GeoPark Limited (GPRK) Q2 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the second quarter ended June 30, 2023. After the speaker’s remarks there will be a question and answer session. [Operator Instructions] If you do not have a copy of the press release 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 webcast 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 Reforms Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time-to-time 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 Andrés 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. And now I will turn the call over to Mr. Andrés Ocampo. Mr. Ocampo, you may begin. Andrés Ocampo: Good morning, everyone and welcome to our second quarter results call. We are joining with our team here in Bogota, Colombia. We are advancing on our drilling program, which is already delivering results. We drilled 10 wells in the second quarter and have a busy schedule ahead of us with 10 rigs now in operation and two more coming this quarter. Our horizontal well drilling campaign in the Mirador formation in the general 34 block is moving ahead full speed with two wells already completed and on production and the third one already started and about 30-days from reaching TD. Beside some of the highest capital return projects in our company, the first horizontal well has already been paid off in approximately 3.5-months and continues producing over 2,000 barrels of oil per day. Our team is quickly taking advantage of the multiple wells campaign and applying new cost efficiencies to the next ones. The second well was drilled faster with 10% lower drilling costs and 32% longer lateral length. We expect to continue pushing these costs down to improve our payback and capital returns even more. Our exploration team has also delivered a new discovery in the Genos basin acreage that have been acquired during the 2019 bid round. Saltador 1 our first well of the Llanos 124 block is producing approximately 880 barrels per day with 5% water. In Ecuador, the Gen2 development well in the Perico block, has encountered a new phase zone in the U-sand formation in addition to confirming its development potential in the OG information. Therefore, we expect to test this new zone before the end of this month. In the CPO-5 block where our production has been down on the back of two very productive wells being shut in, the operator had advanced and completed most of the works requested by the ANH and anticipate that it will have the two wells back online before the end of the month. They also expect to spot the Halcon 1 exploration well in September which contains the potential continuity of the Jacana play into the CPO-5 block. Following Halcon 1, the operator expects to drill another development well on the Indico field before the end of 2023. GeoPark continued to invest in our decarbonization efforts by installing a new photovoltaic solar power system in the OPA pipeline from our Platania block, which will help reduce our emissions and introduce efficiency gains by lowering energy and maintenance costs. We reinforced and extended our sustainability reporting with new submissions to the Carbon Disclosure Project, CDP, in both water and climate. These initiatives assess our ESG management performance and disclosures. Despite production being behind its full potential, GeoPark continue to record strong financial results in the quarter with revenues of $182 million and adjusted EBITDA of 104 million, representing an adjusted EBITDA margin of 57%, and profits of nearly 34 million or $0.59 per share. We invested $43 million during the quarter and generated $2.4 in adjusted EBITDA for each dollar invested proof of GeoPark’s capital discipline and the quality of our assets. Additionally, the return on capital employed over the last 12-months reached 51%. Our financial expenses dropped by almost one-third to $11 million in the quarter following our debt reduction of $275 million during the last two-years. After paying $88 million in cash taxes in the second quarter and returning almost $19 million to our shareholders through dividends and buybacks, we ended the period with more than $86 million in cash. Also, we completed a new $80 million unsecured committed credit facility for the next two-years. Over the rest of this year, we will continue at full speed on our drilling program, adding more rigs and accelerating our activity. With 20 to 25 gross wells, we are targeting short-cycle exploration and development projects, including new horizontal wells in our core Llanos 34 block, exploration drilling in the CPO-5 block, the continued development of the prolific Indico field and more exploration drilling in our operated Llanos acreage as well as our orientating acreage. In our two Eastern Llanos blocks adjacent to CPO-5, we have started preliminary activities to acquire over 650 square kilometers of 3D seismic, one of the largest 3D seismic onshore campaigns in the history of Colombia and will significantly expand our exploration portfolio and inventory. We look forward to reporting to you the results of these activities. And we will now take any questions you may have. Thank you.

[Operator Instructions] We have a question from Alejandro Demichelis of Jefferies.

A couple of questions, please. The first one is maybe you can walk us through the building blocks of the second half of the year to get to your production guidance, the? And then the second question is, how do you see the potential size of your new discovery on from Llanos 123, please.

