Earnings Call Transcript - GPRK Q2 2022

Operator, Operator

Good morning and welcome to the GeoPark Limited Conference Call following the announcement of our results for the second quarter ended June 30, 2022. If you need a copy of the press release, it is available in the Investor Support section on our corporate website at www.geopark.com. You can access a replay of today's call through this webcast in the Investor Support section of the GeoPark corporate website. Before we proceed, please be aware that some statements in the results press release and on this conference call are forward-looking statements, not historical facts, and are subject to risks and uncertainties that could lead to actual results differing materially from those described. The company seeks protections under the Private Securities Litigation Reform Act of 1995 regarding these forward-looking statements. Risks may include competitive developments and factors outlined in the company's SEC reports. These risks aim to highlight key factors that could cause actual results to differ from the forward-looking statements, but do not form a complete list of the company's business risks. All financial figures discussed today were prepared according to IFRS and are presented in U.S. dollars unless indicated otherwise. Reserve figures conform to PRMS standards. Joining us on the call today from GeoPark are Andres Ocampo, Chief Executive Officer; Veronica Davila, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; and Stacy Steimel, Shareholder Value Director. I will now hand the call over to Mr. Andres Ocampo. Mr. Ocampo, you may begin.

Andres Ocampo, CEO

Good morning, and thank you, everyone, for joining the call. We're connecting from Bogota, Colombia with our team to report on our business performance and second quarter results. This quarter can be characterized by a successful high momentum transition or on-the-ground full cycle performance with record results and a lot of good work and drilling underway, opening even more opportunities for the rest of the year. We would like to thank the entire GeoPark team for their discipline and success in delivering another record quarter by increasing production and cash flow, reducing emissions as well as paying down debt and accelerating shareholder cash returns. In terms of operations and our base business performance during the second quarter, we drilled 9 wells and increased production to an average of almost 39,000 barrels a day, a 14% increase over the second quarter last year. We remain on track to achieve our recently upwardly revised full year average production guidance of 385,000 to 40,500 barrels a day. With higher oil prices and production, we were able to maintain our costs in line and increase our cash flow generation significantly. Our adjusted EBITDA jumped by 140% over the same quarter last year to $145 million, which after spending $32 million in CapEx, allowed our cash flow generation to grow to $113 million. This means that every dollar that we invested delivered 4.5x in adjusted EBITDA and is proof of the quality of our assets and team. Bottom line, our profits increased to $68 million, more than $1 per share. We have been allocating our cash flows following the same priorities as always. First, invest in our assets and fund our work program and in the current oil price environment, prioritize and accelerate production; and second, always a combination of debt reduction and returning value to our shareholders. In the year-to-date, we invested more than $70 million in our assets to drill more than 20 wells. We paid down $103 million of debt, returned $25 million in cash to our shareholders and ended the quarter with $122 million in cash. In the second half of the year, we're looking to accelerate the investments in our assets by doubling our CapEx relative to the first half of the year. We expect to also fully repay our 2024 bonds at current oil prices, and our dividends were just increased by 50%, and we also will continue executing our accelerated share buyback program. We're also investing in our energy transition efforts as we just completed the full connection of our main producing fields to the national power grid in Colombia, which is largely hydroelectric power. We're also completing the construction of our solar park, which means that soon, our main fields will be consuming electricity that is 70% to 100% generated from renewable sources. This is a big step forward towards our emission reduction targets and has the additional benefit of producing both cost savings and improved operational reliability. On governance, we would like to welcome Brian Maxted and Carlos Macelari to our Board, 2 proven oil finders with extensive experience in our industry and our region who represent a significant contribution to our majority independent Board and our company. We also welcome to the Board and thank Marcela Baca for her more than 10 years of incredible contributions to our management team as well as to our company. Hartela is one of the most experienced oil and gas professionals in Colombia today and is a great addition as well. We had a great half of the year, producing record results and our team is excited about what is coming. 11 rigs are currently working in our assets and 3 more rigs are on the way. We're executing a multiple catalyst work program that includes in CPO-5, further accelerating production with 1 to 2 more development wells in the Indicofield. We're also testing the Cantelamenco exploration well during the upcoming weeks. And then, there's a second rig that is currently moving to initiate the exploration campaign in the Southeast area of the block. In the Gen4 block, a third rig is already in place to continue developing the main fields and continue adding production. In our general exploration acreage, we will be spinning the first well in the Janus 87 block, the first well since we added the block in the 2019 land grab. Finally, in Ecuador, we will be drilling the first well on our operated Speco block and are discussing more development drilling with our partner in the Perico block. We look forward to reporting results on these activities in the upcoming quarters. And we thank you. And also now we'll be happy to answer any questions you may have. Thank you.

