GeoPark Ltd (GPRK) 2022 Q2 法說會逐字稿

Good morning, and welcome to the GeoPark Ltd conference call following the result announcement for the second quarter ended June 30, 2022. (Operator Instructions) If you do not have a copy of the press release, it is available at the Investor Support section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this webcast in the Investor Support section of the GeoPark corporate website.

Before we continue, please note that certain statements contained in the results press release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of the company's business.

All financial figures included herein were prepared in accordance with 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.

I'll now turn the call over to Mr. Andrés Ocampo. Mr. Ocampo you may begin.

Good morning, and thank you everyone for joining the call. We're connecting from Bogota, Colombia with our team to report on our business performance and second quarter results. This quarter can be characterized by a successful high momentum transition around the ground full cycle performance with record results and a lot of good work and drilling underway, opening even more opportunities for the rest of the year. We would like to thank the entire GeoPark team for their discipline and success in delivering another record quarter by increasing production and cash flow, reducing emissions as well as paying down debt and accelerating shareholder cash returns.

In terms of operations and our base business performance during the second quarter we drilled 9 wells and increased production to an average of almost 39,000 barrels a day, a 14% increase over the second quarter last year. We remain on track to achieve our recently upwardly revised full year average production guidance of 38.5 to 40.5 barrels a day. With higher oil prices and production we were able to maintain our costs in line and increase our cash flow generation significantly. Our adjusted EBITDA jumped by 140% over the same quarter last year to $145 million which after spending $32 million in CapEx allowed our cash flow generation to grow to $113 million. This means that every dollar that we invested delivered 4.5x in adjusted EBITDA another proof of the quality of our assets and team.

Bottom line our profits increased to $68 million more than $1 per share. We have been allocating our cash flows following the same priorities as always. First, invest in our assets and fund our world program and in the current oil price environment prioritize and accelerate production. And second, always a combination of debt reduction and returning value to our shareholders. In the year-to-date, we invested more than $70 million in our assets to drill more than 20 wells.

We paid down $103 million of debt, returned $25 million in cash to our shareholders and ended the quarter with $122 million in cash. In the second half of the year, we're looking to accelerate the investments in our assets by doubling our CapEx relative to the first half of the year. We expect to also fully repay our 2024 bonds at current oil prices and our dividends were just increased by 50%. And we also will continue executing our accelerated share buyback program. We're also investing in our energy transition efforts as we just completed the full connection of our main producing fields to the national power grid in Colombia which is largely hydroelectric power.

We're also completing the construction of our solar park which means that soon our main fields will be consuming electricity that is 70% to 100% generated from renewable sources. This is a big step forward towards our emission reduction targets and has the additional benefit of producing both cost savings and improved operational reliability.

On governance, we would like to welcome Brian Maxted and Carlos Macellari to our Board, 2 proven oil finders with extensive experience in our industry and our region who represent a significant contribution to our majority independent Board and our company. We also welcome to the Board and thank Marcela Vaca for her more than 10 years of incredible contributions to our management team as well as to our company. Marcela is one of the most experienced oil and gas professionals in Colombia today and is a great addition as well.

We had a great half of the year producing record results and our team is excited about what is coming. 11 rigs are currently working in our assets and 3 more rigs are on the way. We're executing a multiple catalyst work programs that includes in CPO-5 further accelerating production with 1 to 2 more development wells in the Indico field. We're also testing the [Cante Flamenco] exploration well during the upcoming weeks. And then there's a second rig that is currently moving to initiate the exploration campaign in the Southeast area of the block. In the Llanos 34 Block, a third rig is already in place to continue developing the main fields and continue adding production. In our Llanos exploration acreage we'll be spinning the first well in the Llanos 87 block, the first well since we added the block in the 2019 land grab.

Finally, in Ecuador we'll be drilling the first well on our operated Espejo Block and are discussing more development drilling with our partner in the Perico block. We look forward to reporting results on these activities in the upcoming quarters. And we thank you. And also now we'll be happy to answer any questions you may have. Thank you.

Our first question comes from Alejandro Demichelis with Nau Securities.

A couple of questions if I may, please. The first one is how are you seeing the proposal for the tax reform that the government in Colombia has put forward? And as a bit of a follow-up from there in your remarks, Andrés , I think you mentioned that you are in the process of the budget for 2023, and you see that as the most powerful tool that management has. So should we expect some changes in the direction of that kind of budget for next year given the proposal of tax of the government? That's the first question. And then the second question on the exploration side, now that you have this new discovery in the block CPO-5, how are you seeing the rest of the target through the end of the year both in the northern part of the field and also in the Southeast field?

Thank you, Alejandro. To address the first portion of your question we have been, of course, looking in detail at the briefly announced (inaudible). It is still very early days in the process for this proposal needs to go to Congress to get commented and folded on. But what we're seeing is the 2 main provisions that will be affecting our industry overall and our company, the main of those are the inclusion of an (inaudible) crude and also the removal of royalties (inaudible).

