GeoPark Ltd Q1 FY2022 Earnings Call

Good morning and welcome to the GeoPark Limited Conference Call following the results announcement for the first quarter ended March 31, 2022. If you do not have a copy of the press release, it is available at the Investor Support section on the company's corporate website at www.geopark.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 on 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. Regarding such forward-looking statements, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors such as competitive developments and risk factors listed from time to time in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of the company's business. All financial figures included herein were prepared in accordance with the IFRS and are stated in US 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; Veronica Davila, Commercial Director; Stacy Steimel, Shareholder Value Director. And now I'll 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 Bogota, Colombia to report on our achievements and financial results for the first quarter of 2022. We want to begin by thanking and recognizing all the hard-working women and men of GeoPark for delivering one of the most successful quarters in our 20-year history, while continuing to build value across our complete business. We believe we are in the right business, in the right place, with the right team, the right platform, the right partners and the right approach to succeed and capture an immense value proposition. Our previously announced management transition is proceeding and being received very well, and the GeoPark team is responding with energy, enthusiasm, ideas and optimism. It is with tremendous gratitude and confidence that I am moving on from this wonderful job to becoming a full-time shareholder and cheerleader. Before passing the word to Andrés and opening for questions, just a word please about our full cycle performance and delivery, something which underlies our unique 20-year track record of continuous value growth. Since the very beginning, GeoPark has been committed to a big idea and long-term plan which allowed us to build our company solidly and steadily while keeping our focus on the larger prize. This gave us a rock-hard foundation which allows us to weather any world or industry crisis and we have been through a bunch and be in a position with all we need to create and win more and more opportunities for the future. So today, we are successfully keeping our team safe, healthy and rewarded, using our G&G and operational excellence to drill, find and produce more oil and gas, being innovative and staying disciplined to achieve greater capital efficiency and reduce costs, protecting the environment and reducing emissions, being a constructive and desired community neighbor, adding more high potential acreage and assets to further expand our big growth fairway, managing the risks of our business and protecting downsides, strengthening and celebrating our powerful culture, and using our record cash flows and revenues to invest more to expand our work program and improve our business, pay down debt and give back more to our shareholders. With all this activity across the full E&P value chain being self-funded by our own cash flows, as we have for nearly 10 years and which provides a continuous snowballing of value and scale. So, Andrés, thank you for stepping up and taking on this job. Perhaps you can please add some more details on this quarter.

Thank you, Jim. We have a year filled with activity across our company and our first quarter results show our strong start to the year. First, we have drilled 13 new wells and increased production by 6% over the fourth quarter of last year. In the CPO-5 block, we're now producing over 20,000 barrels a day gross, that's 2.5 times higher than when we acquired the block almost two years ago. In Ecuador, we discovered two new oil fields currently producing almost 2,000 barrels a day gross. The second, the increased production and oil prices generated record financial results. Our adjusted EBITDA generation in the quarter was up 84% to $123 million, which means more than $350 million for the last 12 months. This also means a net income of more than $100 million in the same period. Third, we invested $39 million of CapEx in the quarter, which means that we generated more than $3 of adjusted EBITDA for every dollar invested in that period. We also used our cash flow to reduce debt, as we repurchased $33 million of our 2024 bonds and also doubled our dividend to $5 million per quarter. Fourth, we added new acreage in our core play. The CPO-41 block is strategically located and covers 120,000 acres adjacent to CPO-5 and other general basin blocks that we own. Finally, as we're always striving to be a better and cleaner company, we advanced on connecting to the Colombian National Grid as well as building our solar plant, which has multiple benefits of reducing our emissions, reducing our costs and increasing our operational reliability. Our efforts are being recognized as MSCI ESG improved our ratings to A. We were also included in the Bloomberg Gender-Equality Index, covering companies with best-in-class gender-related practices and policies. As is always the case, we designed our work programs to be adaptable up or down based on asset performance and oil price volatility. So, given the new discoveries and higher oil prices, we have expanded our self-funded 2022 work program by another $40 million to drill an additional eight to nine new wells, plant facilities, permitting, and licensing. Consequently, we increased our annual production guidance by 8% to a range of 38,500 to 45,000 barrels of oil equivalent per day to reflect new production from Ecuador, the expanded work program, as well as the production from Manati in Brazil. This revised guidance represents an 11% growth compared to 2021, adjusting for the Argentina divestiture but not including any future exploration success. At $95 to $100 Brent, this revised work program is expected to generate more than $0.5 billion in adjusted EBITDA, which would be more than $250 million of free cash flow after CapEx, debt service, and taxes, representing almost a 30% free cash flow yield. We expect to use this extra cash to continue investing in growing our asset base, paying down debt, and giving back more value to shareholders. Our operations and technical teams are busier than ever. We have today eight rigs working full time across our asset platform in Latin America and have four more rigs on their way. We're executing an exciting low-cost, low-risk and high-impact exploration campaign not only in CPO-5, but also in our other general spacing blocks. So, we really look forward to reporting on progress and results from these very exciting activities. Thank you. And we will be pleased to answer any questions you may have.

