GeoPark Ltd Q3 FY2022 Earnings Call

Good morning, and welcome to GeoPark Limited Conference Call following the results announcement for the Third Quarter ended September 30, 2022, and the 2023 Work Program and Investment Guidelines. After the speakers' remarks, there will be a question-and-answer session. 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.geo-park.com. A replay of today's call may be accessed through the webcast with the Investor Support section on the 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. With respect to 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, including 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 company's list of the company's business. All financial figures included herein were prepared in accordance with the IFRS and are stated in U.S. dollars unless otherwise noted. Reserves figures correspond to PRMS standards. On the call today from GeoPark is Andres Ocampo, Chief Executive Officer; Veronica Davila, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; Stacy Steimel, Shareholder Value and Director. And now, I'll turn the call over to Mr. Andres Ocampo. So, Mr. Ocampo, you may begin.

Good morning, and thank you, everyone, for joining the call. We're connecting with our management team from Bogota, Colombia, to report on our third quarter financial results and provide guidance about our expected 2023 Work Program and Plan. During the third quarter, we invested $43 million to drill 11 wells and increased our oil and gas production by 8% compared to the same quarter last year. With a continued main focus on developing our core Llanos 34 block and strong production growth coming from CPO-5, probably one of the fastest growing and most economic projects in the region. When GeoPark purchased CPO-5, the block was producing just 8,000 barrels a day, and today production has tripled to over 24,000 barrels a day with netbacks of approximately $50 per barrel. We continued accelerating our drilling activity with 13 rigs active across our assets, a new company record. This is about 62% higher than last year. Congratulations to the GeoPark team, particularly those in the field, for developing another quarter of record results and maintaining such an intense level of activity while keeping our people safe, our emissions under control, and our operations as low cost and efficient as possible. Our production base generated strong cash flow from operations of over $140 million, which more than doubled the same quarter last year. We generated more than $3 per barrel in adjusted EBITDA for every dollar that we invested, demonstrating outstanding capital efficiency. Revenues were up 48%, adjusted EBITDA was up 63%, and we had record net profits of $73 million, which is $1.20 per share during the quarter. As we usually mention following the funding of our investment program, we have allocated significant capital to our balance sheet strengthening and our shareholder value returns initiatives. During the third quarter, we fully redeemed our 2024 notes for $67 million, totaling a gross debt reduction of $170 million since January this year. GeoPark ended the quarter with comfortable net leverage of 0.8x, well below our long-term target range of 1x to 1.5x adjusted EBITDA. Our cash position at the end of the quarter remained at about $93 million. We continued our base dividend program as well as our discretionary share buyback. GeoPark paid $0.13 per share in dividends, which annualized represents nearly a 4% dividend yield, and has completed its share buyback for a total of $30 million in the last 12 months, which is over 3% of total shares purchased. We have also announced that we will do more in 2023. Our teams are busy executing our ambitious and aggressive 2022 Work Program, which will continue full speed during the next year as well. We currently have six rigs in Llanos 34, two rigs in CPO-5, drilling the Indico 7 development well, which will be followed by further development and exploration wells. One rig in Llanos 87, currently drilling the first wells there; one rig in Llanos 94; one rig in Platanillo; and another one in the Oriente basin in Ecuador. As we announced, this base of activity will continue non-stop over and into 2023 with our self-funded work program. We're planning to drill 50 to 55 wells with approximately 10 to 15 exploration and appraisal wells for a total CapEx program of $200 million to $220 million, with 35% of this CapEx allocated to exploration. As anticipated previously, all of our environmental licenses for the 2023 program have been obtained. As always, our work program is flexible and can be adjusted up or down based on drilling results and oil prices, and in this particular year, it will also depend on the final outcome of the Tax Reform in Colombia that is currently underway. We are estimating an annual average production between 39,500 to 41,500 barrels per day, not including any production from exploration efforts, which would generate over $0.50 billion in adjusted EBITDA at $80 to $90 Brent. After fully funding our base and growth work program, we will continue strengthening our balance sheet as well as returning value to our shareholders. We announced yesterday our intention to deliver approximately 40% to 50% of our free cash flow after taxes back to shareholders through a combination of our base dividends, share buybacks, and/or variable or extraordinary dividends. We continue to make progress towards our aggressive emission reduction plan to reduce Scope 1 and 2 greenhouse gas emissions intensity by 35% to 40% in 2025 or sooner. We expect to have our solar park fully operational before the end of this quarter, which complements the connection to the national electric grid that was fully completed in July. Additional investments were included in our 2023 Work Program to connect more GeoPark operated blocks to the national grid, improving the reliability of our energy source and helping us further reduce our emissions and environmental footprint. We look forward to reporting the results of these activities in the upcoming quarters, and we thank you for your participation. We also invite you to come down and visit us in our operations and now also to visit our new and updated website, which was launched in October this year. And now, we would be happy to answer any questions. Thank you.

