Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the second quarter ended June 30th, 2022. After the speakers' remarks will be a question and answer session. If you would like to ask a question at this time, please press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 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. With this discussion of forward-looking statements, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. Risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC reports. Those risks 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 and are 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, Verónica Dávila, Chief Financial Officer, Augusto Zubillaga, Chief Technical Officer, Martín Terrado, Chief Operating Officer, and Stacy Steimel, Shareholder Value Director. Now I turn the call over to Mr. Andrés Ocampo. Mr. Ocampo, you may begin.
Good morning, and thank you everyone for joining the call. We're connecting from Bogotá, 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, our 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 nine 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 38.5-40.5 thousand 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 4.5 times in adjusted EBITDA, another 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. 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%.
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%-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 Macellari to our board. Two 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 Vaca for her more than 10 years of incredible contributions to our management team, as well as to our company.
Marcela 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 three more rigs are on the way. We're executing a multiple catalyst work program that includes in CPO-5, further accelerating production with one to two more development wells in the Indico field. We're also testing the Cante Flamenco exploration well during the upcoming weeks. There's a second rig that is currently moving to initiate the exploration campaign in the southeast area of the block. In the Llanos 34 block, a third rig is already in place to continue developing the main fields and continue adding production.
In our Llanos exploration acreage, we will be spudding the first well in the Llanos 87 block, the first well since we added the block in the 2019 land round. Finally, in Ecuador, we will be drilling the first well on our operated Espejo 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.
If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Alejandro Demichelis with Nau Securities. Please go ahead.
Yes, good morning. Thank you very much for taking my questions. A couple of questions, if I may please. The first one is, how are you seeing the proposal for tax reform that the government in Colombia has put forward? As a bit of a follow-up from there, in your remarks, Andrés, 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. Should we expect some changes in the direction of that kind of budget for next year, given the proposal of tax of the government? That's the first question.
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 northern part of the field and also in the southeast, please?
Good morning. Thank you, Alejandro. To address the first portion of your question, we have been, of course, looking in detail at the recently announced tax reform proposal. It is still very early days in the process, but this proposal needs to go to Congress to get, you know, commented and voted on. What we are seeing is there's two main provisions that will be affecting our industry overall and our company. Those are the main ones of those are the inclusion of an export tax on crude and also the removal of royalties as a reduction in calculation. Of course, we've been analyzing the impact on our business, as I mentioned, and we expect to get further clarity as time goes by to be able to report back to all of you.
To give the details on those as of now, in terms of royalties, what we would like to highlight is royalties in Colombia are calculated as a percentage of volume. For our company, that's about 8%. What the current proposal appears to address is that 8% calculation, which was before deductible from the income tax calculation, will not be able to be deducted going forward. Keep in mind that this affects income tax bill of 2023. If the reform goes forward in the same fashion as reforms have happened in Colombia in the past, the expectation would be that the non-deductibility is applied for the 2023 tax bill, which is payable in 2024.
Sorry, on the royalty, 88%, that's 100% of the royalty. It affects the ones that are not in kind. It's probably 70% of our royalty. You should assume something like 6% or so, which is the average of what we've been seeing so far in our company. Sorry.
Sure. To the export tax, it is really, it will be very dependent on of course, the final letter of the reform, but also on how each and every company sells their volumes, right? If we look at our composition, we have a portion of direct exports, which is 5% of our overall sales. Roughly half of those are sold domestically. None of those of our overall sales are sold domestically, but then are exported by our clients. Technically, you should be able to consider those as exports. The remaining 35%-45% are sold domestically and refined domestically.
I 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 tends to go towards export parity pricing, whereby regardless of how the volumes are sold, overall pricing in the market gets affected. 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 all of you.
Yeah, I'll take the second one on.
I'm sorry. Just to follow up with that. Are these changes, Verónica, enough to change the way you're thinking about capital allocation for next year then?
