GeoPark Ltd Q3 FY2024 Earnings Call

Good morning and welcome to the GeoPark Limited conference call following the results announcement for the third quarter ending September 30, 2024. After 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 Invest with Us section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this website in the Invest with Us 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. 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 development 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 U.S. dollars, unless otherwise noted. Reserve figures correspond to PMRS standards. On today's call from GeoPark is Andres Ocampo, Chief Executive Officer; Jaime Caballero, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; and Maria Catalina Escobar, Shareholder Value and Capital Markets Director. And now I'll turn the call over to Mr. Andres Ocampo. Mr. Ocampo, you may begin.

Good morning, everyone, and thank you for joining us to review our third quarter 2024 operational and financial performance. Our net revenue for the quarter was $159 million, down 16% from the second quarter, impacted mainly by lower realized oil prices and production. Despite these factors, our financial discipline allowed us to maintain robust margins and profitability. Our adjusted EBITDA for the quarter was close to $100 million, representing a strong 63% margin. In addition, the adjusted EBITDA for the first 9 months of 2024 amounted to $339 million, representing approximately a 2% increase compared to the same period of 2023. Bottom line net profits for the quarter of $25 million also exceeded the same period of last year. This quarter was also marked by a significant cash flow generation, which translated into a cash build of more than 2 times compared to 3 months before, from $66 million of cash on June 30, up to $123 million in September and $140 million in October, which reinforces a strong liquidity and solid balance sheet. Our net leverage ratio remains low at 0.8 times and we have no principal debt maturities until 2027. This position provides us with financial flexibility to manage through market volatility, while continuing to invest in high-value projects. We have also continued to use our cash flow to return value to shareholders and maintained our quarterly dividends of $7.5 million announced yesterday. With this our total cash distributed to shareholders during this year will amount to $73 million which represents approximately an 18% capital return yield. With respect to some of our key operational highlights in Colombia, we focused on development and appraisal activities in the Llanos 34 Block, which remains one of our core assets. We advanced our water flooding campaign and expanded facilities, both critical steps to enhance production and improve recovery rates. In CPO-5 Block, we drilled 2 wells, further advancing our exploration and development goals. In our general exploration acreage, we continued with the appraisal and delineation of the Toritos and Bisbita fields. The entire complex is currently producing approximately 4,000 barrels a day gross. We have currently 2 drilling rigs onsite and expect further activity before year-end and into 2025. Also in Colombia, we are looking forward to starting our first exploration well in the Putumayo Basin later in November this year when we will drill the Bienparado Norte 1 exploration well. Our recent acquisition in the Vaca Muerta unconventional oil play, which became effective on July 1, marked a key milestone in GeoPark's expansion in Latin America. Vaca Muerta is today the most attractive hydrocarbon play in the entire region. During the third quarter, the Pad-4, which included 4 horizontal wells was drilled, completed, and was put on production in October. The block achieved a gross average production of 12,600 barrels of oil per day during the quarter and reached 15,400 barrels a day equivalent, its all-time record in August. The operator is currently drilling the 4 wells in Pad-9, which is expected to finish in December. In addition to the reserves development activities in Mata Mora, GeoPark and Phoenix have also completed the drilling and completion of the first exploration pad in the Confluencia block in the province of Rio Negro. This pad includes 3 horizontal exploration wells. These wells are currently testing and cleaning up, expecting results in the upcoming days. It is also important to mention that production and cash flow from GeoPark's working interest in the Vaca Muerta blocks belong to our company since July 1. However, such production and cash flow will not be consolidated into our financial statements until the transaction is closed, which is expected to happen before year-end. Therefore, none of these results have been included in our reported 3Q financial statements. As anticipated and to support the capital needs of our new assets, GeoPark has secured important local capital market approvals in Argentina, including AA+ Argentinean credit rating and an authorization to issue up to $500 million in local debt securities. This provides financial optimization and flexibility to continue developing these high-potential assets. Looking ahead, we're on track to release our 2025 work program and investment guidelines before year-end. This framework will outline our strategic priorities for sustainable growth and capital allocation across our newly expanded and upgraded portfolio. We see particular promise in our new assets in Vaca Muerta, coupled with ongoing focus on optimizing our core operations to maximize long-term value. Thank you for your continued support and confidence in our company. We're now ready to take any questions you may have.

Our first question comes from Vicente Falanga of BBI. Your line is now open. Please go ahead.