Thank you. We have our first question from Daniel Guardiola of BTG. Please go ahead when you're ready.

Hi, good morning, Andres. I have a couple of questions from my end. I wanted to know if you can share with us more details on the expected impacts of the recently approved Tax Reform in both chambers. I know the tax; the final tax is still in reconciliation process, but the likelihood that the final tax regarding the oil sector will change is very low. So I wanted to know if you can share with us some high-level numbers. I saw that in your 2023 working program, you included a significant increase in cash taxes for 2023. So I'm wondering if you can provide some context on these. That's my first question. And my second question is also related to the 2023 working program in terms of production. I wanted to maybe share with us more details on the guidance not only by country, which is already in the filings, but also by field, specifically between Llanos 34 and CPO-5. As I'm seeing that most of the growth for 2023 will basically come from Colombia, which is expected to fully offset the decline in production coming from Brazil and Chile. So those are my two questions for the time being.

Thank you, Daniel. Good morning. To your first question, as you well mentioned, the Tax Reform was recently approved by Congress and it's in reconciliation. So there is still significant uncertainty in regards to the exact applicability of the law. That will be instrumented by decree and other regulations in the upcoming weeks. That said, we did provide, as you mentioned in our releases yesterday, our estimation in terms of the potential impact of the reform, but it's important to highlight that in the numbers that you see in the release, we are including both the impact of the non-deductibility of the royalties portion and the impact of the surcharge. The surcharge, of course, is going to vary in that guidance because it's linked to prices. For example, for 0% in the guidance going to be 5% at the lower end and 15% at the higher end. What we've done to be fully transparent is to include that impact fully, the estimated impact of the reform in our 2023 guidelines irrespective of when it becomes a cash impact, which could be during 2023 or early 2024. We will continue to follow the process of the reform and hopefully we'll be getting more information that we can share with all of you as it becomes clearer.

Daniel, this is Martin Terrado. I'll go to your second question around 2023 production and the breakout. So as we already announced, our guideline again is 39,500 barrels of oil equivalent per day to 41,500. In Colombia, it's about a 5% increase. When you look at the assets in Colombia, CPO-5, we're expecting a 10% production increase on average year-to-year. In Llanos 34, we're expecting a 2% to 5% increase and Platanillo a decline. When we move to Ecuador, between both blocks Perico and Espejo, we'll go from around 800 barrels of oil equivalent average that we're having in 2022, to the order of 1,300 to 1,500. In Chile and Brazil, we're going to be expecting a decline in the fields of the order of 20%. All of these numbers do not include any production associated with exploration, which is 35% of our CapEx that Andres mentioned.

Thank you, Veronica and Martin. If I may, just to do a follow-up on what you just mentioned, Martin, that this guidance is not including the CapEx that is expected to be deployed in exploration. Can you share with us what you are targeting with these exploratory targets and what could be the outside scenario regarding this guidance in case you are successful in your exploration campaign?