Sure. As Andrés mentioned in his remarks, we are at the beginning of our capital allocation process. This is a thorough process that goes over all of the following weeks and culminates with the approval of our budget in November. As you will expect, of course, all of these items will be considered. I would like to frame that within the overall framework as we define our projects, what projects will be going forward. This is gonna affect one of the aspects, the economic aspects. We will continue to look at the technical, the strategic, and of course the environmental and social aspects of each and every one of those projects.
We'll make them compete, and the Colombian projects may be affected by this expected tax reform, you know. We will carry out the process as we have very thoroughly and in detail, and we'll come up with a program by November.
Thank you.
Hi, Alejandro.
Thank you.
This is Martín Terrado. I'll respond to the question on exploration for CPO-5. We drill year to date two exploration wells in the block and one development well. The two exploration wells, the second one is the Cante Flamenco that Andrés mentioned. We have multiple targets vertically on these exploration wells mainly Ubaque, Guadalupe, and Mirador. Preliminary results from the Cante Flamenco show that we have an oil pay in the Mirador formation. 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 rig to drill two development wells so that we increase production of the block. We will come back to the north.
Again, these wells, the first one, Urraca, was eight kilometers from the Jacana extension. 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. Andrés also mentioned that we have a second rig that is finalizing the mobilization in the southeast of the block, so we're gonna be starting our first well targeting the Ubaque formation in the southeast. That well is called Apteryx. September, October, we expect to have a starting of that well. Overall, when we look at our exploration potential on 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 Indico Mariposa area. We got seismic in the northeast of the block that late in the year, early next year we'll be acquiring. That's a little bit of a flavor of where we're on CPO-5, Alejandro .
Thank you for your questions, Alejandro. Our next question comes from Phil Skolnick with Eight Capital. Please proceed.
Yeah, thanks. Good morning. Just wanna go back onto that question around 2023. You know, 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?
Hey, Phil. This is Martin again. We have different buckets. The bucket of the things that were fully licensed, some of those include basically Llanos 34 and 32, which is maybe development, but some appraisal. We move to the fully licensed that is mainly exploration. That's where CPO-5 is, Llanos 87, that we will be drilling our first wells soon in the next couple of months, and Llanos 94. All fully licensed. The next bucket, if you wanna call it, is the almost complete license, and that's Llanos 124 and 123.
We're almost complete. Basically we have turned in all the documentation and, in some cases we already got, we're close to, in the next month to get those approvals so that we can start drilling wells. Again, Llanos 124 and 123. Finally, we got the back end of the things that are later in time. On those, there could be some delays. We'll see. That's where we have Putumayo and some of the Llanos blocks that are on the west, 104 and 86. But that's kind of like where we are on licensing of Llanos.
Technically, the core areas, the really core, central areas are 100% fully licensed. The next ones in line are almost fully licensed. We're in very, very good shape.
Okay, perfect. Thank you.
Thank you, Phil Skolnick.
Thank you for your questions. We now have a text question from Stephane Foucaud from Auctus Advisors. How much net pay was encountered in the Cante Flamenco well?
Hey, Stephane . Preliminary logging results show that we have around 40 foot of pay in the middle of formation for Cante Flamenco.
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?
Yes, I think that was answered by Vero, and well, 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.
Thank you. Last question from Stephane: What is the current overall production?
Right now, our current production net GeoPark is between 39,000 and 40,000 barrels of oil equivalent per day.
Thank you. Our next question comes from Oriana Covault with Balanz. Please go ahead.
Hi, good morning. Thanks for taking my questions. I had three. If we could go one by one, that would be great. The first one with regards to lifting costs. 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 could take to prevent margins erosion?
Yeah. Hi, Oriana. This is Martín again. Overall, we're seeing about 5%-10% increase on materials and services. Where we see the highest increase is on artificial lift, so basically our pumps between 15%-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 pulling activities to increase oil production. That is gonna be gone by the next quarter. We have a successful campaign, and the pulling is not there anymore. In Ecuador, again, a brand-new block where the OpEx was not the main objective initially.
