GeoPark Limited (GPRK) Q2 2024 Earnings Report, Transcript and Summary

Good morning and welcome to the GeoPark Limited Conference Call following the Results Announcement for the Second Quarter Ending June 30, 2024. After speakers’ remarks, there will a question-and-answer session. [Operator Instructions] If you do not have a copy of the press release, it is available at the Invest With Us section on the company's corporate website at www.geopark.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 result press release and on this conference call are forward-looking statements rather than historical facts and are subject to risk 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 Security Litigation Reform Act of 1995. This risk includes a variety of factors, including competitive development and risk factors listed from time-to-time in the company's SEC results 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 statement, but are not intended to represent a complete list of company business. All financial figures included here and were prepared in accordance with IFRS and are stated in the U.S. dollars unless otherwise noted. Reserves figures correspond to PRMS Standards. On the call today from GeoPark is Andres Ocampo, Chief Executive Officer; Jaime Caballero, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; Rodrigo Dalle Fiore, New Development and Portfolio Director; Stacy Steimel, Shareholder Value Director; and Maria Carolina Escobar, Shareholder Value and Capital Markets Director. And now I'll turn the call over to Mr. Andres Ocampo. Mr. Ocampo, you may begin.

Good morning and thank you for joining our second quarter conference call. We're pleased to report on our continued progress and results. The second quarter, GeoPark demonstrated strong financial performance despite some operational challenges. Our revenue increased by 14% compared to the first quarter to $190 million on the back of higher oil prices. Adjusted EBITDA increased 15% to $128 million, resulting in an EBITDA margin of 67%. Net profit was $25.7 million, equivalent to $0.50 per share, mainly affected by non-cost charges related to the impact of the devaluation of the Colombian peso over deferred income taxes. During the second quarter, GeoPark invested around $49 million in capital expenditures and generated almost 3x that amount in adjusted EBITDA within the same quarter. Again, showing our team’s capital discipline and efficiency of our investments. The return on average capital employed in the last 12 months was 38%. GeoPark’s strong net free cash flow generation continues having finished the quarter with a cash position of $66 million after repurchasing $43.7 million worth of shares through a Dutch auction in May, paying $52 million in taxes and making a down payment of $49 million for the Vaca Muerta assets and having paid $7.5 million in dividends for the quarter. GeoPark continues to further enhance its financial flexibility and balance sheet through two strategic oil prepayment agreements, one effective in the second quarter and the other one nearing finalization, providing additional liquidity available at any time. We continue growing shareholder returns with the board approving a dividend of $7.5 million payable on September 12, which combined with the Dutch auction results, GeoPark will have return over $66 million to shareholders equivalent to $1.29 per share by the end of the third quarter, already exceeding the total amount return in all of 2023 As we look ahead to the second half of 2024, we're looking forward to continue our drilling work cover and water floating campaign in our core Llanos 34 Block, as well as the potential new operational opportunities coming from our recent exploration discoveries in the other Llanos basin blocks, namely the Toritos, [Saltador, Vivita and Sorsal fields], which are currently producing approximately 3,600 barrels a day gross and we expect to drill three to five new wells before the end of the year. In addition, we have already started initial activities and civil works in the Putumayo 8 block, getting ready to drill our first exploration well before year end. The [Machaca 1] prospect. New appraisals and exploration drilling activities in our core CPO-5 Block will continue and our team is already mapping new prospectivity coming from recent 3D seismic in the Llanos 86 and Llanos 104 Blocks, as well as in the CPO-5 Block for next year's exploration campaign. It is important to mention that GeoParks consolidated production is currently 5,000 to 5,500 barrels a day higher than reported. Following our recent acquisition in Vaca Muerta, effective since July 1, and we're on target to close by the end of the third quarter. The Mata Mora Norte Block produced an average of 12,500 barrels a day gross in the second quarter and the operator is continuing development drilling there. Production from this block would boost our 2024 production level to well within our stated guidance. Part number four in Mata Mora Norte, which was drilling at the time. We announced the transaction has been put on production and is already producing more than 5,000 barrels a day gross with a 45% water cut, which means that these wells continue to clean up with less water and higher production until they reach the initial peak in the incoming weeks. Results so far are quite encouraging. The drilling rig is on the Confluencia Norte Block, finishing the first exploration part that includes three wells. Drilling activities are almost complete and a completion set is scheduled for October. We look forward to testing production from this first exploration activities before the year end. The drilling rig will immediately move back to Mora Norte Block to continue drilling development wells and increase production. GeoPark is well positioned to continue its success in 2024 and beyond. Our strategic growth initiatives, disciplined financial management and focus on sustainability will continue to be key drivers of our performance. Thank you for your continued support and confidence in our company. We are now ready to take any questions you may have.

