - (7,263) (13,478) 42,140 - - - - - - - Total 151,217 59,898 (184) (3,033) - 207,898 100,599 (2,528) (7,263) - 298,706 (25,550) (22,700) 69 (48,181) (26,408) 518 (74,071) Carrying amount at 31 December 2010 Carrying amount at 31 December 2011 93,118 594 24,834 1,562 16,197 23,412 159,717 118,352 1,052 28,474 1,721 32,896 42,140 224,635 As of 31 December 2011, the Group has pledged, as security for a mortgage obtained for the acquisition of the operating base in Chile, assets amounting to US$ 638,000 (US$ 708,000 in 2010). See Note 26. On 25 August 2011 the exploratory period in the Fell Block ended. The exploration programme carried out during the exploration period enabled the Company to declare commerciality on approximately 84% of the total area of the Block. The remaining area not declared as commercial was relinquished, which did not generate any loss for the Group. 82 Notes to the Consolidated Financial Statements Note 20 Subsidiary undertakings Details of the subsidiaries and jointly controlled assets of the Company are set (a) Indirectly owned. out below: Subsidiaries Name and registered office interest (e) On 14 April 2011 following Governmental approval the new ownership Ownership (d) LGI has 20% interest through GeoPark Chile S.A. and a 14% direct interest. (b) Dormant companies. (c) Since 20 May 2011, LGI acquired 20% interest. GeoPark Argentina Ltd. - Bermuda GeoPark Argentina Ltd. - Argentine Branch Servicios Southern Cross Limitada (Chile) GeoPark Chile Ltd. - Bermuda GeoPark Chile Ltd. - Chilean Branch GeoPark S.A. (Chile) GeoPark Chile S.A. (Chile) GeoPark Fell S.p.A. (Chile) GeoPark Magallanes Limitada (Chile) GeoPark TdF S.A. (Chile) GeoPark Colombia S.p.A. (Chile) GeoPark Brazil S.p.A. (Chile) Jointly controlled assets Tranquilo Block (Chile) Otway Block (Chile) Flamenco Block (Chile) Isla Norte Block (Chile) Campanario Block (Chile) 100% 100% (a) 100% 100% 100% (a) 100% (a)(b) 80% (a)(c) 80% (a)(c) 80% (a)(c) 69% (a)(d) 100% (a) 100% (a)(b) 29% (e) 25% (f) 50% (g) 60% (g) 50% (g) of the Tranquilo Block was confirmed. The other partners in the JVs are Pluspetrol (29%), Methanex (17%) and Wintershall (25%). (f) On 15 July 2010 following Governmental approval the new ownership of the Otway Block was confirmed. The other partners in the JVs are Pluspetrol (25%), Methanex (12.5%), Wintershall (25%) and IFC (12.5%). (g) After participating in a farm-in process organised by ENAP, GeoPark was awarded 3 blocks in Tierra del Fuego, Chile (Isla Norte Block, Flamenco Block and Campanario Block). GeoPark will be the operator in all blocks with a share of 60% for Isla Norte Block and 50% for the other 2 blocks. The following chart illustrates the Group structure: GeoPark Holdings Limited GeoPark Chile Limited - Bermuda GeoPark Argentina Limited - Bermuda Servicios Southern Cross Limitada GeoPark Chile Limited - Agencia en Chile GeoPark Argentina Limited - Argentine Branch GeoPark Chile S.A. GeoPark Colombia S.p.A. GeoPark Fell S.p.A. GeoPark Magallanes Limitada GeoPark TdF S.A. Notes to the Consolidated Financial Statements 83 Note 21 Prepaid taxes Amounts in US$ ’000 V.A.T. Other prepaid taxes Total prepaid taxes Classified as follows: Current Non current Total prepaid taxes Note 22 Inventories Amounts in US$ ’000 Crude oil Materials and spares 2011 2,669 435 3,104 147 2,957 3,104 2011 499 85 584 Note 23 Trade receivables and Prepayments and other receivables Amounts in US$ ’000 Trade accounts receivable To be recovered from co-venturers Prepayments and other receivables Total Classified as follows: Current Non current Total 2011 15,929 15,929 537 25,154 25,691 41,620 Movements on the Group provision for impairment are as follows: Amounts in US$ ’000 At 1 January Provision for receivables impairment 2011 2010 33 - 33 33 - 33 The credit period for trade receivables is 30 days. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable. The Group does not hold any collateral as security related to 2010 3,347 649 3,996 1,341 2,655 3,996 trade receivables. The carrying value of trade receivables is considered to represent a reasonable approximation of its fair value due to their short-term nature. 2010 Note 24 199 53 252 Financial instruments by category Amounts in US$ ’000 2011 2010 2011 Loans and receivables Assets as per statement of financial position Trade receivables Other financial assets (*) 15,929 8,226 2010 Cash and cash equivalents 193,650 13,071 5,601 99,411 15,929 8,226 193,650 Total 2010 13,071 5,601 99,411 13,071 13,071 1,890 1,451 3,341 217,805 118,083 217,805 118,083 Amounts in US$ ’000 2011 2010 2011 Other financial liabilities Total 2010 16,412 Liabilities as per statement 40,913 707 41,620 16,229 183 16,412 of financial position Trade payables Borrowings 27,580 165,256 11,592 169,388 27,580 165,256 11,592 169,388 192,836 180,980 192,836 180,980 (*) Other financial assets relate to the cash collateral account required Trade receivables that are aged by less than three months are not under the terms of the Bond issued in 2010. This investment is intended to considered impaired. As of 31 December 2011, trade receivables of US$ 4,019 guarantee interest payments and will be recovered once the borrowing (US$ 26,174 in 2010) were aged by more than 3 months, but not impaired. is fully paid. In 2011, also includes the cash down escrow payment that has These relate to customers for whom there is no recent history of default. been released on closing of the purchase of Colombian assets (Note 34). There are no balances due between 31 days and 90 days as of 31 December 2011 and 2010. Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: 84 Notes to the Consolidated Financial Statements Amounts in US$ ’000 2011 2010 Note 25 Trade receivables Counterparties with external credit rating (Moody’s) Share capital A3 Ba1 Baa1 Counterparties without external credit rating Group1 (*) Total trade receivables 11,333 4,089 - 5,977 6,731 334 Issued share capital Common stock (amounts in US$ ’000) The share capital is distributed as follows: Common shares, of nominal US$ 0.001 507 29 Total common shares in issue 2011 43 2010 42 42,474,274 42,474,274 41,703,011 41,703,011 15,929 13,071 (*) Group 1 - existing customers (more than 6 months) with no defaults in the past. Authorised share capital US$ per share Number of common shares (US$ 0.001 each) Amount in US$ 0.001 0.001 5,171,969,000 5,171,969,000 5,171,969 5,171,969 All trade receivables are denominated in US dollars. Cash at bank and investments (1) Amounts in US$ ’000 Counterparties with external credit rating (Moody’s) A1 A3 Aa1 Aa2 Aa3 P1 Total (1) The rest of the balance sheet item 'cash and cash equivalents' is cash on hand amounting to US$ 8,000 (US$ 3,000 in 2010). Financial liabilities - contractual undiscounted cash flows The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. 2011 2010 Details regarding the share capital of the Company are set out below: 2,139 7,631 50,000 54 3,694 - - - Common shares As of 31 December 2011 the outstanding common shares confer the following rights on the holder: 139,594 101,315 • the right to one vote per share; 2,450 - • ranking pari passu, the right to any dividend declared and payable on 201,868 105,009 common shares provided that no dividends shall be declared or paid on common shares. GeoPark Shares issued Shares closing US$(’000) common shares history Date (millions) (millions) Closing Shares outstanding at the end of 2009 Issue of shares to Non-Executive Directors 2010 Stock awards Dec 2010 Between Between Shares outstanding Less than 1 year 1 and 2 years 2 and 5 years at the end of 2010 Issue of shares to Non-Executive Directors 2011 8,265 179,489 Stock awards - - Stock awards 8,265 179,489 IPO stock options May 2011 Oct 2011 Oct 2011 7,391 212,182 at the end of 2011 Shares outstanding - - 30,613 27,580 58,193 25,834 11,592 37,426 0.02 0.02 0.01 0.06 0.10 0.60 41.7 41.7 41.7 41.7 41.7 41.8 41.9 42.5 42.5 42 42 42 42 42 42 42 43 43 7,391 212,182 During 2011, the Company issued 12,028 (14,704 in 2010) shares to Non-Executive Directors in accordance with contracts as compensation. Shares are issued at average price for the period, generating a share premium of US$ 130,733 (US$ 91,000 in 2010). Notes to the Consolidated Financial Statements 85 Amounts in US$ ’000 At 31 December 2011 Borrowings Trade payables At 31 December 2010 Borrowings Trade payables During 2011, 158,000 (22,000 in 2010) new common shares were issued, (b) Facility to establish the operational base in the Fell Block. This facility pursuant to a consulting agreement for services rendered to GeoPark was acquired through a mortgage loan granted by the Banco de Crédito e Holdings Limited generating a shared premium of US$ 1,730,000 Inversiones (BCI), a Chilean private bank (Note 19). The loan was granted (US$ 243,000 in 2010). in Chilean pesos and is repayable over a period of 8 years. The interest rate applicable to this loan is 6.6%. The outstanding amount at 31 December On 6 October 2011, 601,235 common shares were allotted to the trustee 2011 is US$ 410,000. of the EBT in anticipation of the exercise of the 2006 Stock Option Plan (Note 29). In addition, during the last quarter of 2011, GeoPark TdF obtained short-term financing from BCI to start the operations in the new blocks acquired. The accounting treatment of the shares is in line with the Group’s policy on This financing is structured as letter of credit. The maturity is within a year. share-based payments. The outstanding amount at 31 December 2011 is US$ 8,435,000. Other Reserve During 2011, LGI acquired a 20% interest in GeoPark Chile S.A., the subsidiary that owns the Chilean assets for a total consideration of US$ 148,000,000. The (c) The Group has been granted with credit lines for approximately US$ 15,000,000. difference between this amount and the net equity of the Company as per (d) Private placement of US$ 133,000,000 of Reg S Notes on 2 December 2010. the book value was recorded as a reserve for an amount of US$ 111,245,000. The Notes carry a coupon of 7.75% per annum and mature on 15 December Note 26 Borrowings 2015. The Notes are guaranteed by the Company and secured with the pledge of 51% of the shares of GeoPark Fell. In addition, the Note agreement allows for the placement of up to an additional US$ 27,000,000 of Notes under the same indenture, subject to the maintenance of certain financial ratios. The net proceeds of the Notes are being used to support the Group’s Amounts in US$ ’000 2011 2010 growth strategy and improve the Group’s financial flexibility. Outstanding amounts as of 31 December Methanex Corporation (a) Banco de Crédito e Inversiones (b) Overdrafts (c) Bond (d) Classified as follows: Non current Current 18,068 8,845 10,028 25,848 The fair value of these financial instruments at 31 December 2011 amounts to 541 US$ 159,602,000 (US$ 158,492,000 in 2010). 