Earnings Call Transcript - GPRK Q1 2020

Operator, Operator

Good morning and welcome to the GeoPark Limited Conference Call following the results announcement for the Fourth Quarter Ended December 31, 2019. After the speakers’ remarks, there will be a question-and-answer session. If you do not have a copy of the press release, please call Sard Verbinnen & Company in New York at 1(212)687-8080, and we will have one sent to you. Alternatively, you may obtain a copy of the release 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 this webcast in the Investor Support section of the GeoPark corporate website. Before we continue, please note that certain statements contained in the results' press release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the Company seeks protections afforded by the Private Securities Legislation 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 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. Reserves figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer; Augusto Zubillaga, Chief Operating Officer; Andrés Ocampo, Chief Financial Officer; and Stacy Steimel, Shareholder Value Director. And now, I'll turn the call over to Mr. James Park. Mr. Park, you may begin.

James Park, CEO

Thank you, and welcome everyone. We're joining you this morning with our executive team united as ever in our efforts while currently physically separated and calling from our respective homes and locations in Bogota, Santiago, and Buenos. At the outset, we would first like to express our profound gratitude and admiration for the GeoPark women and men who are working day and night pushing us through this downturn and continuously making our company perform, protecting our shareholders and positioning us for the new world on the other side. Across six countries, our team moved with quickness and agility to protect the health and safety of our employees, contractors, and communities, ensuring that our hydrocarbons keep flowing to the market. With greater logistical support, our office staff could work from home, but our field operations require men and women to be onsite and have their hands on the iron. Our field teams again proved why they are the backbone of our company. Before opening up to questions, let's please look at four elements of our business during this first quarter. Firstly, our teams continue to drive performance with solid results, including record production of 45,700 barrels per day, representing 16% growth compared to last year. Strong cash generation with an adjusted EBITDA of $78 million and late capital efficiency with $2.3 generated for every $1 invested. On certain higher-cost mature projects within our portfolio, we took non-cash accounting impairments of $97.5 million, which caused us to record a net loss of $89.5 million for the quarter. Secondly, our team moved quickly into battle mode for the arrival of the global pandemic, the collapse in the world economy, and the flooding of the oil markets with unnecessary and unwanted barrels. In addition to quickly protecting the health and safety of our teams and contractors, we worked with our neighbors and community to keep them informed of operations and risks, providing them with safety, medical, and food supplies, particularly for the most vulnerable. Following our tested business model and track record, our seasoned team simultaneously addressed every component and dimension of our business. So far, more than $280 million of capital and cost savings have been implemented across the board with more coming. This included reducing our self-funded work program by 75% to $45 million to $50 million, focusing on our most strategic assets like the Llanos 34 and CPO-5 blocks in Colombia, and other savings such as voluntary salary and bonus reductions by the board. We also temporarily shut in 6,500 to 7,500 barrels per day to preserve cash and shareholder value, resulting in higher cash flow with less capital expenditure. This also helps us minimize activity and the potential spread of the virus in the field and in our surrounding communities. It is expected that this reduction can be readily brought back online without suffering mechanical delays or reservoir damage. Thirdly, the underlying strength of our assets and key characteristics of our company provide a foundation to protect against and endure through this and other crises. Additional tools in hand include a strong balance sheet with $165.5 million of cash and safety net funding alternatives such as a $75 million oil prepayment with $50 million committed and $130 million in uncommitted credit lines providing us with financial flexibility and liquidity if needed. GeoPark’s long-term debt profile has no principal payments until September 2024. Standard & Poor's and Fitch both recently reaffirmed our long-term corporate credit rating at B plus. We’re also aggressively protecting our base oil price by effectively using hedges, with approximately 26,000 barrels per day and about 70% of our oil production hedged in the second quarter and so far approximately 17,500 barrels per day in the third and fourth quarters respectively. As a long-term opportunity-driven company working in the most attractive hydrocarbon region today, we’re looking ahead with excitement to the recovery and taking this opportunity to streamline and improve our overall business and more strongly position GeoPark for continued economic growth and success. As always, we’re protecting critical people, tools, and capabilities for the short, medium, and long term. Our flexible work programs, operational agility, and significant inventory of organic projects allow us to quickly expand our investment plan as prices begin to recover, starting at $35 plus Brent. We got a head start in this recovery effort by already closing on and integrating the Amerisur Resources acquisition into GeoPark during January. This acquisition provided us additional important low-cost production, reserves, and high-potential acreage adjacent to and on trend with the Llanos 34 block as well as our new entry into the Putumayo Basin with production reserves, attractive exploration acreage, and a new partnership with Oxy. In addition, we went to the capital markets in January and raised $350 million in bonds, which was oversubscribed more than six times by top-tier investors, achieving the lowest interest rates ever for a single-B rated company in Latin America. Thank you and we would be pleased to answer any questions you may have. Please be patient as we try to coordinate our question answering with our team located across the continent today.

