GeoPark Limited (GPRK) Q3 2024 Earnings Report, Transcript and Summary

Good morning and welcome to the GeoPark Limited conference call following the results announcement for the third quarter ending September 30, 2024. After speakers’ remarks, there will be 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.geo-park.com. A replay of today's call may be accessed through this website 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 Reform Act of 1995. These risks include a variety of factors, including competitive development 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. Reserve figures correspond to PMRS standards. On today's call from GeoPark is Andres Ocampo, Chief Executive Officer; Jaime Caballero, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; and Maria Catalina 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, everyone, and thank you for joining us to review together our third quarter 2024 operational and financial performance. Our net revenue for the quarter was $159 million, down 16% from the second quarter, impacted mainly by lower realized oil prices and production. Despite these factors, our financial discipline allowed us to maintain robust margins and profitability. Our adjusted EBITDA for the quarter was close to $100 million, representing a strong 63% margin. In addition, the adjusted EBITDA for the first 9 months of 2024 amounted to $339 million, representing approximately a 2% increase compared to the same period of 2023. Bottom line net profits for the quarter of $25 million also exceeded the same period of last year. This quarter was also marked by a significant cash flow generation, which translated into a cash build of more than 2 times compared to 3 months before, from $66 million of cash on June 30, up to $123 million on September and $140 million in October, what reinforces a strong liquidity and solid balance sheet. Our net leverage ratio remains low at 0.8 times and we have no principal debt maturities until 2027. This position provides us with financial flexibility to manage through market volatility, while continuing to invest in high-value projects. We have also continued to use our cash flow to return value to shareholders and maintained our quarterly dividends of $7.5 million announced yesterday. With this our total cash distributed to shareholders during this year will amount to $73 million which represents approximately an 18% capital return yield. With respect to some of our key operational highlights in Colombia, we focused on development and appraisal activities in the Llanos 34 Block, which remains one of our core assets. We advanced our water flooding campaign and expanded facilities, both critical steps to enhance production and improve recovery rates. In CPO-5 Block, we drilled 2 wells, further advancing our exploration and development goals. In our general exploration acreage, we continued with the appraisal and delineation of the Toritos and Bisbita fields. The entire complex is currently producing approximately 4,000 barrels a day gross. We have currently 2 drilling rigs onsite and expect further activity before year-end and into 2025. Also in Colombia, we are looking forward to start our first exploration well in the Putumayo Basin later in November this year when we will drill the Bienparado Norte 1 exploration well. Our recent acquisition in the Vaca Muerta unconventional oil play, which became effective on July 1, has marked a key milestone in GeoPark's expansion in Latin America. Vaca Muerta is today the most attractive hydrocarbon play in the entire region. During the third quarter, the Pad-4, which included 4 horizontal wells was drilled, completed and was put on production in October. The block achieved a gross average production of 12,600 barrels of oil per day during the quarter and reached 15,400 barrels a day equivalent, its all-time record in August. The operator is currently drilling the 4 wells in Pad-9, which is expected to finish in December. In addition to the reserves development activities in Mata Mora, GeoPark and Phoenix have also finished the drilling and completion of the first exploration pad in the Confluencia block in the province of Rio Negro. This pad includes 3 horizontal exploration wells. These wells are currently testing and cleaning up, expecting results in the upcoming days. It is also important to mention that production and cash flow from GeoPark's working interest in the Vaca Muerta blocks belong to our company since July 1. However, such production and cash flow will not be consolidated into our financial statements until the transaction is closed, which is expected to happen before year-end. Therefore, none of these results have been included in our reported 3Q financial statements. As anticipated and to support the capital needs of our new assets, GeoPark has secured important local capital market approvals in Argentina, including AA+ Argentinean credit rating and an authorization to issue up to $500 million in local debt securities. This provides financial optimization and flexibility to continue developing these high-potential assets. Looking ahead, we're on track to release our 2025 work program and investment guidelines before year-end. This framework will outline our strategic priorities for sustainable growth and capital allocation across our newly expanded and upgraded portfolio. We see particular promise in our new assets in Vaca Muerta, coupled with ongoing focus on optimizing our core operations to maximize long-term value. Thank you for your continued support and confidence in our company. We're now ready to take any questions you may have.

