GeoPark Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to the GeoPark Limited Conference Call. Following the results announcement for the Q4 ended March 31, 2024, 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 atwww.geopark.com. A replay of today's call may be accessed through this webcast in the Investor Relations 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. This risk includes a variety of factors, including competitive development and risk factors listed from time to time in the company's SEC results, 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 company's business. All financial figures included here were prepared in accordance with 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 Jamie Caballero, Chief Financial Officer August Zubillaga Chief Technical Officer, Martin Tergado Chief Operational Officer James Beccleman, Chief Operational Officer Rodrigo Della Fiore, New Development and Portfolio Director and Stacy Staelman, Shareholder Value Director. And now I would like to turn the call over to Mr. Andres Ocampo.

Operator

Mr. Ocampo, please you may begin.

Speaker 1

Good morning, and thank you for joining our Q1 conference call. Today, we're proud to report progress and very important results on all key elements of our business and strategy, with solid Q1 results coming from our improved base business, new significant share repurchases, a big and very attractive transformational acquisition and impressive sustainability and decarbonization metrics. The underlying base business performance is continuing to deliver positive results. We had a strong production in both the Janus 34 and the CPO5 blocks. In the Janus 34, our core asset, the combination of our horizontal well program and increased water flooding project took gross production to a range of 56 to 57000 barrels a day in early April, the highest level in the last 12 months.

Speaker 1

With the addition of the Indico III development well in April, the CPO-five block production reached over 30,000 barrels a day, a new record. Our Q1 financial results were strong, generating over $111,000,000 in adjusted EBITDA with a margin of 67%. During the quarter, we invested almost $50,000,000 and every dollar invested in the base business yielded around $2,300,000 in adjusted EBITDA. The return on capital employed for the last 12 months was 35%. The balance sheet remains strong as we ended the quarter with the highest cash position in the last 3 years, just over $150,000,000 Net leverage closed at 0.8x and remains well below our long term target of 1x to 1.5x.

Speaker 1

We recently added an uptake and prepayment facility with Vitol that further improves our commercial terms and gives us access to up to $500,000,000 of oil prepayment facility, providing immediate access to competitive and flexible financing. In the last 4 years, GeoPark has generated more than $475,000,000 of net free cash flow, almost onetime our market cap, which was distributed to our shareholders in buybacks and dividends as well as to our creditors in debt repayment, a proof of our commitment to maintain our capital discipline, a strong balance sheet while continuing to return value to our shareholders. This month, we successfully repurchased $43,700,000 in GeoPark stock during the Dutch tender offer, reducing shares outstanding by approximately 8%, and our Board just declared a $7,500,000 dividend to be paid on June 14. We have also recently published our Speed Sustainability Report for 2023, which highlights that we reduced our greenhouse gas emissions intensity by 18% from 2022. At 10.6 kilos of CO2 equivalent per barrel, we're extremely proud to report that we have the lowest carbon intensity among our upstream Latin American oil peers.

Speaker 1

Our Janus 34 block, which supplies close to 7% of Colombia's total oil production, had remarkably low intensity of 7 kilos of CO2 equivalent per barrel. With respect to our asset portfolio expansion, we announced on Monday a new transformational acquisition in Vaca Muerta in Argentina, a strategic asset in the world's fastest growing unconventional play. The transaction includes high quality assets with a combination of existing and fast growing production and cash flow with a significant and tangible exploration upside. The Matamoros Norte block was producing 0 about 3 years ago and is currently over 12,000 barrels a day from 26 wells in 8 pads and with a 9th part of 4 wells already drilled and being completed now expected to be put on production before the end of June. This production base is expected to grow to nearly 40,000 barrels a day within the next 4 years and expected CAGR of 35% to 40% during the execution of the multiple remaining drilling locations.

Speaker 1

Upon closing of this transaction, we expect to add between 5,500 to 6,500 net working interest barrels of oil per day to our daily production, which is about 15% to 20% increase to the Q1 production 50,000,000 barrels of net 2P reserves or 43% versus our December 23 reserve certification, which include also over 800,000,000 of after tax NPV-ten at GeoPark working interest, equivalent to more than 4.5x the purchase price of Matamoros Norte. An estimated annual net EBITDA of $90,000,000 to $100,000,000 in full year 2024, which could grow by nearly 3x to $300,000,000 at plateau production and at 70 Brent or more than 3.5x at current oil prices. Approximately 240,000,000 barrels of gross 3C certified contingent exploration resources in nearly 200 additional drilling locations, which could provide further significant growth even beyond the Matamoros Norte Plateau production. A significant part of this exploration upside is imminent as the first part has been built and the first exploration well was spatted this month. We also have incorporated a new strategic partner, Phoenix Global Resources, which is part of the Mercurio Group, one of the world's leading energy training companies.