Thank you. The first question comes from Alejandro Demichelis with Nau Securities. Alejandro, you may proceed.

Good morning. Thank you for taking my questions. I have three questions, if I may. First, could you walk us through the updated production guidance? It seems that bringing in 2,000 barrels at Manati doesn't significantly increase what you're adding for the additional wells being drilled in Llanos 34 and the rest of the program. I'm curious about how conservative this guidance is. My second question is about the status of the CPO-5 and Rocca exploration. What progress have you made, and when can we expect to see some results? Lastly, I'd like to hear your thoughts on cost inflation. We've noticed that your production costs, excluding royalties, have remained quite flat. What should we anticipate for the remainder of the year?

Good morning Alejandro. This is Martin Terrado. Appreciate your questions. I'll cover the first two and then let Veronica go over the operating cost. So, on the production guidance as you've seen, the incremental is in the order of 3,000 barrels of oil equivalent per day. Manati, we expect decline. So, the contribution from Manati or Brazil for the remaining of the year and that guidance is around 1,300. So, we have 1,700 barrels of oil equivalent per day that are coming from new activity and better asset performance. That better asset performance and new activity includes CPO-5 channels production that we have and it incorporates the discoveries from Ecuador that are already communicated.

And also I would add, Andrés here, Alejandro I would add that the incremental activity that we added also has a lot of it is exploration activities which has no incremental production associated. So, as Martin said, the guidance is 1,700 barrels from the guidance are related to better performance and new activities.

So, concerning the second question on the second one on CPO-5 and where we are like Andrés we continue to be really excited about this block. We had a successful result from Indigo 4 and 5. They're both performing without water production, 4,000 barrels of oil equivalent each. So that puts this field Indigo as one of the top 10 fields in Colombia. And we are fortunate that out of those 10, we also have Jacana and Tigana, so three of 10, it's part of GeoPark. And we're very proud of that. In Eureka, the well is being drilled according to plan. And we're about to reach TD. So we should be getting locks and then putting that well on production soon. We do want to make sure that we remind you that this is one of about four wells that we have in the Northwest of the block, that are going to be evaluating, investigating the continuation of the Jacana trend and that rig that is drilled in Eureka. We complete the well. And then, we will continue drilling in the area, and so, very excited about that. We are working with our partner.

Martin, if I may, …

Yes.

If I may, interrupt you, just you're going to play into production. Those are you already have something there.

No. No, no. We're about to reach total depth. So we're still drilling. We will love the well. Case the well and expecting good results. Remember that this is Jacana and Tigana trend so they're not going to be flowing naturally, so we'll have to put a pump. So most likely, first oil will be by the end of the month.