[Operator Instructions] The first question comes from the line of Daniel Guardiola of BTG.

Andres just a couple of questions from my end. The first one related to Argentina and I would like to know if you could share with us, how do you envision the progress of production coming from Argentina? I mean toward the second half of the year, but also in 2025? And the second question related to potential, additional inorganic opportunities. And if you can share with us if the company is actually targeting new potential acquisitions in the region -- and if you could share the rationale behind this potential M&A strategy?

This is Rodrigo from this side. Let's start with the question about Argentina, and the perspective that we have in term of production. We have a robust result in the second quarter of this year. We performed 12,500 barrels per day during the quarter. What we expect after the drill came back to Mata Mora Block, it started increasing again. That's why we expect a slowly increasing production during the ‘25. For ’25, another important milestone is the second drilling rig. So for the future to achieve the base plan where we try to tackle 20,000 -- sorry, 20,000 barrel per day net. We need the second one. We expect to get that drill by the end of next year. So that's the perfection that we have in term of activity. And the production is going to increase. We expect to finish the year between 13,000 and 14,000 barrel equivalent per day. And that's the guidance that we did last call. So we still in the same line.

I think Andres here, Daniel. I think the big picture comments on our new acquisition is that everything is going really ahead of our expectations. If you remember, some of the activities that we're doing that we're actually doing right now was putting on production the part four. And as I mentioned in my introduction, that part is already contributing approximately 5,000 barrels a day, and it's still cleaning up. I mean, it's still producing at 50% water. And if you remember, these wells should clean up to almost zero water in the incoming weeks. So we have high expectations from the productivity coming from that path. And the second big item here is the initial of the exploration activities in Confluencia and that is underway. We haven't completed the wells, but we have completed the drilling of the wells. And of course these are quite close to Mata Mora. So our expectation was to encounter more or less similar conditions that we found in Mata Mora and that is confirmed. So far what we found is well within what we expected. So we look forward to completing and testing production from these wells. This doesn't fully de-risk the entire Confluencia play, but with positive results will open up more opportunities for us to continue drilling there. So, very encouraged and very happy with how the operations are going in in Vaca Muerta right now. We have a great relationship with the operator and they are doing an incredible job. We have already GeoPark team members participating in the operation. We have three people named in the operation that are fully dedicated to work with them to get everything right. So far, really so great.

Daniel, good morning. I'm going to take your question around inorganic opportunities. And I think it's no surprise for everybody in the call that inorganic opportunities are a key component of our strategy going forward. We have as a company, a strong track record of delivering value through inorganic opportunities. We have done that in the past. We're doing it now through, through Mata Mora and we believe that we can continue to do that into the future. When you look at the perspectives in the region, we believe that we can actually access new barrels, new reserves and provide kind of long-term sustainability to the business through those acquisitions. I would say that our focus is around three things. When you try to drill down into what that strategy is trying to accomplish, I think that the first thing is that we are focusing on assets that provide immediate production capabilities. Whilst we still look at exploration opportunities and those sort of renewal type opportunities in the medium- to long-term, that is not our prime focus, and that's not where our primary capital allocation from an organic standpoint is going to be. At this time, we believe that our capital allocation needs to be biased towards those opportunities that bring immediate production to the business. We think that's one key component. A second component is of course, around scale, right? We are focusing the agenda on material opportunities that move the dial in terms of reserves progression for the business. We have spoken in the past of our growth ambition and we believe that the opportunities that are going to be made available to this company if we reach a next ceiling of scale, something around the lines of 70,000 barrels a day or so are different. It opens up new opportunities for the business. It opens up a different type of liquidity in the market and we believe that ease of strategic value and real economic value for our shareholders. So those are, I would say, are two elements of color in the strategy. And I think the third one is of course, the geographic footprint. And as we've said many times in the past, and I'm going to reiterate that Columbia Argentina and Brazil are the places that we are focusing our attention right now.