Speaker 1

The technical and leadership teams at Pfenex have done an impressive job in bringing these assets to their current state, delivering significant production growth at highly competitive drilling, completion and operating costs with further improvements being achieved on every new well. This team, both within Phoenix and our prior ventures, has more than a decade of experience in Vaca Muerta and have also taken part of the derisking of the entire Vaca Muerta oil and gas play in the earlier days. We're very proud and happy to be partnering with Phoenix and Mercuria in this new initiative. We have started a very busy year and have an exciting 2024 and beyond with some high impact upcoming catalysts, both with the drilling activity underway in our existing core asset base as well as the closing and drilling activity in our new Vaca Muerta assets. We look forward to reporting our progress to you.

Speaker 1

We remain committed to consolidating our leading position among Latin American energy companies, producing sustainable hydrocarbons that guarantee energy security, reliability and affordability in this rapidly changing world. We will now be happy to take any questions that you may have. Thank

Speaker 2

you.

Operator

And our first question comes from Alejandro De Michelis from Jefferies.

Speaker 3

Yes, good morning. Thank you very much for taking my questions. Three questions, if I may. Maybe the first one, Andres, is now that you're having more CapEx going to Vaca Muerta, so how should we think about the balance between extra CapEx, free cash flow and cash returns to shareholders over the next kind of couple of years? That's the first question.

Speaker 3

2nd question is, could you please provide us an update on the delineation and appraisal program that you have been conducting on CPO5? And then the third question is on the new acreage in Vaca Muerta where you're doing the exploration, what do you see as the risk of the oil getting much heavier on that side of the basin, please?

Speaker 2

Hello, Alejandro. This is Jaime. I'm going to address your first question, if you will. And it kind of tackles 2 angles. It's as I understand it, which is how does this entry into Acamuerta and its capital profile and production profile affect shareholder returns.

Speaker 2

So I'm going to first talk a little bit about CapEx profile and give you a little bit more detail of what we already announced previously. When you look at the base case for Vaca Muerta and Matamoros in particular, our goal is to reach 40,000 barrels of production around 2027. And we expect to retain a plateau of possibly 2, 3 years around that time. In order to get there, the CapEx exposure that see to get there is going to be around $1,300,000,000 over the next 10 years, right? It's going to gradually escalate.

Speaker 2

We see this year, it's going to imply an incremental CapEx of about $100,000,000 next year, about $160,000,000 $170,000,000 getting to a peak of $280,000,000 around 2026. So that's what it's going to take in order to get there. Now we obviously need to put that in context that getting there is going to have a significant EBITDA contribution to the company. This is a clearly value accretive deal where we're seeing an incremental EBITDA for the company of between to $400,000,000 per annum at $70 So in that context, what we are seeing is that over time, this deal is paying off by itself with its own cash generated, and it's going to allow us the cash flexibility to sustain our shareholder return strategy. So specifically, in the near term, what we're seeing is we are expecting to maintain our existing policy of $30,000,000 in dividend distributions per annum.

Speaker 2

We just announced the $7,500,000 associated to the 1st Q. And at the current price deck, we don't see any issue in maintaining that over time. At the same time, as you also noted, we performed the Dutch auction earlier in April. That's going to take our total shareholder returns this year to $80,000,000 about $80,000,000 which is significantly above what we had last year. Last year, we had $61,000,000 for example.

Speaker 2

So all in all, what we're seeing with this deal is that it actually expands our capacity to maintain these returns over time. There is going to be a capital to provide to provide an interesting yield to our shareholders. And lastly, I guess, the other angle that needs to be covered when you're talking about shareholder returns is that that's probably the cash component. We, of course, see with this deal that there is another angle associated to the intrinsic value of the company. When you look at our reserves, before this deal, we were talking about a 1P net asset valuation of about $1,100,000,000 and a 2P net asset valuation of about $1,800,000,000 With this deal, the 1P net asset valuation goes to $1,500,000,000 That's a 33% increase.

Speaker 2

And the 2P net asset valuation goes from $1,800,000,000 to $2,600,000,000 That's a 46% improvement. So all in all, we believe that our shareholders are going to be benefiting from both sides, on one end from the direct cash yield angle, if you will, but also from an intrinsic growth over time. Thank you.

Speaker 1

On CPO5, Martin would you like to take CPO5?

Speaker 4

Yes. Absolutely. Good morning, Alejandro, and thanks for your question. Like Andres mentioned in his initial remarks, we're really happy with CPO5 performance. We keep breaking records.

Speaker 4

You got to remember that in November 2018 2019 when we acquired Amerisur, that block was 8,000 barrels of oil per day. And like Andres mentioned, we're at 30,000 oil. We have put on production the well Indico 3, and it's producing good rates around 3,000 700 with no water. The rig continues drilling in the When you look at delineation like you were asking, remember we got 2 wells that we drilled delineating the Barco formation. They were Alcon and Perico.