Good morning, Alejandro. This is Martin Terrado. Thanks for your question. In regards to the building blocks to making the guideline on production, it would largely depend on Indico wells getting back on production. We have been working closely with the operator on these two wells from the last call that we had all the civil works have been completed. That included building concrete decks and work is going on related to the flow lines that need to be welded flow lines. So the operator has communicated to us that they will have that ready to go by the end of this month, and the national hydrocarbon agency has told them that with that they will allow those two wheels to be back on production. Those two wells have a gross production of 8,000 barrels of potential. So that is about 2,400 barrels net to GeoPark that we are expecting. As we are building, like you said, the blocks on the next quarters for the core number three, we are expecting partial contribution from those two wells because it will not be fully on stream for the full quarter, but they will be fully on stream for the last quarter. So that is a big contribution that we are expecting. The second one is related to our performance in the Llanos 34 block. For that block, we expect increased production compared to the first half of the year, and that is mainly due to two things. The first one is our continuous production on horizontal drilling. And the second one is we expect the second half of the year to have better downtime. We had about 7% downtime in the first half of the year, and we are expecting around 5%. So those are the two main blocks that we expect to be contributing so that we can make our third quarter average of around 38,500 barrels and the last quarter of 40,800 barrels. And we expect the exit rate to be between 40,000 and 41,000 barrels of production equivalent. This assumes that we don’t have big disruptions in our Llanos 34. And as always, it does not include additional production from exploration wells. Andrés Ocampo: So with that Alendro, Andrés here, just to add to what Martin said. Obviously, with these numbers, roughly on the third quarter, close to 38,000, 39,000 and 40 to 41 in the fourth quarter. That would put us closer to the lower end of the range rather than the midpoint or the higher range. But we still believe that if the operator delivers on the putting back those two wells online before the end of this month that is where we should be.

Hello, Alejandro, you answered about the Llanos 123, the Saltador discovery. So just to give you more contact about the altar, the Saltador, the Saltador exploration well is located in West to Llanos 34, that lock was acquired in 2019 ANH WidinRound. So talking about more casino things, the take concept was to test the structural fault the closure hanging world. We did find hydrocarbons in Barco Gadarupe formation with 29 feet of oil net pay. Today, they will extend testing around 900 barrels of oil per day, 5% water cut. So the testing will provide more information on volumes, reserves and future developments. But in addition to that, the discovery of Saltador may extend another prospect to the South that is called Visbita that could more and more reserves. It is not decided yet, but clearly, the risk this prospect that we could be completed at the end of this year or early 2024.

Our next question comes from Oriana Cobalt of Balance.

This is [Serena] (Ph) with Balance. I had a brief follow-up with regards to the triggers for production in the second half and then I had a couple more if you could go one by one. So just I wanted to confirm where are you seeing production? I think you mentioned 8,000 barrels per day of gross production potential for each Indico 50k once they come back online. So just curious how long should - or how fast are you expecting for production out of these blocks to come back to levels seen before the shutdown during the most part of this year.

Thanks for your question. This is Martin Terrado. And current production for the CPO-5 block is in the order of 17,500 barrels of oil per day. If we compare to where we were a year-ago, a year-ago without Indico six and seven, we were probably around that decline that you see is mainly in Mariposa as the water has encroached in that well. The Indico field is producing flat production. So on top of the 17,500 grows, we will be getting, again, the 8,000 barrels from both Indico six and Indico seven production. These are flowing wells that have been tested. And as soon as we get the green light from the national hydrocarbon agency, they will be contributing to the overall block production. Andrés Ocampo: Andres here, [Ariana] (Ph). The expectation from the operator is to have those two back before the end of this month. So the full production of the block should be on a gross basis back to over 25,000 hopefully, in September or before the end of this month. .

Perfect. Martin and Andes, just keeping up with the CapEx and the exploration side of the business. Just wondering, in terms of the seismic acquisition that you are guiding for second half and it seems to be a very encouraging project from your end. So what are you targeting? What is the key areas? And what would be the main - how much of your CapEx budgeted for exploration with this sync acquisition take up?

Thank you, Ariana. So I will go a little bit about the more ops part, and then I will let Augusto go over, okay, what we are seeing on prospects. But this is premium acreage. It is east of the CPO-5. And like Andres mentioned, it is 650 square kilometers that we are going to be acquiring we were looking at, okay, historically in Colombia, what that means it will be the third biggest acquisition. So where we are today, all the permits have been granted all the socialization has been done. And right now, we are starting all the things that is related to building the comp so that we can start topography. After that is drilling the wells to the explosives and acquisition will start in December of this year. It will take about two months to finish the acquisition, then comes processing, and after that, of course, building the pads and drilling the wells for those locations that prospects that we expect to have. So that is a little bit on where we are on - from an operations perspective, from a capital perspective, the seismic, it is already in our budget and One of the things that we were able to do is we got this seismic cheaper than expected. So we are acquiring seismic for even more than what is our commitment. So that is a little bit on the operations perspective that we have. And from blocks and the commitments on these two blocks, we only have one well commitment in each of the wells. So we are sure that we are going to find prospects to drill there. I don’t know. So if you got...

