GeoPark Ltd Q2 FY2024 Earnings Call

Good morning and welcome to the GeoPark Limited Conference Call following the Results Announcement for the Second Quarter Ending June 30, 2024. After the speakers' remarks, we will have a question-and-answer session. If you do not have a copy of the press release, it is available in the Invest With Us 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 Invest With Us section of the GeoPark Corporate website. Before we continue, please note that certain statements 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 result in actual results differing materially from those described. With regard to such forward-looking statements, the company seeks protections provided by the Private Securities Litigation Reform Act of 1995. These risks include various factors, such as competitive developments and risk factors outlined from time to time in the company's SEC results and public disclosures. Those lists aim to identify specific principal factors that could lead to actual results differing from those in the forward-looking statements, but are not intended to be an exhaustive list of the company's business. All financial figures presented here were prepared in accordance with IFRS and are stated in U.S. dollars unless otherwise noted. Reserves figures follow PRMS Standards. On the call today from GeoPark are Andres Ocampo, Chief Executive Officer; Jaime Caballero, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; Rodrigo Dalle Fiore, New Development and Portfolio Director; Stacy Steimel, Shareholder Value Director; and Maria Carolina Escobar, Shareholder Value and Capital Markets Director. I will now turn the call over to Mr. Andres Ocampo. Mr. Ocampo, you may begin.

Good morning and thank you for joining our second quarter conference call. We're pleased to report on our continued progress and results. In the second quarter, GeoPark demonstrated strong financial performance despite some operational challenges. Our revenue increased by 14% compared to the first quarter to $190 million on the back of higher oil prices. Adjusted EBITDA increased 15% to $128 million, resulting in an EBITDA margin of 67%. Net profit was $25.7 million, equivalent to $0.50 per share, mainly affected by non-cash charges related to the impact of the devaluation of the Colombian peso over deferred income taxes. During the second quarter, GeoPark invested around $49 million in capital expenditures and generated almost 3 times that amount in adjusted EBITDA within the same quarter, again showing our team’s capital discipline and efficiency of our investments. The return on average capital employed in the last 12 months was 38%. GeoPark’s strong net free cash flow generation continues, having finished the quarter with a cash position of $66 million after repurchasing $43.7 million worth of shares through a Dutch auction in May, paying $52 million in taxes, and making a down payment of $49 million for the Vaca Muerta assets and having paid $7.5 million in dividends for the quarter. GeoPark continues to enhance its financial flexibility and balance sheet through two strategic oil prepayment agreements, one effective in the second quarter and the other one nearing finalization, providing additional liquidity available at any time. We continue growing shareholder returns with the board approving a dividend of $7.5 million payable on September 12, which combined with the Dutch auction results, GeoPark will have returned over $66 million to shareholders equivalent to $1.29 per share by the end of the third quarter, already exceeding the total amount returned in all of 2023. As we look ahead to the second half of 2024, we're looking forward to continuing our drilling work, cover, and water flooding campaign in our core Llanos 34 Block, as well as the potential new operational opportunities coming from our recent exploration discoveries in the other Llanos basin blocks, namely the Toritos, Saltador, Vivita, and Sorsal fields, which are currently producing approximately 3,600 barrels a day gross, and we expect to drill three to five new wells before the end of the year. In addition, we have already started initial activities and civil works in the Putumayo 8 block, getting ready to drill our first exploration well before year end, the Machaca prospect. New appraisals and exploration drilling activities in our core CPO-5 Block will continue, and our team is already mapping new prospectivity coming from recent 3D seismic in the Llanos 86 and Llanos 104 Blocks, as well as in the CPO-5 Block for next year's exploration campaign. It is important to mention that GeoPark's consolidated production is currently 5,000 to 5,500 barrels a day higher than reported. Following our recent acquisition in Vaca Muerta, effective since July 1, we're on target to close by the end of the third quarter. The Mata Mora Norte Block produced an average of 12,500 barrels a day gross in the second quarter, and the operator is continuing development drilling there. Production from this block would boost our 2024 production level to well within our stated guidance. Part number four in Mata Mora Norte, which was drilling at the time we announced the transaction, has been put into production and is already producing more than 5,000 barrels a day gross with a 45% water cut, which means that these wells continue to clean up with less water and higher production until they reach the initial peak in the coming weeks. Results so far are quite encouraging. The drilling rig is on the Confluencia Norte Block, finishing the first exploration part that includes three wells. Drilling activities are almost complete, and a completion set is scheduled for October. We look forward to testing production from these first exploration activities before the year end. The drilling rig will immediately move back to the Mora Norte Block to continue drilling development wells and increase production. GeoPark is well positioned to continue its success in 2024 and beyond. Our strategic growth initiatives, disciplined financial management, and focus on sustainability will continue to be key drivers of our performance. Thank you for your continued support and confidence in our company. We are now ready to take any questions you may have.