Speaker 4

Perico is delivering more than 900 barrels of oil per day with very low water cut. Alcon had a completion challenges, so that well it's not producing as well. And as we continue delineating we are drilling the well Sizne. This is part of the barcode delineation that we're doing. We expect to be completing that well by late May.

Speaker 4

And after that, the rig will go and drill another exploration well called Lark. So that's kind of where we are on delineation. We expect to have that rig work in the full year.

Speaker 3

That's great. Thank you, Martin.

Speaker 5

Hi, Alejandro. This is Rodrigo. I'm going to tackle your question about Confuencia. Technically, what we see there is a continuation a continuity of Matamoros to the east part. Of course, we know that there are certain regional trends like the heavy, for example, how it's going to affect the IPI and the gravity of the oil.

Speaker 5

But there are always good things that we can mention here because during the evaluation period, we saw many good results from, for example, Vista and Pan America and Imajal, Palo Este and Agua del Canipa, where they are producing very good wells in the same trends where we are in Conflueresia. So that's from the technical point of view, what we see there, of course. And also we have a robust report from the color and Magnoton where they say that we have more than 200,000,000 barrels as resources in the area. But to be honest, we have to deal with the block. And what we are doing now, we are drilling 3 wells.

Speaker 5

We expect the result before the end of this year. And also, we had just finished 234 kilometers, square kilometer of seismic to complement this information. But we are optimistic and we expect a range of productivity in this area in line with the same range that we see in Matamoros.

Speaker 2

And could you please confirm the rates that you see

Speaker 3

in Matamoros then? Norte, I mean?

Speaker 5

Yes, we can go to Matamoros Norte. During the evaluation period, we run a rather sense. We not only use the 26 wells that we have in Matamoros, we also see the neighborhoods in these analog fields. And also, we have our reserve report from the Coloro de Monter. And at the end of the day, we see a range, a range between 600 1,000 barrels per day and 1,000,000 as most of the wells.

Speaker 5

But what we see now is a clear learning curve leading by our operator and partner because the most recent wells are outperforming. They are producing very, very good. You can see more than 2,000 barrels per day as a productivity. And another example, a good example that you can take is in February, the Matamoros 2073 was the best producer well in the basin. So that's why we believe that the range is adequate at the moment, but also we are seeing that our partner and operator is doing the things better every day.

Speaker 5

So that's why maybe this expectation is increasing in with the last result that we are seeing.

Speaker 3

That's great. Thank you very much.

Operator

Our next question comes from Daniel Guardiola from BTG.

Speaker 6

Hi, good morning, Andres and Jaime. I think most of my questions are on Argentina. It would be great if you could share with us additional details on the acquired assets. I'd like to know, I mean, I know Jaime just talked about the expected CapEx for the upcoming years. But I don't know if Jaime, maybe you could share with us the total size of the development plan agreed with Phoenix for the development of Matanora Norte And what percentage of the total identified wells or drilling locations is this planned forecasting to cover?

Speaker 6

That will be my first question. The second one will be additional details on the Matamoros Norte already drilled wells. So it would be great if you could share with us the IRRs so far that the company has seen per well. It'd be great to see the EURs of the type curve that you're seeing. And the average realized prices at which Fenix is basically selling its oil flowing out from Matamoros Norte?

Speaker 6

And the third question and the last question is on future growth opportunities. I mean, my understanding is that after the closing of this transaction, your net leverage is not going to surpass 1.1 times net debt to EBITDA, which is still very low, very healthy level. So I would like to know your thoughts on additional acquisitions similar to this one. And if you're thinking about it, what will be the main feature you will be looking at when doing another acquisition? That will be all.

Speaker 2

Daniel, the timing here. I'm going to try and cover a number of the questions that you made. And I'm going to then pass it over to Rodrigo, who's going to give us a little bit more color around Matamoros Norte to date. So let's start first with your first question, which is essentially around our development plan philosophy. And I would start with this notion, which is that one of the key reasons why we decided to partner with Pfenex and why Pfenex decided to partner with us, frankly, was that a clear alignment around where we wanted to take the asset, right, where we wanted to take the asset.

Speaker 2

And there is here a joint vision where we want to take the Matamoros development to 40,000 barrels a day. In parallel, we want to fully explore Confuencia and hopefully add to that. And what we're seeing is 4 blocks that over time are going to have massive economies of scale and of development pace and even commercialization. So that's what we're aiming to do, right? And that vision that you can extract from our release takes us to anywhere between 40,000 barrels to 60,000 barrels a day within 5 years.

