I hold a few shares in an oil exploration and production company operating in Latin America. It puzzled me why the region is known as Latin America.
It wasn’t part of the Roman Empire and they don’t speak Italian. The answer goes back to the 19th century when France had territorial ambitions and wanted to show that it had some affinity with the region. Although not much French is spoken in South America, because Spanish and Portuguese are derived from Latin the term was invented and slightly surprisingly is still in use.
The company is called GeoPark. They operate in Chile, Colombia, Brazil, Peru and Argentina. A pit they are not in Guyana where a gusher has just been found. I have held the shares since 2011 and am sitting on a 22% loss. It would be greater if the shares weren’t quoted in US dollars. You may be interested to know why I chose this company to invest in. I broke one of my most important investment rules and listened to a friend who recommended the shares.
Considering that the oil price was on the sunny side of $100 when I bought and subsequently went below $30 it’s a miracle it didn’t go broke. My idea of oil and gas exploration in South America has been formed by John Huston’s 1948 film, The Treasure of the Sierra Madre, although it is set (and was filmed in) Mexico. However, the GeoPark team are far from a bunch of desperadoes. Their reports to shareholders are models of clarity. Put succinctly, they are increasing their production, reducing their costs and reducing their losses. What will happen if the oil price takes another dive? They have been prudent. Here is how they describe their strategy in a statement released this week.
The Company has the following risk management contracts in place as of the date of this release:
* For the period November 2016 – June 2017, GeoPark guaranteed a minimum Brent price of $50 per barrel for 6,000 bopd through a zero-cost collar structure that includes a maximum price of $57 per barrel
* For the period January 2017 – September 2017, GeoPark secured a minimum Brent price of $53 per barrel for 6,000 bopd through a zero-cost collar structure that includes a maximum price of $61 per barrel
The price of Brent today is about $55 and has been hovering there most of this year. On the face of it this seems a Good Plan, especially since it is zero cost. Unfortunately it only extends as far as September 2017 and only covers 6,000 bopd of their 26,000 bopd production. There is no shame in not knowing what bopd means. I turned to Wiki.
Barrels of oil equivalent per day (BOE/D) is a term that is used often in conjunction with the production or distribution of oil. One barrel of oil is generally deemed to have the same amount of energy content as 6,000 cubic feet of natural gas.
When I was an oil broker I advocated this zero-cost collar strategy to an explorer but was put in my place. “I wouldn’t look for oil if I didn’t think the price would go up.”
I am holding onto my GeoPark shares as a reminder not to listen to recommendations from friends. Having one dog in the kennel is acceptable, having a whole pack of hounds is undesirable.