Hi, guys. Thank you very much for taking the questions. I have 2 questions regarding the Phoenix JV. You commented that Confluencia will likely put out results soon. Up to what you can comment, how do you see the results so far? Do you see these as encouraging? Do you think that you will be able to communicate the production results to the market before December? And my second question is on Mata Mora Norte. We were looking at the Secretaria Nadia website and we saw that you produced 13.7 barrels of oil equivalent per day in the month of September. You also mentioned that Pad-9 will start to produce at the end of December. So what should we expect for output there in Mata Mora Norte until the end of the year, which should stay about close to 14,000 barrels of oil equivalent per day? Thanks very much.

Good morning. This is Martin Terrado. When we go over Confluencia Norte-1, yes, Confluencia Norte-1, the results so far look encouraging. It was on track and according to the plan to drill and complete the wells. This pad has 3 wells. Some of the pads in Mata Mora have 4 wells. The drilling had around 3,000 meters of each horizontal section drilled according to plan. One of the things that the operator did differently, and we agreed, was to perform fracs with more intensity. The numbers are basically from 2,300 to 3,000 pounds per frac. As you know, and we are sharing and learning about unconventional drilling, it takes about 45 to 60 days for the flow back and the cleaning of the wells and it's been a little bit over 2 weeks. So far, the results are encouraging, and we will share the results before December for sure. As Andres mentioned, right now we're drilling Pad number 9, that's back into Mata Mora. This pad has 4 wells expected to finish drilling all 4 wells by December. Again, we are on track as we've already drilled 2 of the 4 wells. When you asked the question around the average production for September, what was the production for October? It was similar values around 13,600 barrels of oil equivalent per day. In October, we had basically no new wells stabilizing and that's what we had. We will see increased production as Confluencia Norte kicks in and Mata Mora wells continue to stabilize. But overall, like we mentioned in the past, we are excited about it and we expect to be around 13,500 to 14,500 barrels of oil equivalent by the end of this year.

Great, that’s very helpful. Thank you so much. Nice talking to you guys.

Thank you. The next question comes from Alejandro Demichelis of Jefferies. Your line is now open. Please go ahead.

Yes, good morning, guys. Thank you very much for taking my questions. Two questions, if I may please. The first one is a bit of a follow-up on Confluencia, Martin. When we look at Mata Mora, we have seen a lot of variability in terms of the initial production from the different wells. So what would you expect to be like a good flow for Confluencia? And what kind of gas levels can we expect from there? That's the first question. And then the second question is, how should we think about, say, production and CapEx required for Llanos 34 into next year?

So, when we look at Confluencia, the IPs that we have overall for Vaca Muerta are in the order of 750 barrels of oil per day to 1,500 barrels of oil per day. So this is exploration. We will see where within that range they fall, but that's the order of magnitude where we expect to be on IPs. We had some wells in Mata Mora that Rodrigo mentioned in the past that were beyond that range. We have 2 wells that produce 2,000 and 3,000 barrels of oil per day. So we have some wells that are on the top percentile of oil in Vaca Muerta in Argentina and that's in Mata Mora. But order of magnitude, that's what we have in our business plan and usually, we are within the P50 to the P10 range. So more to come on that pretty soon. And then the question related to production and CapEx?

Sorry, the gas component in Confluencia is unclear.

And the gas component for Confluencia for now, we expect to be similar to what we have in Mata Mora. It's usually when we go from barrels of oil per day and we take it to barrels of oil equivalent, order of magnitude at about 5%. Does that help, Alejandro?

Yes, that's very helpful. Thank you.

And I think your second question was around Llanos 34 production and CapEx. So like Andres mentioned, we will post our work program for all of GeoPark in the next weeks. But what we can share with you is where we are aligned with our partner and you have seen throughout the year that we went to one rig. We have one rig running right now in Llanos 34, and we're in agreement that we will continue that rig all of next year, mainly drilling infill wells, some appraisal wells, follow-ups to good wells that we drilled recently, especially in the Curucucu field. And concerning production, we should expect slight declines as the field is getting more mature and with the level of activity of infill drilling, the focus that we have on water flooding and workovers, order of magnitude around 15% decline.

For the whole of Llanos 34?

For Llanos 34, yes.

Okay. That's clear. And as a bit of a follow-up there because your partner has been talking more about polymers into Llanos 34 and so on. So is that something that we can see in 2025? Or is that a more medium-term plan?

No, it's something that we will be seeing in 2025. So we're working the details to perform a pilot in the second half of the year. That's basically adding polymer to the water so that we get better conformance in 2025.

Thank you.

The next question comes from Daniel Guardiola of BTG. Your line is now open. Please go ahead.

Thanks. Good morning, everyone, and the entire team. I have a couple of questions. The first one, I would like to touch on costs. Looking at the quarter, we saw once again a deterioration of your OpEx per barrel to levels close to $16, $17 per barrel. If we look at the last 2 years, the OpEx has almost doubled. I wanted to know, first of all, if you can share with us what is driving this deterioration in costs? And two, what is the company planning to do to basically tackle this significant increase in costs? So that would be my first question. If you want, you can answer it and then I can follow up with the second one, if that's okay with you guys.