Operator, Operator

Our first question comes from Alejandro Demichelis with Nau Securities.

Alejandro Demichelis, Analyst

Yes. A couple of questions, if I may, please. The first one is, how are you seeing the proposal for the tax reform that the government in Colombia has put forward? And as a bit of a follow-up from there in your remarks, Andres, I think you mentioned that you are in the process of the budget for 2023. And you see that as the most powerful tool that management has. So should we expect some changes in the direction of that kind of budget for next year given the proposal of tax of the garments? That's the first question. And then the second question, on the exploration side, now that you have this new discovery in the block CPO-5, how are you seeing the rest of the target through the end of the year, both in the northern part of the field and also in the Southeast, please.

Andres Ocampo, CEO

Good morning. Thank you, Alejandro. To address the first part of your question, we have been carefully examining the recently announced tax reform proposal. It's still early in the process, and it needs to go to Congress for approval. The main provisions that will impact our industry and our company include the introduction of an export tax on crude and the elimination of royalty deductions. We've been analyzing how this might affect our business, and we expect to gain more clarity in the future to report back to all of you. Currently, I want to highlight that producer royalties in Colombia are based on a percentage of volume, which for our company, is about 8%. The current proposal seems to address this 8% calculation, which is a key deduction in the income tax calculation, and it appears that this will not be applicable moving forward. This change would affect the income tax assessment for 2023, meaning if the reform proceeds similarly to past reforms in Colombia, the non-deductibility would be applicable for the 2023 tax, due in 2021, equating to 8%, or 100% of the royalty. This primarily impacts the non-in-kind royalties, which comprise about 70% of our total royalties. Therefore, you should anticipate around 6% on average for our company.

Alejandro Demichelis, Analyst

Sure. However, regarding export tax, we will be heavily reliant on the final details of the reform and how each company manages their sales volumes.

Andres Ocampo, CEO

If we examine our composition, a portion of our direct exports accounts for 5% of our total sales. About half of those are sold domestically, while none of our overall sales are sold domestically but are instead exported by our clients, which can technically be considered as exports. The remaining 35% to 45% are sold and refined domestically. This is still contingent on sales, and it remains uncertain how the market will react to the overall regulation. In other markets subject to this type of tax, pricing tends to align with export parity, meaning that pricing is influenced regardless of how the volumes are sold. However, as I mentioned earlier, we are in the early stages. We anticipate gaining more clarity, and we will share updates as they become available.

Alejandro Demichelis, Analyst

Yes, I'll take the second one on I'm sorry, just to follow up on that. Are changes there aren't enough to change the way you are thinking about capital allocation for next year?

Veronica Davila, CFO

As Andres mentioned earlier, we are just starting our capital allocation process, which will take several weeks and conclude with the approval of our budget in November. Naturally, we will evaluate all relevant factors within the framework of our project definitions and determine which projects will proceed. This will impact the economic considerations we take into account, along with technical, strategic, environmental, and social aspects for each project. We will allow these projects to compete for resources. The Colombian projects might be influenced by the anticipated tax reform, but we will conduct this process thoroughly and in detail to finalize our program by November.

Martin Terrado, COO

Alejandro, this is Martin Terrado. I'll respond to the question on the acceleration for CPO-5. So we grew year-to-date 2 exploration wells in the block and 1 development well. The 2 exploration wells, the second one is the Cantelamenco that Andres mentioned, we have multiple targets vertically on this exploration well, mainly Aqua, Guadalupe and Mirador. Preliminary results from the Cantelamenco show that we have oil pay in the Mirador formation. So right now, we're doing the completion of that well. The next step is to move that rig to the Indico field. We're taking advantage of the oil prices and moving that rig to drill 2 development wells so that we increase production of the block. We will come back to the north. Again, these wells, the first one, Urakawas, is 8 kilometers from the Jacana extension. So the Guadalupe formation is one that we haven't tested yet, and we need to get closer to the north. We're building the pads in that area. And there's also mentioned that we have a second rig that is finalizing the mobilization in the Southeast of the block. So we're going to be spudding our first well targeting the wake formation in the Southeast that was called Aptris. So September, October, we expect to have spudding of that well. Overall, when we look at our exploration potential in the block, we keep being really encouraged. We have the seismic that we acquired, and the teams are looking at additional prospects. We have some prospects that jointly, we have already agreed with our partner to drill closer to the Indicomriposa area. We got seismic in the northeast of the block that late in the year, early next year, we will be acquiring. So that's a little bit of a flavor of where we are on CPO-5.