15,015 128,315 127,984 165,256 169,388 Note 27 Provisions for other long-term liabilities 134,643 143,824 30,613 25,564 (a) The financing obtained in 2007, for development and investing activities Amounts in US$ ’000 on the Fell Block, is structured as a gas pre-sale agreement with a six year pay-back period and an interest rate of LIBOR flat. In each year, the Group will At 1 January 2010 Revision to provision repay principal up to an amount equal to the loan amount multiplied by a Unwinding of discount specified percentage. Subject to that annual maximum principal repayment amount, the Group will repay principal and interest in an amount equal to the amount of gas specified in the contract at the effective selling price. At 31 December 2010 Revision to provision / Contributions received Amortisation In addition, on 30 October 2009, another financing agreement was signed Unwinding of discount with Methanex Corporation under which Methanex have funded GeoPark’s At 31 December 2011 portions of cash calls for the Otway Joint Venture for US$ 3,100,000. The loan Assets retirement Deferred obligation income 1,021 1,873 259 3,153 1,947 - 350 5,450 - - - - 5,000 (1,038) - 3,962 Total 1,021 1,873 259 3,153 6,947 (1,038) 350 9,412 is being repaid by GeoPark funding Methanex’s portion of cash calls made The provision for decommissioning relates to the estimation of future between August 2011 and 11 May 2012 (or earlier). If any amount of loan disbursements related to the abandonment and decommissioning of oil and remains outstanding on 11 May 2012, it will be repaid in a lump sum on that gas wells. This provision will be utilised when the related wells are fully date. The purpose is to finance the exploration, development and production depleted. of natural gas from the Otway Block. This financing does not bear interest. 86 Notes to the Consolidated Financial Statements Deferred income relates to contributions received to improve the project Amount Shares not economics of the gas wells. The amortization is in line with the related asset. Year Grant Date of Shares vested 2011 2010 Note 28 Trade and other payable Amounts in US$ ’000 V.A.T. Trade payables 2011 955 27,580 28,535 15 December 2011 500,000 - 37 - 15 December 2010 1,000,000 136,900 2,776 253 15 December 2008 1,000,000 41,686 2011 2010 2008 925 3,738 1,017 1,270 2010 1,118 11,592 Subtotal Stock awards 12,710 for service October contracts 2010 300,000 120,000 672 1,300 The average credit period (expressed as creditor days) during the year ended Stock awards 31 December 2011 was 74 days (2010: 49 days). for service 31 August The fair value of these short-term financial instruments is not individually contracts Shares 2011 90,000 - 757 - determined as the carrying amount is a reasonable approximation of fair value. granted to Note 29 Share-based payments IPO Award Programme and Executive Stock Option plan The Group has established IPO Award Programme and Executive Stock Non-Executive Directors 131 5,298 60 2,630 The awards that do not vest are cancelled since they correspond to employees that had left the Group before vesting date. Option plans. These schemes were established to incentivise the Directors, A total of 613,380 IPO Awards were granted to all of the Group’s employees senior management and employees, enabling them to benefit from the and certain consultants at the IPO date (May 2006). The Awards vested on increased market capitalization of the Company. 15 May 2008, the second anniversary of admission to IPO. On 3 July 2008, the Company issued 602,000 shares for nominal value of $ 0.001 each, During 2008, GeoPark Shareholders voted to authorise the Board to use up corresponding to the total IPO awards vested which are held in a Beneficiary to 12% of the issued share capital of the Company at the relevant time for the Trust. There are 11,380 awards that did not vest and were cancelled since purposes of the Performance-based Employee Long-Term Incentive Plan. they involved employees that had left the Group before the vesting date. Main characteristics of the Stock Awards Programmes are: During 2011, 15,000 (241,500 in 2010) of these shares were sold by the • All employees are eligible. • Exercise price is equal to the nominal value of shares. • Vesting period is four years. • Specific Award amounts are reviewed and approved by the Executive employees at a weighted average price of £ 7.45 (£ 5.81 in 2010) per share. The shares held in the employee Beneficiary Trust rank pari-passu with GeoPark’s ordinary shares. Directors and