GeoPark Limited (GPRK) Earnings Call Transcript & Summary

Good morning, and welcome to the GeoPark Limited Conference Call, following the results announcement for the third quarter ended September 30, 2023, and the 2024 work program and investment guidelines. [Operator Instructions] If you do not have a copy of the press release, it is available at the Invest with Us section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this 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. 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 under 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; James Deckelman, Chief Exploration Officer; and Stacy Steimel, Shareholder Value Director. And now I'll turn the call to Mr. Andrés Ocampo. Mr. Ocampo, you may begin.

Good morning, everyone, and thank you for joining our call. We are here today in Bogota, with our team to report our third quarter results and next year's work program and budget guidelines. During the third quarter, GeoPark invested $44 million drilled, 14 wells and produced approximately 35,000 barrels a day equivalents, impacted by temporary production shut-ins in CPO-5, which were restored in late September. Production is today at approximately 39,000 barrels a day equivalent. The company recorded revenues of $192 million and adjusted EBITDA of $115 million, a margin of 60%, which means that for every dollar invested, GeoPark generated approximately $2.60. As a result, net profits reached $25 million or $0.44 per share. Over the last 12 months, our return on capital employed was 42%. In 2023, GeoPark continues to return value to its shareholders. Between share buybacks and dividends, expect to exceed $50 million, including the announced dividend of $7.5 million to be paid in December. This should be above the target of 40% to 50% of free cash flow for the year. After investing in our assets, servicing our debt and taxes, as well as distributing cash back to shareholders, GeoPark ended the quarter with $160 million in cash on the balance sheet and a net leverage ratio of less than 1x. Our 2023 drilling campaign continues to deliver positive results, particularly from our accelerated activity during the second half of the year with 12 rigs working. Multiple new plays are being opened by our team and portfolio, which are adding new exciting appraisal and delineation activity for the remainder of this year and next. The horizontal well campaign in Llanos 34, with the most recent well producing over 3,400 barrels a day, currently has 2 full-time rigs executing back-to-back wells and is expected to continue. The Toritos discovery in the Llanos Basin is flowing 1,300 barrels of oil per day and represents a new exciting stratigraphic play in the Paleogene, which we will continue to appraise and delineate. Zorzal Este, another Paleogene prospect, is showing positive preliminary logging information and will be tested in the next couple of weeks, may also open more drilling opportunities. The Halcon 1 well in CPO-5, which is showing positive preliminary logging information, will be tested in the next couple of weeks and will be followed by Perico 1 well in the same Paleogene play and trend. The U-sand, new play in Ecuador, developed by our exploration team with 3 successful wells already flowing 2,700 barrels of oil per day and more to come. Our 2024 drilling campaign will be focused on continuing the development in Llanos 34 with water plotting project and horizontal wells campaign as well as on appraising and delineating the new plays being opened by the 2023 program. As always, the work program and guidelines are flexible and can be adapted based on changes in oil prices or other conditions, as well as drilling results. We expect to invest $150 million to $200 million to drill 35 to 45 wells and produce between 37,000 and 40,000 barrels per day with production growth expected to come from Colombia and Ecuador, partially offset by Brazil and Chile, which have no capital allocated. We expect to generate between $420 million and $550 million in adjusted EBITDA at $80 to $90 Brent. Approximately 20% to 30% of our CapEx will be allocated to exploration and the rest will be allocated to appraisal, delineation and development activities as well as facilities. We are also executing the third largest 3D seismic acquisition program in Colombia across 2 blocks adjacent to CPO-5, complemented also by an additional seismic program within the CPO-5 block. We expect this large new seismic information will allow our subsurface team to define and map new potential prospective areas and plays. As always, after fully funding our CapEx program, we will continue to allocate our cash flow to return value to shareholders and continue to strengthen our balance sheet. We expect to return approximately 40% to 50% of our free cash flow after taxes and debt service back to shareholders through a combination of our base dividends, share buybacks and/or extraordinary dividends. We're finishing the year with great results, which are positioning GeoPark for an even better 2024. We look forward to continue delivering and reporting on our progress in the incoming quarters. Thank you, and we will now take your questions.

[Operator Instructions] First question comes from Alejandro Demichelis from Jefferies.

A couple of questions, please. The first one is on production. Could you please give us some granularity on how you see that production into next year evolving? Because you have given us quite a wide range of production. Then the second one is your production costs have been a bit high this quarter. Maybe you can give us some kind of indication of how you see that production cost evolving over time, say, over the next 12 months? And then on the exploration side, you have made some good progress. Maybe you can give us some more detail on how you're seeing Zorzal, Halcon, and what excites you in the program that you have for the next 12 months, please?