[Operator Instructions] Our first question comes from the line of Vicente Falanga of BBI. Your line is now open. please go ahead.

Hi, guys. Thank you very much taking the questions. for I basically have 2 questions regarding the Phoenix JV. You commented that Confluencia will likely put out results soon. Up to what you can comment, how do you see the results so far? Do you see these as encouraging? Do you think that you will be able to communicate the production results to the market before December? And my second question is on Mata Mora Norte. We were looking at the Secretaria Nadia website and we saw that you produced 13.7 barrels of oil equivalent per day in the month of September. You also mentioned that Pad-9 will start to produce at the end of December. So what should we expect for output there in Mata Mora Norte until the end of the year, which should stay about close to 14,000 barrels of oil equivalent per day? Thanks very much.

Good morning. This is Martin Terrado. When we go over Confluencia Norte-1 -- yes, Confluencia Norte-1, the results so far look encouraging. It was on track and according to the plan, the drill, the complete of the wells. This pad has 3 wells. Some of the pads in the Mata Mora have 4. This one has 3 wells. The drilling had around 3,000 meters of each horizontal section drilled according to plan. And one of the things that the operator did differently and we agreed was to be doing fracs with more intensity. The numbers are basically from 2,300 to 3,000 pounds per frac. As you know and we are sharing and learning unconventional, it takes about 45 to 60 days for the flow back and the cleaning of the wells and it's been about a little bit over 2 weeks. So far, the results are encouraging and we will share the results before December for sure. So that's about the recent pad that has been completed. As Andres mentioned, right now we're drilling Pad number 9, that's back into Mata Mora. This pad has 4 wells expected to finish drilling all 4 wells by December. Again, we are on track as we already drilled -- the operator already drilled 2 of the 4 wells. And when you asked the question around the average production for September, what was the production for October? It was similar values around 13,600 barrels of oil equivalent per day. In October it was basically no new wells stabilizing and so that's what we had. We will see increased production as Confluencia Norte kicks in and Mata Mora wells continue to stabilize. But overall, like we mentioned in the past, we are excited about it and we expect to be around 13,500 to 14,500 barrels of oil equivalent by the end of this year.

Great, that’s very helpful. Thank you so much. Nice talking to you guys.

Thank you. The next question comes from Alejandro Demichelis of Jefferies. Your line is now open. Please go ahead.

Yes, good morning, guys. Thank you very much for taking my questions. Two questions, if I may please. The first one is on a bit of a follow-up on Confluencia, Martin. When we look at Mata Mora, we have seen a lot of variability in terms of the initial production from the different wells. So what would you expect to be like a good flow for Confluencia? And what kind of gas levels can we expect from there? That's the first question. And then the second question is, how should we think about, say, production and CapEx required for Llanos 34 into next year?

So when we look at Confluencia, the IPs that we have overall for Vaca Muerta are in the order of 750 barrels of oil per day to 1,500 barrels of oil per day. So this is exploration. We will see where within that range they fall, but that's order of magnitude where we expect to be on IPs. We had some wells in Mata Mora that Rodrigo mentioned in the past that were beyond that range. We have 2 wells that produce 2,000 and 3,000 barrels of oil per day. So we have some wells that are on the top percentile of oil of Vaca Muerta in Argentina and that's in Mata Mora. But order of magnitude, that's what we have in our business plan and usually, we are within the P50 to the P10 range. So more to come on that pretty soon. And then the question related to production and CapEx?

Sorry, the gas component in Confluencia [Indiscernible].

And the gas component for Confluencia for now, we expect to be similar to what we have in Mata Mora. It's usually when we go from barrels of oil per day and we take it to barrels of oil equivalent, order of magnitude at about 5%. Does that help, Alejandro?

Yes, that's very helpful. Thank you.

And I think your second question was around Llanos 34 production and CapEx. So like Andres mentioned, we will post our work program for all of GeoPark in the next weeks. But what we can share with you is where we are aligned with our partner and you have seen throughout the year that we went to one rig. We have one rig running right now in Llanos 34, we're in agreement that we will continue that rig all of next year, mainly drilling infill wells, some appraisal wells, follow-ups to good wells that we drilled recently, especially in the Curucucu field. And concerning production, we should expect slight declines as the field is getting more mature and with the level of activity of infill drilling, the focus that we have on water flooding and workovers, order of magnitude around 15% decline.