The first question comes from Daniel Guardiola of BTG.

Andres, I have a couple of questions. The first is about Argentina; could you share your thoughts on the expected production progress from Argentina, particularly in the second half of the year and also looking ahead to 2025? My second question is about potential inorganic growth opportunities. Is the company looking to pursue new acquisitions in the region, and could you explain the reasoning behind this potential M&A strategy?

This is Rodrigo from this side. Let's start with the question about Argentina, and the perspective that we have in terms of production. We have a robust result in the second quarter of this year. We performed 12,500 barrels per day during the quarter. What we expect after the drill returns to the Mata Mora Block is that production will start increasing again. That's why we expect a slow increase in production during '25. For '25, another important milestone is the second drilling rig. So for the future to achieve our base plan where we aim to tackle 20,000 barrels per day net, we need the second rig. We expect to have that rig by the end of next year. So that's the perspective that we have regarding activity. We expect to finish the year between 13,000 and 14,000 barrel equivalent per day, and that's the guidance that we provided last call. So we're still in the same line.

I think Andres here, Daniel. I think the big picture comments on our new acquisition is that everything is going really ahead of our expectations. If you remember, some of the activities that we're currently executing were putting into production the part four. And as I mentioned in my introduction, this part is already contributing approximately 5,000 barrels a day, and it's still cleaning up. I mean, it's still producing at 50% water. If you remember, these wells should clean up to almost zero water in the coming weeks. So we have high expectations for the productivity coming from that part. The second big item here is the initiation of the exploration activities in Confluencia, which is underway. We haven't completed the wells, but we have completed the drilling of the wells. And of course, these are quite close to Mata Mora. Therefore, our expectation was to encounter similar conditions to those we found in Mata Mora, which have been confirmed thus far. So, we look forward to completing and testing production from these wells. This doesn't fully de-risk the entire Confluencia play, but with positive results will open up more opportunities for us to continue drilling there. So, we are very encouraged and very happy with how the operations are going in Vaca Muerta right now. We have a great relationship with the operator, and they are doing an incredible job. We have already assigned GeoPark team members to participate in the operation. We have three people dedicated to ensuring everything runs smoothly. So far, everything looks great.

Daniel, good morning. I'm going to take your question around inorganic opportunities. And I think it's no surprise for everyone on the call that inorganic opportunities are a key component of our strategy going forward. Our company has a strong track record of delivering value through inorganic opportunities. We have done that in the past, and we are doing it now through Mata Mora, and we believe that we can continue to do that into the future. When you look at the perspectives in the region, we believe that we can access new barrels and new reserves and provide long-term sustainability to the business through these acquisitions. I would say that our focus is on three things when drilling down into what this strategy aims to accomplish. First, we are focusing on assets that provide immediate production capabilities. While we still consider exploration opportunities and renewal-type opportunities in the medium to long term, that is not our primary focus, and that's not where our primary capital allocation is directed. At this time, we believe that our capital allocation needs to prioritize those opportunities that bring immediate production to the business. We think that's one key component. The second component is of course about scale. We are focusing on material opportunities that move the dial in terms of reserves progression for the business. We have spoken in the past about our growth ambition, and we believe that the opportunities available to us if we reach the next ceiling of scale, something around 70,000 barrels a day or so, opens up new opportunities for the business. It opens up a different type of liquidity in the market and we believe that it is of strategic value and real economic value for our shareholders. So I would say, those are two aspects of our strategy. The third one, of course, is geographic footprint. As we have said many times before, I will reiterate that Colombia, Argentina, and Brazil are the places that we are focusing our attention on right now.

