Earnings Call Transcript - GPRK Q2 2020

Operator, Operator

Good morning. And welcome to the GeoPark Limited conference call following the results announcement for the second quarter ended June 30, 2020. 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 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 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 complete list of the company's business. All financial figures included herein were prepared in accordance with IFRS and are stated in US dollars unless otherwise noted. Reserves figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer; Andres Ocampo, Chief Financial Officer; Martin Terrado, Director of Operations; 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 are joining you this morning with our executive team united as ever but still physically separated and calling in from our respective locations in Colombia, Argentina and Texas. Again, we wish to begin by expressing our passionate thanks and respect 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. And while this second quarter was the ugliest and meanest three-month period I have experienced in over 40 years in this business, we collected the whole rotten enchilada: a global pandemic, a production war, a lockdown of the world's economy, a historic demand collapse and even negative oil prices. Before opening up to questions, and in order to give some flavor to the dynamics and operational and financial efforts during the quarter, let's please review five key areas of our business. First, looking at our production and drilling response and actions with speed and agility, all of our drilling and workover were suspended at the beginning of the quarter, involving the shutdown of eight rigs. Then, always considering health and safety, reservoir, mechanical and cost factors, we shut in 6,500 to 7,500 barrels per day of production when prices were at their lowest. As prices subsequently strengthened, we reopened 70% to 80% of these wells, which raised us back up to our current production of over 40,000 barrels per day and a quarterly average of 37,000 barrels per day. We also resumed drilling with a revised program of six to eight wells in the Llanos 34 block where GeoPark is operating and one to two wells in the CPO-5 block where ONGC is operating, and we put our workover and well maintenance rigs back into operation. Second, looking at our cost and investment response and actions, we put the brakes on capital expenditures with an 80% cut and began driving down each and every cost, with production and operating costs down 55%, operating cost per barrel down 26% to $6 per barrel, and G&A and G&G costs down 19%. Across our platform, total cost and investment savings exceeded $290 million. Now, with strengthening prices, we were able to revise our full-year 2020 budget upward to $65 million to $75 million, supporting our program targeting production of 40,000 to 42,000 barrels per day and an operating netback of $230 million to $260 million at Brent of $35 to $40 per barrel. Third, looking at our cash preservation, safety net, and risk management response and actions, cash preservation was a key risk management principle. After beginning the quarter with cash of $166 million, we have the same level today. As an additional safety net, we secured a $75 million oil prepayment facility with $50 million committed and no amounts drawn, and we have an additional $140 million in uncommitted credit lines. We have a long-term financial debt maturity profile with no principal payments until September 2024. S&P and Fitch recently reaffirmed GeoPark's long-term corporate credit rating at B plus. Our hedging program was an effective tool in protecting our base oil price and provided a $14 million cash gain in the first half of 2020. Fourth, looking at our SPEED, ESG response, and actions, SPEED is GeoPark's successful integrated value system, which includes ESG components as well as health and safety and employee well-being. Concerning the pandemic, we quickly put protocols, preventative measures, and crisis response plans in place across our six-country platform and reduced field teams to a minimum with backup crews and contingencies in place to keep people working safely and production flowing. GeoPark was the first E&P company in Colombia to obtain Bureau Veritas certification on biosecurity protocols to mitigate and manage the impact of COVID-19 in our operations. In keeping with our continuous work with our neighbors and communities, we stepped up our efforts during the pandemic to provide safety, medical, and food supplies, particularly for the most vulnerable. Our efforts have impacted over 1,100 families or 6,000 people, supported local health officials and also coordinated with federal officials. Fifth, looking at our structural efforts to create a better and stronger business, taking advantage of the turbulence, we began working to streamline all of our business to improve the overall cost structure and benefit from available synergies and new innovative technology. This has involved a review of all departments and capabilities and a reorganization of our asset management approach. We also retired from the nonproducing Morona block in Peru due to an extended force majeure. Our teams are now working on the 2021 work program and the upcoming capital allocation process and are developing a rich inventory of new projects that provide attractive returns at a $35 to $40 oil price environment. We are pleased to welcome Sylvia Escovar and Somit Varma as new independent board members; two respected and proven executives who will help drive GeoPark to our exciting energy future. A lot has been accomplished. We remain prepared for however long the full duration of this storm might be. Our company was born in a crisis in 2002 and has shown, once again, we can keep focused and navigate through these upheavals. As much as these times hurt, GeoPark has always adapted to come out better and stronger on the other side as we are on the move to do so again. Thank you. 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 two continents today.