Speaker 2

The work program budget that we've agreed with them essentially reflects that. So the numbers that you've seen, we quoted about 150 remaining drilling locations. That's what we've identified with Phoenix and that's what we want to pursue together with them. Same thing applies for Confuencia in the success case. Obviously, Confuencia is farther behind, if you will, in terms of its maturity.

Speaker 2

So those are not firm numbers. There's a derisking component associated to that. But in Matamoros, it's actually quite firm, and it's what essentially, it's what underpins the reserves numbers that you see us quoting. And how does that translate to actual activity? Essentially, we've actually committed with Phoenix jointly, we've committed to sustaining a 2 rig program over time.

Speaker 2

That's how we are seeing this develop. Currently, there's 1 rig. The second rig is going to come in the later part of next year. And after that, we're seeing a sustained 2 rig drilling program indefinitely, essentially indefinitely as more options as we go through this hopper of essentially 350 wells and hopefully, other options will arise. That's how we're thinking about it.

Speaker 2

The CapEx numbers that I quoted, Daniel, in the previous question are consistent with that. If you essentially do the numbers of 3.50 wells, given the well cost, it's going to take you to that place. Let me cover now the average realized prices. Essentially, what we're seeing and what we're expecting, Daniel, is I would say there's 2 angles here. There's production that goes to international markets and there's production that is sold domestically.

Speaker 2

Those ratios are going to change over time. If you look at the history, that's been the case. So we cannot be too deterministic about it. But as a rule of thumb, what I would suggest is that we can sustain at least 30% of sales are domestic and about 70% can go to international markets. That's what we're seeing.

Speaker 2

I think that's going to change over time as the market evolves. This is a basin that is growing very quickly and of course, that the commercial conditions around it as infrastructure matures and evolves are going to change as well. But generally speaking, that's the direction that we're seeing. I think what underpins that assumption that 70% of the barrels can be exported is that we are now seeing a surplus whereby the needs of the refining sector in Argentina are very well met. So that allows for a flexibility to export volumes.

Speaker 2

The sort of differentials that we're seeing are in the range of $10 to $12 versus Brent. That's the sort of discount that we are seeing and that we are modeling going forward as we look at this development. In terms of net leverage, you already quoted, Daniel, the number that we're seeing, that kind of 1.1, that's not to exceed over the near term. I think what could change that is there's 2 angles that could change that leverage. I think that if we have a success case in Confuencia, possibly our capital or possibly no, Our capital intensity will increase, but it will increase for the right reasons, right?

Speaker 2

It will increase for the right reasons with a substantial reserves, production and EBITDA price associated to that. We modeled that at a very high level. And even in those scenarios, we are in the 1.2 we actually don't reach 1.3 even in those scenarios, right, even in those scenarios. So that gives you an idea of kind of like the profile that this development has. What that means is that we do have remaining firepower to engage in attractive inorganic opportunities.

Speaker 2

The way that I would frame this is that in the near term, clearly, our focus is on delivering our plan, our existing organic plan and now a high quality incorporation of these assets into our portfolio. That is clearly a priority. This is a big investment for GeoPark and we are going to get it right and we need to get it right. And in that sense, we're setting up a team that is going to work with Phoenix to progress this development plan. As we've been discussing, we're going to be placing second deals.

Speaker 2

We're going to be securing the provincial approvals that we need to get the transaction closed within the next few months. We're going to set up performance management processes that allow us to have quality conversations with our partner and with the market around how this is evolving over time. And in the end, it's ultimately all about how can we efficiently and effectively priority. Having said that, we our growth aspirations do not stop here. And we will continue to be looking at options, strategic options that make sense for us.

Speaker 2

I think Andres, in the prior call, Daniel, when you asked about this, Andres was very eloquent about our pan regional aspiration. We have we are strong believers in the quality of Colombia, Brazil and Argentina as world class petroleum basins that we need to be in and that's unchanged with this transaction. Actually, what I would say is that this transaction shows that, demonstrates that and is evidence of that, but it's not the end. It's not the end, and we will continue to look at options that make sense for us. So I know that was a long answer, but I covered I think I covered 4 of your 5 questions.

Speaker 2

Over to Rodrigo.

Speaker 5

Thank you, Jaime. Hello, Daniel. This is Rodrigo. We said that range between 600,000 barrels and 1,000,000 as an average in the Matamoros North area. But let me put this in a frame in a time frame because what we see is a clear learning curve here.

Speaker 5

Most of the first wells in the area looks poorer than the recent wells that we are seeing. So that means that the operator is doing a great job in order to improve not only operational aspect, but also the way that they are at least landing the wells because they switch from a C2, what we call is a very technical definition, but they started to drill new wells in other landing zones in the area where we have or we see better productivity. So that's part of the learning curve that we are seeing. So that's why, if I had to summary this, the initial estimation that we see for the area is a well that can produce between 1,000,1500 barrels a day as a peak, at least in the 1st 2 months. Now we are seeing most of the wells producing more than 2,000 wells, 2,000 barrels per day.