the Remuneration Committee of the Board of Directors. On admission to AIM the Company granted: Details of these costs and the characteristics of the different stock awards i) 605,000 stock options to the senior management and some eligible programmes are described in the following table and explanations: employees, from which 60,000 have expired. The exercise price of these stock options is £ 4.00 (125 per cent of placing price). The vesting date of these stock options was 15 May 2008 and they expire in five years from that date, on 15 May 2013. The stock options give no voting rights to the holders until they are exercised and converted into common shares when they will rank pari-passu with all existing common shares. ii) to the Executive Directors 306,690 stock options at an exercise price of £ 3.20 and 613,380 at an exercise price of £ 4.00. The vesting conditions of these options are equal to those described in i). Notes to the Consolidated Financial Statements 87 The fair value of the options granted was calculated using the Black-Scholes Joint venture model. Due to the short trading history of the Company, expected volatility was determined by comparison to a sample of AIM listed oil and gas companies with a similar market capitalisation to the Group but a longer trading history. In addition, a simplified procedure for the exercise of the Options was approved by the Board. It is a payment mechanism available to option holders that enables a cash-free exercise of their Options. The mechanism Subsidiary Interest Assets PP&E / E&E Other assets Total assets allows participating option holders to exercise their options utilizing fully Liabilities issued shares made available by the EBT (Employee Beneficiary Trust) Current liabilities according to a formula (the “Stock Option cash-free payment option”). Total liabilities This allows participating option holders to exercise options to buy shares for Net assets / (liabilities) the same number of shares they would have obtained with borrowed cash Sales and then sell sufficient shares to repay the borrowed sums. Net loss Tranquilo Block GeoPark Otway Block GeoPark Magallanes Ltda. Magallanes Ltda. 29% 2011 8,438 2,458 10,896 (1,048) (1,048) 9,848 - 569 2010 3,114 435 3,549 (495) (495) 3,054 - 547 25% 2011 2,561 262 2,823 (332) (332) 2,491 - 232 2010 1,108 176 1,284 (98) (98) 1,186 - 219 On 6 October 2011, 601,235 common shares each credited as fully paid, were Capital commitments related to the Tranquilo and Otway Blocks are disclosed allotted to the trustee of the EBT in anticipation of the exercise of the Options. in Note 31 (b). This number of shares issued was estimated assuming that all beneficiaries will adopt the cash-less exercise mechanism at market price £ 6.5. Other share-based payments As it is mentioned in Note 25, the Company granted 12,028 (14,704 in 2010) shares at average price for each three month period for services rendered by the Non-Executive Directors of the Company. Fees paid in shares Note 31 Commitments (a) Royalty commitments In Argentina, crude oil production accrues royalties payable to the Provinces were directly expensed in the Administrative costs line in the amount of of Santa Cruz and Mendoza equivalent to 12 per cent on estimated value US$ 130,745 (US$ 60,815 in 2010). at well head of those products. This value is equivalent to final sales price less Note 30 Interests in Joint Ventures transport, storage and treatment costs. In Argentina crude oil sales accrue private royalties payable to EPP Petróleo S.A. (2.5 per cent on invoiced amount of crude oil obtained from wells at “Del Mosquito”, Province of Santa Cruz, Argentina) and to Occidental The Group has interests in five joint ventures, which are involved in the Petroleum Argentina INC, formerly Vintage Argentina Ltd. (8 per cent on exploration of hydrocarbons in Chile (Note 20). Three of them are related invoiced amount of crude oil obtained from wells at “Loma Cortaderal” and to the new blocks acquired in Tierra del Fuego (TdF), Chile. These joint ventures had no operations during 2011; however operations have started during the first quarter of 2012. GeoPark is the operator in Tranquilo and Otway Blocks and will be the operator in all TdF blocks with a share of 60% for Isla Norte Block and 50% for the other 2 blocks. “Cerro Doña Juana”, Province of Mendoza, Argentina). In Chile, royalties are payable to the Chilean Government, which is calculated at 5 per cent of crude oil production and 3 per cent of gas production. (b) Capital commitments The Tranquilo Block Consortium has committed to drill four exploratory wells, to perform 2D and 3D seismic until July 2011. An extension of eighteen The following amounts represent the Company’s share in the assets, liabilities months has been granted. The joint venture estimates that the remaining and results of the joint ventures which have been consolidated line by line commitment amounts to US$ 4,350,000 at GeoPark’s working interest (29%). in the consolidated statement of financial position and statement of income: The Otway Block Consortium has committed to drill two exploratory wells and to perform 3D seismic until May 2012. The joint venture estimates that the remaining commitment amounts to US$ 3,750,000 at GeoPark’s working interest (25%). 