Operator, Operator

Thank you for your question, Alejandro. Our next question comes from an undisclosed participant.

Unidentified Analyst, Analyst

Just want to go back on to that question around 2023. Things do start to slow down in Colombia. What is your permitting situation there look like today with respect to what you would need to carry out a program in next year?

Martin Terrado, COO

Phil, this is Martin again. We have different categories. The first category includes fully licensed areas like Channel 34 and 32, which involve some development and appraisal. Next, we have areas primarily focused on exploration, such as CPO-5 Janus, where we will begin drilling our first wells in the next couple of months, along with Channels 94, all of which are fully licensed. The next category consists of nearly complete licenses, which includes Channels 124 and 123. By almost complete, I mean we have submitted all necessary documentation, and in some instances, we expect to receive approvals in the coming months to commence drilling in these channels. Lastly, we have targets that are further out, which may face some delays. This includes Putuo and several channel blocks to the west, specifically 104 and 86. Overall, our licensing situation for the core areas is 100% fully licensed, the next in line are nearly fully licensed, and we are in a very strong position.

Operator, Operator

Thank you for your questions. We now have a text question from Stephane Foucaud from Auctus Advisors.

Stephane Foucaud, Analyst

How much net pay was reported?

Andres Ocampo, CEO

Stephan, preliminary log-in results show that we have around 40 feet of pay in the Mirador formation for Cantelamenco.

Veronica Davila, CFO

Thank you. Stephane's second question. Since the official appointment of the new President of Colombia, have you seen any important announcements that would impact the business.

Andres Ocampo, CEO

Yes, I believe Vero addressed that, and the most significant factor is the tax reform that was announced yesterday. In our opinion, that is the primary measure taken that will undoubtedly affect our business. As for the last question from Stephane, currently, our production is netting GeoPark between 39,000 and 40,000 barrels of oil equivalent per day.

Operator, Operator

Our next question comes from Oriana Covault with Balanz.

Oriana Covault, Analyst

I had three. If we could go one by one that would be great. And the first one with regards to lifting cost, we observed a rise during the quarter compared with the previous one. Just curious on how much of that increase should be attributed to increased activities? And what are you seeing from inflationary dynamics mitigating factors or alternatives that GeoPark prevent margin erosion?

Martin Terrado, COO

Yes, Oriana, this is Martin again. So overall, we're seeing about a 5% to 10% increase on materials and services, where we see the highest increases from artificial lift, so basically our pumps between 15% to 20%. Overall, we're seeing about 10%. That was included in our budget. When you look at the details, you might have seen in the report some increases, for example, in Chile, where our OpEx went up for the quarter because we had pooling activities to increase oil production. That is going to be gone by the next quarter. We have a successful campaign and the pooling is not there anymore. In Ecuador, again, a brand-new block where the OpEx was not the main objective initiative, and now that we have 3 wells on production with close to 3,000 barrels of oil equivalent per day. We're working really close with our partner to bring down those OpEx. We have things that we have identified, and I'll give you a couple of examples. As we are contracting for our block, we're seeing that we were able to adjust better the contracts and get better prices. For example, on the transporting of liquids in and out of the build platforms. And we're also looking into opportunities such as connecting to existing pipelines. This was Intracampos so there's a lot of infrastructure around. And in channels, we are on track on our production OpEx.

Oriana Covault, Analyst

Perfect. That's very clear. Perhaps my second one more deal to the excess cash uses. And given the recent dividend increase that you announced, maybe like where should we expect to see dividends head in more broader terms or possible changes or perhaps a defined dividend policy? How should we think of this?

