GeoPark Limited (NYSE:GPRK) Q2 2022 Earnings Conference Call August 11, 2022 10:00 AM ET
Company Participants
Andres Ocampo – Chief Executive Officer
Veronica Davila – Chief Financial Officer
Martin Terrado – Director of Operations
Conference Call Participants
Alejandro Demichelis – Nau Securities
Stephane Foucaud – Auctus Advisors
Oriana Covault – Balanz
Roman Rose – Canaccord Genuity
Operator
Good morning and welcome to the GeoPark Limited Conference Call following the results announcement for the Second Quarter ended June 30, 2022. [Operator Instructions] If you do not have a copy of the press release it is available at the Investor Support section on the company’s corporate website at www.geopark.com. A replay of today’s call may be accessed through this webcast in the Investor Support section of the GeoPark corporate website.
Before we continue, please note that certain statements contained in the results press release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. Risks include a variety of users, including competitive developments and risk factors risked from time to time in the company’s SEC reports. Those risks are intended to identify certain principal factors that could cause actual to differ materially as described in the forward-looking statements but are not intended to represent a complete list of the company’s business. All financial figures included herein were prepared in accordance with the IFRS and are stated in U.S. dollars unless otherwise noted. Reserves figures correspond to PRMS standards.
On the call today from GeoPark is Andres Ocampo, Chief Executive Officer; Veronica Davila, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; Stacy Steimel, Shareholder Value Director.
I’ll now turn the call over to Mr. Andres Ocampo, Mr. Aka, you may begin.
Andres Ocampo
Good morning, and thank you, everyone, for joining the call. We’re connecting from Bogota, Colombia with our team to report on our business performance and second quarter results.
This quarter can be characterized by a successful high momentum transition or on the ground full cycle performance with record results and a lot of good work and drilling underway, opening even more opportunities for the rest of the year. We would like to thank the entire GeoPark team for their discipline and success in delivering another record quarter by increasing production and cash flow, reducing emissions as well as paying down debt and accelerating shareholder cash returns.
In terms of operations and our base business performance during the second quarter, we drilled 9 wells and increased production to an average of almost 39,000 barrels a day, a 14% increase over the second quarter last year. We remain on track to achieve our recently upwardly revised full year average production guidance of 385,000 to 40,500 barrels a day. With higher oil prices and production, we were able to maintain our costs in line and increase our cash flow generation significantly.
Our adjusted EBITDA jumped by 140% over the same quarter last year to $145 million, which after spending $32 million in CapEx, allowed our cash flow generation to grow to $113 million. This means that every dollar that we invested delivered 4.5x in adjusted EBITDA and are a proof of the quality of our assets and team. Bottom line, our profits increased to $68 million, more than $1 per share. We have been allocating our cash flows following the same priorities as always. First, invest in our assets and fund our work program and in the current oil price environment, prioritize and accelerate production; and second, always a combination of debt reduction and returning value to our shareholders.
In the year-to-date, we invested more than $70 million in our assets to drill more than 20 wells. We paid down $103 million of debt, returned $25 million in cash to our shareholders and ended the quarter with $122 million in cash. In the second half of the year, we’re looking to accelerate the investments in our assets by doubling our CapEx relative to the first half of the year. We expect to also fully repay our 2024 bonds at current oil prices, and our dividends were just increased by 50%, and we also will continue executing our accelerated share buyback program.
We’re also investing in our energy transition efforts as we just completed the full connection of our main producing fields to the national power grid in Colombia, which is largely hydroelectric power. We’re also completing the construction of our solar park, which means that soon, our main fields will be consuming electricity that is 70% to 100% generated from renewable sources. This is a big step forward towards our emission reduction targets and has the additional benefit of producing both cost savings and improved operational reliability. On governance, we would like to welcome Brian Maxted and Carlos Macelari to our Board, 2 proven oil finders with extensive experience in our industry and our region who represent a significant contribution to our majority independent Board and our company.
We also welcome to the Board and thank Marcela Baca for her more than 10 years of incredible contributions to our management team as well as to our company. Hartela is one of the most experienced oil and gas professionals in Colombia today and is a great addition as well. We had a great half of the year, producing record results and our team is excited about what is coming. 11 rigs are currently working in our assets and 3 more rigs are on the way. We’re executing a multiple catalyst work programs that includes in CPO-5, further accelerating production with 1 to 2 more development wells in the Indicofield. We’re also testing the Cantelamenco exploration well during the upcoming weeks.
