GeoPark Ltd Q4 FY2020 Earnings Call

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the fourth quarter ended December 31, 2020. If you do not have a copy of the press release, it is available on the Investor Support section of the company's corporate website at www.geo-park.com. A replay of today's call can be accessed through this webcast in the Investor Support section of the GeoPark corporate website. Before we continue, please note that certain statements contained in the results press release and during this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With regard to such forward-looking statements, the company seeks protections under the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed in the company's SEC reports and public releases. Those lists are meant to identify certain key factors that could result in actual results differing materially from those in the forward-looking statements, but they do not represent a complete list of the company's business. All financial figures included here were prepared in accordance with IFRS and are expressed in U.S. dollars unless otherwise noted. Reserves figures correspond to PRMS standards. On the call today from GeoPark are James F. Park, Chief Executive Officer; Augusto Zubillaga, Chief Operating Officer; Andrés Ocampo, Chief Financial Officer; Martin Terrado, Director of Operations; and Stacy Steimel, Shareholder Value Director. Now I will turn the call over to Mr. James Park. Mr. Park, you may begin.

Thank you, and welcome, everyone. We are joining you this morning with our executive team in Bogotá, Colombia, and Buenos Aires, Argentina, to report on our fourth quarter and full year 2020 financial results, present an upgraded work and investment program for 2021, and highlight our steps to continue returning more value to our shareholders. As everyone has personally experienced, 2020 was a historically challenging year, and we must first recognize and express gratitude for the superhuman efforts by the GeoPark women and men that made it possible for us to prevail through the storms of 2020 and successfully continue along our hard-fought 18-year growth trajectory. As we have done repeatedly in our history, GeoPark has emerged from this crisis as a better and stronger company today. Our bottom line illustrates our accomplishments. We kept our teams safe and healthy. We operated in the field without interruption for 365 days. We grew oil and gas production for the 18th straight year to over 40,000 barrels per day. We found more oil and gas and now have 2P reserves of 175 million barrels with a net present value of $2.5 billion. We expanded our Colombian exploration resources to over 750 million barrels with increased acreage in the Llanos and Putumayo basins. We beat down each and every cost and achieved savings of over $290 million. We funded all our work and obligations with our own cash flow. We invested $75 million and recovered nearly three times this amount in EBITDA of $217 million. We acquired a new company, Amerisur, and fully integrated it into our company. We completely restructured our asset portfolio and organization under our revised business model. We strengthened our balance sheet and almost doubled our cash in hand to $200 million. We provided important aid and support during the pandemic to our neighboring communities. We moved to reduce our carbon footprint and minimize social and environmental impacts. And even with low oil prices of $40 to $45, we reinstated our shareholder value initiatives with share buybacks and cash dividends. As always, the underlying foundation for GeoPark's performance is our in-house integrated value system we call SPEED. This program was a founding element of our company and one of our proudest accomplishments, always pushing us to be the employer of choice, partner of choice, and neighbor of choice. SPEED stands for our priorities of safety; prosperity, including governance; our employees; the environment; and our development of communities where we operate. We consider this ESG plus, and we welcome the increased scrutiny from investors about an area where we excel. So 2021 is already well underway with seven rigs at work. Seismic being run to identify new prospects on our high potential acreage and our team fully engaged in getting every molecule of hydrocarbon safely, cleanly, and profitably out of the ground and to market. With higher prices and increased cash generation, we are accelerating our profitable production growth. We have expanded our work program to now invest $130 million to $150 million to drill 37 to 42 wells, focused mainly on the continued development of our prolific Llanos 34 block and some high-impact drilling on our surrounding blocks in the Llanos basin, including the CPO-5 block. We look forward to executing this exciting, fully funded, risk-balanced work program and developing our big growth opportunity in Colombia, while maintaining a strong balance sheet and continuing to return tangible value to our shareholders. Thank you. And we would be pleased to answer any questions you may have.

Our first question comes from Stephane Foucaud of Auctus Advisors.

I have two questions. The new capital expenditure program for 2021 is based on an oil price of $50 to $55 per barrel. Currently, we are above $65 per barrel. If oil prices stay at this level for the rest of the year, would you consider accelerating the activity program, increasing dividends, conducting more share buybacks, or paying down debt? I would appreciate your thoughts on this. Secondly, I noticed that the Putumayo production is currently down due to protests. I was wondering if the production guidance for 2021 included any projections for Putumayo, and if so, how much?