Yes. So again, like we said in our guidance, it's about 10 to 15 exploration wells. Our growth and risk mean resource is in the order of around 150 million barrels that we're expecting to investigate. The wells are going to be drilled in the blocks that we have in Llanos exploration that we call, so it's Llanos 1, 123 block, 124 block, and 87. Then we're going to be also drilling in CPO-5. In Platanillo, we're finishing right now the drilling of an exploration well, and we will see how the results turn out there. In Oriente, we will have an appraisal well and at the same time also some appraisals in Llanos 34.

Andres here, Daniel. So we think there's upside associated with this exploration in terms of production. But as you know, we usually don't give guidance associated with that because of the risk associated with it. So it is better not to give numbers for us. We'd rather be a little conservative, we know. But the volume that we're tapping, as Martin said, is pretty significant. It's $150 million of gross and risk mean resources. So it's an attractive program, and hopefully, we'll provide updates to our production guidance during the year. If there are positive results, then we may revise it as we get results hopefully.

Thank you. We now have our next question from Alejandro Demichelis from Nau Securities. Please go ahead when you are ready.

Hi, Andres, Veronica and team. Thank you for taking my questions. Two questions, if I may. First, as a follow-up on the production side of things. Can you give us some kind of order of magnitude regarding how much more volumes can you expect from CPO-5 with the resources that you already have? And then, as a small follow-up, when you gave us your five-year plan to 2026, you indicated 10% per annum growth in production assuming both your existing fields plus exploration. With the guidance that now we have for 2023, are we more reliant on the exploration upside to get to those numbers than we were before?

So, Alejandro, hi, it's Martin here. I'll touch on the CPO-5 question. So we started the year, and on the second quarter, our production was around 20,300 barrels of oil equivalent growth. In the third quarter, we had some production going down because of blockages, and we were around 19,000. Today, we're around 24,000. The production we have includes the production from the Indico 6 well, that we announced the results for, and it is producing right now with a choke rate of more than 4,000 barrels of oil per day, with no water. As we're speaking, we're drilling the Indico 7 well, a development well. So that's going to increase our production by the end of the year, and we expect that to be reflective of how we start 2023. For next year in CPO-5, we have one additional development well and further exploration wells; however, that production is not accounted because it's still in exploration.

And then with respect to your comments about the five-year plan — sorry —

Sorry, no, no, follow up with your question, please.

Yes, yes. So — but what you have and the development work that you're planning for the next few months: is Indico a 30,000 barrel field or is Indico a 60,000 barrel field?

Sorry, that — so there are two more wells, as Martin said, development wells coming. One is Indico 7 that is being drilled right now, and it's going to come upstream early next year. Then another development well is planned for next year's program and the volumes are in the range of what we have been expecting. So what we've been releasing; it's not a 60,000 barrels a day field. It's more in the area of 30,000 barrels a day field range.

Thank you.

Then, with respect — no, sorry, operator. I think Alejandro had a second question about the five-year plan and how it ties in with our 2023 work program. So as you mentioned, Alejandro, the five-year plan has a 10% CAGR per year. That includes all the exploration activity that we're planning to do in that five-year plan, which is going to be quite active. It is an order of magnitude range that we gave to show what we are targeting in the medium-term plan. Every year we announce our work program on that more specific activity; we usually don't provide guidance on exploration, and we will be releasing the results as they come in. But I can confirm that it's largely in line with what is expected in that five-year plan. What we're announcing and what we're doing this year is pretty much what we had in mind when we set out that five-year plan.

Thank you. Your next question comes from Phil Skolnick of Eight Capital. Please go ahead when you're ready.

Yes, thanks. Good morning. Just on — further on to the five-year plan in light of the Colombia Tax Reform, does it make you think a little differently about it with respect to trying to maybe push capital outside a little bit more of Colombia, or maybe even diversify more to transact outside?