And then, there’s a second rig that is currently moving to initiate the exploration campaign in the Southeast area of the block. In the Gen4 block, a third rig is already in place to continue developing the main fields and continue adding production. In our general exploration acreage, we will be spinning the first well in the Janus 87 block, the first well since we added the block in the 2019 land grab. Finally, in Ecuador, we will be drilling the first well on our operated Speco block and are discussing more development drilling with our partner in the Perico block.
We look forward to reporting results on these activities in the upcoming quarters. And we thank you. And also now we’ll be happy to answer any questions you may have. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Alejandro Demichelis with Nau Securities.
Alejandro Demichelis
Yes. A couple of questions, if I may, please. The first one is, how are you seeing the proposal for the tax reform that the government in Colombia has put forward. And as a bit of a follow-up from there in your remarks, Andres, I think you mentioned that you are in the process of the budget for 2023. And you see that as the most powerful tool that management has. So should we expect some changes in the direction of that kind of budget for next year given the proposal of tax of the garments? That’s the first question. And then the second question, on the exploration side, now that you have this new discovery in the block CPO-5, how are you seeing the rest of the target through the end of the year, both in the northern part of the field and also in the Southeast, please.
Andres Ocampo
Good morning. Thank you, Alejandro. To address your first — the first portion of your question, — we have been, of course, looking in detail at the greatly announced at form proposal and still very early days in the process, they propose to need to go to Congress to get commenced and bolted on. But what we are seeing is the main provisions that will be affecting our industry overall and our company. Those are the main of those are the inclusion of an export tax crude and also the removal of royalties reduction. Of course, we’ve been analyzing the impact on our business, as I mentioned, and we expect to get further clarity as time goes right to be able to report back to all of you to those as of now. In terms of royalties, what we would like to highlight is produces in Colombia are calculated as a percentage of volume for our company, that’s about 8%. And so what the current proposal appears to address is that 8% calculation, which was the core deductible from the income tax peculation will not be able to action forward.
Keep in mind, that this affects income tax bill of 2023. So is the reform goes forward in the same fashion as one has happened in Colombia in the past, then the expectation would be that the non-deductibility is applied for the 2023 tax, which is payable in 2021 is 8%; that’s 100% of the royalty. So and it affects the ones that are not in kind. So it’s probably 70% of our royalty. So you should assume something like 6% or so, which is the average of what in so far in our company.
Alejandro Demichelis
Sure. But then to export tax, it is really — we will be very dependent on, of course, final letter of the reform, but also on how every — each and every company sells their volumes, right?
Andres Ocampo
If we look at our composition, we have a portion of direct exports, which is 5% of our overall sales. Then roughly half of those are sold domestically — none of those of our overall sales are sold domestically, but then are exported by our clients. So technically, you should be able to consider those as exports. And then the remaining 35% to 45% are sold domestically and refined domestically. It is still, again, also dependent on the sales, but it’s still unclear how the market will take this overall regulation. In other markets with this type of tax, the overall market tend to go towards export parity pricing, whereby regardless of how the volumes are sold, overall pricing in the market gets affected. But as I mentioned at the beginning, it’s very early stages. We expect to get more clarity. And as we do, we will be pleased to share with Olof. Yes, I’ll take the second one on I’m sorry, just to follow up on that. Are changes there aren’t enough to change the way you are thinking about capital allocation for next year.
Veronica Davila
So, as Andres mentioned in his remarks, we are at the beginning of our capital allocation process. This is a thorough process that goes all of the following weeks and culminates with the approval of our budget in November. As you would expect, of course, all of these items will be considered, but I would like to frame that within our — the overall form as we define the — our projects, what projects will be going forward. This is going to affect one of the aspects, the economic aspects that we will continue to look at the technical, the strategic and of course, environmental and social aspects of each and every one of those projects. We will make them compete. And the Colombian projects make and be affected by the expected tax reform. But we will carry out the process as we have very thoroughly and in detail and we’ll come up with the program by November.
Martin Terrado
Alejandro, this is Martin Terrado. I’ll respond to the question on acceleration for CPO-5. So we grew year-to-date 2 exploration wells in the block and 1 development well. The 2 exploration wells, the second one is the CanteFlamenco that Andres mentioned, we have multiple targets vertically on this exploration well, mainly aqua, Guadalupe and Mirador preliminary results from the ante Flamenco show that we have oil pay in the Mirador formation. So right now, we’re doing the completion of that well. The next step is to move that rig to the Indico field. We’re taking advantage of the oil prices and moving that rate to drive 2 development wells so that we increased production of the block. We will come back to the north.