Thank you for your questions, Stephane. Regarding our new CapEx guidance of $50 to $55 million, if oil prices maintain their current levels, it will likely involve a mix of priorities. The first focus for our excess cash generation will always be to reinvest and expedite our development and exploration efforts in our existing asset portfolio. After that, we combine shareholder value return and balance sheet management. Therefore, it is probable that we will pursue a combination of these three priorities while considering our debt and our goal to continue improving our debt levels. We also aim to enhance our shareholder value initiatives while reinvesting to accelerate exploration and development on our existing assets. If oil prices remain stable, we anticipate generating significantly more free cash flow from our assets, which will enable us to pursue these strategies. Regarding your second question about our production in Putumayo, our guidance does take into account the recent temporary production interruptions. As of last night, we were in discussions with our team on the ground, and the situation has been resolved. Production resumed today, and we expect it to return to normal levels of approximately 2,400 barrels per day within the next three to five days. The situation has now normalized, and unfortunately, we were not involved in the protest that led to the interruption, which was simply a demonstration against the state. The good news is that everything has been resolved, and production is now flowing again. Additionally, this stock was included in our guidance for 2021.

Our next question comes from the line of Ricardo Rezende of JPMorgan.

James, Andrés, Stacy. So a couple of questions on my side. First one, if we think about oil prices remaining where they are now, I'm just wondering if you could, by any chance, actually accelerate your hedging program and try to lock in those prices above your guidance for the year. And then the second question is on potential new projects for the year or areas where you could be looking at maybe acquiring some blocks or new auctions. If you could comment on that, that would be great.

Thank you, Ricardo. Regarding the hedging question, this is the right time to enhance our hedging strategy since better costs are available. Currently, we are approximately 70% hedged for the first half of the year and around 50% for the second half. In the first quarter of 2022, we expect to be about 15% to 20% hedged. We are actively increasing our hedges, particularly for the second half of this year and the first half of next year. The current market levels are about $50 floors and $75 ceilings for Brent. If we can secure pricing at these levels, we will definitely look to increase volumes at the mills. Regarding opportunities and new projects, this is a vital part of our business, and we are actively engaged in various divestiture initiatives across the region. There are significant projects for sale in Brazil, both onshore and offshore, and attractive acreage is opening up in Colombia as well. We are continuously looking for and participating in these projects. Additionally, following our significant acquisition in Llanos 34 in 2019, we are consolidating and preparing to expedite our exploration efforts within our organic portfolio. We have raised our expectations for any new projects, and we remain careful and patient in our acquisitions. However, we will seize opportunities as they arise.

Our next question comes from the line of Alejandro Demichelis of Nau Securities.

Few questions, if I may. First one, please. Could you indicate how you're seeing the cost evolving now that you're accelerating activity levels? How we're going to retain some of those gains that you executed during last year? Or is part of that kind of coming back to the first question? Second question, on the production side of things. If we look back to, say, first quarter of 2020 before COVID, you were producing 45,000, 46,000 barrels a day on average. What would it take for you to go back to that level? Do we need more investment than the one that you're guiding towards now? And probably a third question, if I may, is on the exploration program. With the acceleration of the exploration, how much of the prospective resources that you indicated of 750 million barrels, do you think you can be accessing with the current exploration program.

Thank you, Alejandro. In response to your first question about our cost basis, there are several factors involved. Last year, we made significant cost reductions, and for a time, we also paused production that was at a higher cost. With Brent prices around $50 to $55, some of that production will likely resume. Consequently, our consolidated operating expenses per barrel may see a slight increase compared to last year. Last year, our average was about $7.5 per barrel of oil equivalent, with the lowest being $6 per barrel in the second and third quarters on a consolidated basis. For 2021, we estimate that the average will be similar or slightly higher, ranging from $7.5 to $8 per barrel at Brent prices of $50 to $55. Another factor to consider is that as oil prices recover, exchange rates in Latin America generally appreciate, and approximately 70% of our operating expenses are in local currency. These two elements influence each other, as the foreign exchange rate interacts with commodity prices. Regarding your question about production, we believe there is an aspect not mentioned in our guidance. On average, we anticipate an increase of about 1,000 barrels compared to our previous guidance, with capital expenditures split between development and other needs. Although this may not appear substantial on an average basis, the trajectory now indicates growth in the latter half of the year. By year-end, we aim to approach the production levels of 44,000 to 45,000 barrels, similar to our previous figures. Additionally, I want to highlight that our primary asset, Llanos 34, is receiving most of our capital allocation. This asset, previously a major growth driver for our company, is now transitioning to a phase focused on generating significant cash flow with minimal capital expenditures instead of rapid growth. We welcome this new phase and are prioritizing cash flow and profits over flashy growth numbers. To address your final question on the full prospectivity outlined in our recent audit and its relation to the 2021 program, I would estimate that we are targeting a small portion. This amounts to about 30 million to 50 million barrels, which is a fraction of the total un-risked resources. Much of this is located in the CPO-5 block and the remaining Llanos acreage. This year, we are investing in 3D seismic acquisition and advancing the licensing process to prepare this acreage for drilling additional prospects in 2022 and beyond.