For the whole of Llanos 34?

For Llanos 34, yes.

Okay. That's clear. And as a bit of a follow-up there because your partner has been talking more about polymers into Llanos 34 and so on. So is that something that we can see in 2025? Or is that a more medium-term plan?

No, it's something that we will be seeing in 2025. So we're working the details to perform a pilot in the second half of the year. That's basically adding polymer to the water so that we get better conformance, 2025.

Thank you.

The next question comes from Daniel Guardiola of BTG. Your line is now open. Please go ahead.

Thanks. Good morning, [Indiscernible] entire team. I have a couple of questions. The first one, I would like to touch on costs. Looking at the quarter, we saw once again a deterioration of your OpEx per barrel to levels close to $16, $17 per barrel. And if we look at the last 2 years, the OpEx has almost doubled. And I wanted to know, first of all, if you can share with us what is driving this deterioration in costs? And two, what is the company planning to do to basically tackle this significant increase in costs? So that would be my first question. And if you want, you can answer it and then we can -- I can follow up with the second one, if that's okay with you guys.

Absolutely, Daniel. This is Martin again. So when we look at our OpEx on a dollar per barrel, a couple of comments. One is our goal is to stay at the main assets in the order of $10 to $12 per barrel range. What has happened in the past 2 years and what you are referring to -- if we look at 2022 in Llanos 34, we are producing about 350,000 barrels of fluid per day and our consumption of energy was 50 megawatts. Right now our total fluid has increased 40% from those 350,000 and our megawatt requirements has increased by 20%. So clearly, when we look at our OpEx, around 40% of the OpEx is energy cost. Since we connected to the national grid, one of the visions and the objectives that we had was to tie and lock fixed price energy cost. Unfortunately, the first couple of years and where we are today, we are with the spot price. And in Colombia, we had El Nino, so the energy prices have gone up. In addition to that, of course, we have inflation and exchange rate. But those are, if you want to say, excuses or the things that have happened. What have we done? And I'm going to let Jaime complement later on, but we're working and we're locking energy prices so that this volatility and paying more than COP 900 per kilowatt hour doesn't happen now that we have windows and we can lock that. We have also looked and we're looking at reviewing where we have OpEx in places where we can purchase facilities. For example, in Llanos 123, we had zero production about 1.5 years ago. We got 4,000 barrels on production right now. All of those facilities were rented and we're purchasing those sections of the facilities that have quick payouts and they make sense to keep. And of course, we're reviewing also with our supply chain group our contracts and looking at opportunities. So again, I want to make sure that you take it that the goal is to stay between $10 and $12 per barrel range in the next years.

And to complement on that, good morning, everybody, this is Jaime. Daniel, on the energy side, I think it's clearly one of the biggest levers. One of the things that we're seeing is that the market is evolving, following El Nino and all the kind of crisis that we had at the middle of this year, the market is stabilizing. And when you look at energy rates that can be secured for the next number of years, actually, long-term contracts are becoming very attractive, right? And they are significantly under what we expected. So the possibility of locking in rates that secure the clean energy for our fields, particularly for Llanos 34, is something that we're looking into and that is going to help us a lot to mitigate that increasing trend of energy costs associated to the enhanced recovery of the field. I think the other angle that we need to take into account when you see the evolution of lifting costs is that there is a component associated to what I would call immature operations, which is all the exploration fronts that we have open currently. Those exploration fronts that we have in the periphery of Janos, in Putumayo and in Ecuador are operations that don't benefit from economies of scale and from the sorts of systematic supply chain approach that you can have in Llanos 34. And they are affecting the consolidated OpEx per barrel. To the extent that those operations mature into appraisal and development, we should expect to capture the economies of scale associated to a mature operation and that's going to help as well. So those are the 2 things to consider as we look at the long-term prognosis of OpEx per barrel. Thanks, Daniel.

Thank you very much, Martin, Jaime. My second question is on Brazil. I mean, this is the second consecutive quarter where you're posting 0 production from Brazil. And I wanted to know if you can provide us an update on what's going on in Brazil and what are your expectations going forward?