But just to clarify for everyone, this is an exploration well. As of now, we have no indication or information regarding whether this will lead to a discovery. Martin is saying that if we receive information that confirms it is a discovery, we will proceed accordingly. However, we haven't reached total depth yet and are not in the zone of interest, so we do not have any logging information available. To be clear, we haven't entered the zone, so there is no information at this stage. Once we cross into the zone, we will make decisions based on the logging data from the well. We will evaluate whether to complete the well and conduct tests to determine if it is successful. This process will likely take another month, so I wouldn't anticipate any news regarding this particular well for at least that duration. Is that clear?

That's very clear.

Okay.

That's very clear. Thank you.

Okay. Great.

Alejandro this is Veronica. Thank you for your question. In regards to OpEx, for 2022 we expect our overall OpEx to be in the $8.5 to $9 per BOE range. This is between 5% and 10% increase over 2021 numbers and is already included in our guidance. This OpEx expectation for 2022 already takes into account the impact of inflation cost reduction initiatives including the connection to the national grid in Colombia and increased production from higher OpEx fields, namely in Chile and Ecuador.

That’s very clear. Thank you, Veronica.

Thank you.

Thank you for your question, Alejandro. Our next question comes from the line of Oriana Covault with Balanz. Oriana, please proceed.

Hi. Thanks for taking my call. This Oriana with Balanz and I had three questions. If we may go one-by-one that would be great, just following up on the inflation side and just thinking about your budget, how much should we think in terms of your drilling costs and completion costs that that update in budget is reflecting higher inflation, or is it only related with additional wells coming in your plan?

Thank you, Oriana, this is Andrés. The activity we are discussing is entirely new. This does not involve adjusting the existing activities for inflation, as our original guidance already accounted for some inflation in our costs. Specifically, for drilling and completion, we are observing about a 5% to 7% increase across materials, casing, and services, making our wells approximately 5% to 7% more expensive. This increase has already been included in our original guidance, and the new activity reflects this adjustment.

That's very clear. I would like to follow up on another aspect of the business, specifically regarding the Vasconia differential. Could you provide more details on the local market differential for Colombia mentioned in your press release? We believe this has widened over the past quarter, so I would like to understand the factors driving this difference and how we should anticipate this trend in the future.

Thank you, Oriana. Vasconia is the grade that we mainly produced in Colombia. We have seen a differential of Vasconia at $3.7 per barrel so that's $3.7 below Brent for the first quarter. Today that's closer to $4.5, but it's been as wide, as you mentioned, at $7 per barrel below Brent during April and then recently recovered. There are a few factors pushing Vasconia lower versus Brent. On the one side, there’s a deep discount for heavy grades, which are faced with strong competition with Russian barrels that are trading at very deep discounts currently in the market, especially into Asia. Also, there are increased volumes of medium sour grades to compete with Vasconia as well, coming out of the US as it releases barrels from its strategic petroleum reserve. On the other side, factors supporting Vasconia include; increasing and strong demand in Colombia, that is consuming most of the Vasconia production domestically and a strong global demand for diesel, which should support crude such as Vasconia that have a high diesel production once refined. In all, we expect Vasconia pricing to stabilize and be within our $3 to $4 per barrel discount to Brent, which is our budget assumption and it's within our guidance.

Thank you. That was very clear. I have one last question regarding the announcement you made yesterday about tendering approximately $45 million of the 2024. Could you explain the reasoning behind that? I understand you already conducted some buybacks in the first quarter, so I would like to know why you chose the tender instead of taking advantage of lower local prices with favorable trade-ins. Thank you.

Thank you, Oriana. As you well mentioned, we announced yesterday we're going to exercise the call for $45 million of our 2024 bonds. This is in addition to $33 million that we have purchased year-to-date in the open market below the call price. This is part of our deleveraging strategy. We started on this strategy last year with our liability management, executed in April last year, which reduced about $105 million of the 2024 notes. And as we have mentioned in the past, we are continuing to delever, taking advantage of a high cash flow generation, and we expect to continue to do that. This is another step in that deleveraging process, which will be completed in terms of the call for the 2024 $45 million by the end of May.

The reason we're making this call is that we repurchased as much as we could find. The bond size is small, around $150 million, making it difficult to acquire. So far this year, we've purchased everything available below the call price, and now we've decided to take a larger amount.