88 Notes to the Consolidated Financial Statements After participating in a farm-in process organised by ENAP, GeoPark was c) 10.18 per cent of share capital, by Cartica Corporate Governance Fund, L.P. awarded 3 blocks in Tierra del Fuego (Isla Norte Block, Flamenco Block d) 8.14 per cent of share capital, by IFC (International Finance Corporation). and Campanario Block). e) 5.10 per cent of share capital, by Socoservin Overseas Ltd controlled by Juan Cristóbal Pavez (Non- Executive Director). Future investment commitments assumed by GeoPark were: f) 4.86 per cent of share capital, by MONEDA A.F.I. • 3 exploratory wells and 350 km2 of Seismic on Isla Norte Block • 8 exploratory wells and 578 km2 of Seismic on Campanario Block Balances outstanding and transactions with related parties • 10 exploratory wells and 570 km2 of Seismic on Flamenco Block (Amounts in ’000) Related As part of the agreement, the investments made in the first exploratory Account Transaction Balances Party Relationship period will be carried 100% by GeoPark and will not be recoverable in the future (commitment of 21 exploratory wells and 1,498 km2 of Seismic). 2011 To be recovered from co-ventures Once the related CEOPs are signed, the Group shall assume the commitment to guarantee US$ 101,430,000 for the work commitment through a stand-by - 537 Ventures Ventures Joint Joint Non- Carlos Executive letter or collateral. In any case, the applicable instrument will be issued by an Exploration costs 138 - Gulisano Director (*) international financial institution. (c) Operating lease commitments - Group company as lessee The Group leases various plant and machinery under non-cancellable 2010 To be recovered from co-ventures - 1,890 Ventures Ventures Joint Joint operating lease agreements. Borrowings 1,061 - IFC Share- holders Non- The Group also leases offices under non-cancellable operating lease Carlos Executive agreements. The lease terms are between 2 and 3 years, and the majority of Exploration costs 162 - Gulisano Director (*) lease agreements are renewable at the end of the lease period at market rate. During 2011 a total amount of US$ 3,313,000 was charged to the income statement and US$ 28,132,000 of operating leases were capitalised as There have been no other transactions with the Board of Directors, Property, plant and equipment (US$ 11,676,000 in 2010). Executive Board, Executive officers, significant shareholders or other related The future aggregate minimum lease payments under non-cancellable have been eliminated in the consolidated financial statements, and normal operating leases are as follows: remuneration of Board of Directors and Executive Board. parties during the year besides the intercompany transactions which (*) Corresponding to geosciences consultancy. Amounts in US$ ’000 Operating lease commitments Falling due within 1 year Falling due within 1 - 5 years Total minimum lease payments Note 32 Related parties 2011 2010 34,126 25,019 59,145 Note 33 Fees paid to Auditors 13,224 30,301 43,525 Amounts in US$ ’000 2011 2010 Fees payable to the Group’s auditors for the audit of the consolidated financial statements Fees payable to the Group’s auditors for the review of interim financial results Fees payable for the audit of the Group’s subsidiaries pursuant to legislation Non-audit services Fees paid to auditors 120 32 113 239 504 115 28 98 146 387 Controlling interest The main shareholders of GeoPark Holdings Limited, a company registered in Bermuda, as of 31 December 2011, are: a) 19.24 per cent of share capital, by Gerald O’Shaughnessy (founder). b) 16.44 per cent of share capital, by Energy Holdings, LLC controlled by Non-audit services relate to tax services for US$ 123,000 (US$ 94,000 in 2010) James F. Park (founder). and other services for US$ 116,000 (US$ 52,000 in 2010). Notes to the Consolidated Financial Statements 89 Note 34 Business transactions Note 35 Subsequent Events LGI partnership On 12 March 2010, LGI and the Company agreed to form a new strategic Acquisitions in Colombia In February 2012, GeoPark acquired two privately-held exploration and partnership to jointly acquire and develop upstream oil and gas projects in production companies operating in Colombia, Winchester Oil and Gas S.A. Latin America. and La Luna Oil Company Limited S.A. (“Winchester Luna”). During 2011, GeoPark and LGI entered into the following agreements through In March 2012, a second acquisition occurred with the purchase of Hupecol which LGI acquires an equity interest in the Chilean Business of the Group: Cuerva LLC (“Hupecol”), a privately-held company with two exploration and production blocks in Colombia. • On 20 May 2011, the Company (through its wholly owned subsidiaries GeoPark Chile Chilean Branch and GeoPark Chile S.A.) and LGI signed a The combined Hupecol and Winchester Luna purchases (acquired for a total subscription agreement in which LGI subscribed 10 million of ordinary shares consideration of US$ 105,000,000, adjusted