Operator, Operator

The first question will come from Robin Haworth with Stifel. Please go ahead.

Robin Haworth, Analyst

Hello, thank you very much for taking my question. I have a couple of questions regarding the CapEx budget. I would be interested to know what was the last project that came out of the capital budget and what is the highest returning opportunity in your portfolio that you're not able to pursue in the current environment. Secondly, regarding the capital budget, does this imply that you see almost all drilling programs suspended given that you spent a large proportion of the 2020 budget? When should we start expecting to see underlying declines in the portfolio, ignoring the shut-in barrels? Lastly, do you expect to use this downturn to expand your footprint or would you prefer to slim down to your core Colombian asset base?

Andrés Ocampo, CFO

Thanks very much, Robin. Thanks for the question. Can you hear me okay? This is Andrés.

Robin Haworth, Analyst

I can hear you fine. Yes, thank you.

Andrés Ocampo, CFO

So the first question about CapEx, we estimate our CapEx now for the year to be roughly $45 million to $50 million. As you saw in our release, most of that has already been invested, so what is remaining is very limited, around $5 million per quarter. In some quarters, we may go up to $8 million. But in this context of high volatility, in some cases we are not even lifting some wells because of either pump failures or issues that are common in day-to-day business. I would say our CapEx has been compressed down to below what we would call a maintenance CapEx. We are just working on putting one well back online. We’ll release that rig even after that job is done primarily because of the high volatility in oil prices. For example, Brent was probably in the 20s a few days ago, and today it’s up to 30. The swings are significant, making it uncertain how quickly or effectively we could achieve any returns on those investments. As for when we could start investing again, we don't need prices to go over $40; as mentioned, with oil prices around $35 or higher, we're ready to start work again. We hope this will occur as soon as there is market clarity.

Robin Haworth, Analyst

Yes, it does. Just to clarify, I was also asking about the difference between your old CapEx guidance of $70 million and the current $45 to $50 million. What specific projects were removed?

Andrés Ocampo, CFO

Some activities we postponed include building facilities, some workovers we planned, around 6 to 7 workovers that we postponed, and some seismic work that was still budgeted. Previously, with our $70 million budget, we only had one or two wells planned in CPO-5. In this current budget, we have no new wells aside from the workovers. Most of these activities do not have immediate production associated with them.

Robin Haworth, Analyst

Okay, thanks.

Andrés Ocampo, CFO

Regarding the declines, we are shutting in production, and we expect this to balance the impact of potential declines. So, really, the production we're seeing should remain relatively flat throughout the year. Still, it will depend on oil pricing. If we assume an average price of $30 for Brent, production will stay around 40,000 barrels a day per quarter, except for the second quarter. The second quarter is particularly affected by the approximately 6,500 to 7,500 barrels a day that are shut in. The guidance we provided indicates that we estimate these will be back by the beginning of July. Therefore, those barrels will be offline for the entire quarter, but that situation is not our expectation. We hope to bring those wells back online. At current prices, it is very economic to do so. By this, I mean that with a $30 Brent and a $6 differential on Vasconia, it translates to an effective price of around $24 in Colombia. Most of those shut-in barrels can generate significant cash flow at those levels. However, shutting in and bringing wells back online is not straightforward. We would need more clarity on the sustainability of these prices to ensure that returning the closed wells makes sense. Assuming those barrels are not back on stream until the end of June, the second quarter production will be 35,000 to 36,000 barrels a day. If they are back on production at the beginning of June, we expect closer to 38,000 barrels a day. Then, for the remainder of the year, it should hold steady around 40,000 barrels a day.