Andres Ocampo, CEO

Thank you, Oriana. Good morning. We will continue to allocate our cash flows according to our established priorities, which include funding our assets, reducing debt, and returning value to shareholders. Regarding dividends, we doubled our dividend last quarter and have now increased it by an additional 50%, leading to a payout of $7.5 million per quarter, resulting in approximately a 4% dividend yield. We consider this to be the base dividend, which is sustainable even in low oil price environments, and it can grow as our company develops. We will evaluate our dividend payments as part of our overall strategy for shareholder returns and will keep enhancing the value we provide to our shareholders in the coming quarters.

Oriana Covault, Analyst

Got it. And just one final one from me. Just picking up on some of the possibility of the flexibility in capital allocation due to perhaps a potential slowdown in the regulatory environment in Colombia. Just curious like what other avenues you might be considering given your presence in Ecuador or maybe looking at new jurisdictions to start exploring.

Andres Ocampo, CEO

Thank you, Oriana. As Martin mentioned, our assets, particularly in the Basin, are either fully licensed or nearing licensing, which allows us to maintain our activities for the remainder of the year and into next year. Regardless of the varying measures or conditions in Colombia, we've adapted to this situation, as conditions in every Latin American country can be quite dynamic. We have always taken a rational approach to our portfolio, which is a crucial component of our business strategy and will remain so. Our focus on diversification is something we've emphasized, and we may have become less regional than we initially intended. A challenge we face is to expand our presence outside of Colombia. We have assets like three fields in Ecuador and fields in Chile that we can develop further, making our diversification efforts more important now.

Oriana Covault, Analyst

Perfect. Thanks for the questions.

Operator, Operator

Our next question comes from Roman Rose with Canaccord Genuity.

Roman Rose, Analyst

I will ask the questions in order, if that's okay. The first one is related to Oriana's questions. Regarding the 2027 notes, you mentioned some of the inventory is being affected. I want to know what is the maximum buyback we could anticipate from Clark given these inventory changes.

Andres Ocampo, CEO

Thank you, Roman. Complementing the question that Ian asked as well. We spoke about dividends and moving on to the we have had, for some time, a program to repurchase up to 10% of outstanding shares. We have been executing on that buyback. We paid out roughly $15 million this year and $5 million of those in July alone. So we expect to be able to sustain this pace at current market conditions and, of course, keep working, as I mentioned, on our overall shareholder return strategy as we do always. So we've accelerated the trend and you should expect us to continue our acceleration.

Roman Rose, Analyst

Perfect. And this one long for Martin. As you are finishing the transition in electricity generation in a 34, I wanted to ask you how much of OpEx is related to electricity generation? And if we should expect a significant reduction in operating expenses there.

Martin Terrado, COO

Yes, Ramon, no problem. About 40% of our OpEx in Channels comes from the generation of electricity. So this is something that is big for us, and it's good. We expect around a 10% of OpEx reduction due to the connection to tell. And it could fluctuate depending on the price of electricity going forward, but it's about 10%, what we expect.

Roman Rose, Analyst

Perfect. And the last one has something with royalties. I wanted to understand, I know that high price cost will really depend on oil prices. But I wanted to understand how should we think of the factor part of this royalty going forward.

Martin Terrado, COO

Sorry, Roman, did you ask about the export tax payment?

Roman Rose, Analyst

Sorry. Yes. We have originated, please go ahead.

Martin Terrado, COO

Thank you, Roman. Regarding royalties, particularly in relation to tax reform, the cash royalty stands at 38%. There are additional components of government revenue, including the extractor you mentioned, which vary from block to block. Each exploration and production contract will have a different X-factor. This has consistently been the case in Colombia, and these contracts are fully executed and currently active. We do not anticipate any changes to the factors outlined in those contracts.

Roman Rose, Analyst

Okay. Thank you very much. Congratulations on the quarter.

Operator, Operator

Thank you for your questions. There are currently no questions registered. There are no questions awaiting at this time. So, I'll pass the conference back over to Mr. Ocampo for any further remarks.

Andres Ocampo, CEO

Thank you, everybody, for your interest and support of GeoPark. And we're always available to answer any questions that you may have. Please, we encourage you to visit us and our operations or call us any time for more information you may need. Thank you, and have a good day.

Operator, Operator

Thank you for your participation. You may now disconnect your lines.