Again, these wells, the first one, Urakawas 8 kilometers from the Jacana extension. So the Guadalupe formation is one that we haven’t tested yet, and we need to get closer to the north. We’re building the pads on that area. And there’s also mentioned that we have a second rig that is finalizing the mobilization in the Southeast of the block. So we’re going to be spudding our first well targeting the wake formation in the Southeast that was called Aptris. So September, October, we expect to have sparing of that well. And overall, when we look at our exploration potential in the block, we keep being really encouraged. We have the seismic that we acquired that the teams are looking at additional prospects.
We have some prospects that jointly, we have already agreed with our partner to drill closer to the IndiComriposa area. And we got seismic in the northeast of the block that late in the year, early next year, we will be acquiring. So that’s a little bit of a flavor of where we’re on CP [ph].
Operator
Thank you for your question, Alejandro. Our next question comes from [indiscernible].
Unidentified Analyst
Just want to go back on to that question around 2023. Things do start to slow down in Colombia. What is your permitting situation there look like today with respect to what you would need to carry out a program in next year…
Martin Terrado
Phil, this is Martin again. So we have different buckets. The bucket of the things that were fully licensed, some of those include basically channel 34 and 32, which is maybe development but some appraisal — then we move to the fully licensed that is mainly exploration, and that’s where CPO-5 is Janus that we will be drilling our first wells soon in the next couple of months and Channels 94, all fully licensed. The next bucket, if you want to call it, is the almost complete license, and that’s channels 124 and Chanos 123. And by almost complete, basically, we have turned in all the documentation. And in some cases, we already got we’re close to in the next months to get those approvals so that we can start drilling wells, again, channels 124 and 123.
And finally, we got the target of the things that are later in time and on those, there could be some delays, we’ll see. And that’s where we have Putuo and some of the channels blocks that are on the west, 104 and 86. But that’s kind of where we are on licensing of channels. So technically, the core areas, the really core central areas are 100% fully licensed and the next ones in line are almost fully licensed, and we’re in very, very good shape.
Operator
Thank you for your questions. We now have a text question from Stephane Foucaud from Auctus Advisors.
Stephane Foucaud
How much net pay was encountered [indiscernible]?
Andres Ocampo
Stephan, preliminary log-in results show that we have around 40 foot of pay in the Mirador formation for Canteen.
Veronica Davila
Thank you. Stephane’s second question. Since the official appointment of the new President of Colombia, have you seen any important announcements that would impact the business.
Andres Ocampo
Yes, I think that was answered by Vero and the biggest one is the tax reform that was announced yesterday. That is, in our view, the main measure that was taken that will definitely impact our business. And last question from Stephane — right now, our current production net GeoPark between 39,000 and 40,000 barrels of oil equivalent per day.
Operator
Our next question comes from Oriana Covault with Balanz.
Oriana Covault
I had three. If we could go one by one that would be great. And the first one with regards to lifting cost, we observed a rise during the quarter compared with the previous one. Just curious on how much of that increase should be attributed to increased activities? And what are you seeing from inflationary dynamics mitigating factors or alternatives that GeoPark prevent margin erosion.
Martin Terrado
Yes. Oren, this is Martin again. So overall, we’re seeing about 5% to 10% increase on materials and services, where we see the highest increases from artificial lift, so basically our pumps between 15% to 20%. Overall, we’re seeing about 10%. That was included in our budget. So we’re within budget. When you look at the details, you might have seen in the report some increases, for example, in Chile, where our OpEx went up for the quarter because we had pooling activities to increase oil production. That is going to be gone by the next quarter. We have a successful campaign and the pooling is not there anymore. In Ecuador, again, a brand-new block where the OpEx was not the main objective initiative, and now that we have 3 wells on production with close to 3,000 barrels of oil equivalent per day.
We’re working really close with our partner to bring down those OpEx. We have things that we have identified, and I’ll give you a couple of examples. As we are contracting for our block, we’re seeing that we were able to adjust better the contracts and get better prices. For example, on transporting of liquids in and out of the build platforms. And we’re also looking into opportunities such as connecting to existing pipelines. This was Intracampos so there’s a lot of infrastructure around. And in channels, we are on track on our production OpEx.
Oriana Covault
Perfect. That’s very clear. Perhaps my second one more deal to the excess cash uses. And given the recent dividend increase that you announced, maybe like where should we expect to see dividends head in more broader terms or possible changes or perhaps a defined dividend policy? How should we think of this?