Operator, Operator

Thank you. Your first question comes from the line of Alejandro Demichelis of Nau Securities.

Alejandro Demichelis, Analyst

Yes, hello. Good morning, gentlemen. A couple of questions, if I may. You have had an impressive run in terms of reducing the cost base, and you have done very well on that. I am wondering as you restart production and bring back some of the more expensive fields, how much of that kind of cost savings are we going to see coming back into the numbers? And then the second question is, some of your peers seem to be having trouble in the Putumayo area; maybe you can comment on how you're seeing your own block and what the risk of facing some capital lock there?

Andres Ocampo, CFO

Great. Thank you, Alejandro, and good morning. On the cost side, as you said, we've significantly improved our cost base across all of the fields. I would say, probably with the reduction that you see from the first quarter to the second quarter, it is, as you said, depending part of it on the OpEx side mostly, depending a little bit on how much of the production is put on stream. So part of the savings that you see in the second quarter are going to be reversed when the production has been brought back. I would say probably half of that is there to stay; half of the savings is there to stay, and half of it may come back as if oil prices remain at the levels that we are experiencing today, which is much higher than what it was in the second quarter. Martin Terrado can also add some of the efforts that have been done on the renegotiations and also some of the things that have been included in those negotiations. Martin?

Martin Terrado, Director of Operations

Yeah. Thank you, Andres. Hello, Alejandro. In the past month, we negotiated around 300 contracts, and we achieved savings in both service contracts and material purchases. This is about a 10% savings on top of the savings that we have achieved back in 2015. So that's basically where we are today. We expect to have, for this year, with those discounts, about $10 million in contracts and material savings.

Andres Ocampo, CFO

Some of those contracts are long-term and have been in place for years. In 2015 and '16, we had already embedded in them a 30% discount compared to normalized contracts. Your second question was about operations in Putumayo. It's certainly surface-wise a different area compared to Llanos basin; we had expected that. Our production in Putumayo represents less than 10% of the overall company production. In any case, since we started our operations there, we have not faced any disruptions or issues with our neighbors. Currently, as a result of COVID, we are obviously increasing safety and health measures across all of our operations. Some of these communities do have incremental worries of cases or contamination coming their way. So we have seen increasing activity or increasing limitations with respect to having operators coming in and out. So that is a risk that exists continuously. We haven't faced any interruptions as a result of that yet, but we do see some of that concern rising in the area. In any case, as I mentioned, this does not represent a significant portion of our production, and our number one priority in these cases is the health of our neighbors and the health of our operations crew.

Alejandro Demichelis, Analyst

Okay, that's very clear. Thank you very much, Martin and Andres.

James Park, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Gavin Wylie of Scotiabank.

Gavin Wylie, Analyst

Yeah, guys. Just one, maybe two quick questions for me, if I can. It looks like you're taking advantage of some of the Colombian government's tax deferral programs that are available. There's no cash taxes paid during the quarter, which is typically when you guys do your big installment payment for Colombia. So just a quick question on that: if I do the math, it looks like there's remaining about $50 million to $55 million in cash tax charges for the balance of 2020, and I wonder if you can give me a sense of what quarters those will be layered into? Or if there's a deferral program in place that you could see that being pushed out to Q1 of 2021? The second question is just around M&A and how you're thinking about the longer-term kind of portfolio with the block in Peru retired now. Was that a big chunk of future growth? Are you kind of back on the warpath, so to speak, to find new acreage or some more significant projects, given that you do have quite a bit of liquidity headroom currently? Those are the two questions.

