GeoPark Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the 2nd quarter ended June 30, 2023. After the speakers' remarks, there will be a question and answer session. 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 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.

Operator

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 company 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.

Operator

Dollars unless otherwise noted. Reserve figures correspond to PRMS standards. On the call today from GeoPark is Andres Ocampo, Chief Executive Officer Veronika Davila, Chief Financial Officer Augusto Zubalaga, Chief Technical Officer Martin Tirado, Chief Operating Officer and Stacy Steimell, Shareholder Value Director. And now I'll turn the call over to Mr. Andres Ocampo.

Operator

Mr. Ocampo, you may begin.

Speaker 1

Good morning, everyone, and welcome to our 2nd quarter results call. We're joining with our team here in Bogota, Colombia. We're advancing on our drilling program, which is already delivering results. We drilled 10 wells in the 2nd quarter and have a busy schedule ahead of us with 10 rigs now in operation and 2 more coming this quarter. Our horizontal well drilling campaign in the Mirador formation in the Janus 34 block is moving ahead full speed with 2 wells already completed and on production and the third one already spotted and about 30 days from reaching TD.

Speaker 1

These are 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.

Speaker 1

Our exploration team has also delivered a new discovery in the Janus Basin acreage that have been acquired during the 2019 bid round. Saltador 1, our first well of the Janus 123 block is producing approximately 8 80 barrels per day with 5% water. In Ecuador, the U. S. In the Perico block has encountered a new phase zone in the U.

Speaker 1

S. And formation in addition to confirming its development potential in the U. S. Where our production has been down on the back of 2 very productive wells being shut in, the operator has advanced and completed most of the works requested by the ANH and anticipates that it will have the 2 wells back online before the end of the month. They also expect to spot the Alcon 1 exploration well in September, which could test the potential continuity of the Hakana play into the CPO pipe block.

Speaker 1

Following Alcon, 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 OVA pipeline from our Platanejo 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 continued to record strong financial results in the quarter with revenues of $182,000,000 and adjusted EBITDA of $104,000,000 representing an adjusted EBITDA margin of 57% and profits of nearly $34,000,000 or $0.59 per share.

Speaker 1

We invested $43,000,000 during the quarter and generated $2,400,000 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 1 third to $11,000,000 in the quarter following our debt reduction of $275,000,000 during the last 2 years. After paying $88,000,000 in cash taxes in the 2nd quarter and returning almost $19,000,000 to our shareholders through dividends and buybacks, we ended the period with more than $86,000,000 in cash. Also, we completed a new $80,000,000 unsecured committed credit facility for the next 2 years.

Speaker 1

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 Janos 34 block, exploration drilling in the CPO-five block, the continued development of the prolific Indico field and more exploration drilling in our operated Janos acreage as well as our oriented basin acreage. In our 2 Eastern Janos blocks adjacent to CPO-five, we have started preliminary activities to acquire over 650 Square Kilometers of 3 d seismic, one of the largest 3 d 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

We have a question from Alejandro Demichelis of Jefferies. Alejandro, the line is yours.

Speaker 2

Good morning, guys. Thank you very much for taking my questions. A couple of questions, please. 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 38,000 to 40,000. And then the second question is, how do you see the potential size of your new discovery on Blooglianos 123, please?

Speaker 3

Good morning, Alejandro. This is Martin Terado. Thanks for your question. In regards to the building blocks to making the guideline on production, it would largely depend on Indica 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.

Speaker 3

That included building concrete dikes 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 2 wells to be back on production. Those 2 wells have a gross production of 8,000 barrels of potential. So that's about 2,400 barrels net to GeoPark that we're expecting.

Speaker 3

As we're building, like you said, the blocks on the next quarters for the quarter number 3, we're expecting partial contribution from those 2 wells because it will not be fully on stream for the whole quarter, but they will be fully on stream for the last quarter. So that's a big contribution that we're expecting. The second one is related to our performance in the channels 34 block. For that block, we expect increased production compared to the first half of the year. And that is mainly due to 2 things.

Speaker 3

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're expecting around 5%. So those are the 2 main blocks that we expect to be contributing so that we can make our Q3 average of around 38,500 barrels and the last quarter of 40,800 barrels. And we expect the exit rate to be between 4,041,000 barrels of oil production equivalent.

Speaker 3

This assumes that we don't have big disruptions in our channels 34 and as always, it does not include additional production from exploration wells.

Speaker 4

So with that, Alejandro,

Speaker 1

Andres here. Just to

Speaker 4

add to what Martin said. Obviously, with these numbers, roughly on the 3rd quarter, close to 38,000, 39,041,041 in the 4th quarter, that would

Speaker 1

put us closer to the lower end of the

Speaker 4

range rather than the midpoint or the higher range. But we still believe that if the operator delivers on the putting back those 2 wells online before the end of this month, that's where we should be.

