Earnings Call Transcript - GPRK Q3 2020

Operator, Operator

Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the third quarter ended September 30, 2020 and the 2021 work program and investment guideline. 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. 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 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 Park, Chief Executive Officer; Andres Ocampo, Chief Financial Officer; Martin Torrado, 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 reunited in Bogota, Colombia to report on our third quarter 2020 results, introduce our work and investment program for 2021 and highlight our steps to return more value to shareholders. When we founded GeoPark in 2002, we set out to build a company for the long term that would be the premier Latin American oil and gas independent and capture the big energy opportunity prize in this region. I want to express our gratitude to the women and men of GeoPark, past and present, who have made this company what it is today and created an unparalleled track record, a track record that, incredibly, despite this monster storm we are fighting, is on target for our 18th straight year of growth. We had a great start to this year in the first quarter with the acquisition of Amerisur, which significantly advanced our Llanos Basin expansion effort, which has now positioned us with 1.4 million prime acres surrounding Llanos 34. This has made us one of the leading landholders in one of the world's most attractive onshore hydrocarbon basins and secured us with a powerful, low risk, short, medium and long-term growth fairway. During the wild and turbulent second quarter, our team moved decisively and significantly on all fronts: first, to keep our teams safe and healthy and then pulling in our horns hard and dropping our capital investment program by 80% and attacking each and every cost line to achieve nearly $300 million of future cost savings. This quickness and agility allowed us to then reengage and get back to work smoothly during a more stable third quarter, meaning putting rigs back to work and opening up temporarily shut-in production. Our unique low breakeven production base, coupled with our relentless cost-cutting efforts, which again resulted in big declines of over 30% in operating costs and 30% in G&A and G&G costs during the third quarter generated a doubling of our second quarter EBITDA to $56 million. Our forceful cash preservation efforts maintained a healthy cash balance of $164 million, which is even more cash than what we started the year with. Operationally, we resumed drilling on the Llanos 34 block and significantly began drilling on the CPO-5 block to appraise the Indico oilfield. We have high expectations of the CPO-5 block with its combination of development opportunities and very large multi-play exploration prospects and see it as a key component of our continuing Llanos Basin growth story. Taking advantage of the downturn, we worked to transform GeoPark into an even better and stronger company. This included a major restructuring of our project portfolio from a country or regional perspective to an asset-focused approach, which allowed us to capture large savings through synergies and improved efficiency. As always, the underlying foundation for GeoPark's performance is our in-house integrated value ESG+ program we call SPEED. This program was a founding element of our company and one of our prime accomplishments, always pushing us to be the employer of choice, partner of choice and neighbor of choice. This has been especially evident during the pandemic with our success in keeping our teams safe and healthy and assisting our neighboring communities with medical and economic aid. So today, from a position of strength, we are finishing another successful year and have been able to build an attractive work program for 2021 to grow our company and return cash to our shareholders. Turbulence has been an opportunity zone for us throughout our history, and we are heading into 2021 with confidence and optimism. Our projected work program using a base case assumption of $40 to $45 Brent provides for $100 million to $120 million to drill 31 to 34 wells, approximately 65% development and 35% exploration with an average annual production of 40,000 to 42,000 barrels per day and generating an operating netback of $210 million to $280 million. And there's, in every program, every year, we have built in our flexibility with a fully funded high case at Brent over $50 and a fully funded low case at Brent below $35, focusing on the lowest-risk projects that can yield attractive returns. Overall, 90% of our production is cash flow positive between $20 to $30 Brent. One year ago, in our November 2019 conference call, we said, 'we believe that a company that can consistently execute, invest, find oil, grow and return value back to its shareholders, all funded by its own cash flow is the run model for our industry today. In a volatile world, being able to deliver on all these fronts is the true measure of a company's durability and value.' We did not know at that time that we were about to face the biggest collapse in our industry's history. But GeoPark's ability to prevail, continue growing, provide cash back to its shareholders and maintain a strong and secure financial position during this time is a powerful test of our resilience and enduring value. Thank you, and we would be pleased to answer any questions you may have.

Operator, Operator

Our first question comes from Alejandro Demichelis of Nau Securities.

Alejandro Demichelis, Analyst

Yes. Good afternoon, gentlemen. Congratulations on the quarter on the cash returns. A couple of questions, please. The first one is on your production guidance for next year, which is effectively flat from where you are today despite you spending $100 million, $120 million in capex. So could you please give us some indications of what are the moving parts to keep that kind of production flat? And then the second question, I think in your press release, you indicate that there could be some more cost efficiencies to come. So trying to understand where are those cost efficiencies coming from and how large this could be?