Of course, we've been analyzing the impact on our business as I mentioned and we expect to get further clarity as time goes by to be able to report back to all of you. (inaudible) as of now in terms of royalties, what we would like to highlight this oil fields in Colombia are calculated as a percentage of volume. For our company, that's about 8%.

And so what the current proposal appears to address is that 8% calculation which was the full deductible from the income tax calculation will not be able to deduct this going forward. Keep in mind that this affects income tax bill of 2023. So if the reform goes forward in the same fashion as one has happened in Colombia in the past then the expectation would be that the non-deductibility is applied for the 2023 tax bill which is payable in 2024.

(inaudible) 8%. That's 100% of the royalty. And it affects the ones that are not in kind. So it's probably 70% of our royalties. So you should assume something like 6% or so which is the average of what you think so far in our company.

But then to the export tax, it will be very dependent on of course the final letter of the response but also on how each and every company sells their volumes, right? If we look at our composition we have a portion of direct exports which is 5% of our overall sales. Then roughly half of those are sold domestically. None of those of our overall sales are sold domestically but then are exported by our clients. So technically, you should be able to consider those as exports. And then the remaining 35% to 45% are sols domestically and refined domestically. Again also dependent on the sales but it's still unclear how the market will take this overall regulation. In other markets with this type of tax the overall market tend to go towards export priority pricing, whereby regardless of how the volumes are sold overall pricing in the market gets affected. But as I mentioned at the beginning it's very early stages. We expect to get more clarity. And as we do, we will be pleased to share with others.

Are these changes Veronica enough to change the way you're thinking about capital allocation for next year?

So as Andrés mentioned in his remarks, we're at the beginning of our capital allocation process. This is a thorough process that goes over all of the following weeks and culminate with the approval of our budget in November. As you would expect, of course, all of these items will be considered but I would like to frame that within the overall frame as we define our projects, what purchase will be going forward. This is going to affect one of the aspects, the economic aspects that we will continue to look at the technical, the strategic and of course, environmental and social aspects of each and every one of those projects. We will make them compete. And the Colombian projects may g affected by the expected tax reform. But we will carry out the process as we have very thoroughly and in detail and we'll come up with the program by November.

I'll respond to the question on acceleration for CPO-5. So we draw year-to-date 2 exploration wells in the (inaudible). The 2 exploration wells, the second one is the Cante Flamenco that Andrés mentioned. We have multiple targets vertically on this exploration well mainly Ubaque, Guadalupe and Mirador, preliminary results from the Cante Flamenco show that we have oil pay in the Mirador formation. So right now, we were doing the completion of that well.

The next step is to move that rig to the Indico field. We're taking advantage of the oil prices and moving that rate to drill 2 development wells so that we increase production of the block. We will come back to the north. Again, these wells the first one, Urraca was 8 kilometers from the Jacana extension.

So the Guadalupe formation is one that we haven't tested yet and we need to get closer to the north. We're building the pads on that area. Andrés also mentioned that we have a second rig that is finalizing the mobilization in the southeast of the block. So we're going to be studying our first well targeting the Ubaque formation in the Southeast that was called [Aptrix].

So September, October, we expect to have [expiring] of that well. And overall, when we look at our exploration potential on the block we keep being really encouraged. We have the seismic that we acquired that the teams are looking at additional prospects. We have some prospects that jointly, we have already agreed with our partner to drill closer to the Indico Mariposa area. And we got seismic in the northeast of the block that late in the year, early next year, we will be acquiring. So that's a little bit of a flavor of where we're on CPO-5.

Our next question comes from Phil Skolnick with Eight Capital.

Just want to go back on to that question around 2023. Things do start to slow down in Colombia. What is your permitting situation there look like today with respect to what you would need to carry out a program in next year?

This is Martin again. So we have different buckets. The bucket of the things that were fully licensed. Some of those include basically Llanos 34 and 32 which is maybe development but some appraisal. Then we move to the fully licensed that is mainly exploration. And that's where CPO-5 is. Llanos 87 that we will be drilling our first wells soon in the next couple of months and Llanos 94, all fully licensed. The next bucket if you want to call it is the almost complete license and that's Llanos 124 and Llanos 123. And by almost complete, basically we have turning all the documentation and in some cases, we already got we're close to in the next months to get those approvals so that we can start drilling wells again Llanos 124 and 123.

And finally, we got the target of the things that are later in time and on those there could be some delays, we'll see. And that's where we have Putumayo and some of the Llanos blocks that are on the west 104 and 86. But that's kind of where we are on licensing of Llanos.

So technically, the core areas, the really core central areas are 100% fully licensed and the next ones in line are almost fully licensed. So we're in very, very good shape.

We now have a text question from Stephane Foucaud from Auctus Advisors. How much net pay was encountered in the Cante Flamenco well?

Preliminary log-in results show that we have around 40 foot of pay in the Mirador formation for Cante Flamenco.

Stephane's second question. Since the official appointment of the new President of Colombia have you seen any important announcements that would impact the business?

Yes, I think that was answered by Vero and the biggest one is the tax reform that was announced yesterday. That is in our view the main measure that was taken that will definitely impact our business.

And last question from Stephane. What is the current overall production?