Speaker 5

So that's a great news for us. It's recent because we are talking about wells that are producing for the last 3 months. But definitely, we see this trend in most of the activities that we they are carrying out in the field. So that's a great news for us and for Avel, of course. Another thing that we see with a optimistic eyes is the well cost.

Speaker 5

They were able to reduce the cost of the well more than $15,000,000 at the beginning. Now they are drilling between $14,300,000 and we expect to finish the year close to $13,000,000 per well. So that's what we expect. That's the intention of the operator and, of course, our intention, too. So that's what we are seeing in terms of productivity, well costs.

Speaker 5

And of course, we you asked about the plan. We've got to mention as Jaime mentioned, we expect to develop the 150 wells in the area. And that's the plan that we have as a minimum plan with them.

Speaker 1

And I think the IRR, he also passed about the IRR expected from the wells.

Speaker 5

The IRR is a range, of course, but we are seeing between 30% 70%. Thank you for reminding.

Speaker 6

Thank you guys for the very thorough answer.

Operator

Our next question comes from Roman Rosi from Canaccord.

Speaker 7

Good morning, guys. Thanks for taking the questions and congrats on the results and the acquisition announced. So just wanted to get a sense regarding the facility with Itol, I would like to understand how much are you expecting to use for the acquisition And what are the terms beyond you mentioned it's software plus 35%, but does it cover an undrawn fund cost associated? And additionally, what's the cash at hand target after the acquisition?

Speaker 2

Hello, Roman. How are you? Let me cover the Bitol question. So I would start saying that the Vitol deal, it starts with being about commercial performance. Financing optionality is a plus.

Speaker 2

It's an upside, but we underpinning its commercial performance. So this deal covers and secures a very competitive commercial discount for our Janos 34 production. That improved commercial differential is something that we're actually going to see coming across as better price realizations. I think we've quoted in the statement that this represents a $0.60 improvement over what we were seeing 2, 3 years ago. And that's a prime motivator for engaging in this type of deal.

Speaker 2

The nice thing is that beyond the commercial performance that this delivers, it does provide significant financing optionality. So the key terms are we have Bittol has committed $300,000,000 that we can draw at any time in the near term. It is unsecured. It has a very competitive interest. We quoted sulfur plus 3.75%.

Speaker 2

That's about 9% interest, which compares very favorably even with our own existing bond and the sort of interest that you would get in longer term financing in the bond market today. It also give us a grace period that extends through the end of this year without making any payments if we draw on the line and it can be repaid at any time. So it actually keeps our longer term financing options fully available for us if we believe that's the convenient thing to do and if the market conditions adjust to that. So that's kind of like the general framework. In terms of our plans with that line, I think the way that we think about it let me stand back and talk more broadly about how we are actually approaching this deal, the Vaca Muerta deal.

Speaker 2

So basically, when you look at the deal, at signing, we already paid $50,000,000 of the numbers that we quoted there in the statement. That's already been paid and we paid that with our own cash, right, with existing cash that we had, no financing whatsoever. And actually, let me tell you, the remaining balance after paying those $50,000,000 was 110,000,000 dollars So currently, we have $110,000,000 in the bank, and that's already going through the upfront consideration of this deal. The next big milestone in the deal is the balance that we need to pay at closing, and that balance is essentially $150,000,000 that need to be paid at closing. With that, we covered the entire upfront consideration of the deal.

Speaker 2

The other thing that we need to consider when we look at our CapEx is that the carry component, the carry component of the Confuencia wells is going to go in parallel to this. And what we are estimating is that, that's going to represent this year about $100,000,000 That's the estimate that we are expecting this year. So what that means is that in the remainder of this year, the deal is going to represent an extra $250,000,000 versus the plan that we had. How are we going to finance that? It's going to be likely a combination of the cash surplus that we are accumulating at these prices.

Speaker 2

We are accumulating a cash an important cash surplus every month at this price deck. And the remainder, very likely using the Itol financing facility. If I would give you an indication and with the caveat that this is flexible because we have total flexibility around this, I would give you an indication that we could use about $150,000,000 of the Amtoel facility this year to underpin this effort. And it represents no interest this year as it's covered by the grace period. If we do that, payments will start in January of next year.

Speaker 2

And you're going to see monthly amortizations for that figure of about $7,000,000 a month. That's the way to think about it from a modeling standpoint. Thank you, Roman.

Speaker 7

Great. Thank you, Jaime. And maybe a follow-up on the acquisition. You said that you expect to close in Q3, so that will be impacting your 4th quarter financials, right?