Robin Haworth, Analyst

That’s very clear.

Andrés Ocampo, CFO

From a strategic viewpoint, the most profitable and largest cash flow generation for the company currently focuses primarily on Colombia, specifically in Llanos, mainly in Llanos 34 and CPO-5, which we expect to concentrate on. We significantly reduced or are no longer investing in Peru under the current circumstances as it is deemed uneconomic. Additionally, we've also done some internal reviews for our oil assets in Chile and Argentina due to the situation. We still believe it's the right time to look for opportunities. Therefore, we will remain vigilant for potential opportunities in a market that we find attractive. Although raising capital in this market is difficult, we are mainly focusing on Colombia right now while remaining open to other enticing prospects.

Operator, Operator

The next question will come from Stephane Foucaud with Auctus Advisors. Please go ahead.

Stephane Foucaud, Analyst

Two questions from me. First, for clarification, if oil remains at $30 a barrel until the end of the year, should we expect no further exploration drilling in Colombia at CPO-8? My second question is regarding your total netback. It seems production is lower, yet your operating netback appears unchanged or slightly up. Can you clarify what has caused this change? Are you forecasting lower operating expenses, lower transport costs, or have the better differentials played a role?

James Park, CEO

Good morning, Stephane. Could you please repeat your first question? I grasp the second question, but I did not fully understand the first; the line is a little noisy.

Stephane Foucaud, Analyst

It was just a clarification that at $30 a barrel, we should not expect further exploration drilling, which I think was implied in your last statement. I just want to ensure I correctly understood that.

James Park, CEO

Yes, that is correct. In a $30 scenario, we're not anticipating any exploration drilling, although there might be a minor operator well in CPO-5, but it would represent a negligible amount of capital. For CPO-5, we’re keeping open the possibility of one operator well, potentially increasing production, and perhaps one exploration well, but those would collectively account for no more than $3 million in total net impact. Thus, it is unlikely we'll pursue them before the end of the year.

Stephane Foucaud, Analyst

Regarding your second point, I noted that despite shutting in production, the netback has increased. I understand your points regarding operating expenses.

James Park, CEO

Your observation is correct. Despite lower production, the netback is higher largely due to the substantial reduction in operating expenses. Our G&A has been cut by nearly 40%, and you need to consider our new company acquisition with its corresponding G&A overhead. When comparing to 2019 figures without this company, the cut appears even more significant. However, as you rightly pointed out, G&A is not included in the operating netback. The main factor here is the reduction in operating expenses. For instance, our OpEx at the newly acquired office is being reduced from $18 to $20 per barrel to about $10 per barrel in that group. Similarly, in Argentina and Chile, we are targeting around $9.5 per barrel, significantly down from around $20 last year. Additionally, in Colombia, the costs for other assets have decreased by about 20% to 25%. Therefore, overall reductions are generating a better impact on the netbacks.

Stephane Foucaud, Analyst

As a follow-up, did you indicate that some of those OpEx reductions are structural, or should we expect them to revert back as prices recover?

James Park, CEO

Some reductions are simply postponing projects, but most of the changes are structural adjustments. These include renegotiating contracts and redesigning operations. Therefore, the majority of the changes will likely be permanent efficiencies we establish.

Operator, Operator

At this time, I would like to turn the conference back over to James Park for any closing comments.

James Park, CEO

Thank you everybody for your interest in GeoPark and your continued support of our company. Once the world's borders begin to open again, we encourage you to please visit us at our operations in each country and call us at any time for more information or comments. Thank you, and please stay healthy and strong.

Operator, Operator

Ladies and gentlemen, thank you for participating. You may all disconnect.