Speaker 5

Thank you. Hello, Alejandro. You answered about the regional 1, 2, 3, right, the Saltador discovery. So just to give you more context about the Saltador, the Saltador exploration well is located in our block west to Jan 34. That block was acquired in 2019, ANH bidding round.

Speaker 5

So talking about more technical things, the big concept was to test the structural fault deep closure hanging well. We did find hydrocarbons in Barco Guadalupe formation with 29 feet of oil net pay. Today, the well is 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

Speaker 1

prospect to the south

Speaker 5

that is called Pizbita that could more add more reserves. It's not decided yet, but clearly, it's at a low derisk this prospect that we could really be completed at the end of this year or early 2024.

Speaker 2

Okay. That's great. Thank you.

Operator

Our next question comes from Orianna Kowalz of Balan. Orianna, the line is yours.

Speaker 6

Hi. This is Orianna Kowalz with Balan. Thanks for taking my questions. 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?

Speaker 6

I think you mentioned 8,000 barrels per day of gross production potential for each Indico 5 and Indico 6 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 the year of this year?

Speaker 3

Hi, Orianna. Thanks for your question. This is Martin Tirado. And a current production for the CPO-five 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 6 and 7, we were probably around 18 1500.

Speaker 3

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 gross, we will be getting again the 8,000 barrels from both Indico 6 and Indico 7 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 traction.

Speaker 1

So the expectation Andres here, Orianna. The expectation operator

Speaker 4

is to have those 2 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.

Speaker 6

Perfect. Thank you, Martin and Andres. Just keeping up with the CapEx and the exploration side of the business, just wondering in terms of the seismic acquisition that you're guiding for second half and it seems to be a very encouraging project from your end. So what are you targeting? What's the key areas?

Speaker 6

And what would be the main how much of your CapEx budgeted for exploration with this seismic acquisition take up?

Speaker 3

Thank you, Ariana. So I'll go a little bit about the more ops part and then I'll let Suvi go over, okay, what we're seeing on prospects. But this is premium acreage. It is east of the CPO-five. And like Andres mentioned, it's 650 square kilometers that we're going to be acquiring.

Speaker 3

And we were looking at, okay, historically in Colombia what that means, it will be the 3rd biggest acquisition. So where we are today, all the permits have been granted, all the socialization has been done. And right now, we're starting all the things that is related to building the camp 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 2 months to finish the acquisition, then comes processing.

Speaker 3

And after that, of course, building the pads and drilling the wells for those locations that prospects that we expect to have. So that's a little bit on where we are on from operations perspective. From a capital perspective, the seismic, it's already in our budget. And one of the things that we were able to do is we got the seismic cheaper than expected. So we're acquiring seismic for even more than what is our commitment.

Speaker 3

So that's a little bit on the operations perspective that we have. And from blocks and commitments on these two blocks, we only have one well commitment in each of the wells. So we're sure that we're going to find prospects to drill there. I don't know, Silvi, if you got?

Speaker 5

Yes. Beyond the commitment that Martin mentioned, we really believe that those blocks that we have there in the premium acreage, like Martin mentioned before, these blocks are located to the Ito CPO-five near to important fields, example, Caracara and also we have Puerto Guaitani site also developed. So the team also defined several leads that after the seismic, I'm sure that we're going to have new prospects and exploration opportunities.

Speaker 4

So the objective of this 3 d seismic effectively is to expand our exploration inventory and portfolio. So the idea of acquiring 3 d 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 this seismic. As Martin said, it's already within our CapEx guidance and is roughly at our working interest, roughly $20,000,000

Speaker 6

Perfect. Thank you very much. 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.

Speaker 6

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've seen some tightening recently? And or when 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.

Speaker 7

Thank you, Orianna. Good morning. Veronica here. As you mentioned, we have revised adjusted our expected 2023 EBITDA range by about $40,000,000 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.

Speaker 7

We continue to use $4 to $5 for the remainder of the year. It's now pricing $3.5 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's taken us to expect higher OpEx for the full year ranging between $10 $11 per barrel on a consolidated basis. The drivers for this increase in OpEx are twofold.

Speaker 7

On the one side, we have 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, which 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.

Speaker 6

Thank you very much, Veronika and the rest of the team. That would be all from my side.

Speaker 7

Thank you, Adriana.

Operator

We've received some text questions. Our first one asked from Stephane Foucaud of Auctus. Good morning to all. One question for me on Yin II, Ecuador. 14 net pay in a new formation looks good.

Operator

How material is it? What are the implications for production and development of the asset?

Speaker 5

Hi, Stefan. Good morning. Yes, we are very happy with the result of this well. The plan was to develop the Ogi information and investigate the potential up U SAN. The Ogi information resulted with good hydrocarbon saturation and thickness similar to the Jandaya and Jing wells with 25 feet net pay.