If I may just squeeze another one related to the last comment you did, Jaime, can you share with us what is the maximum level of leverage that the company will feel comfortable out at operating?

I don't know if you heard that. I had a bit of a mute moment here, but I was saying that sure. What we indicated in the past, and when we look at our financial frame going forward, we believe that a gross debt to EBITDA ratio of 1.5 is manageable. We're nowhere near that ratio. Nor do we think that we would be in a sustained way at that level. But we believe that we can look at opportunities that at times take us to that level. Of course, we're going to look at the type of assets and the nature of how those assets look into give us a financial flexibility and assurance. We've been a company that is known for its prudent financial discipline, and that's not going to change. But when we're looking at opportunities that's kind of the depth ceiling that we put to ourselves.

[Operator Instructions] The next question comes from the line of Stephane Foucaud of Auctus Advisors.

I've got a few, the first one around production, so what's the current production net in -- and Argentina? I think was the number quarter of that we'll get confirmation of that. Second at least in my model, the cash tax in the quarter was quite lower than what I was expecting in Colombia. And I was wondering, what do you expect to pay in cash tax in the second half of the year and 2025? And lastly what's the -- so there is a new prepay with trophy I think that comes with an improved discount, a lower discount for CPO-5. I was wondering if you could give us a sense of how long is that discount for and what did you have to pay for the trophy prepay? What I'm trying to get to is whether the lower discount for CPO-5 production is just for the duration of the prepay or whether that's something that can carry for longer?