That sounds great. Thanks again and congratulations on the biggest quarter.

Thank you.

Thank you for your question, Oriana. Our next question comes from the line of Stephane Foucaud with Auctus Advisors. Please go ahead with your question.

Hi, everyone. Thank you for taking my question. I have three questions. First, regarding the deleveraging, after the $45 million announced for further bond redemption, how do you view the second half of the year? Assuming oil prices stay stable and considering the free cash flow generated, can we anticipate additional bond redemptions or buybacks in the latter part of the year? My second question pertains to the new production guidance. How do you anticipate the exit production guidance for 2022? I've noticed that Parex has reported a significant increase for December. Do you expect something similar? Lastly, could you share some insights on CPO-4, the block you recently acquired an interest in from Parex, and the potential resources as well as the upcoming work program? Thank you.

Hi, Stephane, good morning. Andrés here. Regarding your question about deleveraging, we are currently looking at $45 million. We are nearing a point in the next couple of months where it may be more beneficial to wait and make the call in September, when the call price decreases again. Therefore, it is likely that in the second half of the year, assuming oil prices remain stable and our cash flow develops as we projected within the $90 to $100 range, we will aim to call 100% of the 2024 debt sometime after September in the latter half of the year. That is what we anticipate.

And Stephane, this is Martin Terrado. Related to the 2022 exit production in Colombia, as we publish our first quarter, Colombia production was 33,700 barrels of oil equivalent per day. We see our exit for Colombia around 1,000 barrels above that. And all of that does not include any kind of exploration success.

Hi, Stephane, this is Zubi. Regarding your question about CPO 4, let me provide some context. In 2019, we awarded six blocks during the round, mostly around our successful Gen34. We've been working on environmental permits and drilling activities since then. This year, we plan to start drilling two exploration wells in channel 87, located in the northwest part of Llanos 34, and one exploration well in channel 94, named Max x-1. As for CPO-4, it is adjacent to the channel 94 block. Our working interest is 50%, and it covers 150,000 acres, which is double the size of Llanos 34. Half of the area is covered with 3D seismic data, and we've identified strategic locations in the formation. Our commitment for this block includes drilling one exploration well during the initial exploration phases.

Hello. Can you hear us?

Yes, I can hear you.

Yes. Yes. Sorry, the main line that is connected. So we're sorry Stephane. We got disconnected on the main line. We're joining on the backup line. So Zubi, you can continue.

So, I don't know when you missed it CPO-4.

You were talking about the expansion...

To summarize, in addition to the 0.6 billion to 1.6 billion for CPO-4.

Hello. Can you hear us?

Yes, I can hear you.

Yes. Yes. Sorry, the main line that is connected. So we're sorry Stephane. We got disconnected on the main line. We're joining on the backup line. So Zubi, you can continue.

So, I don't know when you missed it CPO-4.

You were talking about the expansion...

So that's just to summarize all the CPO-4, in addition to the 0.6 billion to 1.6 billion.

Hello. Can you hear us?

Excuse me all. It seems that we have lost our speaker line. Please allow me one moment to reconnect them.

And we were answering Mr. Guardiola's question. Are we back online? I apologize for that. We're having some technical problems with the line. So Martin, you can continue.

Yeah. Sorry about that everybody. So like I was saying, the order of magnitude of the resources that we're after is about to about 170 million to 350 million barrels. With our working interest it ends up being around 70 million to 140 million barrels and the chances of success are between 25% and 40%. As we go through the different quarters, we're going to be drilling anywhere between four and six exploration wells per quarter, and most of those are going to be drilled in Colombia. In Colombia, most of those are going to be drilled in channels. We have around five to six wells that could to be drilled in CPO-5 about two wells that are going to be drilled in channel 34 and the same amount in channel 94 and channel 87. What's outside of Colombia or channels is one exploratory well in Platanillo and two wells in Ecuador. One will be a follow-up to our success in the Espejo and Perico block and the other one will be our first exploration well operated by GeoPark in the Espejo block. So again, Daniel apologies for the cut, but let us know if there's further questions or clarification.