Speaker 5

The USAN found about 40 feet of net pay, you mentioned. So according to our team and in line with our partner, we are going to complete the USAN because it has better reservoir conditions. With this initiative, we will understand how the well behaves and which is the volume found for future development. We have also analogies of near fields that is called Juantal Reno, where these sands, the initial production could be between 900 to 1300 barrels of oil per day. So again, we're really happy with the results, and we will testing this well very soon.

Speaker 4

It's 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 logging indication right now and we will know a lot better once the well is tested.

Operator

Our next question comes from Roman Rosy of Canaccord. Morning and thanks for taking my questions. 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's the estimated cost for each well? 2nd, can you give us more color on the derivatives loss?

Operator

And what's the strategy going forward? And then finally, do you have any FX hedges?

Speaker 3

Thank you, Roman. This is Martin again. I'll 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 very good results compared to what we were expecting, basically delivering the expectations of the pilot well.

Speaker 3

We adjusted our program and we're now going under our 3rd well. I'll share with you a little bit of numbers on estimated cost and performance, but the first well was drilled at around $11,000,000 When we went to the 2nd well, we drilled it with a longer length at around 10% cheaper, so at $10,000,000 And right now, we're drilling our 3rd well. We expect to be drilling that well around $9,500,000 and we're going for about 3 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 5 to 6 wells by the end of the year. All of these wells are targeting the Midadore formation, which has an original oil in place of around 100,000,000 barrels.

Speaker 3

And we're looking at other opportunities within the channels block in other formations, but also outside of the channels 34 in places like Platinico. Efficiencies that we continue to work on. Again, we're drilling our 3rd 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. And 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 wells.

Speaker 7

Good morning, Roman. This is Veronica. On your questions on derivatives, So we continue to apply our hedging strategy for crude prices, looking to protect the crude downside. We've done this consistently over the past years. There have been no cash impact from the hedges year to date.

Speaker 7

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've executed a few FX hedges looking to protect the income tax payments that happened in the Q2 of the year. Those transactions recorded about $3,000,000 of gain year to date, and we'll look at other opportunities to enter in this type of transactions as we see fit going forward.

Operator

Our next question comes from Daniel Guardiola of BTG. Daniel, the line is yours.

Speaker 8

Thank you. Good morning, Andreas and Veronika. I joined the call a little bit late, so

Speaker 1

I don't

Speaker 8

know if some of my questions were already answered during the presentation. But first of all, I would like 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?

Speaker 8

So that's my first question. If you want, we can go 1 by 1.

Speaker 4

Okay. Hi, Daniel. Good morning. Andres here.

Speaker 1

So we are I would say

Speaker 4

in the second half of the year, we have accelerated the exploration activity. We've already reported today the result of Saltador and the encouraging logging information that we have on gene. And then we also provided a list of all the prospects that we're drilling on the second half of the year. I think there's some interesting prospects that we're going to be testing. We usually don't give guidance on reserves.

Speaker 4

So it's 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 2 wells that we are testing right now and on the 6 or 7 wells that we're 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 Golar and Magnotta's or the Certificator's view on the discoveries.

Speaker 8

Understood. Understood. My second one was regarding the easiness of operating in Colombia. I mean, it's been already a year since Petro was running here in Colombia. And I wanted to know your thoughts.

Speaker 8

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 if is it getting more difficult to operate in Colombia or is business as usual?

Speaker 4

Thank you. Andres here again, Daniel. I think it has changed a little bit in different locations. So as Martin mentioned, we've experienced some downtime in the Casanada area, for example, in the Llanos Basin, which in the past, we hadn't experienced any. And for conflicted place of the country, so far this year, we haven't experienced any disruptions or any blockades or things like that.

Speaker 4

So I think I wouldn't say it 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 the projects. And we're obviously investing more time and efforts on making sure that we maximize the relationship with our neighbors.

Speaker 4

But again, I wouldn't say that this is 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 Put8 project, the one that has the Bienparado prospect is one of the best prospects that we have in our portfolio. We completed a public audience where all the communities participated. That's fully public.

Speaker 4

It's 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're pending the final approval by the environmental authority. We're still within the expected time line.

Speaker 4

So I also couldn't say that there has been delays or obstacles from any of these regulatory bodies really.

Speaker 8

Thank you, Andres. And just the last one from my end. A very high level question maybe for you, Andres. In your view, what are the main challenges and opportunities that the company is facing right now?

Speaker 4

Well, I can tell you the biggest challenge that we have today is bringing those 2 wells back online. That's obviously the top priority for the entire company and for myself. I know you're asking a more strategic question, but I don't I wake up every morning just thinking of those 2 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's fair to say that we've been producing 40,000 barrels a day over the last 2 years. And that's a comfortable place that we don't feel comfortable at.

Speaker 4

We really we're 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's probably the biggest challenge and opportunity that we have today.

Speaker 8

Thank you very much, Andres.

Speaker 4

Thank you, Daniel.

Operator

With that, I'll hand back to CEO, Andreas Acampo, for closing remarks.

Speaker 4

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

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