This is Martin Terrado. I'm going to cover the question around how we're doing on the current production in channels. I will let Rodrigo talk about Argentina. So for channels, we look at it three ways. The first one is our two legacy blocks, which are CPO-5 and Llanos 34. And then the third component is exploration. So I'll touch a lever on each of those. In CPO-5 and Llanos, remember we got three of the top 10 fields for the country. We're right now between those two blocks, producing around 70,000 barrels gross and net to us is in the order of 28,000 barrels of oil per day. These fields are a little more mature than, as some goes by. If we think about CPO-5 when we acquired CPO-5 back in early 2020, we were producing 8,000 barrels. Now, as we already published, we reached a peak production last quarter of around 26,400 net in the block. We're still in that order of magnitude between 26,000 and 26,500. As you recall, all of those wells are naturally flowing, so the next step is to put artificial lift in some of those wells. We plan to do that on the second half of the year for three of those wells. We have one rig that is running. It has drilled three exploration wells. One of them has been a successful well in called Perico, producing 900 barrels. And then we had two exploration wells that did not result in putting them on production. Lark and Sisene. Lark was a low chance of success, but high potential prospect that was targeting the same as Indico in the Barco formation. And since Sisene was delineating and evaluating the stratigraphic play that we have in the north of the block, where we have two out of three wells already producing. So that's what has been going on from a drilling perspective. Yesterday we spotted Cante Flamenco 2, which is an appraisal well and we expect to have results from that well in about 45 days. In addition to that in CPO-5, as we mentioned before, we do have that 3D seismic that was acquired early this year, and our subsurface teams are looking at that data. That's about 470 square kilometers of 3D. So that's like Andres mentioned at the beginning, is what we are envisioning for additional prospects in the block. When we move to Llanos 34. Llanos 34 has been on production. And we, if we recall what we've been talking in the past we had three drilling rigs, pretty much most of last year. And the stage of that asset is going into a phase where we're going to be doing less drilling. Most of the drilling that we did late last year and that we're doing this year is about horizontal wells, some injector wells that were required as part of our water flooding strategy right now, the field has about 17% of the production coming from horizontal wells and those horizontal wells have been very successful on production. And also economically, we spend around $90 million of gross CapEx. The payout for those wealths has been around 14 months, and they already provided positive cash flow. So horizontal wealth has been a good story. Now we're running out of horizontal wells as the ones who were originally drilled, and that's why we’re releasing a rig. We have some additional ideas and we were successful drilling a short -- as well, which is basically using an existing vertical to do another horizontal well. And by that we can do it cheaper. So that's part of what we're doing next. We continue doing workover. Our workover campaign has been very successful, and again, as the field gets more mature, some of those formations that initially we left behind pipe, we're going back into those and opening those. So a very successful campaign and we're going to do about 14 more. We're doing deepening of some pumps and we continue reinforcing the water flood. So, that's what we're doing in the Llanos 34. As you can imagine when you bring down the number of rigs and we're not drilling that many wells the decline of the field, it's probably going to be something that it's not keeping the field flat. So with all the activity that we got planned for the second half of the year we probably, we expect that the decline of the field is going to be in the order of 10% to 15%. Now, the other component that is affecting both of these Blocks, CPO-5 and Llanos of 34 is blockages. When we put together our budget, we always assume downtime for several root causes. One of them is social unrest. And what we assume for the year 2024 was the same numbers that we had seen in the year 2023. And one of the reasons why we're saying that there's a chance of being on the low end of our guidance and maybe even below that, it's blockages in these two blocks. The blockages that we had assumed for CPO-5 had a 3% downtime. And in CPO-5, it has been around 4x that. And when we look at our lock Llanos 34, we had assumed 1.5, and it has been around twice that much. So that's something that we see in most of the blocks, not only ours but the neighbouring blocks. It is something that we're working, working with the local, regional and government entities, also with the National Hydrocarbon Agency and also with the petroleum operators that are associated in Colombia. So, that's something that we wanted to address. The other component that we have is the component of exploration. And the last year, we had discoveries in seven wells throughout our operations in Ecuador and Columbia. Specifically, for Colombia, we had three successful exploration well [Saltador, Lis, Vita] and Toritos. Those are in the blocks -- very close to Llanos 34 and CPO-5. In those blocks, if we look back one year, they were producing about a 100 barrels net to us. We started the year and they were producing 1500, and today they're producing like Andres mentioned 1800 barrels net to us. So that's a really good story. We have one rig that is drilling in the area, and we got one more rig coming. The latest wells that we have drilled, one of them is producing around 900 barrels oil per day, and the other one is producing around 500 barrels oil per day. So we're encouraged about the results that we have in the Llanos 123. We will keep drilling about three to five more wells in that block. The other component that we have is exploration in a block that we've been pushing for about two years, which is Putumayo 8 that is in the Putumayo basins adjacent to the [Platanecia] block. And as we speak, we're doing the civil works. So we expect to drill the first well called [Machaca], like Andres mentioned, spot that well in October, November, followed by another well. So as our CPO-5 Indico field gets more mature and Llanos 34 goes into the stages where we will continue pushing for new ideas beyond vertical well, but mainly around water flooding work overs. We expect to have a -- continue having good results from the exploration program that we have in Colombia.

This is Rodrigo. We are moving to Argentina. As you can see, the average production for the last quarter was 2,500 barrels and we are producing the same level today. We have some wells, shooting wells due to a workover operation in the past six. But the key news are coming from the new pads. We started with the PUT-22 on last February and the result are far away what we expect in the model that we did by the business at that time. So the result of those wells are above the P10 of our estimation, the characteristics of that well is that is located in the center of the block. There are three wells there, and I think this is part of the learning curve that we have with the operator in the area. They started to drill only the top side of Vaca Muerta. The level we call is C3.5. The result that we are achieving there is really good. Even better than we expect as I mentioned. So after six months, the performance is over the P10 of the expectation that we have even, so this is a shorter PUT. We have 2,200 meters as horizontal legs. The other good news that we have is recent because we put it on production to path number four. Path number four starts 25 days ago, four wells, the same levels as I mentioned C3.5 and C3. So we are talking about the top side of Vaca Muerta, but this part is located in the north of the block. The results are pretty good. We are in the beginning, we are cleaning the well, but at least at the moment, we are far away from the P10. So we have to wait and see the decline projection. But at the moment, we are very happy with the performance of the new wells. Why there is a good performance, as I mentioned, something that related with the subsurface, but there is new technology. What we are doing, we have oriented perforation in both paths. And so apparently this is something that contributes a lot in the performance of the well. The next path is going to be Confluencia. That's the first exploratory path that we drill in the next door block. We are very excited what we saw in the logs. We cannot production yet. We have to see the productivity we're going to find, but at least the projection that we see is similar than Mata Mora. So that we are very happy with the result that the moment. In that case, we have three wells, both those are long wells. So we are talking about almost 3,000 as a lateral length well and that sits from Mata Mora and Confluencia. At the moment, what we expect is to finish the year between 13,000 and 14,000 barrel a day and increasing the productivity -- the production as soon as we are putting new wells on production.

