GeoPark Limited (NYSE:GPRK) Q3 2022 Earnings Conference Call November 10, 2022 10:00 AM ET
Company Participants
Andres Ocampo – CEO
Veronica Davila – CFO
Augusto Zubillaga – CTO
Martin Terrado – COO
Stacy Steimel – Shareholder Value & Director
Conference Call Participants
Daniel Guardiola – BTG
Alejandro Demichelis – Nau Securities
Phil Skolnick – Eight Capital
Roman Rossi – Canaccord
Operator
Good morning, and welcome to GeoPark Limited Conference Call following the results announcement for the Third Quarter ended September 30, 2022, and the 2023 Work Program and Investment Guidelines. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].
If you do not have a copy of the press release it is available at the Investor Support section on the company’s corporate website at www.geo-park.com. A replay of today’s call may be accessed through the webcast with the Investor Support section on the 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 company’s 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 and Director.
And now, I’ll turn the call over to Mr. Andres Ocampo. So, Mr. Ocampo, you may begin.
Andres Ocampo
Good morning, and thank you, everyone, for joining the call.
We’re connecting with our management team from Bogota, Colombia, to report on our third quarter financial results and provide guidance about our expected 2023 Work Program and Plan.
During the third quarter, we invested $43 million to drill 11 wells and increased our oil and gas production by 8% compared to the same quarter last year. With a continued main focus on developing our core Llanos 34 block and strong production growth coming from CPO-5, probably one of the fastest growing and most economic projects in the region. When GeoPark purchased CPO-5 the block was producing just 8,000 barrels a day and today production just tripled to over 24,000 barrels a day with netbacks of approximately $50 per barrel.
We continued accelerating our drilling activity with 13 rigs active across our assets, a new company record. This is about 62% higher than last year. Congratulations to the GeoPark team, particularly those in the field for developing another quarter of record results and maintaining such an intense level of activity, while keeping our people safe, our emissions under control and our operations as low cost and efficient as possible.
Our production base generated strong cash flow from operations over $140 million, which more than doubled the same quarter last year. We generated more than $3 per barrel in adjusted EBITDA for every dollar that we invested an outstanding capital efficiency.
Revenues were up 48%, adjusted EBITDA was up 63%, and we had record net profits of $73 million, which is $1.20 per share during the quarter.
As we usually mentioned following the funding of our investment program, we have allocated significant capital to our balance sheet strengthening and our shareholder value returns initiatives.
During the third quarter, we fully redeemed our 2024 notes for $67 million, totaling a gross debt reduction of $170 million since January this year. GeoPark ended the quarter with comfortable net leverage of 0.8x well below our long-term target range of 1x to 1.5x adjusted EBITDA.
Our cash position at the end of the quarter remained at about $93 million. We continued our base dividend program as well as our discretionary share buyback. GeoPark paid $0.13 per share in dividends, which annualized represents nearly a 4% dividend yield and has completed its share buyback for a total of $30 million in the last 12 months, which is over 3% of total shares purchased.
And we have also announced that we will do more in 2023. Our teams are busy executing our ambitious and aggressive 2022 Work Program, which will continue full speed during the next year as well.
We currently have six rigs in Llanos 34, 2 rigs in CPO-5, drilling the Indico 7 development well and which will be followed by further development and exploration wells. One rig in Llanos 87, currently drilling the first wells there, one rig in Llanos 94, one rig in Platanillo, and another one in Oriente basin in Ecuador.
As we announced, this base of activity we will continue non-stop over and into 2023 with our self-funded work program. We’re planning to drill 50 to 55 wells with approximately 10 to 15 exploration and appraisal wells for a total CapEx program of $200 million to $220 million, with 35% of these CapEx allocated to exploration. As anticipated previously, all of our environmental licenses for 2023 program have been obtained.
As always, our work program is flexible and can be adjusted up or down based on drilling results and oil prices and in this particular year, it will also be depending on final outcome of the Tax Reform in Colombia that is currently underway.
We are estimating an annual average production between 39,500 to 41,500 barrels per day, not including any production from exploration efforts, which would generate over $0.50 billion in adjusted EBITDA at $80 to $90 Brent.