Andres Ocampo
Thank you, Oriana. Good morning. We will continue to allocate our cash flows within our well-established set of priorities, and Des alluded to this, first and foremost, fund our assets and then this combination of the lever and shareholder returns. To your specific point on dividends, — as you may recall, we doubled our dividend last quarter, and we have now increased it by an additional 50% to be paying out $7.5 million per quarter. That accounts to on and about a 4% dividend yield. We see this as the base dividend, something that is sustainable, even in low oil price scenarios, but also that is scalable as our company continues to grow. So we will be looking at our dividend payments within our full shareholder return strategy and continue to keep improving our shareholder return that we have had over the last few quarters.
Oriana Covault
Got it. And just one final one from me. Just picking up on some of the possibility of the flexibility in capital allocation due to perhaps a potential slowdown in the regulatory environment in Colombia. Just curious like what other avenues you might be considering given your presence in Ecuador or maybe looking at new jurisdictions to start exploring.
Andres Ocampo
Thank you, Ariana. As Martin described, right, we — the call of our assets, especially with no Basin is either fully licensed or about to be licensed to be able to — for us to keep up with our activities in the remainder of the year in the following year. But irrespective of how the different measures take place, the final forms and how ups and downs in Colombia, but we’re used to this, right, in every Latin American country, conditions are very fluid, and they change. We have always had a unresonal approach as we look at our portfolio. It is a key aspect of our business strategy, and it will continue to be.
So we look at diversification, as I think we’ve said many times, we probably became less regional than intended. So one of the challenges that we have is also to continue expanding that footprint outside Colombia. We have assets in our portfolio that we can accelerate like 3 fields in Ecuador and fills in Chile. But obviously, that diversification now obviously become more relevant.
Oriana Covault
Perfect. Thanks for the questions [ph].
Operator
Our next question comes from Roman Rose with Canaccord Genuity.
Roman Rose
I will ask the sequentially, if I may. The first one is following one of Oriana’s questions. So regarding the — you set some the invent of the 2027 notes, right? And so the restricted being impacted. I want to understand what is the maximum buyback we could expect from Clark given these changes to inventory.
Andres Ocampo
Thank you, Roman. Complementing the question that Ian asked as well. We spoke about dividends and moving on to the we have had, for some time, a program to repurchase up to 10% of an outstanding shares. We have been executing on that buyback. We paid out roughly $15 million this year and $5 million of those in July alone. So we expect to be able to sustain this pace at current market conditions and, of course, keep working, as I mentioned, on our overall shareholder return strategy as we do always. So we’ve accelerated the trend and you should expect us to continue our acceleration.
Roman Rose
Perfect. And this one long for Martin. As you are finishing the transition in electricity generation in a 34, I wanted to ask you how much of OpEx is related to entice generation? And if we should expect a significant reduction in operating expenses there.
Martin Terrado
Yes. Ramon, no problem. About 40% of our OpEx in channels comes from a generation of electricity. So this is something that is big for us and it’s good. We expect around 10% of OpEx reduction due to the connection to tell. And it could fluctuate depending on the price of electricity going forward, but it’s about 10%, what we expect.
Roman Rose
Perfect. And the last one has something with royalties. I wanted to understand, I know that high price cost will really depend on oil prices. But I wanted to understand how should we think of the factor part of this royalty going forward.
Martin Terrado
Sorry, Roman, did you ask about the export tax — the payment?
Roman Rose
Sorry. Yes. We have originated — go ahead, please.
Martin Terrado
Sure. Thank you, Roman. So in terms of royalties, and I think you’re linking right back to tax reform, the cash royalty is 38%, right? There are other components of government take, such as the extractor that you mentioned. And those are different from block to block, right? Each E&P contract will have a different X-factor. That’s the way it has been in Colombia. — always and those contracts are fully executed and they’re ongoing. And we don’t expect any changes on the factors on those contracts.
Roman Rose
Okay. Thank you very much. Congratulations on the quarter.
Operator
Thank you for your questions. There are currently no questions registered. [Operator Instructions] There are no questions awaiting at this time. So, I’ll pass the conference back over to Mr. Ocampo for any further remarks.
Andres Ocampo
Thank you, everybody, for your interest and support of GeoPark. And we’re always available to answer any questions that you may have. Please, we encourage you to visit us and our operations or call us any time for more information you may need. Thank you, and have a good day.
Operator
Thank you for your participation. You may now disconnect your lines.
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