If I may just squeeze another one related to the last comment you made, Jaime. Can you share with us what is the maximum level of leverage that the company will feel comfortable operating at?

I don't know if you heard that. I had a bit of a mute moment here, but I was saying that sure. What we indicated in the past, and when we look at our financial frame going forward, we believe that a gross debt to EBITDA ratio of 1.5 is manageable. We're nowhere near that ratio, nor do we think that we would be at that level in a sustained way. But we believe that we can look at opportunities that at times might take us to that level. Of course, we're going to evaluate the type of assets and the nature of how they look in order to give us financial flexibility and assurance. We've been a company known for its prudent financial discipline, and that's not going to change. But when we're looking at opportunities, that's the depth ceiling that we've committed to ourselves.

The next question comes from Stephane Foucaud of Auctus Advisors.

I have a few questions. First, what is the current production net in Argentina? I believe we will get confirmation on that number in the upcoming quarter. Secondly, in my model, the cash tax for the quarter was significantly lower than I anticipated in Colombia. What do you expect to pay in cash tax for the second half of the year and in 2025? Lastly, regarding the new prepay with Trafigura, I understand it includes an improved, lower discount for CPO-5. Could you provide us with details on how long that discount will last and what you paid for the Trafigura prepay? I'm interested in whether this lower discount for CPO-5 production applies only for the duration of the prepay or if it could extend longer.

This is Martin Terrado. I will discuss our current production in the channels, and then Rodrigo will address Argentina. We analyze channels in three ways: our two legacy blocks, CPO-5 and Llanos 34, and the exploration component. Regarding CPO-5 and Llanos, we currently produce about 70,000 barrels gross, translating to approximately 28,000 barrels net per day. These fields are maturing; for instance, when we acquired CPO-5 in early 2020, production was 8,000 barrels. Recently, we reached a peak production of around 26,400 net barrels in the last quarter. Right now, production remains stable around 26,000 to 26,500 barrels. All wells are naturally flowing, and we plan to implement artificial lift on three of them in the second half of the year. We currently have one rig operational, having drilled three exploration wells. One was successful, named Perico, yielding 900 barrels, while two others, Lark and Sisene, did not produce. Lark aimed at a prospect similar to Indico in the Barco formation, and Sisene was focused on delineating the stratigraphic play in the northern block, where two of our three wells are already producing. Recently, we also started drilling Cante Flamenco 2, an appraisal well, with results expected in about 45 days. Additionally, we acquired a 3D seismic data set earlier this year covering approximately 470 square kilometers, which our subsurface teams are currently analyzing, as mentioned by Andres earlier. Moving to Llanos 34, production has been ongoing. As we’ve noted previously, we operated three drilling rigs for most of last year. This asset is transitioning to a phase of reduced drilling activity. Much of the drilling conducted late last year and this year focused on horizontal wells and some injector wells as part of our water flooding strategy. Currently, about 17% of production comes from horizontal wells, which have been very successful, both in output and economics. We invested around $90 million in gross capital expenditure, and those wells typically have a payout period of around 14 months, already contributing positive cash flow. However, we are reaching the end of the horizontal wells that were initially drilled, which is why we are scaling back on rig operations. We have further plans, including a successful short-reach well using an existing vertical well to drill another horizontal well at a lower cost. Our workover campaign has also yielded good results; as the field matures, we are revisiting certain formations that we previously overlooked, and we plan around 14 more interventions. We are deepening some pumps and enhancing our water flood operations in Llanos 34. As expected, reducing the number of rigs and drilling will lead to a field decline not maintaining flat production. We anticipate this decline to be around 10% to 15% with our planned activities in the latter half of the year. Another aspect impacting both CPO-5 and Llanos 34 is downtime caused by blockages. When formulating our budget, we account for potential downtimes, including factors like social unrest. Our initial expectations for 2024 were based on the conditions we saw in 2023. Currently, the blockages affecting CPO-5 have led to downtime significantly exceeding our anticipated 3%. For Llanos 34, the 1.5% downtime we expected has also been approximately double that figure. This is a broader issue impacting not only our blocks but also nearby ones, and we are actively engaging with local, regional, and government authorities, alongside the National Hydrocarbon Agency and other petroleum operators in Colombia, to address these challenges. Regarding exploration, we made discoveries in seven wells across Ecuador and Colombia last year. In Colombia alone, we had three successful exploration wells: Saltador, Lis, Vita, and Toritos, situated near Llanos 34 and CPO-5. These blocks previously produced about 100 barrels net. At the start of the year, production increased to 1,500 barrels, and it currently stands at approximately 1,800 barrels net. Encouragingly, we have one rig drilling in the area with another rig expected to arrive soon. The latest wells we've drilled are yielding around 900 barrels and 500 barrels of oil per day, which is positive news for Llanos 123. We plan to drill an additional three to five wells in that block. Additionally, we are progressing with exploration in the Putumayo 8 block, adjacent to the Platanecia block, conducting civil works in preparation for drilling our first well, Machaca, projected for October or November, followed by additional wells. As the CPO-5 Indico field matures and Llanos 34 evolves, we continue to seek innovative ideas beyond just vertical wells, concentrating on strategies related to water flooding and workovers to sustain a positive exploration trajectory in Colombia.