Alejandro, thanks for the question. This is Martin. I'll start with the first question that you asked around production for 2024 and more granularity, and then I'll pass it on to Andrés and Veronica. So for 2024, our average for the year will be between 37,000 and 40,000 barrels of oil equivalent per day. That's around 1% to 10% increase from 2023. And when we look at each of the assets, Platanillo and Chile, they will be declining around 10% to 30%. As Andrés mentioned, there's no development capital allocated to these 2 assets. If we move to Brazil. In Brazil, we expect flat production. Llanos 34 will be flat to slightly decline. And then in CPO-5 and Llanos exploration block, we expect growing. So overall, Colombia and Ecuador production, we expect an increase of 3% to 11%.

Thank you, Alejandro. Good morning. Moving on to your question on production costs. We've seen an increase in the production cost over the past quarters. A few significant drivers of this on the one side, energy cost in Colombia that have recent given a linear weather pattern. We saw a significant increase in the third quarter. It has since receded a bit and started to stabilize. But that accounted for about 50% of the increase that we saw in the third quarter '23 alone. Additionally, the peso has appreciated. The Colombian peso has appreciated that was about 10% in the third quarter. Also affected our local currency denominated costs, which are about 70% of production costs. One factor that is particular to the third quarter has to do with the composition of sales. So we have a drop in inventories for Putumayo and Oriente assets, those have higher overall production costs than our Llanos Basin asset and so they move that averages, but those are factors that tend to even over time. All in all, for 2023, we still expect consolidated production cost to be about $10 to $11 per BOE, in line with the guidance that we previously provided. If we look to 2024, we still expect to see pressure both from energy cost in Colombia and from inflation. The guidance that we provided yesterday within a work program, includes $160 million to $170 million worth of OpEx. That equates to about $12 per BOE, considering volumes produced. I have to say, our team will continue to focus on implementing constituency initiatives, and we look forward to doing that over the next year.

Alejandro, Andrés here. So to comment on your question about which excites us from these new activities or this new plays, we really believe these are more or less the 4 or 5 we mentioned in the introduction and in the release are really exciting new opportunities. I'll start with the horizontal well campaign in Llanos 34 that is really delivering great results with the last horizontal wells, having been drilled and completed at more than 35% cost saving to the first one. And it was put on production a lot faster. It's also flowing 3,500 barrels a day. That's really exciting. And having 2 rigs working on that play, back to back, also makes us really excited about that. In terms of the things that exploration opportunities have been opened up this year, all of them are slightly different and exciting from -- for different reasons. The Toritos oil play is Guadalupe, Paleogene formation, stratigraphic type of trap. So as you know, like it happened in Tigana and Jacana, which are mostly stratigraphic plays in that same formation, stratigraphic traps tend to be more risky or difficult to find. But once you find them, usually are associated with bigger volumes. So we expect to add more wells before the end of the year. And the campaign for next year also has some significant operation and development drilling in that new opportunity. All of these plays, we're getting results as we speak. Some of them have been testing for a couple of weeks. Some of them are going to be testing for the next few weeks. So obviously, it's very preliminary everything we can say now. But we look forward over the course of the next few months, as we add more activity to these and have more information to them. Hopefully, we can be more precise and give more details on what does it mean in terms of volumes and activity. Zorzal is an updip well from the discovery earlier this year in the Zorzal 1 well. So we just drilled Zorzal Este 1 well. It encountered about 40 feet of net pay, net oil pay in the Guadalupe formation, is a down-thrown structural trap. If you remember, back in 2012, when we discovered the Tua field in the Llanos Basin, it was the first -- the Tua field was the first down-thrown field in the basin that was discovered, and that opened a new play. And following that, we had a number of discoveries in the basin. So Zorzal is exciting because it's another down-thrown structural trough that we discovered. So right now, as I said, the logging information is showing more or less 40 feet of oil pay with no oil water contact in that formation. So looking forward to test this well. I mean so far, the result looks encouraging. But obviously, as always, we need to put the barrels on the tank before we celebrate. But if the testing is successful, we see a lot more activity coming from that field. Halcon is very important for us because it's in CPO-5, is in the northern part of the block. And if you remember, when we purchased Amerisur some years ago, we had multiple reasons for that acquisition. But one of those reasons was because we saw there was a lot of potential in the Guadalupe formation up in the northern part of the block. Halcon 1 was the well to -- that we were drilling to hopefully prove that thesis. So again, this is a well that we're going to be testing in the next couple of weeks, but the logging information today is showing that there's an oil pay with no oil water contact in that area. Also, given these results, we have already agreed with the operator, that there's going to be a second well drilled back-to-back to it. So once Halcon is tested and completed, we're going to move to Perico 1, to continue delineating this new play that is opened in the northern part of the block. So also very excited about that. And the last one is Ecuador. And in Ecuador, our geoscience team developed a new geological model to track the traffic mechanism of the U-sand inside of some of our blocks. And we've drilled already 3 wells -- 3 successful wells following this model, producing 2,700 barrels a day of gross oil. Today, the production in Ecuador is 3x what it was last quarter. So we also think this opens up a lot of activity and opportunities for us to continue delineating and appraising this new play. So again, I'm sorry, I didn't give you a short answer or which ones we're excited most, but I think these 5 are the biggest highlights from what we can say. And also, I would like to take the opportunity, we're talking about exploration. I would like to introduce James Deckelman, who's our new C Ex O, who recently joined the management team. He's with us on the call and he'll probably, in the future, be taking these questions. But James, if you want to add anything I may have missed?