Andres Ocampo, CFO

Hi. Good morning, Alejandro, thank you for your questions. On the first question with respect to the production outlook for 2021, I would take into consideration, first, the fact that we're projecting our budget around $40 Brent, which is still a little bit lower than the average of 2020. Additionally, we are able to keep two full-time rigs in our core asset in Llanos 34. And as we also mentioned in the release, we were finally able to resume activities in CPO-5. So having two full-time rigs in Llanos 34 will probably keep the production there more or less flat with moderate growth. If you remember, at the end of '19, we had a program for 2020, and we were targeting to grow between 5% to 10%, but having at least three full-time drilling rigs in the area. So, I would say with this level of activity, it is reasonable that we are keeping the production between flat and moderate growth. Additionally, I would highlight the cash flow that is going to be generated by Llanos is going to be very significant. So, if you think in Llanos 34, we're allocating something like $50 million to $60 million worth of development CapEx. And at a $40 Brent, the asset would be generating something between $200 million to $230 million of operating netback. Additionally, on the consolidated budget or the consolidated CapEx budget of $110 million to $120 million, there is a bigger weight on exploration than it was in the couple of years. So around 35% of this CapEx is exploration and there are no production associated in our guidance coming from those, so basically, 35% of the CapEx. So effectively, the CapEx associated with the development is roughly 65% of the total. There is a third of the CapEx that has no production associated. Half of that exploration is for four wells and the other half is for 3D seismic licensing, to prepare for a more aggressive exploration campaign combined for 2022. I don't know if I missed anything, maybe that one last point is on the rest of the assets of the portfolio, you will see that there is very little capital expenditures being allocated to them. And we are being able to keep the production 30 plus with very little investment. And then on CPO-5, we are targeting a pretty significant growth in 2021 our expectation with the level of activity is that we should be able to almost double the production and CPO-5 during 2021. We're targeting around a 90% production growth from the 7,000 to 8,000 barrels a day experienced in 2020 to something along 15,000 barrels a day next year. And then with respect to your question about cost efficiencies, we went through a big restructuring during 2020. We reshaped the organization completely and the way we are going to ourselves. We're shutting some offices, and we reduced some of the other offices. And we also made some changes in our operations to continue reducing our costs, as well as in our transportation cost which also has been brought down. So all of those are for us an ongoing continuous effort. So our expectation is to keep making efficiencies.

Operator, Operator

Your next question comes from the line of Stephane Foucaud of Auctus.

Stephane Foucaud, Analyst

Yes. Good morning, guys. Thanks for taking the questions. I've got three. The first one is around the special dividend. So I understand the logic of the quarterly dividend to return to shareholders and the buyback. But what was the logic behind the one-off extra cash dividend given specifically this quarter on top of the quarterly? That's my first question. My second question is around the tax in Colombia, the cash tax. Given the repayment and the discussion that you had in Colombia, where would you see now the cash tax or tax repayment for 2020? Where would you see 2021? And my last question is around CPO-5. It's back bidding on the previous question. Could you come back to the production you would expect from CPO-5 in the guidance in 2021? I think it's 15,000 probably a working interest. But if it's the case, compared to where we are today, what are the moving parts of 50,000 barrels per day at the moment? If CPO-5 goes up, then what goes down? Thank you.

Andres Ocampo, CFO

Thank you, Stephane, for your questions. Regarding the dividend, let me provide some context starting from 2019. We initiated our dividend payments in late 2019 at $2.5 million per quarter, totaling approximately $10 million annually if we continued with that payment every quarter. At that time, this represented roughly a 1% yield for the company. Following the impact of COVID, with a decrease in oil prices and market conditions, we paid a $2.5 million dividend in the first quarter. If we add another $2.5 million dividend this quarter, that would amount to $5 million for the year, maintaining a similar yield of about 1% or slightly more. The reason for splitting it is that the ordinary dividend is recurrent rather than one-time, and we plan to continue this in upcoming quarters. Thus, we could expect around $5 million in dividends for the year if we choose to maintain this level. Regarding cash taxes, in 2020 we experienced various tax reductions, deferrals, and reimbursements, leading to a net cash impact from tax payments of around $10 million. Part of this was deferred to 2021, amounting to approximately $20 million to $25 million which will be included in the 2021 tax calculations. We estimate our cash tax payments for 2021 to also be in the range of $20 million to $25 million. Overall, we expect total cash tax payments in 2021 to be around $40 million to $50 million. Lastly, concerning your question about CPO-5 and production guidance, we will address that next.

Stephane Foucaud, Analyst

Yes.