Speaker 2

Yes, Ronald. So basically, on this, I think there's 2 things that 2 key milestones that you need to consider. I think there is the effective date and then there is the closing mix. So regardless of closing, let me define closing. So for the purposes of this deal, the private deal between Phoenix GeoPark are fully complete.

Speaker 2

So that deal is complete. It's irrevocable. We have an agreement between us. Now when we talk about closing, we're really talking about the regulatory approval that the provinces in Argentina need to provide so that we are, if you will, the equivalent of a leaseholder, right? So that we come through in the public deed as a leaseholder.

Speaker 2

That's what we refer to closing on this. And there are 2 aspects. We need an approval in Neuquen for Matamora and we need an approval in Rio Negro for Confluencia. So we are expecting that to occur within the next few months. When that occurs, that triggers the payments that I mentioned previously of $150,000,000

Speaker 5

to Phoenix.

Speaker 2

So that's what closing refers to. Despite that or having said that, the effective date is going to be the 1st July. So the economic aspects of this deal are already effective starting on the 1st July. So we start to look at all the accounting of the deal on that fifty-fifty basis, the 50% basis. And how is this going to translate into accounting?

Speaker 2

What we see is that subject to closing date, and let's assume that we close by the end of the 3Q, what you're going to see is that in the 4th Q financial statements, you're going to see these fully consolidated on a line by line basis, right? As an indication of that, in 4Q, you're going to see anywhere between 6000, 7000 extra barrels a day of performance of production. You're going to see a share of cost. You're going to see all the different lines, what this deal implies. On the EBITDA line, what you should be expecting for 4Q would be an additional EBITDA around of around $30,000,000 That's what we are estimating at this time.

Speaker 2

So it's going to be fluid from here to here. But if I would have to give you a message is that consolidation starts post closing, but economic effects start the 1st July regardless of closing date. That's the bottom line.

Speaker 7

Awesome. And just one last question on Colombia. So a couple of days ago, there was a public hearing at the constitutional court regarding the non deductibility of royalties. So do you have any comments on that front? And say that they want to keep the nonreliability valid for 2023, which is one of the alternatives that the government is trying to get.

Speaker 7

So will you need to pay more taxes or how that will work for Geoparc? Thanks.

Speaker 2

Sure, Robin. So let me provide some kind of broader context on this. So really what's in discussion is that as part of the tax reform that was approved last year, the tax reform had 2 components. It had a surcharge linked to price environment on the corporate tax. That surcharge went from 0 to 15.

Speaker 2

That's in place. It's not in discussion. The other component was the nondeductibility of royalties, which was declared unconstitutional by the constitutional court at the time. What has happened is that the government presented a recourse whereby they requested like a second hearing on that by the constitutional court. What the constitutional court has communicated is not a final decision on it, but the willingness to perform that review, willingness to perform that review.

Speaker 2

While they do that, the prior decision still stands, still stands. So this does not suspend the decision that the constitutional court had already made of declaring that unconstitutional. What that means is that for we are actually in May, which is tax season, right? So we are in tax season. Companies are going to make a decision around how are they calculating the deductibility of royalties.

Speaker 2

What prevails at this time is that decision that, that is unconstitutional. So at least for Hill Park, we are going to act on the basis that that's unconstitutional, right? And now what could happen later on is that if the constitutional court decides to reconsider its previous decision, this will have an effect on next year's declaration, right? And there could be some form of a recognition of what was not paid in 2024. What we have estimated what we have estimated, the impact associated to that, we have estimated it between $12,000,000 to $15,000,000 That's the rough estimate that we have associated to that.

Speaker 2

It is a range because it depends on things like royalties paid on time, fluctuating volumes. There's some moving pieces around that. So we estimated in the 12% to 15% range. Importantly, in the guidance that we have provided to you guys around our full year 2024 EBITDA, we actually this actually doesn't have any impact on that because the way that we provided that guidance, it assumed at the time, remember that this was the plan that we announced back in November. At the time, we were operating under the existing tax reform.

Speaker 2

So for us, the this is an upside. If ultimately, this is confirmed as unconstitutional, it is an upside to our case, right? And if the government's idea of contesting this and timing this goes forward, it's not going to represent a downside.

Speaker 7

Okay, awesome. Thank you, Jaime, and congrats again on the acquisition.

Speaker 2

Thank you. Thank you very much.

Operator

And our next question comes from Ariana Kovaldi from Balen.

Speaker 8

Hi, thanks for taking my questions. Many of them have been answered already, but I have One for a couple of follow ups on the Vaca Muerta acquisition. First, regarding the development and completion costs that you shared, before understanding that local authorities have been in the $10,000,000 to $11,000,000 per well. So just to understand if there's difference between the numbers that you're targeting is because of various specifics. And or if you could share additional color on what you're seeing on your end.