for working capital, plus certain representing 10% equity interest in GeoPark Chile S.A., the Company owner possible contingent payments) provide GeoPark with the following in of the Chilean assets, for a total consideration of US$ 70,000,000. Colombia: • On 4 October 2011, an addendum to the agreement dated 20 May 2011 was signed whereby 12.5 million of ordinary shares in GeoPark Chile S.A. were • Interests in 10 blocks (ranging from 5% to 100%), with licence operations subscribed by LGI, for a consideration of US$ 78,000,000, representing an in four of them, located in the Llanos, Magdalena and Catatumbo Basins, additional 10%. covering an area of approximately 220,000 gross acres. The transactions mentioned above have been considered to be a deemed • Risk-balanced asset portfolio of existing reserves, low risk development disposal and in accordance with IAS 27 it has been accounted for as a potential and attractive exploration upside. With current oil production of transaction with Non-controlling interest. Consequently, the gain as a result approximately 2,800 barrels per day (bopd) from three blocks. of US$ 111,245,000 has been recognised through equity rather than in the income statement for the year. • 2P oil reserves of approximately 10 million barrels and prospective oil Under the terms of this agreement LGI also committed to provide additional resources (unrisked) of 25+ million barrels (Company estimates). equity funding of US$ 18 million to GeoPark Chile S.A. over the next three years, being LGI’s share of GeoPark Chile S.A.’s commitments under the • Successful Colombian operating and administrative team to support minimum work programme of the three Tierra del Fuego licences (see note 31). a smooth transition and start-up by GeoPark in Colombia together with Associations and JVs with principal Colombian operators. Tierra del Fuego blocks In 2011, after participating in a farm-in process organised by ENAP, GeoPark The acquisitions were afforded from the existing cash resources as of was awarded three blocks in Tierra del Fuego (Isla Norte Block, Flamenco 31 December 2011. In the same way, the Company will fund the investment Block and Campanario Block). programme from the same source. GeoPark is the operator in all blocks with a share of 60% for Isla Norte Block and 50% for the other 2 blocks. Future investment commitments assumed by GeoPark were: - 3 exploratory wells and 350 km2 of Seismic on Isla Norte Block Agreement with Methanex In March 2012, the Company and Methanex signed a third addendum and amendment to the Gas Supply Agreement to incentivise the development of gas reserves. Through this new agreement, the Company is undertaking a programme consisting of drilling a minimum of five new gas wells during - 8 exploratory wells and 578 km2 of Seismic on Campanario Block 2012. Methanex will contribute to the cost of drilling the wells in order to - 10 exploratory wells and 570 km2 of Seismic on Flamenco Block improve the project economics. As part of the agreement, the investments made in the first exploratory period will be carried 100% by GeoPark and will not be recoverable in the future (commitment of 21 exploratory wells and 1,498 km2 of 3D Seismic). If commercial production is reached, both parties will fund the development and operating expenses on a pro rata basis. 90 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 91 Board of Directors Gerald E. O’Shaughnessy | Executive Chairman Mr. O’Shaughnessy graduated from the University of Notre Dame with degrees in government and law, and thereafter practiced law until joining Lario Oil and Gas (his family company and one of the oldest independent oil and gas companies in the USA) as Senior Vice President. From 1986 to date, Mr. O’Shaughnessy has focused on private venture capital investment activities, including international oil and gas exploration and development through the Globe Resources Group. In 1992, Mr. O’Shaughnessy acquired a geophysical service company which co-founded the first energy sector joint venture in Russia during perestroika and from 1992 to 1995 he initiated and managed the largest well servicing and rehabilitation project in Western Siberia, involving sophisticated logistical operations and the rehabilitation of 700 wells (increasing production from 0 to 100,000 bpd). Mr. O’Shaughnessy’s participation in this project made him the first western partner of OAO Lukoil, and he subsequently entered into other partnerships with OAO Lukoil including building and managing one of the world’s largest oilfield pump repair facilities. Mr. O’Shaughnessy co-founded GeoPark in 2002. Sir Michael Romilly Heald Jenkins | Non-Executive Director After graduating from Cambridge University in 1959, Sir Michael joined the British Diplomatic Service and served in several European capitals, including ten years in the European Commission in Brussels with terms as Chef de Cabinet to the Commissioner for Regional Policy, Principal Adviser to the EC President Roy Jenkins and Deputy Secretary-General of the Commission. Sir Michael was Assistant Under-Secretary of State at the Foreign & Commonwealth Office responsible for European affairs and East/West relations before becoming Minister and deputy head of mission at the British Embassy in Washington D.C from 1986 to 1988. From 1988 to 1992, he was British Ambassador to The Netherlands. Sir Michael joined the board of investment bank Kleinwort Benson in 1993 as an Executive director and became Vice-Chairman of Dresdner Kleinwort Wasserstein in 1996 with particular focus on the investment bank’s continental European activities. Sir Michael was a Non-Executive director of the Dutch insurance group AEGON from 1995 to 2001; Chairman of the British Group of the Trilateral Commission from 1996 to 1998; and President of Boeing UK from 2003 to 2005. Sir Michael joined GeoPark in April 2006 Peter Ryalls | Non-Executive Director Mr. Ryalls, who joined GeoPark in April 2006, obtained a Master’s Degree in Petroleum Engineering from Imperial College in London and began working in the oil industry in 1972 with oil service company Schlumberger in Angola, Gabon and Nigeria. Mr. Ryalls then joined Mobil North Sea and later Unocal where he worked in increasingly senior positions, including Managing Director in Aberdeen, and where he developed extensive experience in offshore production and drilling operations in the North Sea and internationally. In 1994, Mr. Ryalls represented Unocal in the Azerbaijan International Operating Company (AIOC) as Vice President of Operations based in Baku and was responsible for production, drilling, reservoir engineering and logistics. In 1998, Mr. Ryalls moved to Buenos Aires, Argentina as General Manager for Unocal in Argentina. He subsequently moved to Louisiana as Vice President of Unocal’s onshore Gulf of Mexico oil and gas business and then Vice President Global Engineering & Construction of Unocal, responsible for the implementation of all major capital projects ranging from deepwater developments in Indonesia and the Gulf of Mexico to conventional oil and gas projects in Thailand. Mr. Ryalls strengths are in risk management across the project development cycle with a strong focus on health, safety and environment. Christian Maurice Weyer | Non-Executive Director Christian Weyer is an international banker and financier with over 50 years of experience. Mr. Weyer began his banking career with Chase Manhattan Bank as a senior credit officer in Paris and Geneva and subsequently worked as an executive at Banque Paribas until becoming President of Banque Paribas (Suisse) in 1984-5. During his career, Mr. Weyer has been credited with innovating new forms of trade finance and lines of credit as one of the leaders of the Geneva banking industry. Mr. Weyer also was instrumental in the growth of several large oil trading firms; as well as supporting the development of oil and gas exploration companies. From 1988 to 1992, Mr. Weyer was special adviser to Banque Indosuez for energy matters. Since 1992, he has been President of ENERFIN in Geneva, Switzerland, an advisory firm providing investment banking services to junior oil and gas companies. Mr. Weyer joined GeoPark in 2002 as an advisory board member and in 2003 as a Director. In April 2006, he was appointed as a Non-Executive Director. 92 Board of Directors Juan Cristóbal Pavez | Non-Executive Director Mr. Pavez graduated from the Universidad Católica de Chile (Catholic University of Chile) in 1992 with a degree in Commercial Engineering, and then joined Grupo CB (CB Group) as a research analyst. Thereafter, he obtained an MBA from the Massachusetts Institute of Technology. He was then portfolio analyst at Moneda Asset Management until 1998, when he joined Santana, an investment company, as CEO. At Santana he focused mainly on investments in capital markets and real estate. While at Santana, he was appointed interim CEO of Laboratorios Andrómaco (Andrómaco Laboratories), one of Santana’s principal assets. In 1999, Mr. Pavez co-founded Eventures, an internet company with subsidiaries in Argentina and Brazil. Since 2001 he has been CEO at Centinela, a company with diversified global investments, with a special focus in the energy industry, through the development of wind parks and run-of-the-river hydropower plants. Mr. Pavez is also a board member of Grupo Security, Vida Security, and Chairman of Hidroeléctrica Totoral. Mr. Pavez became a Non-Executive Director of GeoPark in August 2008. Carlos Gulisano | Non-Executive Director Dr. Gulisano is a respected leader in the fields of petroleum geology and geophysics in Latin America and has over 30 years of successful exploration, development and management experience in the oil and gas industry. Dr. Gulisano has worked with YPF, Petrolera Argentina San Jorge, Chevron and GeoPark and has been a leader on teams credited with significant oil and gas discoveries (including the giant Trapial Field in Argentina). He has worked in Argentina, Bolivia, Peru, Ecuador, Colombia, Venezuela, Brazil, Chile, and USA. Dr. Gulisano holds a B.Sc in Geology, a postgraduate degree in Petroleum Engineering and a PhD in Geology from the University of Buenos Aires and has authored and co-authored over 40 technical