Yes. Beyond the commitment that Martin mentioned we really believe that those blocks but we have the premium average, like Martin mentioned before. These blocks are located to the CPO-5 near to important fields, for example, Caracara and also we have quaratining side also the block. So the team also defined several leads that after the seismic, I’m sure that we are going to have new prospects and exploration opportunities. Andrés Ocampo: So the objective of this real effectively is to expand our exploration inventory and portfolio. So the idea of acquiring 3D seismic in such a large portion of this part of the basin is to find and identify our technical team to identify more prospectivity. And you asked about how much of the CapEx was allocated to the seismic, as Martin said, is already within our CapEx guidance and it is roughly at our working interest, roughly $20 million. .

Perfect. That was very clear. And just one final one. Going through your filings, you think that the EBITDA guidance using that same $80 to $90 per barrel was revised slightly downwards at the midpoint. So I just wanted to know if you could share perhaps more insights on what are the key drivers for this guidance revision is it in terms of wider discounts even though we have seen some timing recently? And/or are you - where are you seeing OpEx cost - like total OpEx per barrel through the remainder of the year, and that would be very helpful.

Thank you, Ariana. Veronika here. As you mentioned, we have revised - adjusted our expected 2023 EBITDA range by about $40 million. Half of that is already realized impact during the first half from lower Brent prices and also wider Vasconia differentials that you mentioned. Going forward, in terms of the differentials, we really don’t expect further widening. We continue to use $4 to $5 for the remainder of the year. It is now pricing $3.50, but we would expect that to revert to 4% to 5% range, as I mentioned. The other half of the adjustment is related to higher OpEx. We have already been impacted by this in the first half and that is taken us to expect higher OpEx for the full-year ranging between $10 and $11 per barrel on a consolidated basis. The drivers for this increase in OpEx are twofold. On the one side, we have an appreciation of the currency in Colombia, which affects about 70% of our OpEx that is local currency-denominated and also higher energy prices that really come from weather-related effects from the El Nino weather pattern in Colombia, with a power grid that is mostly hydroelectric. As you see, these are mainly external factors. Our team will continue to focus on finding cost efficiencies and initiatives going forward.

We have received some text questions. Our first one is from Stephane Foucaud of Auctus. One question for me on in Ecuador. 40 net pay in a new formation looks good. How material is it? What are the implications for production and development of the asset?

Stephane. Yes, we are very happy with the results of this well. The plan was to develop [indiscernible] information and investigate the potential upside to the U-sand, the Hanjin formation resulted with good hydrocarbon saturation and thickness, similar to the Jandia Hanjin wells with our 25 feet net pay. And the U-sand found about 40 feet of netback as you mentioned. So according to our team and in line with our partner, we are going to complete the use and because it has better reservoir conditions. With this initiative, we will understand how the well behaves and which is the volume fund for future development. We have also analogies of near fields that I call an Torino, where recent the initial production could be between 900 to 1,300 barrels of oil per day. So again, we are really happy with the results, and we have been testing this well very soon. .

It is important to mention that these are the analogs, and this is information that our team uses to complete the wells and test them. The reality is that we have a good login indication right now, and we will know a lot better once the well is tested.

Our next question comes from Roman Rossi of Canaccord. I have a couple, if I may. First, I would like to understand if the horizontal drilling was part of your original 2023 campaign and what is the estimated cost for each well? Second, can you give us more color on the derivatives loss and what is the strategy going forward? And then finally, do you have any FX hedges?

Thank you, Roman. This is Martin again. I will cover the question around the horizontal well. So when we put together our budget, the horizontal drilling was a pilot with follow-up wells. So with a very good results compared to what we were expecting basically delivering the expectations of the pilot well, we adjusted our program, and we are now going under our third well. I will share with you a little bit of numbers on estimated cost and performance, but the first well was drilled at around $11 million. When we went to the second well, we drilled it with a longer length at around 10% cheaper, so at $10 million. And right now, we are drilling our third well. We expect to be drilling that well around $9.5 million and we are going for about three times the length of the first horizontal well. So in short, we have adjusted our program as we have expected pending pilot results of the first well, and we expect to have about five to six wells by the end of the year. All of these wells are targeting the Mirador formation which has an original oil in place of around 100 million barrels. And we are looking at other opportunities within the channels block in other formations but also outside of the channels 34 in places like Catania. The efficiencies that we continue to work on. Again, we are drilling our third well. But our first well, Andres mentioned a little bit, drilled the first well at 46-days, the second one at 40-days and even though we are drilling longer horizontal sections. Of course, we are learning and investigating what else we can do on the completion side. So very excited about the results and we will continue on our journey on horizontal wealth.