Hi Phil, thanks very much. That's a very good question. We try to include as much detail as we can in the release with respect to the imminent impact of this Tax Reform, which, as you can see, is quite significant. The numbers may be a little conservative, but we'd rather be that way, and not the other way. How it impacts the five-year plan is still to be seen. We are still working on filtering through this new Tax Reform concerning our entire portfolio. However, we will see over the course of the years and according to the results whether we need to adjust our investments depending on the final impact. As you know, the impact of the reform is largely dependent on oil prices. So when oil prices are in the range of $60, the impact is much less significant than it is at current prices. So it's hard to predict today how much it will impact our five-year plan. But regarding your point about diversification, that is something that has always been in the DNA of the company, and we strive to maintain a diversified asset base in different basins and countries. This is something that we continue to explore and hold at the center of our business model to build a diversified portfolio of assets across different basins and countries in the region.

Okay, thanks. Just one follow-up question. How soon could something like that possibly happen concerning your exploration program and the upside that it could provide to your guidance?

Well, we're currently actively drilling four or five exploration wells at this time. That will continue in many places, almost back to back. So I don't know, Martin, if you want to provide the details on which ones they are, but —

So Phil, this is Martin. Out of the eight rigs that we have drilling, about half of those are drilling exploration wells. In the Llanos 6 exploration asset that we call, we have block Llanos 87, and we're currently drilling the well Tororoi, our first exploration well in that block. We expect to reach total depth by the last part of November. For all the exploration wells we drill, we have setup contracts, and we're ready to complete and put wells on early production testing. So that production, if the wells are successful, will be coming in by December. When we move to Platanillo, in Platanillo into commercial racing, we're drilling right now the Alea well, so about 30 more days to get to PV and complete that well. When we move to Oriente in Ecuador in the Espejo block, we're testing right now and completing — doing completion tests on the Pashuri well that we announced reached PV, and the rig is drilling the Caracara well, which is about 30 to 40 more days. In the non-operated region, we're testing the Humea well in Llanos 94. You can see that there is plenty of activity and exploration as we speak. We're keeping all of these rigs as we move into the first half of next year. The mix is probably going to be similar. So about half of the wells we’ll be drilling in the first half of the year will be from a rig perspective and will be exploration wells. They take longer, so it doesn’t mean half of the wells, but the rigs will be drilling exploration wells.

Thank you. We now have a question from Roman Rossi of Canaccord. Please go ahead when you're ready.

Good morning, and thanks for taking my questions. The first question is regarding CapEx for 2022. So right now, you have an accumulated $115 million. To reach the lower end of your guidance for the year, you would need to deploy $85 million in the fourth quarter. This seems a bit aggressive compared to historical standards. Can you please give us some color on how you're expecting to deploy this cash?

Hi, Roman. This is Martin again. The guideline that we have, like you said, is from $200 million to $220 million net. Then, the first nine months was $115 million. In October, a month that we've already finished, we had spent $25 million. This is mainly due to the increased activity. If we look back a year ago, we had only eight rigs running. We have 13 now. So we expect to be on the lower range of that $200 million to $220 million, but we're confident that we're going to be around $200 million to $220 million at the low end of the range.

Perfect. Thank you. And so this is probably for you, Martin, again. We saw some impact regarding blockages in Colombia during the third quarter, and you also mentioned some blockages during October. So can you give some color on – in which block and what were the causes of this blockade?

Yes, absolutely. Roman, I want to start by saying that, as we speak, we have no blockages in any of our operations, and all the production is normalized. Now we are seeing a change in the context. If we look back to 2016, it was a period when there were the least amount of blockages nationwide, around 270. When we look at the full year that ended in 2021, there were about 770. The number of blockages has been increasing in Colombia for the past years. In our channels, we have not suffered any for several years. The first block we experienced as GeoPark was in 2020 in Putumayo, where most of them were related to illegal crops. But lately, we have seen some increase in requests. In the third quarter of this year, we had about 38 days of production downtime in Platanillo and 10 days of production downtime in CPO-5. That production cut means around 1,100 to 1,200 barrels of oil per day on average that we had shut in. In the fourth quarter, we had production shut in, in Llanos 34, of about 200 to 250 barrels of oil per day on average for the running quarter that we’re expecting. Again, we continue having very constructive dialogue with the neighbors and with the national and regional authorities in Casanare regarding the requests related to channels. Many of these requests come considering that we have three of the top 10 fields in Colombia—Hakana, Tigana and Indico. Sometimes when there are national requests, they impact the larger assets, and they're not necessarily linked one-on-one with our company.