papers. He is a former adjunct professor at the Universidad del Sur, a former thesis director at the University of La Plata, and a former scholarship director at CONICET (the national technology research council) in Argentina. Dr. Gulisano has been a key element of GeoPark’s growth – as an adviser since 2002 and as the Managing Director from February 2008 until June 2010. Steven J. Quamme | Non-Executive Director Mr. Quamme has 25 years of successful experience as a securities lawyer, private equity investor and investment banker. He is a recognised expert in corporate governance and has been a member of over fifteen Boards of Directors including public companies, private companies and non-profit organizations. Mr. Quamme is the co-founder and President of Cartica Management, a registered investment advisor focused exclusively on emerging markets. Cartica manages a series of private investment funds investing in listed equities in 24 countries. From 2005-2007, Mr. Quamme was the co-founder and COO of Breeden Partners, a US$ 1.5 billion corporate governance fund. In addition, from 2002-2007, Mr. Quamme was a Senior Managing Director of Richard C. Breeden & Co., the leading professional services firm focused exclusively \on corporate governance and crisis management. From 2000-2005, Mr. Quamme was the founder and CEO of Milestone Merchant Partners -- a full service merchant bank based in Washington D.C. and the parent of International Equity Partners, a sponsor of emerging markets private equity funds for many of the world’s largest institutional investors. Mr. Quamme received a BA in Economics from Northwestern University and a Juris Doctor degree from the Northwestern University School of Law where he is a member of the Law School Board. He began his career as a securities and M&A attorney at Baker Botts. James F. Park | Chief Executive Officer and Deputy Chairman Mr. Park has over 35 years of experience in all phases of the upstream oil and gas business - with a strong background in the acquisition, implementation and management of international joint ventures, including assignments in North America, Latin America, Asia, Europe and the Middle East. He graduated from the University of California at Berkeley with a degree in geophysics, following which he worked as a research scientist in earthquake and tectonic studies. In 1978, Mr. Park joined an oil and gas exploration project in Guatemala which pioneered the development of commercial oil and gas production in Central America and, as a senior executive, and Board member, was closely involved in the development of the company (including grass-roots exploration activities, drilling and production operations, surface and pipeline construction, legal and regulatory issues, crude oil marketing and transportation, and raising substantial investment funds) until its sale in 1997. Mr. Park has also participated in projects in California, Louisiana, Argentina, Yemen, and China. Mr. Park has lived in Argentina and Chile since co-founding GeoPark in 2002 and has been the Chief Executive Officer since its founding. Directors, Secretary & Advisors Directors Registered Office Buenos Aires Office gerald eugene o’Shaughnessy (executive chairman) James Franklin park (chief executive officer and Deputy chairman) Sir michael romily heald Jenkins (non-executive Director) peter ryalls (non-executive Director) christian maurice weyer (non-executive Director) Juan cristóbal pavez (non-executive Director) carlos gulisano (non-executive Director) Steven J. Quamme (non-executive Director) cumberland house 9th Floor, 1 Victoria Street hamilton hm11 – Bermuda Florida 981 2th Floor c1005AAS Buenos Aires Argentina + 54 11 4312 9400 Secretary pedro Aylwin chiorrini Nominated Advisor and Broker Solicitors to the Company as to English law Solicitors to the Company as to Bermuda law Solicitors to the Company as to Chilean law Solicitors to the Company as to Argentine law Independent Auditors Petroleum Consultant Registrar Registrar to the Depositary oriel Securities 150 cheapside london ec2V 6et, united kingdom norton rose 3 more london riverside london Se1 2AQ, united kingdom cox hallett wilkinson cumberland house 9th Floor, 1 Victoria Street hamilton hm11 - Bermuda p.o. Box hm 1561 hamilton hmFX - Bermuda Aylwin Abogados Avenida Isidora goyenechea 3162, 8th Floor, of. 801 las condes, Santiago chile maciel, norman & Asociados cerrito 1136, 10th Floor c1010AAX - Buenos Aires Argentina pricewaterhousecoopers llp 1 embankment place london wc2n 6rh, united kingdom www.pwc.com Degolyer and macnaughton 5001 Spring Valley road Suite 800 east Dallas, texas 75244 uSA computershare Investor Services (Jersey) ltd Queensway house hilgrove Street. St helier – Jersey Je1 1eS united kingdom computershare Investor Services plc po Box 82 the pavilions, Bridgewater road Bristol BS99 7 nh united kingdom Designed by: chiappini + Becker tel. +54 11 4314 7774 www.ch-b.com photographer: Diego Dicarlo, geologist. carlos gulisano, geologist. Directors, Secretary & Advisors 92 AnnuAl report 2011 www.geo-pArk.com 

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