Absolutely, Daniel. This is Martin again. When we analyze our operating expenses on a dollar per barrel basis, I’d like to make a couple of observations. Our aim is to maintain the costs associated with our major assets in the $10 to $12 per barrel range. Over the past two years, specifically in 2022 in Llanos 34, we were producing approximately 350,000 barrels of fluid per day with an energy consumption of 50 megawatts. Currently, our total fluid production has increased by 40% from that initial figure, while our megawatt requirements have grown by 20%. It's important to note that about 40% of our operating expenses is related to energy costs. After connecting to the national grid, we aimed to secure fixed energy prices. However, for the first few years and presently, we are dealing with spot prices. The El Niño phenomenon in Colombia has led to an increase in energy prices, along with inflation and exchange rate fluctuations. These factors explain some of the challenges we've faced. In response, we are actively working to secure energy prices to prevent volatility and avoid paying over COP 900 per kilowatt hour, especially now that we have the capacity to do so. Additionally, we are reviewing our operating expenses and considering acquisitions of facilities. For instance, we had zero production in Llanos 123 about 1.5 years ago, but we are now producing 4,000 barrels. We have been renting those facilities, and now we are purchasing parts of them that offer quick returns and are sensible to keep. We are also collaborating with our supply chain team to reassess our contracts and pursue new opportunities. Our goal remains to maintain our costs in the $10 to $12 per barrel range in the upcoming years.

To complement that, good morning, everybody, this is Jaime. Daniel, on the energy side, I think it's clearly one of the biggest levers. One of the things that we're seeing is that the market is evolving. Following El Niño and all the kind of crisis that we had in the middle of this year, the market is stabilizing. When you look at energy rates that can be secured for the next number of years, actually, long-term contracts are becoming very attractive and they are significantly under what we expected. The possibility of locking in rates that secure clean energy for our fields, particularly for Llanos 34, is something that we're looking into and that is going to help us a lot to mitigate that increasing trend of energy costs associated with the enhanced recovery of the field. I think the other angle that we need to take into account when you see the evolution of lifting costs is that there is a component associated with what I would call immature operations, which is all the exploration fronts that we have open currently. Those exploration fronts that we have in the periphery of Llanos, in Putumayo, and in Ecuador are operations that don't benefit from economies of scale and from the sorts of systematic supply chain approach that you can have in Llanos 34. They are affecting the consolidated OpEx per barrel. To the extent that those operations mature into appraisal and development, we should expect to capture the economies of scale associated with a mature operation and that's going to help us as well. Those are the 2 things to consider as we look at the long-term prognosis of OpEx per barrel. Thanks, Daniel.

Thank you very much, Martin, Jaime. My second question is on Brazil. I mean, this is the second consecutive quarter where you're posting 0 production from Brazil. I wanted to know if you can provide us an update on what's going on in Brazil and what are your expectations going forward?

Yeah, Daniel. So latest, we have been communicated by the operator that the date that we had to restart operations was late October, and 2 weeks ago, they shared with us that the firefighting and additional maintenance are required. So the new date is late February. As you mentioned, this is 1,100 barrels of oil equivalent per day that we had in our plan for all of 2024, and it's been shut since the middle of March. The new date that we're expecting is restart early March.

And if I may just squeeze in a last question on Argentina. I would like to know your thoughts on the DUPLICAR project, which is eagerly anticipated by most of the producers. It would be great if you can share with us how you see this project progressing and when you expect to know the project to be fully online for you guys to start shipping additional barrels of oil. Also, it would be great if you could share with us what is the total capacity that you have secured in this project? And if you foresee any potential to use additional spare capacity in 2025?

Sure, Daniel. This is Jaime. Let's start from the baseline. Our evacuation efforts around Vaca Muerta are going well. Our production is in line with or even better than our expectations from a few months ago based on the results we're seeing from the different wells. Currently, about 50% of our volumes are being transported through our contracted capacity with Oldelval, which is around 7,500 barrels a day. The rest is being transported via Oldelval through third-party capacity. We do occasionally utilize some trucking for surplus, which is actually a good problem because it indicates higher production levels than we anticipated. Overall, we have secured about 15,000 barrels of evacuation capacity from our various resources, including our own and third-party capacity, as well as trucking. We expect the Oldelval DUPLICAR component to come online around March. This timeline remains unchanged. While there may be some discussion of delays pushing it to April, we are confident it will be around that time. This addition will give us another 9,000 barrels a day of capacity net to GeoPark, bringing us to a total of 24,000 barrels, which is significantly more than we expect to be producing at that time. Overall, our midstream efforts are doing well and are ahead of our production volumes, which is how it should be.