After fully funding our base and growth work program, we will continue strengthening our balance sheet as well as returning value to our shareholders. We announced yesterday our intention to deliver approximately 40% to 50% of our free cash flow after taxes back to shareholders through a combination of our base dividends, share buybacks and/or variable or extraordinary dividends.
We continue to make progress towards our aggressive emission reduction plan to reduce Scope 1 and 2 greenhouse gas emissions intensity by 35% to 40% in 2025 or sooner. We expect to have our solar park fully operational before the end of this quarter, which complements the connection to the national electric grid that was fully completed in July.
Additional investments were included in our 2023 Work Program to connect more GeoPark operated blocks to the national grid, improving the reliability of our source of energy and helping us reduce further our emissions and environmental footprint.
We look forward to reporting the results of these activities in the upcoming quarters, and we thank you for your participation. We also please invite you to come down and visit us in our operations and now also to visit our new and updated website, which was launched in October this year.
And now, we would be happy to answer any questions. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions].
We have our first question from Daniel Guardiola of BTG. Please go ahead when you’re ready.
Daniel Guardiola
Hi, good morning, Andres. I have a couple of questions from my end. I wanted to know if you can share with us more details on the expected impacts of the recently approved Tax Reform in both chambers. I know the tax; the final tax is still in reconciliation process, but the likelihood that the final tax regarding the taxes on oil — on the oil sector the likelihood they’re going to change is very low. So I wanted to know if you can share with us some high-level numbers. I saw that in your 2023 working program, you included a very significant increase in cash taxes for 2023. So I’m wondering if you can provide some color on these. So that’s my first question. And my second question is also related to a 2023 working program in terms of production. And I wanted to maybe kind of share with us more details on the guidance not only by country, which is already in the filings, but also by field specifically between Llanos 34 and CPO-5. As I’m seeing that most of the growth for 2023 will basically come from Colombia, which is expected to fully offset the decline in production coming from Brazil and Chile. So those are my two questions for time being.
Veronica Davila
Thank you, Daniel. Good morning. To your first question, and as you well mentioned, right, the Tax Reform was recently approved by Congress and it’s in reconciliation. So there is still significant uncertainties in regards to the exact applicability of the law. That will be instrumented by decree and other regulations in the upcoming weeks.
And said that, we did provide, as you mentioned in our releases yesterday, our estimation in terms of the potential impact of the reform, but it’s important to highlight there is in the numbers that you see on the release, we are including both the impact of the non-deductibility of royalties portion and the impact of the surcharge, right?
The surcharge of course is going to be varying in that guidance because it’s linked to prices, because for 0% in the guidance going to be 5% at the lower end and 15% at the higher end. And what we’ve done to be fully transparent is to include that impact fully, the impact of the reform or estimated impact fully into that 2023 guidelines irrespective of when it becomes a cash impact, which could be during 2023 or into early 2024. We will continue to follow the process of the reform and hopefully we’ll be getting more information that we can share with all of you as it becomes clearer.
Martin Terrado
Daniel, this is Martin Terrado. I’ll go to your second question around 2023 production and the breakout. So as we already announced, our guideline again is 39,500 barrels of oil equivalent per day to 41,500. In Colombia, it’s about a 5% increase. And when you look at the assets in Colombia, CPO-5, we’re expecting a 10% production increase average year-to-year. In Llanos 34, we’re expecting a 2% to 5% increase and Platanillo a decline.
When we move to Ecuador between both blocks Perico and Espejo, we’ll go from around 800 barrels of oil equivalent average that we’re having in 2022, to the order of 1,300 to 1,500. And in Chile and Brazil, we’re going to be expecting a declining of the fields of the order of 20%. All of these numbers do not include any production associated to exploration that 35% of our CapEx that Andres mentioned.
Daniel Guardiola
Thank you, Veronica and Martin. If I may just to do a follow-up on what you just mentioned, Martin, that this guidance is not including the CapEx that is expected to be deployed in exploration. Can you share with us what are you targeting with these exploratory targets and what could be the outside scenario in order to these guidance in case you are successful in your exploratory campaign?