Right now our current production net GeoPark is between 39,000 and 40,000 barrels of oil equivalent per day.

Our next question comes from (inaudible).

I had 3, if we could go one by one that would be great. And the first one with regards to lifting cost. We observed a rise during the quarter compared with the previous one. Just curious on how much of that increase should be attributed to increased activities? And what are you seeing from inflationary dynamics, mitigating factors or alternatives that GeoPark could take to prevent margin erosion?

So overall, we're seeing about 5% to 10% increase on materials and services where we see the highest increase is from artificial lifts. So basically our pumps between 15% to 20%. Overall, we're seeing about 10%. That was included in our budget. So we're within budget. When you look at the details, you might have seen in the report some increases. For example, in Chile, where our OpEx went up for the quarter because we had pooling activities to increase oil production. That is going to be gone by the next quarter. We have a successful campaign and the pooling is not there anymore.

In Ecuador, again a brand-new block where the OpEx was not the main objective initiative and now that we have 3 wells on production with close to 3,000 barrels of oil equivalent per day. We're working really close with our partner to bring down those OpEx. We have things that we have identified and I'll give you a couple of examples. As we are contracting for our block we're seeing that we were able to adjust better the contracts and get better prices. For example, on transporting of liquids in and out of the build platforms. We're also looking into opportunities such as connecting to existing pipelines. This was Intracampos so there's a lot of infrastructure around. And in [channels] we are on track on our production OpEx.

Perhaps my second one, more directly to the excess cash uses. And given the recent dividend increase that you announced maybe like where should we expect to see dividends head in more broader terms or possible changes or perhaps a defined dividend policy? How should we think of this?

We will continue to allocate our cash flows within our well-established set of priorities. And thus alluded to this, first and foremost fund our assets and then this combination of deliver and shareholder returns. To your specific point on dividend as you may recall we doubled our dividend last quarter and we have now increased it by an additional 50% to be paying out $7.5 million per quarter. That accounts to on and about a 4% dividend yield. We see this as the base dividend something that is sustainable even in low oil price scenarios. But also that is scalable as our company continues to grow. So we will be looking at our dividend payments within our full shareholder return strategy and continue to keep improving our shareholder returns that we have had over the last few quarters.

Just picking up on the possibility of the flexibility on capital allocation due to perhaps a potential slowdown in the regulatory environment in Colombia. Just curious like what other avenues you might be considering given your presence in Ecuador or maybe looking to add new jurisdictions to start exploring?

As Martin described right, the core of our assets especially within Llanos basin is either full licensed or about to be licensed to be able for us to keep up with our activities in the remainder of the year in the following year. But irrespective of how the different measures take place, the final forms and how ups and downs in Colombia. But we're used to this right, in every Latin American country conditions are very fluid and they change. We have always had a (inaudible) approach as we look at our portfolio. It is a key aspect of our business strategy and it will continue to be.

And as I think we've said many times, we’d probably became less regional than intended. So one of the challenges that we have is also to continue expanding that footprint outside Colombia. We have assets in our portfolio that we can accelerate like 3 fields in Ecuador or one fields in Chile. But obviously, that diversification now obviously become more relevant.

Our next question comes from Roman Rossi with Canaccord Genuity.

The first one is following one of Ariana's question. So regarding you said some (inaudible) right? And so the restricted being (inaudible) I want to understand what is the maximum buyback we could expect from GeoPark given these changes to inventory?

Complementing the question that Arian asked as well. We spoke about dividends and moving on to the buyback. We have had for some time a program to repurchase up to 10% of an outstanding shares. We have been executing on that buyback. We paid out roughly $15 million this year and $5 million of those in July alone. So we expect to be able to sustain this space at current market conditions. And of course keep working as I mentioned on our overall shareholder return strategy as we do always.

So we've accelerated the trend and you should expect us to continue our acceleration.

As you are thinking the transition in electricity (inaudible) 34. I wanted to ask you how much of OpEx is related to (inaudible)? And if we should expect a significant reduction in operating expenses there?

About 40% of our OpEx in channels comes from a generation of electricity. So this is something that is big for us and it's good. We expect around 10% of OpEx reduction due to the connection to (inaudible) and it could fluctuate depending on the price of electricity going forward. But it's about 10% what we expect.

And the last one has something to do with royalties. I wanted to understand, I know that high price costs were really dependent on oil prices. But I wanted to understand how should you think of the [ex factor] part of this royalty going forward?

Roman, did you ask about the export tax (inaudible)?

So in terms of royalties and I think you're linking right back to tax reform, the cash royalty is 38%, right? There are other components of government take such as the ex factor that you mentioned. And those are different from block to block, right? Each E&P contract we have a different ex factor. That's the way it has been in Colombia always and those contracts are fully executed and they're ongoing. And we don't expect any changes on the ex factors on those contracts.

So I'll pass the conference back over to Mr. Ocampo for any further remarks.

Thank you everybody for your interest and support of GeoPark. And we're always available to answer any questions that you may have. Please, we encourage you to visit us and our operations or call us any time for more information you may need. Thank you and have a good day.