Could you provide a breakdown of how many wells are allocated for CPO-5 and how many are designated for the other block?

Yes, this is not going to be exact. In CPO-5, we have planned around five wells, with four of them designated as exploration wells and one as a development well, which we hope will begin drilling in May or June this year. Our target includes two exploration wells in Llanos 32, one exploration well in Llanos 34, and one exploration well in Llanos 94. These are all the exploration wells we plan for this campaign.

Our next question comes from Daniel Guardiola of BTG.

Andrés and James, I have a couple of questions. My first question is about realized prices. I know you are actively hedging future production through various methods, and I would like to understand how much exposure you have to the upside of oil prices, given that they are currently at $68. If oil prices remain at this level, will you be able to benefit from it? That's my first question. You can choose to answer it now or I can ask my other questions if that works better for you.

Sure, I can take that question. We have some exposure to the upside in oil prices, but it's somewhat limited by our hedges, especially in the first half of the year. For the first half, we will capture the full upside on about 30% of our production. The remaining 70% is hedged with an average cap around $52 to $53 per barrel. The full details are in the release. In the second half of the year, we have about 45% to 48% hedged, meaning half of our production will benefit from the upside, while the other half has a higher average cap than in the first half. The ceiling for the second half is approximately $60 to $61 per barrel. Therefore, our limitations are greater in the first half, but in the second half, we will almost realize the full value. For next year, we will be fully exposed.

Okay. So just to make sure I totally understood your answer. So for the first half of the year, you have a cap at $60.

No. For the first half of the year, we have a cap of $52 in the first quarter and $54 in the second quarter, which applies to 70% of our production. Therefore, 30% has no cap and no flow. For the second half of the year, the ceiling is $60, applying to 48% of the production, while 52% of the production has no cap and is fully exposed.

Okay, I understand. My second question, if you could clarify, please.

No, no, that's okay. Sorry, go ahead.

No. I was going to ask you, my second question is about production. Could you share more details on the expected production from the main fields, Llanos 34 and CPO-5, in 2021 and beyond, considering that you increased your capital expenditures or your working program for this year?

I think the breakdown is mostly similar to what we had before, with possibly a bit more emphasis in the second half in Platanillo due to the addition of two wells being drilled in that field, which is significant since we have a 100% working interest. The target for Llanos 34 remains flat to a 5% growth, comparable to our previous outlook, perhaps slightly higher. We had aimed to double the production in CPO-5 compared to last year. Initially, we were forecasting a small decline in Platanillo, but now we expect a slight growth of around 0% to 5%. The rest of Colombia appears relatively stable, and the same goes for Chile, Argentina, and Brazil. This outlines the expected changes in our production.

Andrés, and if I may squeeze a follow-up regarding production. I remember that before the pandemic started, you were targeting to reach plateau production in Llanos 34 close to 80,000 barrels of oil per day, if I'm not mistaken. Does it make sense to once again reach those levels, considering the current environment of our price?

The key point to remember is that after a period of six months with no activity in the block, oil production declines. Subsequently, we had limited activity in the area, but we are now returning to normal drilling operations with three rigs as we had previously. It is unlikely we will achieve the plateau due to the six months of no drilling, resulting in a decline of approximately 6,000 to 7,000 barrels a day on a growth basis. Thus, I don’t believe the 80,000 barrels is currently the plateau. What’s more important is focusing on the cash generation. This year, with a capital expenditure of $60 million to $70 million and oil prices at $50 per barrel, we expect to generate over $250 million in operating netback. Our main focus now is on profitability rather than just high growth rates.

Okay, Andrés. Just a very brief last one. When you look, I mean, your cash flow generation or expected cash flow generation for 2021, it's expected to be very healthy, especially comparing it against 2020. And I wanted to ask you, I mean, what are going to be your priorities to use that excess of cash in 2021?

I think we can summarize that as the main priority always is to reinvest in our assets. And then the second one is a combination of deleveraging and shareholder value returns. So those are the three biggest elements that are probably going to be taking the cash that we generate in 2021.

And at this time, I'm showing no further questions. I'd like to turn the floor over to Andrés Ocampo for any additional or closing remarks.

Thank you, everybody, for your interest in GeoPark and your continued support of our company. As the world's borders begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their interactions this year than ever with webinars, video conferences and direct calls, and is available around the clock as is our management team to answer any questions or listen to your comments. So thank you, and please stay healthy and strong.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.