Martin Terrado
Yes. So again like we said in our guidance, it’s about 10 to 15 exploration wells. Our growth and risk mean resource is in the order of around 150 million barrels that we’re expecting to be investigating. The wells are going to be drilled in the blocks that we have in Llanos exploration that we call, so it’s Llanos 1, 123 block, 124 block and 87. And then we’re going to be also drilling in CPO-5. In Platanillo we’re finishing right now, we’re drilling an exploration well. So we’ll see how the results turn out in that one. And in Oriente, we will have appraisal well and at the same time also some appraisals in Llanos 34.
Andres Ocampo
And Andres here, Daniel. So we think there’s upside obviously associated with this exploration in terms of production. But as you know, we usually don’t give a guidance associated to that because of the risk associated to it. So it is better not to give numbers for us. We’d rather be a little conservative, we know. But the volume that we’re tapping as Martin said is pretty significant. It’s $150 million of gross and mean — and risk mean resources. So it’s an attractive program and hopefully we’ll provide update to our production guidance during the year. And if it does, then we may revise it as we get results hopefully.
Operator
Thank you. We now have our next question from Alejandro Demichelis from Nau Securities. Please go ahead when you are ready.
Alejandro Demichelis
Hi, Andres, Veronica and team. Thank you for taking my questions. Two questions if I may. First one as a follow-up on the production side of things. Can you give us some kind of order of magnitude, how much more volumes can you expect from CPO-5 with gigs, with the resources that you already have? And then, as a small kind of follow-up from there, when you gave us our five-year plan to 2026, you indicated 10% per annum growth in production assuming both your existing fields plus exploration. With the guidance that now we have for 2023, are we more reliant on the exploration upside to get to those numbers than were before?
Martin Terrado
So, Alejandro, hi, it’s Martin here, I’ll touch on the CPO-5 question. So we started the year and on the second quarter of production was around 20,300 barrels oil equivalent growth. In the third quarter, we had some production going down because of blockages and we were around 19,000. Today, we’re around 24,000. The production that we have includes the production from the Indico 6 well, that we announced the results and is producing right now with a choke more than 4,000 barrels of oil per day, no water. And as we’re speaking, we’re drilling the Indico 7 well, a development well. So that’s going to increase our production by the end of the year, and we expect that to be kind of how we start 2023. For next year in CPO-5, we have one additional development well and farther exploration wells that again that production is not accounted because it’s exploration.
Alejandro Demichelis
And then with respect to your comments about five years — sorry —
Andres Ocampo
Sorry. No, no, follow-up the question, please.
Alejandro Demichelis
Yes, yes. So — but what you have and the development work that you’re planning for the next few months is Indico a 30,000 barrel field is Indico a 60,000 barrel field.
Andres Ocampo
Sorry, that — so there’s two more wells, as Martin said, there’s two more wells, development wells coming. One is Indico 7 that is being drilled right now, and it’s going to come upstream early next year. And then another development well planned for next year program and the volumes are in the range of what we have been expecting. So what we’ve been releasing. So it’s not a 60,000 barrels a day field, it’s more in the area of 30,000 barrels a day field range.
Alejandro Demichelis
Okay. That’s clear. Thank you.
Operator
Thank you.
Andres Ocampo
Then with respect — no, sorry, operator. I think Alejandro had a second question about the five-year plan and how it ties in with our 2023 work program. So as you mentioned, Alejandro, the five-year plan has a 10% CAGR per year. And that includes all the exploration activity that we’re planning to do in that five-year plan, which is going to be quite active.
It is an order of magnitude range that we gave to more or less show what is it that we’re shooting for in the medium-term plan. Every year we announce our work program on that more specific activity, we usually don’t give this guidance on exploration and we will be releasing the results as we — as they come in. But I can confirm that it’s largely in line with what is expected in that five-year plan. What we’re announcing and what we’re doing this year is pretty much what we had in mind when we were setting out that five-year plan.
Operator
Thank you. Your next question comes from Phil Skolnick of Eight Capital. Please go ahead when you’re ready.
Phil Skolnick
Yes, thanks. Good morning. Just on — further on to the five-year plan in light of the Colombia Tax Reform, making you think a little bit differently about it, with respect to trying to maybe push capital outside a little bit more of Colombia or maybe even diversify more to transact outside?
Andres Ocampo
Hi Phil, thanks very much. That’s a very good question. We try to include as much detail as we can in the release with respect to the imminent impact of these Tax Reform, which as you can see is quite significant. And the — probably the numbers may be a little conservative but we’d rather be that way and not the other way.