Andres Ocampo, CFO

The numbers I provided indicate production increasing from 7,000 to 8,000 this year to around 15,000 next year. However, gross production is viewed from the working interest perspective. This breaks down into our production base with CPO-5 showing modest growth, remaining fairly flat with a slight increase of zero to 5%. The declines are primarily due to other assets, mainly stemming from lesser production declines in Argentina, Chile, and Brazil.

Operator, Operator

Your next question comes from the line of Ricardo Rezende of JPMorgan.

Ricardo Rezende, Analyst

Can you hear me?

James Park, CEO

Yes, we can hear you, Ricardo.

Ricardo Rezende, Analyst

Thank you for taking my questions. I have a couple of inquiries. The first relates to your 2021 work program, specifically regarding CPO-5. I would like to follow up on what you mentioned earlier. I am interested in how discussions are progressing with your partner, especially since this is the first year you are part of the controlling group for CPO-5. How much of the synergy you experienced with 34 and the best practices implemented there can be introduced in CPO-5 in 2021? For my second question, I noticed this morning that PetroRio, which is a partner, announced they are selling their 10% stake in that block in Brazil. I am curious about your plans, especially since the other partners in that block stated earlier this year their intention to sell their stakes at some point.

Andres Ocampo, CFO

Thank you, Ricardo. Good morning. With respect to your question about CPO-5, I think so far, so good. We have a long relationship with ONGC and have been working with them in the area. We have been working before CPO-5 in jointly looking at opportunities in Latin America and particularly in the Llanos Basin. So they are open and welcoming our joining CPO-5 and have a very good partnership with them. We are very happy that we finally got a rig on site in Indico. We're just finishing drilling the Indico two well. We are expecting to perforate and test this well in the coming days. So that's great news. We are also looking at a good drilling campaign following Indico two that has been agreed between the two partners. So I would say the relationship has been excellent. They welcome all of our input with respect to ideas and considerations on experience we've had in Llanos 34. The fact that we are back drilling and hopefully keeping the rig in the area to continue drilling after Indico two, the rig is going to move to an exploration prospect called Agila and then after that is going to continue drilling, probably coming back to Indico for more development wells. So long answer, but really, our experience so far has been quite positive, and we're very optimistic about this very attractive acreage position. With respect to your question about PetroRio and Manati, we read that announcement, and we know of this initiative that is going around Manati. It is one of the assets that is a very attractive gas field in Brazil. It does have limited upside, so it would be part of one of the assets in our portfolio that for us would be a divestiture could be considered. We've analyzed the idea many times, and if anything comes to reality, we will make the appropriate announcements and will update the market on any advances on that front. So there's not much that I can say about that, but it is an idea that we're happy to consider.

Operator, Operator

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

Robin Haworth, Analyst

Hi, Andres. So just on buybacks, is your buyback capped by free cash flow in 2021? Or would you consider using cash on the balance sheet in excess of free cash flow? Just looking at my estimates of free cash flow, I don't think there's tons given your spending guidance today. So I was just wondering if you would essentially spend balance sheet cash on buying back stock here. And then how do you think about buying back stock versus doing more drilling either Llanos 34 or CPO-5? And then just another follow up on CPO-5 production rates, about 15,000 barrels a day you mentioned, is that an exit rate for 2021? Or I think you'd be quite a good effort to make that 2021 average. If you could clear that up, that would be good.

Martin Torrado, Director of Operations

Good morning. This is Martin Torrado. I'll start with the second question related to CPO-5 production. That is the exit rate. So in addition to Mariposa one and Indico one that we have in production today, we are adding the production from Indico two and two additional development wells in 2021. So we expect to be in the order of 12,000 to 15,000 barrels close at the end of the year.

James Park, CEO

And there's three exploration prospects in the campaign that have no production associated that are not included in that guidance.

Andres Ocampo, CFO

In response to your question about our cash use for buybacks, we plan to utilize some of our cash. Our guidance indicates that we are operating in a cash-neutral position after accounting for asset-related expenses, taxes, and other financial obligations. We are committed to managing dividends, buybacks, and non-asset-related expenditures. Given the current prices, we see buybacks as a valuable investment. However, we must also consider our balance sheet management, as maintaining cash is essential for a strong financial position. Despite this, we believe we have a robust financial standing for 2021, along with healthy cash inflows, so we will certainly use a portion of our cash to repurchase shares.

Robin Haworth, Analyst

Great. Thank you. So just, I guess, to follow up on that. Are you sort of committing to use the full 10% ability to buy back stock? Or is it more opportunistic than that?