Yeah, Daniel. So latest, we have been communicated by the operator the date that we had to restart operations was late October and 2 weeks ago, they shared with us that the firefighting and additional maintenance is required. So the new date is late February. And as you mentioned, this is 1,100 barrels of oil equivalent per day that we had in our plan for all of 2024 and it's been shutting since middle of March. So the new date that we're expecting is restart early March.

And if I may just squeeze a last question on Argentina. And I would like to know your thoughts on the DUPLICAR project, which is eagerly expected or anticipated by most of the producers. And it would be great if you can share with us how do you see this project progressing? And when do you expect to know the project to be fully online for you guys to start shipping additional barrels of oil? And also it would be great if you can share with us what is the total capacity that you have secured in this project? And if you foresee any potential to use additional spare capacity in 2025?

Sure, Daniel. This is Jaime. So I guess let's start from the baseline. Our evacuation efforts around Vaca Muerta are going well. You see that we're having production that is very much in line, if not even better than what we expected a few months ago with the sort of results that we're getting from the different wells. Currently, where we are is -- we're in a place that around 50% of our volumes currently are being transported through our own contracted capacity with Oldelval. That's around -- currently, that available capacity is at around 7,500 barrels a day. The remainder, the bulk of it, we are using Oldelval as well, but through third parties' capacity that make them available to us. And there's a little bit a surplus that we -- at times, we use through trucking. And actually it's a good problem to have because it actually means that production levels are higher than what we anticipated, right? So it's good. That in total means that we have secured currently through those different mechanisms, our own capacity in Oldelval, third-party capacity in Oldelval and trucking capacity, basically what is the -- about 15,000 barrels of evacuation available. Oldelval, the DUPLICAR component is expected to come online around March. That's kind of where we are. There's been no change to that. Some -- we go back and forth around this. And as you say, I know you have other industry sources, but there's a broad consensus that it's still around that time, March. If there are delays, eventually it could go into April, but it's in that time frame. And we feel pretty confident that that's going to be the case. In our case, it brings an additional 9,000 barrels a day of evacuation capacity that's net, net to GeoPark to our own barrels, which puts us at 24 MBV, which is significantly more than what we expect to be producing at that time. So all in all, our midstream efforts are going well and are ahead of our production volumes as they need to be.

Thank you guys.

We now have a written question from Stephan Foucaud of Auctus. What is the current production? How do you see 2P reserves at LL34 at year '24 directionally? Is this about 2P reserves at year '23 minus production? Or could there be technical revision impacting reserves 3? Do you see potential production growth in Ecuador in 2025? And any update on the Bienparado Norte 1 exploration well, Cante Flamenco at CPO-5 and Toritos and Curucucu? Thank you.