How it impacts the five-year plan is still to be seen. We are still working on filtering through this new Tax Reform our entire portfolio. But again, we — we’re going to see over the course of the years and according to the results, whether we need to adjust our investments depending on the final impact. As you know, also the impact of the reform is largely dependent on oil prices. So what oil price is in the range of $60 is much less significant than it is at current prices. So it’s hard to predict today how much is going to impact our five-year plan.
But with respect to your point about diversification, that is something that we’ve — it’s always been in the DNA of the company and that is something that we’ve always strived for, which is to have a diversified asset base in different basins and in different countries. So that is something that we continue to explore and it’s something that we obviously continue to have in the center of our business model to come — to continue building a diversified portfolio of facets throughout different basins and countries in the region.
Phil Skolnick
Okay, thanks. Just one follow-up question. How — with respect to your expiration program, on the upside that it could provide to your guidance, how soon could something like that possibly happen?
Andres Ocampo
Well we’re right now, we’re actively drilling four or five exploration wells at this time. That will continue in most places, almost back to back. So I don’t know, Martin, if you want to give the details on which ones they are, but —
Martin Terrado
So Phil, this is Martin, out of the eight rigs that we have drilling, we’re drilling about half of those are drilling exploration wells, in Llanos 6 exploration asset that we call it. We have block Llanos 87, we’re drilling right now the well Tororoi our first exploration well in that block, and we expect by the last part of November to reach total depth. In all of the exploration wells that we drill, we have setup contracts and we’re ready to complete and put wells on early production testing. So that production, if the wells are successful will be coming in by December.
When we move to Platanillo, in Platanillo into commercial racing, we’re drilling right now the Alea well, so about 30 more days to get to PV and complete that well. When we move to Oriente in Ecuador in the Espejo block, we’re testing right now and completing — doing completion tests on the Pashuri well that we announced that we reach PV and well at the same time the rig [ph] is drilling the Caracara well, so that one in the order of around 30 to 40 more days and the non-operated we’re testing the Humea well in Llanos 94. So you can see that plenty of activity and exploration as we speak. And we’re keeping all of these rigs as we move into the first half of next year. And the mix is probably going to be similar. Okay. So about half of the wells would be drilling in the first half of the year will be from a rig perspective would be exploration wells. They take longer. So it doesn’t mean half of the wells, but the rigs will be drilling exploration wells.
Operator
Thank you. We now have a question from Roman Rossi of Canaccord. Please go ahead when you’re ready.
Roman Rossi
Good morning, and thanks for taking my questions. So the first question is regarding CapEx for 2022. So right now you have an accumulated $115 million. So in order to reach the lower end of your guidance for the year, you would need to deploy $85 million in the fourth quarter. So this seems a bit aggressive compared to historical standards. So can you please give us a color on how you’re expecting to deploy this cash?
Martin Terrado
Hi, Roman. This is Martin again. And so, the guideline that we have, like you said, is from $200 million to $220 million net. Then the first nine months was $115 million. In October, a month that we’re already finished, we had spent $25 million. And this is mainly due to a more activity. If we look back a year ago, we had only eight rigs running. We have 13 now. So we expect to be on the lower range of that $200 million to $220 million, but we’re confident that we’re going to be around $200 million to $220 million on the low end — low range.
Roman Rossi
Perfect. Thank you. And so this is probably for you Martin, again. We saw some impact regarding blockage in Colombia during the third quarter, and you also mentioned some blockage during October. So can you give some color on — in which block and what were the causes of this blockade?
Martin Terrado
Yes, absolutely. Roman, so I want to start by saying that, as we speak, we have no blockages in any of our operations and all the production is normalized. Now we are seeing a change in the context, if we look back in 2016, is when national wide there was the least amount of blockages around 270. And we look at the full-year that finish in 2021, there were like 770. So the number of blockages have been increasing in Colombia for the past years. We — in channels, we have not suffered any for several years. The first one that we suffered as GeoPark were in 2020 in the Putumayo blockages that we have, most of them were related to illegal crops. But lately, we have seen some appraise in request. Okay. So in the third quarter of this year, we had about 38 days of Platanillo production down 10 days of production down in CPO-5.