This is Rodrigo. We are moving to Argentina. As you can see, the average production for the last quarter was 2,500 barrels, and we are producing at the same level today. We have some wells undergoing workover operations. However, the key news is coming from the new pads. We started with the PUT-22 in February, and the results are significantly better than we expected in the models we developed at that time. The results of those wells are above the P10 of our estimates, and they are located in the center of the block. There are three wells there, and I think this is part of the learning curve we have with the operator in the area. They started to drill only the top side of Vaca Muerta, specifically the C3.5 level. The results we are achieving there are very promising, even better than we expected. After six months, the performance is above the P10 of the agency's sponsored estimates. This is a shorter PUT, and we have 2,200 meters as horizontal legs. The other good news is that we've recently put part number four into production, which started 25 days ago with four wells, at the same levels as I mentioned, C3.5 and C3. Therefore, we are talking about the top side of Vaca Muerta, but this part is located in the north of the block. The results are promising. We are just starting and still cleaning the wells, but at least at the moment, the results are far better than the P10. We have to wait and see the decline projection, but we are currently very pleased with the performance of the new wells. The good performance is related to subsurface conditions and the application of new technology. We are implementing oriented perforation in both pads, which seems to be significantly contributing to the performance of the wells. The next pad we will drill is Confluencia. That's the first exploratory pad we are drilling in the adjacent block. We're very excited about what we've seen in the logs. We cannot disclose production yet, as we need to assess productivity, but at least the preliminary projection we have shows that it aligns well with Mata Mora. So, we are very optimistic about the results so far. At the moment, we expect to finish the year between 13,000 and 14,000 barrels a day while increasing production as we put new wells into production.

Stefan, this is Jaime. I'm going to cover the other two points. The first one is around the lower cash taxes. In the first half of the year, which is when the bulk of the tax season occurs, our outflows amounted to approximately $70 million. That represents the Pareto of our tax payments for this year. We expect another $20 million, perhaps $25 million from here to year end, taking us to about $95 million for the full year. If you do the math, it effectively puts our cash tax rate at around 40%, which is a good outcome. Compared to our estimates from the end of last year, we are seeing lower withholding taxes. There have been some changes in Colombia affecting the withholding tax rate, which has specifically decreased from 10% to 7% on one end. Additionally, we are identifying more deductible items that can offset our tax position. Regarding your other question around the Trafigura prepayment, let me share a few key facts. The scope of this agreement pertains to CPO-5, specifically around the lighter crudes in CPO-5 because that crude quality is quite special. This is arguably the best crude, or one of the top two crudes in Colombia. Not only does it have a better discount, but it actually commands a premium over Brent. The goal of our deal with Trafigura is to capture that premium. This deal has other benefits too, including diversifying our off-takers and providing us more flexibility in our crude marketing. Regarding the off-take agreement, it will have a 12-month duration. We set this up to start on August 1, lasting an entire year. Furthermore, it offers us the opportunity to obtain financing from the off-taker for up to $100 million, which enhances our financial flexibility. Those are the main aspects. You also inquired about the outlook for this crude. Fundamentally, Colombia is facing an increasing deficit of lighter crudes domestically, which is expected to grow over time. As such, this crude will become even more attractive in the future as it is essential for the local refinery mix. So, for the next 12 months, we have secured an advantageous differential. We'll assess market conditions next year and adjust accordingly.