So thank you, Stephan, for the questions. I think I wrote them all. And if I miss any, we'll make sure that to come back. So the first one, for sure, we took it. So what's the current production in Llanos 34 and where do we expect to be on reserves? For the full year for Llanos 34, net to us, we expect to be in the order of 22,000 barrels of oil per day to 23,000 barrels of oil per day. That is basically along what we had in mind on a field that is getting more mature. A couple of data points that are worth mentioning. This was a very successful year 2024 on horizontal well drilling, more intense than previous years on water flooding. Good results on workovers and as many of you know, we went down from 3 rigs to 1 rig. So what we've seen this year is a decline in the order of what we mentioned before, around 15%. And when we think about reserves, it's too early to tell, as you all know, we communicate reserves in the first quarter of next year. What we can say is that we already started our reserves certification. And based on what we've been discussing throughout the year, we have some positives like water flooding and horizontal wells and also some things that we're getting some quicker water cuts and some things that are not as good. So we will see. Outside of Llanos 34, we have good results on the Llanos exploration wells and encouraging results on the follow-up appraisals that we have. So from a reserve, Stephan, you can probably understand that there's not much that we can share at this point. If we move to the next question around production potential growth in Ecuador. In Ecuador, with the 2 blocks that we have overall, we have around 4,000 barrels of oil per day on production. We did drilling and workovers, we finished the campaign and the production growth that we see for now in the Perico block, it's around water flooding. Some of the wells, we can see that they need some pressure support. So that's coming as a discussion with our partner for next year. And in Espejo block, we're looking at the recent wells that we drilled and we'll see what we propose for next year. When we move to Bienparado, Bienparado Norte, again it's a well in Putumayo-8 like Andres mentioned a few minutes ago [Technical Difficulty] that's to Platanillo, to the west of Platanillo. Civil works have been completed. The rig is right now mobilizing and we expect to spud this well in the second half of November. So pretty quick, we will be spudding that well and we have a second well that we're finishing the platform. So for sure, 2 wells. Bienparado Norte is a stratigraphic/structural play. We're targeting the N sand. I'm very excited about that. So again, more news to come by the end of the year, for sure, in the next call. And I think -- let me see, Cante Flamenco-2, Cante Flamenco-2 is an exploration well that we drilled and completed in the CPO-5 Block. The target for that well was Mirador. This is in the northern part of the block. It's as you all remember, a big block, 500,000 acres. The main target was Mirador, secondary target, Ubaque. Ubaque is the same formation that we have in Indico producing 40 API gravity flowing wells. The results of the drilling were really encouraging in Ubaque. Ubaque found oil with a water well contact. This is the first time that we find Ubaque on the east side of the Alto de Metiica. We tested that Ubaque, it gave us around 34 API crude. Water contact was very close, so right now the well is shut in, waiting on a workover. The most encouraging thing is that it opens our geologists' and engineers' eyes to look at, okay, what other opportunities are, because clearly oil was flowing through and moving there millions of years ago. So next step on Cante Flamenco-2 is workover program is coming before the end of the year. We're going to isolate the Ubaque and test the Mirador. Mirador, again, was the primary target where order of magnitude, we found 10 feet of net pay. I think you asked us about Curucucu. Curucucu 2 is -- sorry, Curucucu 4, we drilled first the well number 4. It's a appraisal or follow-up well in the Llanos-34 to Curucucu. The well is producing with very good rates in the order of 800 barrels of oil per day with 40% water cut. And we are aligned with our partner and working so that before the end of the year, we'll go back to this platform and drill another Curucucu. Let me see, you asked us also around Toritos 2. Before I jump into Toritos 2, I want to share a little bit overall where we are in Llanos 123. And Andres also mentioned it, so just to reinforce that Llanos 123 exploration block where we had zero production about 18 months ago, right now we're producing in the order of 4,000 barrels of oil per day. We have 2 rigs running, 2 platforms, one is Toritos and the other one is where we have Bisbita and Saltador. This is one of the blocks where going back to previous questions, we're purchasing from facilities to reduce our OpEx. And the ones that we drilled recently have performed really well, Toritos-2, Toritos Sur 1 and Bisbita Este, all 3 of them are giving us around 1,500 barrels of oil per day. So we continue appraising these discoveries. And for next year, we will continue with drilling activity. If you want to know specific how Toritos Sur 1 is doing, that well right now, it's producing in the order of 450 barrels of oil per day with less than 10% water cut. And I think that we covered all the questions, but please, if we missed any of them, let us know. Operator, are you there? Are there any more questions? [Technical Difficulty]

An update on the surcharge.

An update on the surcharge. Jaime?

Great. So on the tax front, the surcharge estimate that we're having for this year is of 10%. Remember, the context around this is that with the tax reform, there is a scale depending on the oil price average for the year, you end up classifying under a different kind of surcharge bracket. Given oil price evolution over the last quarter and the expectation that we have for the year, we believe we're going to end up on that 10% bracket and that's kind of unchanged versus where we were a few months ago. I understand that part of the question is also around the treatment of royalties. And as we've said before, the courts in Colombia have pronounced themselves on that and the project that the tax reform included didn't pass through the courts. So the treatment of royalties is unchanged versus what we had in the past. The only component of the tax reform that applies to us is a surcharge, and it's at 10%. Thanks.

We have no further questions. So I'll pass back to the management team for any closing remarks.

Thanks, everybody, and we apologize for the technical difficulties. Hopefully all of the answers -- all of the questions were answered. If anybody had any pending questions that were not completed, please feel free to reach out to us directly. So thanks very much for joining and your support of our company and have a good day.

Thank you all for joining. That concludes the GeoPark's conference call. You may now disconnect your lines.