Andres Ocampo, CFO

Hey, Gavin. Good morning. Thank you for your questions. The first one with respect to cash taxes, our original estimation in our budget was a completely different number. But the last data point that we gave included in our corporate presentation was around $60 million in cash taxes for 2020, from which $17 million had already been paid in the first quarter this year. The remaining cash taxes, let's say more or less $40 million. As you pointed out, it was not paid in the second quarter. So those remaining $40 million are composed as follows. Between $20 million to $25 million are deferred to 2021 as part of the agreement with Oriente of refinancing those payments in installments beginning in August and ending in August next year. That gives you more or less a $20 million to $25 million payable next year, and there's roughly $15 million additional cash taxes to be paid in 2020. At the same time, we have collected around $15 million of former taxes that were paid in 2019, but Oriente has accelerated the procedures to collect quicker. So basically, we collected $15 million already in July that will offset the payment that is still due in 2020. The short answer is a net effect of zero in 2020 and then remaining $24 million in the first half most of it in the first half of 2021. There are additional cash tax benefits that may occur during 2020, around $4 million to $5 million of additional income tax reimbursement from prior years that are still processing, and there's also an additional $15 million of VAT taxes that we may collect from now until the end of the year. But those two are still contingent. But the ones that are firm are the $15 million that will offset the payment for this year and then the $24 million payable first half next year. Sorry, that was long. I hope that was clear. If that was clear, I'll move on to the next one about the portfolio.

Gavin Wylie, Analyst

Okay, very good, thank you.

Andres Ocampo, CFO

So as you pointed out, we decided to exit our project in Peru. That was part of our future significant growth. But something that occurred during 2019 has been what we call a pretty significant silent land grab, particularly in Colombia and more specifically in the Llanos basin. We expanded an original position we had. At the beginning of 2019, we had 80,000 acres in the central Llanos basin, which is Llanos 34, and then we ended the year or started 2020 with roughly 1.5 million acres of exploration and reserves and development opportunities in alignment with our Llanos 34 block. We agree that the exit from Peru does impact our long-term future growth. It was an additional upside optionality for us, but we believe that the land grab we achieved during 2019 has been very significant. Some of those blocks house some of the most attractive onshore exploration prospects that our team has mapped in the region over the last few years. We look forward to continuing our exploration activities in those areas and expect significant future growth from them. We will continue looking for additional opportunities throughout the remaining areas in our portfolio. I would say that probably Colombia, particularly the Llanos basin, is one of the most imminent and attractive exploration opportunities. I would also add that not only did we add a significant acreage position in the Llanos, but we also added the Putumayo basin, which is part of the MOP basin, the Maranon-Oriente-Putumayo basin, that has been targeted by our team for many years. We're pursuing it in the right way with production and development opportunities, but also significant exploration upside in partnership with a world-class partner like Oxy, and we also have significant partners in our acreage in Llanos, such as ONGC in CPO-5 but also Ecopetrol and Hocol in the other exploration projects. It's really very exciting acreage, and we look forward to our next field trip in Colombia where our geologists can start sharing some of the ideas they're seeing because it's incredibly exciting.

Operator, Operator

Your next question comes from the line of Johanna Castro of Itau.

Johanna Castro, Analyst

Hi, good morning, everybody. My question is regarding Platanillo and just to understand a little bit the rationale of the operation, how you guys are opening up the operations. I understood based on that decision of Amerisur, Platanillo had relatively low production cost. In January, Platanillo was producing 4,000 barrels and I don't know if maybe, because I don't know, what the production is broken into several wells distanced between them, it's not economically efficient to put them into production, but I understood that it was kind of a low breakeven kind of production. I guess not the same as CPO-5, but something that could have been kept. It would be great if you could explain a little bit the logic of how you are opening up those production facilities in the coming months.

Andres Ocampo, CFO

Thank you, Johanna, and good morning. Yes, Platanillo is a field that has the potential production of roughly 3,700 to 4,000 barrels a day. It has been mostly on production throughout the whole year. There were a few days of disruption because of the problem in the SOTE pipeline in Ecuador. But field-wise, it has been operating most of the time. As you said, it's a fairly low-cost field, not as low as CPO-5 or Llanos 34, but it has an OpEx of roughly $13 per barrel with commercial discounts that go from $4 or $5 per barrel. With the exception of certain periods where we opened or closed some of the wells, most times, the field is producing something between 3,000 to 3,700 barrels a day, which is its potential. That's how we have been managing the field thus far with no significant issues. I'm not sure if that addresses your point.