Roman, this is Veronica on your questions on derivatives we continue to apply our hedging strategy for crude prices looking to protect the crude downside. We have done this consistently over the past years. There have been no cash impact from the hedges year-to-date. As you know, the prices have remained between the floors and the ceilings, so no gains or losses from those contracts on the year-to-date. We did experience some of those losses in last year that maybe you were alluding to. And in terms of the FX hedges, we have executed a few FX hedges looking to protect the income tax payments that happened in the second quarter of the year. Those transactions recorded about $3 million of gain year-to-date. And we will look at other opportunities to enter these separate transactions as we see fit going forward. .

Our next question comes from Daniel Guardiola of BTG.

I joined the call a little bit late, so I don’t know if some of my questions were already answered during the presentation. But first of all, I will let to touch on reserves addition. Basically, considering that this area has been one that the company has been struggling not adding reserves or fully replacing reserves in the last couple of years. I wanted to know if you can share with us for you guys, what are the most promising exploratory projects you are currently working on - and what is your expectation in terms of reserves addition for 2023? So that is my first question. SP-2 If you want, we can go one by one. Andrés Ocampo: Okay. Daniel, Andres here. So we are - I would say, in the second half of the year, we have accelerated the exploration activity. We have already reported today the result of Saltador and the encouraging login information that we have on gene. And then we also provided at least of all the prospects that we are drilling in the second half of the year. I think there are some interesting prospects that we are going to be testing. We usually don’t give guidance on reserves - so it is really too early for us to be saying anything about our potential reserve replacement for this year. It will largely depend on the results on the two wells that we are testing right now. And on the six or seven wells that we are going to be drilling from now until the end of the year. So again, we don’t usually give guidance on reserves because that also largely depends on the GoleraMagnotons or the certificator view on the discoveries.

And my second one was regarding the easiness of operator in Colombia. I mean it is been already a year since Petro was turning here in Colombia. And I wanted to know your thoughts. I want to know if you have perceived any material change with respect to the process of environmental licensing and the procurement of getting a social license to operate. I mean I wanted to know is it getting more difficult to operate in Colombia or business as usual. Andrés Ocampo: Andres here, again, Daniel. I think I think it has changed a little bit in different locations. So as Martin mentioned, we experienced some downtime in the Casanare area, for example, in the channel spacing, which in the past, we hadn’t experienced any. And for example, in the Putumayo area, where historically has been a more conflictive place of the country. So far this year, we haven’t experienced any disruptions or any blockage or things like that. So I think I wouldn’t say has dramatically changed or it has become a lot more difficult for companies to operate in the country, at least in the areas where we operate, that is not a significant change. There have been some changes but not really a very significant change. Compared to other countries, we still believe Colombia is one of the best regions in Latin America for oil companies to prosper and to develop and execute their projects. And we are obviously investing more time and efforts on making sure that we maximize the relationship with our neighbors. But again, I wouldn’t say that this is a Colombia-specific I think these changes are just ongoing happening in many places at the same time. Recently, as an example, we have a project in the Putumayo area, the Pure project, the one that has the BenPal prospect is one of the best prospects that we have in our portfolio. And we completed a public audience where all the communities participated. That is fully public. It is even listed on YouTube and you can see the type of relationships and communications that we are developing with all these stakeholders. So I think that is going well. We are pending the final approval by the environmental authority. We are still within the expected time line. So I also couldn’t say that there has been delays or obstacles from any of these regulatory bodies really.

And just a last one from my end. A very high-level question, maybe for you, Andreas. In your view, what are the main challenges and opportunities that the company is facing right now? Andrés Ocampo: Well, I can tell you, the biggest challenge that we have today is bringing those two wells back online. That is obviously the top priority for the entire company and for myself. I know you are asking a more strategic question, but I don’t - I wake up every morning just thinking of those two wells. And be sure that the entire team is fully committed to bringing those back online very fast. Then beyond that, I think bringing the company back on the growth path, I think it is fair to say that we have been producing 40,000 barrels a day roughly over the last two years. and that is a comfortable place that we don’t feel comfortable of that. We really were bound to be a much bigger player and a much more relevant player. So really delivering results on our exploration campaign and making sure that we bring the company back to its growth trajectory, that is probably the biggest challenge and opportunity that we have today.

With that, I will hand back to CEO, Andres Ocampo for closing remarks. Andrés Ocampo: Thank you, everybody, for your interest and your support of our company. We are always here to answer any questions you may have, and we encourage you to visit us in our field and our operations. or call us any time for further information. So thank you, and have a good day. .

Thank you. This concludes today’s call. Thank you for joining. You may now disconnect your lines.