So that on production it means around 1,100 to 1,200 barrels of oil per day average that we had shut-in. And in the fourth quarter, we had production shut-in, in channels 34, about 200 to 250 barrels of oil per day average for the quarter that we’re running right now. That’s what we’re expecting. And again, we continue having very constructive dialogue with the neighbors, with the national and the regional authorities in Casanare for the channels request. Many of these requests come considering that we have three of the top 10 fields in Colombia, Hakana [ph] Tigana and Indico. Sometimes when they’re general national requests, they go to the big assets and so they’re not things that are related directly to our company.
Andres Ocampo
Yes, this last point is important. This is something that we’ve seen generalized. I mean, when we had locate more recently, we’ve also seen most companies also being stopped for quite some time.
Roman Rossi
Perfect. Thank you. And maybe the last question is regarding production costs. So we saw that production costs were almost 15% down quarter-over-quarter. So just only to understand if this is related to current depreciation and what should we expect going forward?
Veronica Davila
Thank you, Roman. Good morning. So for 2022 in terms of operating cost, we expect to be as well in the lower edge of that range. We are targeting $8 to $8.5 dollars per boe. I think that’s a result of the strong effort of our team in terms of cost efficiency in a high inflation context, and also some impact of the local currency devaluations.
What you see particularly in the third quarter is not — it’s transitory, right? It relates to the impact of lower sales in Platanillo which are combination of as Martin mentioned that as well. Platanillo, remember Platanillo sales will vary according to the lower pro — loading programs out of the Ecuadorian port, right? We sell Platanillo barrels to Ecuador and those are seaborne. So you will see that from time to time you get inventory accumulation and then to sales and given that’s a higher OpEx per boe asset that can change, give you some fluctuation in the overall.
Looking into 2023, we’ll continue our efforts in terms of keeping our cost down and our efficiencies and we expect to have a year of between $8 and $9 per boe for 2023 that’s included in our guidance.
Operator
Thank you. We now have a next question from Stephane Foucaud from Auctus Advisors. Saying, good morning all. There is a lot of drilling and appraisal activities in Ecuador in 2023. Any success case, where would you see the asset base in Ecuador at YE2023 and what production and how much reserves?
Augusto Zubillaga
Hi, Stephane, this is Zubi. So in Ecuador we had great results in 2022. So we started the year with no production. So far, we have three discovers in the Perico block and our gross production now around 3,000 barrel of oil per day. So in the other block, the Espejo block, as Martin mentioned before, we are in the completion process of the Pashuri well, and now the well is under testing. So going to your question, which is the plan and activity for 2023 in the Perico block, we plan to release three appraisal wells. With those wells we will define volume, size, and structures of the discovery for 2022. In Espejo block after Pashuri well, we will read that. Martin mention also the second inspiration well which is the Caracara well, so then subject to the results of those wells, we will decide with the partner if we will drill more appraisal aspiration wells in the block this year.
Andres Ocampo
Yes. Just to follow-up on Zubi. We keep learning from these wells. We’re very encouraged on how things are turning in Ecuador. We’re — now we’re working on optimizing the cost and there’s a big round coming up called Intercambios 2 that we will be participating as well.
Operator
Thank you. We now have the next text question from Miguel Ospina from Compass Group, asking could you give us some details on what you plan to do with the excess cash you were not planning to distribute as dividends buybacks. Thanks.
Veronica Davila
Thank you, Miguel. Good morning. Thank you for your question. As we mentioned in a release yesterday, we will be continuing to increase our allocation to shareholder returns by allocating between 40% and 50% of free cash flows over the next year.
To your particular point, the excess after we are done, of course our — what we need to do is find our assets and then what we’re down in terms of shareholder returns will allow for a combination of cash build and also opportunistic further the leverage and that mentioned already, we’re very comfortable leverage in terms of net debt to EBITDA of 0.8x but we could consider further leverage in 2023.
Operator
I would like to hand it back to our CEO, Mr. Andres Ocampo, for some closing remarks.
Andres Ocampo
Thank you, everybody for your continued interest and support of GeoPark. We’re always available to answer any questions that you may have. So please call us any time for more information. Thank you and have a good day.
Operator
Thank you for joining today’s call. You may now disconnect your lines and have a lovely day.
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