And there was a point in question on hedging also.

Thank you Daniel, and good morning. I'll go first in terms of the question on priorities in allocating our cash flow. So our priorities continue to remain the same. As Jim mentioned in his opening remarks we're going to prioritize funding our asset base and followed by a combination of debt reduction which we already touched upon a little bit on the call and shareholder return. In terms of our assets, we have already been discussing today, the expansion of our work program, with 14 exploratory wells. And we are ready to deploy additional capital to our assets should we be successful within that exploration. On the debt reduction, we already touched upon it, but we have launched the call for the 2024 for $45 million. We have already purchased $33 million year-to-date. And as Andrés mentioned we would expect to continue deleveraging in the second half of the year. And in terms of shareholder returns we have doubled our dividend and we expect to continue to pay out $5 million per quarter in terms of dividends. We already – we have the discretion of share buyback in place, which is also part of our initiative in terms of shareholder return.

Daniel, this is Martin Terrado. Regarding our exploration work program, as previously mentioned, we plan to add approximately 14 to 18 additional wells to the two already drilled in Ecuador. At a high level, we're aiming for between 180 million and 350 million barrels of un-risked new resources or P10. This is our target range, while our working interest is around 70 million to 140 million resources with a success probability ranging from 25% to 40%. Now, what does this look like for us this year?

Excuse me all. It seems that we have lost our speaker line. Please allow me one moment to reconnect them.

And we were answering Mr. Guardiola's question. Are we back online? I apologize for that. We're having some technical problems with the line. So Martin, you can continue.

Yeah. Sorry about that everybody. So like I was saying, the order of magnitude of the resources that we're after is about to about 170 million to 350 million barrels. With our working interest it ends up being around 70 million to 140 million barrels and the chances of success are between 25% and 40%. As we go through the different quarters, we're going to be drilling anywhere between four and six exploration wells per quarter, and most of those are going to be drilled in Colombia. In Colombia, most of those are going to be drilled in channels. We have around five to six wells that could be drilled in CPO-5 about two wells that are going to be drilled in channel 34 and the same amount in channel 94 and channel 87. What's outside of Colombia or channels is one exploratory well in Platanillo and two wells in Ecuador. One will be a follow-up to our success in the Espejo and Perico block and the other one will be our first exploration well operated by GeoPark in the Espejo block. So again, Daniel, apologies for the cut, but let us know if there's further questions or clarification.

We are continuing to implement our hedging strategy, believing that it serves as an effective risk management tool to shield ourselves from the volatility in our business. Regarding the hedge costs you asked about, we recorded $30 million of hedge costs in the first quarter and have set aside an additional $50 million in unrealized hedge costs for the remainder of the year. These figures are consistent with our expectations for hedge costs moving forward if market prices remain stable, and they have already been factored into our guidance. Daniel, I'm not sure if that answers your question or if you have anything else to add?

If you have a follow-up question from Daniel, he asked do you foresee any risk to your operations related to the upcoming presidential elections in Colombia?

Thank you, Daniel. The Colombian elections are expected to have the primary round before the end of the month. It seems likely that there will be a second round in mid-June. It appears it will be a close race. However, as we've stated in previous calls, we are very confident in Colombia's long-term political and economic stability. The country has strong institutions and demonstrates one of the highest levels of respect for contracts and the rule of law in the region. Therefore, we are optimistic about the future of the country. Once again, we anticipate that the institutions will maintain the necessary balance for the country to uphold its historical stability.

Perfect. There are no more questions waiting at this time. So I will now pass the call back to our management team for closing remarks.

Thank you everybody for your interest in GeoPark and your continued support of our company. Our shareholder value team is available around the clock as is our management team to answer any questions or listen to your comments. We look forward to hearing from and seeing you soon. Thank you.

That concludes the Geo Park First Quarter 2022 Results Conference Call. Thank you for your participation. You may now disconnect your lines.