Stefan this is Jaime. I'm going to cover the other two points, the first one is around the lower cash taxes. I get so on that one, let me put some kind of tax in the room. The first half of the year, which is where the bulk of the tax season is, our outflows amounted circa $70 million. And that’s the Pareto, if you will of tax payments that we're going to have this year. We expect a further $20 million perhaps $25 million from here to year end, taking us to about $95 million for the full year. That -- if you do the math and it basically puts that tax effective rate from a cash standpoint at around 40%, it is a good outcome. And what we're seeing compared to our estimates that we had perhaps at the back end of last year, is that we are actually seeing lower withholding taxes. Particularly, there's been some changes in effecting Colombia around that the withholding tax rate specifically actually went from 10% to 7% on one end. And the other thing that we're seeing is more deductible items, more deductible items that can actually offset our tax position. With regards to outlook on taxes beyond 2024, it's all going to -- I think it's going to -- the biggest factor is going to be in what price environment we are, because actually the biggest lever regarding tax is the calculation around the tax surcharge that we have as part of the tax reform that occurred in Colombia. That is the biggest component. What we're estimating at this stage that the price tags that we're going to see are that if we are -- if we have a price environment that is above $76 per barrel, we're going to be in the 10% tax surcharge environment. And if we are above $81, we are going to be at 15%. That takes you to a nominal of 50% kind of ceiling. So that’s the way kind of to look at it. With regards to your other question around the traffic with a prepayment, let me just kind of two, three kind of key facts to put in the room. The first one is the scope. And we have mentioned this is about CPO-5, but it's specifically around the lighter crudes in CPO-5, that's the particular scope. And the reason for that, and to put you in our terms, it's the indigo production particularly, it's because the quality of that oil is very special. This is probably the best crude or maybe top two crudes in Colombia. So it actually has -- not actually does it have a better discounts, it actually has a premium over brand, right? And what we were searching for from a commercial standpoint was to capture that premium. So that's the aim of that deal with Trafigura to capture the premium. Now it has other benefits and the other benefits is obviously it diversifies our off takers. And it gives us a little bit more flexibility around how do we market that crude in particular. With regards to the off-take agreement, it has a 12 month duration. That's how we've laid it out. So it covers, it started the 1 of August. It's going to go for a full year. And it gives us also the option to obtain financing from the offtaker for up to a $100 million, which is something that we also appreciate in terms of the toolbox of financial flexibility to deliver our strategy. So those are the biggest elements. And you ask, I think your other element in the question was what was the outlook for this crude? And fundamentally, when you look at Colombia, there is an increasing deficit of lighter crudes in country, right? And that's actually going to grow over time, so over time this crude is going to become more and more and more attractive because it's actually a key component of the local refinery. So the local refineries in Colombia need this crude as part of their mix, and if they cannot find it domestically, they need to import it. So, for the next 12 months, we locked in a very competitive differential. We'll see how market conditions are next year. And we'll work with that.

The next question comes from the line of Vicente Falanga of Bradesco, your line is now open.