Speaker 8

And also related to the Vaca Muerta acquisition, if you could comment on any from the regulatory side of things, right? How are you seeing the landscape in terms of the possibility of repatriating profits of the operations once they are ongoing? And one last one regarding quality discounts. Congratulations on the commercial agreement, people. So just to understand, if you're expecting any potential what are you seeing from the entry into operations of the refineries and Pemex lower exports of crude oil?

Speaker 8

Could this potentially benefit you in terms of quality discount? That would be

Speaker 2

a helpful color to have.

Speaker 8

Thank you.

Speaker 5

Hi, Orianna. This is Andres. Your line comes a little bit noisy. Let me repeat if I am to see if we understood your questions correctly. Your first question is respect

Speaker 1

to the drilling and completion cost of the wells that we are estimating for these assets?

Speaker 8

Yes. It has to do with the drilling and completion cost compared to what local peers have been reporting in the same area. Our understanding is that it is closer to perhaps $11,000,000 per well. So just to understand whether the difference is something area specific or if you could share additional color on what you're seeing. And also on the La Camorca transaction, the additional follow-up had to do with the regulatory challenges that you may see to the potential of taking profits from the operations?

Speaker 8

And the last one had to do with quality discounts and where do you see them going through the remainder of the year?

Speaker 1

So the second one is related to capital controls in Argentina and the last one to quality discounts on the crude sales, correct?

Speaker 8

Yes. Sorry for this. I'll work with the line.

Speaker 1

No, no. That's okay. That's okay. So, Rodrigo?

Speaker 5

Hello, good morning. This is Rodrigo here. It's important to remark that the drilling cost 2 years ago was close to $16,000,000 per well. Now the last 23, they end the year with $14,300,000 per well. So that's a tremendous improvement.

Speaker 5

Of course, this is because they learn, but also they introduce technology and the services prices getting down. So that's the trend that we see for future. In the model, we use for the next 2 years, dollars 14,300,000 per well. But after 'twenty six, with an extra drilling rig in the area, we are talking about $13,600,000 per well. So that's the base case that we have.

Speaker 5

But to be honest, what we see is a trend not only here in Argentina, but at the same time, you can see the same trend in Permian, The trend in efficiency in terms of drilling wells is continually improving. So that's why we expect better performance in the future and lower cost. But that's the cost that we use for the model.

Speaker 2

Orianna, I guess in terms of your the angle around benchmarking, I think there's several considerations here, but I think the most important thing is to look at the trend, right? Regardless of who is the operator, the what we're seeing in Vaca Muerta is a consistent trend where your cost per well is improving over time. I think as you would expect, there are differences from operator to operator. That's always the case. It depends on the standards that we use.

Speaker 2

It depends on a specific requirement of the locations and geographies where they are operating that allow synergies or not. The $10,000,000 to $11,000,000 cost per well that you're mentioning, we believe that is in the very low end. We prefer to use a more conservative assumption that ensures that we can maintain the robust well designs that have characterized Phoenix so far. That's something that actually attracted us to this deal and it has to do with this alignment of ways of operating and everything. And Phoenix is of the view that you need to ensure certain integrity standards and quality standards on the well, and we're comfortable with that.

Speaker 2

I think anything that can be delivered on top of the EUR 13,600,000 is going to be upside, and that is, of course, great news. With regards to your other questions, Orianna, the regulatory challenges in Argentina, I'd say the way that we structured that transaction is that the transaction needs to fly under existing under the existing regulatory environment, right? So we are not banking on any type of positive developments in the regulatory environment, even though there are clear winds of change that could suggest that those upsides are possible. In the near term, the biggest consideration that we've looked into is capital controls and particularly those associated to the influx of money going into Argentina and coming out of Argentina and what are the impact of that in the economics. I would say that our biggest consideration is that when you look at the profile of this program and the goals that we talked about this program where we want to grow the asset quickly over the next 5 years, what we're seeing is that it is not a big issue that capital controls because we actually expect that all the revenues and all the EBITDA that this deal generates to stay in country to underpin that growth in the near term.

Speaker 2

I'm sure that over the medium and long term, options will come up if that is needed. But the priority at this time is to make sure that we can fully fund the growth of that asset, and we're confident that we can do that under the existing regulation. And lastly, with regards to the quality to the evolution of discounts over time, I think it's going to be very fluid. And as I mentioned before, Orianna,

Speaker 3

on a

Speaker 2

prior question, the important thing is the trend. And the trend that we're seeing is that as Vaca Muerta grows, the surplus production relative to the requirements of domestic refining is just going to grow and grow and grow and grow, right? Surely, there's going to be a discussion between with the regulator and between operators about how do you distribute and how do you allocate exports capacities. Surely, that's going to develop over time. What we're seeing is that this even in a stress scenario where you have to fundamentally alter that balance between exports and domestic sales, the quality of these assets is such that it allows you a good return.