Johanna Castro, Analyst

Well, what I was thinking is how is it going to work ahead depending on prices and how flexible are you to open and close production in those facilities?

Andres Ocampo, CFO

At these prices, Platanillo is economic and is producing and generating cash flow. That is the current status of the field. It's not part of the shut-in production that we mentioned before. Platanillo has continued to produce throughout the cycle. We did shut in a few wells in Platanillo for a period at the bottom when Brent touched $20 or lower for a few weeks, but not more than that. It was brought back at full capacity pretty fast. The expectation is that it will continue to produce within the same levels it has the potential to produce.

Operator, Operator

Your next question comes from the line of Robin Haworth of Stifel.

Robin Haworth, Analyst

Thanks for taking my questions. Two, if I may. So I think Jim, in his prepared remarks, said that current production was around 40,000 barrels a day. I was just wondering where we should expect that to go over the rest of the quarter and the year. Should we be looking for that to increase towards the 45,000 barrel a day level you were able to achieve in Q1? Or would you really expect that to be flat, considering both compatible with your guidance for the full year? And then the second question is on CPO-5, and great to see some firm wells in the schedule there. I was just wondering if you could talk about the current status. Are you preparing to rig up there? If you could say a little bit about the targets and the risk profile, are these exploration wells? Or are these appraisal wells of some of the discoveries that have already been made in that block? That would be great.

Andres Ocampo, CFO

Thanks very much, Robin. With respect to your question about production outlook, the expectation for the remainder of the year is more or less around 40,000 to 42,000 barrels a day. That's the range we would expect. That is pretty much what you should expect, assuming that we are estimating one rig drilling in Llanos 34. With that level of activity, the expectation is to be within the levels we're saying in the release, which is something more or less between 40,000 to 42,000 barrels a day. In terms of the specific activity and the wells that we're targeting to drill, the rigs are already up and drilling. In fact, we have two drilling rigs right now; these are the rigs that were operating when we shut them down, and they just stayed there. One of those rigs is finishing drilling and will leave Llanos 34, and we will keep the other rig full-time until at least the end of this year, hopefully drilling back-to-back wells. On the side of that rig, we have two completion rigs or workover rigs: one to complete the wells that we drill and the other one to do workovers or lead back wells that may go offline from time to time. They are already drilling. Most of the wells we're targeting are development wells mainly in the Tigana, Jacana, and Tigui areas. I don't know if Martin, if I missed anything, please add whatever you think.

Martin Terrado, Director of Operations

I think you covered most of it, Andres, unless there's a follow-up question.

Robin Haworth, Analyst

I guess my question was also relating to CPO-5 as well and just on wells in the schedule there.

Martin Terrado, Director of Operations

Yes, I can take CPO-5, Robin. So the plan is to drill one appraisal well, which will be Indico. Indico, out of the two wells that are producing in that block, is the one that has more than 250 feet of net paying. It's producing around 5,000 barrels of oil per day with a zero water cut. The well did not find the water-oil contact. We're very excited that this well will help us understand and confirm that it's much bigger than just one well. That will be the first well to be drilled by ONGC, followed by Aguila, which is an exploration well, targeting the same formation and the same play from Mariposa and Aguila, and Indico.

Robin Haworth, Analyst

Perfect, yeah, that's great. Thanks, Martin. Thanks, Andres. Good to hear from you guys.

Andres Ocampo, CFO

Thank you, Robin.

Operator, Operator

That was our final question for today. I will now return the call to Mr. James Park for 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. Also, our Shareholder Value Team has accelerated their interactions and is busier than ever with webinars, video conferences and direct calls, and is available around the clock, as is all of our management team to answer any questions or to listen to your comments. Thank you, and please stay healthy and strong.

Operator, Operator

Thank you for participating in the GeoPark Second Quarter 2020 Results Release Conference Call and Webcast. You may now disconnect your lines and have a wonderful day.