Yes, this last point is important. This is something that we've seen generalized. I mean, when we have localized issues more recently, we've also seen other companies also being stopped for quite some time.

Perfect. Thank you. And maybe the last question is regarding production costs. We saw that production costs were almost 15% down quarter-over-quarter. Just to understand if this is related to current depreciation and what should we expect going forward?

Thank you, Roman. Good morning. For 2022 in terms of operating costs, we expect to be as well in the lower edge of that range. We are targeting $8 to $8.5 dollars per boe. I think that's a result of the strong effort of our team in terms of cost efficiency in a high inflation context, and also some impact of the local currency devaluations. What you see particularly in the third quarter is not — it's transitory, right? It relates to the impact of lower sales in Platanillo, which is a combination of what Martin mentioned earlier. Remember, Platanillo sales will vary according to the lower loading programs out of the Ecuadorian port. We sell Platanillo barrels to Ecuador, and those are seaborne. So you will see that from time to time, you get inventory accumulation and then to sales; given that it's a higher OpEx per boe asset, that can change, giving you some fluctuations overall. Looking into 2023, we'll continue our efforts in terms of keeping our costs down and our efficiencies, and we expect to have a year of between $8 and $9 per boe for 2023 that’s included in our guidance.

Thank you. We now have the next question from Stephane Foucaud from Auctus Advisors. Good morning, all. There is a lot of drilling and appraisal activities in Ecuador in 2023. Any success case, where would you see the asset base in Ecuador at YE2023, and what production and how much reserves?

Hi, Stephane, this is Zubi. In Ecuador, we had great results in 2022. We started the year with no production. So far, we have three discoveries in the Perico block, and our gross production is now around 3,000 barrels of oil per day. In the Espejo block, as Martin mentioned before, we are in the completion process of the Pashuri well, and now the well is undergoing testing. To address your question, regarding the plan and activity for 2023 in the Perico block, we plan to release three appraisal wells. With those wells, we will define volume, size, and structures of the discoveries for 2022. In the Espejo block, after the Pashuri well, we will read that. Martin also mentioned the second inspiration well, which is the Caracara well, and then subject to the results of those wells, we will decide with the partner if we will drill more appraisal aspiration wells in the block this year.

Yes, just to follow-up on Zubi. We keep learning from these wells. We're very encouraged about how things are turning in Ecuador. We're currently working on optimizing the cost, and there’s a big round of opportunity coming up called Intercambios 2, in which we will be participating as well.

Thank you. We now have the next question from Miguel Ospina from Compass Group, asking if you could give us some details on what you plan to do with the excess cash you were not planning to distribute as dividends or buybacks. Thanks.

Thank you, Miguel. Good morning. Thank you for your question. As we mentioned in a release yesterday, we will be continuing to increase our allocation to shareholder returns by allocating between 40% and 50% of free cash flow over the next year. To your particular point, the excess after we are done, of course, would depend on our assets and what we need to figure out in terms of shareholder returns. This will allow for a combination of cash buildup and also an opportunistic further leverage, and I mentioned already that we're comfortable with our leverage in terms of net debt to EBITDA of 0.8x, but we could consider further leverage in 2023.

I would like to hand it back to our CEO, Mr. Andres Ocampo, for some closing remarks.

Thank you, everybody, for your continued interest and support of GeoPark. We're always available to answer any questions that you may have. So please call us any time for more information. Thank you, and have a good day.

Thank you for joining today's call. You may now disconnect your lines and have a lovely day.