Now that we have three wells in 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 platforms. We're also looking into opportunities such as connecting to existing pipelines. This was Intracampos, so there's a lot of infrastructure around. In Llanos, we are on track on our production OpEx.
Perfect. That's very clear. Perhaps my second one more directly to the excess cash uses and given the recent dividend increase that you announced. Maybe, like, where should we expect to see dividends heading in more broader terms or possible changes or perhaps a defined dividend policy? How should we think of this?
Thank you, Oriana. Good morning. We will continue to, you know, allocate our cash flows within our well-established set of priorities, and as we alluded to this, you know, first and foremost, fund our assets and then this combination of the leverage 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 comes to or 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. We will be looking at our dividend payments within our full shareholder return strategy and continue to keep improving our shareholder returns that we have had over the last few quarters.
Got it. Just one final one from me. Just picking up on the possibility of this, the flexibility and 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?
Thank you, Oriana. As Martín described, right, we, the core of our assets, especially within Llanos 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. 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 pan-regional approach, as we look at our portfolio. It is a key aspect of our business strategy, and it will continue to be.
Perfect. Thanks.
We are looking at, you know, looking at diversification. As I think we've said many times, we probably became less regional than intended. One of the challenges that we have is also to continue, you know, expanding that footprint outside Colombia. We have assets in our portfolio that we can accelerate, like three fields in Ecuador and fields in Chile, but obviously that diversification now obviously becomes more relevant.
Perfect. Thanks again for taking my questions. I'm done for this quarter.
Thank you.
Thank you.
Thank you for your questions. Our next question comes from Román Rossi with Canaccord Genuity. Please proceed.
Good morning, and thanks for taking the question. I will ask them sequentially, if I may. The first one is, following one of Oriana's question. Regarding the, you supplemented the indenture of the 27 notes, right? If there were three things in basket, I want to understand what would be the maximum buyback we could expect from GeoPark given these changes to the indenture?
Thank you, Román. Good morning. Complementing the question that Oriana asked as well, we spoke about dividends and moving on to the buyback. We have had for some time a program to repurchase up to 10% of outstanding shares. We have been executing on that buyback. We paid out roughly $15 million this year and five of those in July alone. We expect to be able to sustain this pace at current market conditions, and of course, you know, keep working, as I mentioned, on our overall shareholder returns strategy as we do always.
We've accelerated the trend, and you should expect us to continue our acceleration. No?
Correct. Perfect. Thank you very much. This one is probably for Martín. As you are finishing the transition in electricity generation in the third quarter, I wanted to ask you how much OpEx is related to electricity generation, and if we should expect any significant reduction in operating expenses there?
Yeah. Román, no problem. About 40% of our OpEx in Llanos comes from generation of electricity. This is something that is big for us and is good. We expect around 10% of OpEx reduction due to the connection to the grid. It could fluctuate depending on, you know, the price of electricity going forward, but it's about 10%, what we expect.
Perfect. Thank you very much for that. The last one has something to do with royalties. I wanted to understand. I know that high price costs will really depend on oil prices, but I wanted to understand how should we think of the X factor as part of this royalty going forward?
Sorry, Román, did you ask about the export tax? There came a little noise.
The X factor of royalty. Sorry.
Yeah.
Thank you, Román.
We have. Unless Oriana did. Go ahead, please.
Sure. Thank you, Román. So in terms of royalties, and I think you're linking right to back to tax reform. The cash royalties are at 8%, right? There are other components of government take, such as the X factor 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 that has been in Colombia always, and those contracts are fully executed and they're ongoing, and we don't expect any changes on the X factors on those contracts.
Okay. Thank you very much. Thank you, and congratulations on the quarter.
Thank you.
Thank you for your questions. There are currently no questions registered, so as a reminder, it is star one if you'd like to ask a question. There are no questions waiting at this time, so I'll pass the conference back over to Mr. Ocampo for any further remarks.
Thank you, everybody, for your interest and support of GeoPark. 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 anyt ime for more information you may need. Thank you and have a good day.
That concludes the call. Thank you for your participation. You may now disconnect your line.