Excellent. Thanks, Andrés. Thank you so much for the introduction. Alejandro, my thanks to you for the question. We appreciate that very, very much. I'd like to begin by first saying that I'm very pleased to be a part of this leadership team, a very, very high caliber, working assets of such high-quality in basins that are so very prolific. These are basins that I worked earlier in my career and is very pleased and I'll be levering that experience and success here at GeoPark, principally in 3 areas. One is organic and inorganic growth; secondly, to expand our organizational capabilities; and the third thing is to develop some differential technologies. So again, very, very pleased to be here. Since I joined the company quite recently, with respect to your question regarding what we're very excited about, I would reinforce some of the comments that were made by Andrés. And what's really of interest to me are the high-volume stratigraphic concepts that we're now developing both in Colombia and in Ecuador. What's germane here are 2 key points. One is the volume potential of these traps and also the play repeatability. And what we're seeing in the Toritos play, for example, is clear repeatability within Block 123, therefore, significant scope for additional volume potential as well as a possible extension into CPO 4.

Okay. That's great. As a small follow-up because Andrés, you mentioned the pay at Zorzal, but you didn't mention the pay at Halcon. Could you give us some kind of range on the pay on Halcon?

Yes, it's more or less 25, 30 feet, which is similar to what we've seen in other parts of -- in that formation in other parts of that area. So it's more or less within what we expected.

And just adding to that, that well also intersected no water contact, which is very, very important as well.

The next question comes from Stephane Foucaud from Auctus Advisors.

I've got two, first, looking at 2024 production guidance. Given the level of activities and the new field entering production, it looks a bit conservative. So I was wondering whether you can give us a sense of why you would expect production to be at the end of 2024, when the Llanos 123, 87 and Ecuador are in full production? That would help us, I think, me, to have a view on where in 2025 could be in production. So that's my first question. Second, on 123 and 87, what do you think, from what you see so far and the development program, what do you see being the production capacity at each of these fields, it's a bit early stage but you may have some sense of that. And lastly, what do you expect to pay any cash tax in Colombia in Q4 '23? And if yes, how much?

Stephane, this is Martin Terrado. Thanks for your question. I'll cover the first one around production exit for 2024, and then I'll pass it on to Andrés and Veronica again. So for 2024, as Andrés mentioned in the initial remarks, the average will be 37,000 to 40,000 barrels of oil equivalent per day. And as you can imagine, next year is going to have significant appraisal activity in this cover field. So the exit will depend on the learnings and the results of these fairways, that we will be appraising. In Ecuador, we're going to be drilling between 2, 1, 7 appraisal wells in Llanos exploration, 3 to 9 wells. So at this point, that's as much as we can share.

So I think Stephane both the first and second question. This -- what is different about next year's program is that it has maybe a more significant component of the delineation and appraisal than maybe in the past couple of years. I think in the past couple of years, it was either development or new exploration. And it was very easy development. We associate production and exploration. We don't. In delineation and appraisals, there's some risking associated with it. And you can see that the range of activity on each one of these delineation place is pretty wide. I mean some of it goes to, I think, in Ecuador, we're going to do something like 2 to 7 wells. And I think Llanos exploration goes from 3 to 9 wells. So that's a pretty wide range. And the reason for that is because we're in early stages. We're seeing, what we're seeing, it's encouraging. We hope we can be on the upper side of the range. And if we are there then, yes, we would be on the derisking side of the play. And hopefully, what that brings is a lot more upside on the production side than what we're showing in our guidance. So probably, that is the main reason why it sounds a little odd, the level of activity compared with the level of production that we're showing. Also, part of the production, as it was mentioned by Martin, it is offset by 3 assets that we have that are producing today collectively something around 4,000 barrels a day that are not getting any capital associated that are going to be declining. So that offsets a little bit the corporate production growth. Sorry, on the cash taxes, Veronica, do you want to make a comment?

Stephane, so as you well know, income taxes in Colombia are paid primarily in the second quarter. So the bulk of our cash taxes we have already paid for this year. Now on every quarter, we do have withholding taxes that are part of that cash tax payments. And so if we look at the fourth quarter, we would expect on and about $10 million to $20 million of those to be paid for during the quarter, and that is included and in line with the guidance, we provided previously.

[Operator Instructions] I'll now hand the call back to Mr. Andrés Ocampo for any concluding remarks.

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

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.