The next question comes from the line of Vicente Falanga of Bradesco, your line is now open.

I was trying to figure out a little bit more over the long-term for Llanos 123, Espejo, and Putumayo 8 blocks. I know you've been running tests there, and they've been encouraging. I was just wondering, what sort of output these fields could grant you over the coming years? Then if you could explain a bit more about the results from the Mata Mora North two to three wells, which if I'm not mistaken produced an average of 2,136 barrels of oil per day during the second quarter. If you can walk us through what peak production you saw there and how it's declining? And if we could expect other wells with similar characteristics?

This is Martin Terrado. I'll cover the Llanos 123 and Putumayo 8 questions, and then I'll let Rodrigo respond to the Vaca Muerta question. Regarding Llanos 123, currently, this block is producing net to us 1,800 barrels of oil per day. A year ago, it was producing 90 barrels. Therefore, the increase in production from this block is significant. We have one rig that is running, and we're bringing in another one, which indicates our confidence in more drilling in this area. The latest wells we drilled produced around 1,300 barrels of oil per day. We have also started drilling an exploration well called Toritos about 10 days ago, with the second rig anticipated to begin in mid-September. These are usually Barco formation wells, which are similar to what we've observed in Llanos 34. We have facilities in place ready to put wells into production as soon as we have discoveries, and based on the results from the second half of the year, we will collaborate with our partner to decide on the next wells to drill into 2025. At this point, we are set for this year's campaign and are encouraged by the results. Regarding Putumayo 8, it's purely an exploratory block. When we acquired Amerisur back in 2020, we focused on blocks in the Putumayo area. Putumayo 8 is one of our top priorities. Since then, we have conducted seismic studies, received environmental permits, and successfully completed one of the first public hearings. We have identified three prospects and are currently preparing to drill the first well, Machaca, which is expected to take place in October.

This is Rodrigo. Regarding your question about Mata Mora, in 2022, ’23, that was one of the best wells we have in the block—it was certainly put into production last February. After six months, we can confidently say that the well is outstanding. If you observe the performance of the interior part located in the center of the block, it is quite impressive and is on the P10 of our expectations. At this point, we are almost double what we projected in the P50 and in the forecasts. That's why we are very pleased. You asked if we could find more wells like this in the block? Definitely, yes. We are seeing not only one well but many of the new wells we have in the block. We are eager to see the peak production and how it will trend down. We've seen positive trends, but we'll need to wait to see the full impact. We believe that the new technology, such as oriented perforation, has positively impacted the performance of these wells. As I said, on C3.5 level, that is a crucial element. We can achieve great performance for fracking. Overall, we are optimistic about these developments. We understand that the awaited results from Confluencia will be revealed in October, but for now, we are quite upbeat about the results we've seen so far.

Certainly, results are very encouraging. As Rodrigo mentioned, some of these flows are among the highest flowing wells in the entire Vaca Muerta play, which is promising. Whether these higher initial rates will translate into sustained production increases will take time to clarify. We're cautious regarding future expectations, but so far, the results have exceeded our projections.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Mr. Andres Ocampo for closing remarks.

Thank you, everybody, for your interest and your support of our company. We're always here to answer any questions you may have and encourage you to come visit us in our field and our operations or call us anytime for further information. Thank you and have a good day.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.