Speaker 2

So even in those scenarios, that is not a concern. So obviously, to the extent that you can fully if the market in Argentina develops in a way that you have, if you will, a free market with perfect conditions, that's only going to represent upside to this deal. Thank you.

Speaker 8

Thanks for your question. Just one follow-up because maybe I wasn't fully clear, but I was referring more on the Colombian side of quality discounts just to understand how are you seeing the evolution of potentially fewer exports out of Pemex because of the entry into operations of the low cost refinery having a potential upside into your heavy crude cement habitation. That was more of the angle on this, Amigos? Thank you.

Speaker 2

Yes, sure. Thanks for clarifying, Lorena. So I guess, in Colombia, I'd say I'll start with a simpler view and then kind of a more broader kind of market. In our case, the bulk of our production, which is down 34, we've already secured commercial conditions for those through the Vitol deal that covers about 20,000 barrels of production, give or take. And then what you're talking about is really the remainder, which is a combination of CPO-five, Dhanos-thirty four, exploration and Putumayo.

Speaker 2

The fundamentals for all of them are going in a positive direction. CPO5 is a super high quality crude that is extremely attractive to the local refineries in Colombia. We believe that we can maintain the existing differentials that we're seeing, the existing commercial differentials that we're seeing for that, which are actually a premium. We're actually getting a premium on Brent of about $5 a barrel on that. So we are very optimistic about the commercial differentials that we can get for CPO5.

Speaker 2

On the Putumayo front and Oriente front, what we're seeing is an interesting development where we where a number of players are actually quite interested in getting those volumes because they're able to export them through the Pacific or to make blends, special blends associated to that. So overall, what I would tell you, Ariane, is that the sort of differentials that you saw in 1Q, we believe we can sustain them over the medium term.

Speaker 8

Perfect. That's great. Thank you very much guys.

Speaker 1

Thank you.

Operator

And our next question comes from Aleksandra Andrade from JPMorgan.

Speaker 8

Hi. Thanks so much for taking my question. Mine is a quick one. I know you said you already have some existing infrastructure for transportation in Argentina, but just wondering because you said that there was a pipeline still that needed to be built in order to have all the proper infrastructure for exports and transportation. So just wondering if you could comment a little bit more on that.

Speaker 8

Thank you.

Speaker 2

Hi, Alejandra. This is Jaime. So yes, effectively, as part of this transaction, we secured the access to the medium capacity that we need to make the deal work. Essentially, we secured entry into the duplicate pipeline that provides us with a capacity of 19 the equivalent of about 19,000 barrels per day. Of that, about 5,000 barrels a day are already in place and the pipeline is under construction and it's expected to be fully delivered by April 2026.

Speaker 2

So by that time, which is when we are starting to we're going to get near to that plateau production, we are expecting to have that capability fully in place. There's also open market access. There's open to a redundant capacity in that pipeline where there's the ability to access that. And there are other projects in place to construct additional capacity in Argentina. But with respect to this deal in particular, what we have secured is that 19,000 barrels a day that I mentioned.

Speaker 2

That covers essentially 50% of the plateau, right? So the way to think about it is that we have secured transport rights to export ports for about 50% of the production already, and there's optionality for infrastructure that's going to come about over the next couple of years.

Operator

Thank you so much.

Speaker 2

Thank you.

Operator

We currently have no further questions. I will hand back over to Andre Ocampo to conclude.

Speaker 1

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 field and our operations or call us anytime for further information. So thank you, and have a good day.

Operator

And this concludes today's call. Thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • GeoPark delivered Q1 adjusted EBITDA of $111 million at a 67% margin and a 35% last-12-month ROCE, while setting 12-month production highs in its Janus 34 (56–57 kbd) and CPO5 (>30 kbd) blocks.
  • The balance sheet strengthened with >$150 million in cash, 0.8× net leverage and a $500 million oil prepayment facility with Vitol, offering improved commercial terms and financing optionality.
  • Over the past four years GeoPark generated >$475 million of net free cash flow, returned value via a 8% share buyback and declared a $7.5 million dividend for June 14.
  • In its 2023 Sustainability Report GeoPark reduced carbon intensity by 18% to 10.6 kg CO₂eq per barrel (7 kg CO₂eq at Janus 34), the lowest among Latin American upstream peers.
  • GeoPark agreed a transformational Vaca Muerta acquisition—Matamoros Norte adds 12 kbd current output, targets 40 kbd plateau from ~150 wells, 50 million boe of 2P reserves and $90–100 million 2024 EBITDA.
AI Generated. May Contain Errors.
Earnings Conference Call
GeoPark Q1 2024
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