Thank you guys.

We now have a written question from Stephan Foucaud of Auctus. What is the current production? How do you see 2P reserves at Llanos 34 at year '24 directionally? Is this about 2P reserves at year '23 minus production? Or could there be a technical revision impacting reserves? Do you see potential production growth in Ecuador in 2025? And any update on the Bienparado Norte 1 exploration well, Cante Flamenco at CPO-5 and Toritos and Curucucu? Thank you.

Thank you, Stephan, for your questions. I believe I have noted them all, and if I miss any, we will make sure to follow up. To start, regarding current production in Llanos 34 and our reserve expectations, for the full year, we anticipate net production between 22,000 to 23,000 barrels of oil per day. This aligns with our expectations for a maturing field. Noteworthy highlights from this year include successful horizontal well drilling, increased water flooding, and positive workover results. As many of you are aware, we reduced our rigs from three to one, which has resulted in a production decline of approximately 15%. Concerning reserves, it is still too soon to provide specifics, as we will communicate our reserves in the first quarter of next year. However, we have initiated our reserves certification process and have some encouraging factors, such as improvements in water flooding and horizontal wells, along with challenges like increased water cuts. Beyond Llanos 34, preliminary results from Llanos exploration wells are promising, and our appraisal outcomes look favorable, though we cannot disclose much more at this moment. Regarding potential production growth in Ecuador, we currently produce around 4,000 barrels of oil per day from our two blocks. A drilling and workover campaign was completed, and we are seeing growth primarily from water flooding in the Perico block. Some wells require pressure support, which we are discussing with our partner for next year. In the Espejo block, we are evaluating the recent wells we drilled to determine our proposals for next year. Moving on to Bienparado Norte, this well in Putumayo-8, as mentioned earlier, is completing civil works, and our rig is mobilizing to spud this well in the second half of November. We plan to drill two wells, with Bienparado Norte targeting the N sand, which I find very exciting. Further updates will be provided by the end of the year and in our next call. Cante Flamenco-2, which we drilled and completed in the CPO-5 Block, aimed at the Mirador target in the northern section of the block. The drilling results were highly promising for the Ubaque target, which encountered oil with a water contact for the first time on the east side of Alto de Metiica. Testing revealed about 34 API crude, and the well is currently shut in awaiting a workover. This discovery has sparked great interest among our geologists and engineers to explore other opportunities in the area, indicating that oil has been flowing there for millions of years. Our next steps for Cante Flamenco-2 include a workover program before year-end, where we will isolate the Ubaque and test the Mirador target, which previously showed about 10 feet of net pay. Regarding Curucucu, we have already drilled the Curucucu 4 well as an appraisal in Llanos 34. This well is producing at impressive rates of approximately 800 barrels of oil per day with a 40% water cut. We are collaborating with our partner to revisit this platform and plan for another Curucucu well before the year concludes. Lastly, I want to update you on the Llanos 123 exploration block, which was previously at zero production 18 months ago, and is now yielding around 4,000 barrels of oil per day. We have two rigs operating across two platforms, including Toritos, Bisbita, and Saltador. The wells we recently drilled, including Toritos-2, Toritos Sur 1, and Bisbita Este, are performing exceedingly well, each producing around 1,500 barrels of oil per day. We will continue appraisal work in these areas next year. As for Toritos Sur 1, that well is currently producing approximately 450 barrels of oil per day with under 10% water cut. I believe we have addressed all your questions, but if there is anything we have missed, please let us know.

An update on the surcharge.

An update on the surcharge. Jaime?

Great. So on the tax front, the surcharge estimate that we're having for this year is of 10%. Remember, the context around this is that with the tax reform, there is a scale depending on the oil price average for the year, you end up classifying under a different kind of surcharge bracket. Given oil price evolution over the last quarter and the expectation that we have for the year, we believe we're going to end up on that 10% bracket and that's unchanged vs where we were a few months ago. I understand that part of the question is also around the treatment of royalties. As we've said before, the courts in Colombia have pronounced themselves on that, and the project that the tax reform included didn't pass through the courts. So the treatment of royalties is unchanged vs what we had in the past. The only component of the tax reform that applies to us is a surcharge, and it's at 10%. Thanks.

We have no further questions. So I'll pass back to the management team for any closing remarks.

Thanks, everybody, and we apologize for the technical difficulties. Hopefully, all of the answers to the questions were addressed. If anybody had any pending questions that were not completed, please feel free to reach out to us directly. Thanks very much for joining and your support of our company, and have a good day.

Thank you all for joining. That concludes the GeoPark's conference call. You may now disconnect your lines.