I was trying to figure out a little bit more over the long-term for Llanos 123, Espejo and Putumayo 8 blocks. I know you've been running tests there, and they've been encouraging. I was just wondering, what sort of output these fields could grant you over the next coming years. Then if you could explain a little bit more about the results of the Mata Mora North two to three well, which if I'm not mistaken produced an average of 2,136 barrels of oil per day during the second quarter. If you can walk us through what sort of the peak production you saw there and how it's declining? And if we could expect other wells with similar characteristics.

This is Martin Terrado. I'll cover the Llanos 123 and the Putumayo 8 questions. And let Rodrigo go over the Vaca Muerta question. When we think about Llanos 123, again, that, like I said before I'll make more focus on Llanos 123, but this block right now is producing net to us 1,800 barrels of oil per day. A year ago, it was producing 90 barrels. So the increase on the proportion of barrels coming out of that block are representative. We have one rig that is running and we're bringing another rig. So that gives you an idea of how confident we are on more drilling in that block. The latest wells that we have drilled have given us between the two, around 1,300 barrels oil per day. And right now, we're drilling and exploration well called Toritos. We started that well around 10 days ago, and the second rig will be starting in the middle of September. So these are usually Barco formation where Guadalupe wells that are similar to what we've seen in Llanos 34. We have facilities in place ready to put the wells on production as soon as we have discoveries and based on the results that we see on the second half of the year, we will sit together with our partner and decide on what are the next wells that we want to drill going into 2025. At this point, what we have for sure is the campaign for this year. And encourage about those results. When we look at Putumayo 8 is a 100% exploration. So these are when we acquired Amerisur back in 2020, and we look at the blocks that were available coming with that acquisition in the Putumayo, we focus on around six blocks. Putumayo 8 is clearly one of the top ones. And since then, in that log we’ve done Seismic, we got the environmental permit. We went through one of the first public hearings successfully went through that one. And we have three prospects already identified. Some were coming on the way, but out of the three [Machaca] is the first one that we will be drilling spotting in October and then be in parallel. So if you ask us, okay, what’s the output for the next years? We'll have to see how the results show on those two wells and a third one. But we feel confident that area is an area that has not been explored that much in the past. So probably more to come in the next call.

This is Rodrigo. Going back to your question about Mata Mora 2022, ’23, that was one of the best well that we have in the block, definitely put it on production last February after six months, we can say that the well is an outstanding, but at the same time, if you see the performance of the interior path that is located in the center of the block is quite good is on the P10 of the expectation that we have. So we are not almost the double that we expect in the P50 and in the -- for the deal. So that's why we are very happy. You asked if we about the behavior of the will. So you can find the peak of the [Technical Difficulty] 2,500 barrels per day. Remember that this well is a short well, there is now 2,050 meters [Technical Difficulty]. So that's, if you know well about one of the best in the basin, so I understand what you said is, can we find more wells than this in the block? Definitely, yes. Because if you see at least the beginning of the path number four located in the north of the path is even better than this well. But then we are in the first month, so we have to wait, see the peak of the production and then the decline ratio. But after this new, these two new paths, we are very excited about the result. We believe that the new technology, as I mentioned oriented perforation helps a lot, but definitely put the wells in the upper side of Vaca Muerta. As I mentioned, C3.5 level is one of the key elements here, so where we can develop a better performance in the fracking. So we are seeing very good result. Not only one well, in most of the new wells that we have in the block. Let's see what happened in Confluencia, of course, we have to wait till October to see the result, but we are very -- at least at the moment, we have very encouraging results.

So certainly, very much results are very encouraging. And as Rodrigo said some of these flows, additional flows that and remember, these are some of the highest flowing wells almost in the entire Vaca Muerta play are very encouraging and can be seen in other wells as Rodrigo said, we're seeing it on one of the wells in the path four. So, that's why we're happy. Obviously, whether these higher initial rates are going to translate in future incrementally things like that, it will take time, be more cautious about it. But so far the results are being ahead of our expectations.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Mr. Andres Ocampo for closing remarks.

Thank you everybody for your interest and your support of our company. We're always here to answer any questions you may have and encourage you to come visit us in our field and our operations or call us anytime for further information. Thank you and have a good day.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.