Andres Ocampo, CFO

No, we're not committing to use up the full 10%. We would be more opportunistic and it will depend really on market conditions generally. But that's the maximum allowance that we have approved, but we will not commit to use the full amount.

Robin Haworth, Analyst

Right. Thank you very much.

Operator, Operator

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

Johanna Castro, Analyst

Hi, thank you for taking my questions. I have a strategic inquiry regarding your outlook for the beginning of next quarter, as you often provide detailed guidance on your capital expenditures. I appreciate that insight, but I'm curious about your perspective on the market and your negotiations with Trafigura in the first quarter of 2021. Can you share how you view the market landscape in Colombia, which is most pertinent to you? Additionally, I have a more accounting-related question for the end of this year. If the results in the fourth quarter are similar to those in the third quarter, you may encounter negative equity. Are you planning to avoid that outcome for the sake of presenting results, or does it not significantly impact the group?

Andres Ocampo, CFO

Hi, good morning, Johanna, could you please repeat the first question? I'm not sure I understood your question, please.

Johanna Castro, Analyst

I understand that you have previously used projected commercial figures with Trafigura to forecast sales, and I have noted that we would consider this approach if liquidity were needed. However, I'm unsure if this is the situation for the first quarter of 2021. If you're employing this strategy to predict some sales from production, I am curious if that applies for the first quarter of 2021.

Andres Ocampo, CFO

Okay. So basically, what happened this year is we negotiated an agreement with Trafigura to implement another prepaid facility. In exchange for that, we have an uptake contract with them. They will be taking part of our production during next year and the following year. That agreement is still in place, and we have the commitment from Trafigura to diverse if we require $50 million of available liquidity committed to us that has to be expanded to $75 million. I confirm that none of these amounts have been withdrawn, so the line is unused. We expect to keep that in place also for the next year. As a result of that, you will see part of our volumes being sold to Potiguar in 2021. I don't know if that addresses the question. Yes. To your point, we'll see results in the fourth quarter. If it happens, as you said, there is a chance that our net equity becomes negative during the fourth quarter. We don't really see that as a concern. That's purely an accounting rule matter. The main explanation for that is that you can see that a very important and big asset like Llanos 34 is booked in our balance sheet at a book value of $200 million. That follows simply accounting rules that we need to follow, which is booking our assets taking into consideration on the past investments minus depreciation following production. The book value of the equity as a result of those accounting rules does not reflect fairly what we believe is the real underlying value of the assets. Llanos 34 is going to generate that much in the next 12 months. For that reason, we don't see this as a concern. We have a very solid cash position. We have just announced a preterm and robust work program and budget that is going to generate a lot of cash flow for our company. Thus, we don't think it is an issue. There have been many companies facing similar scenarios without any real issues. This is not an unusual event.

Operator, Operator

Our next question is a follow-up from Alejandro Demichelis of Nau Securities.

Alejandro Demichelis, Analyst

Yes. Guys, just to follow up on something that Martin said on CPO-5. Can you confirm that you are taking Indico two into production? And because your press release indicates comments on any kind of early indications for Indico two. So maybe you can tell us how you're seeing the progress there maybe already in the reservoir.

Andres Ocampo, CFO

Yes. So we're very excited. Indico two has finally a rig operating there. We are aligned with our partner. The Indico two well was started in September targeting the Une formation, the same formation that's been producing in both Mariposa and Indico one. As we speak, the operator of GC is completing the well. We're excited, and shortly, we will communicate those results. Following that Indico two completion, the rig is moving to the Agila, and that is also targeting the Une formation. We expect to have results to share with you shortly.

Alejandro Demichelis, Analyst

But surely, if you're completing a well, it's because you have a discovery, yes?

Andres Ocampo, CFO

So we are casing the well, and the results look good. We will, again, share once we have the well with more information.

Martin Torrado, Director of Operations

Yes, Alejandro. And just remember, Indico two is not an exploration well, just for clarity. It's an appraisal well inside the Indico field. So it wouldn't qualify as a discovery. It's a development/operation well, and hopefully, we will be starting to test the well in the coming weeks. So looking forward to that.

Operator, Operator

That was our final question for today. I would now like to return the call to Mr. James Park for any additional or closing comments.

James Park, CEO

Thank you, everybody, for your interest in GeoPark and your continued support of our company. As the world’s quarters begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their actions and has been here more than ever with webinars, video conferences and direct calls, and is available around the clock as is our management team to answer any questions or listen to your comments. Thank you, and please stay healthy.

Operator, Operator

Thank you. That does conclude the GeoPark third quarter 2020 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.