Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the Q1 ended March 31, 2022. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at this time, 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.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. 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 statement, 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 US dollars unless otherwise noted.
Reserve figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer, Augusto Zubillaga, Chief Operating Officer, Andrés Ocampo, Chief Financial Officer, Martín Terrado, Director of Operations, Veronica Davila, Commercial Director, and Stacy Steimel, Shareholder Value Director. Now I'll turn the call over to Mr. James Park. Mr. Park, you may begin.
Thank you, and welcome everyone. We are joining you this morning with our executive team in Bogotá, Colombia, to report on our achievements and financial results for the Q1 of 2022. We want to begin by thanking and recognizing all the hardworking women and men of GeoPark for delivering one of the most successful quarters in our 20-year history while continuing building value across our complete business. We believe we are in the right business, in the right place, with the right team, the right platform, the right partners, and the right approach to succeed and capture an immense value proposition. Our previously announced management transition is proceeding and being received very well, and the GeoPark team is responding with energy, enthusiasm, ideas, and optimism.
It is with tremendous gratitude and confidence that I am moving on from this wonderful job to becoming a full-time shareholder and cheerleader. Before passing the word to Andrés as well as opening for questions, just a word please about our full cycle performance and delivery, something which underlies our unique 20-year track record of continuous value growth. Since the very beginning, GeoPark has been committed to a big idea and long-term plan, which allowed us to build our company solidly and steadily while keeping our focus on the larger prize. This gave us a rock-hard foundation, which allows us to weather any world or industry crises, and we have been through a bunch, and be in a position with all we need to create and win more and more opportunities for the future. Today, we are successfully keeping our team safe, healthy, and rewarded.
Using our G&G and operational excellence to drill, find, and produce more oil and gas. Being innovative and staying disciplined to achieve greater capital efficiency and reduced costs. Protecting the environment and reducing emissions. Being a constructive and desired community neighbor. Adding more high-potential acreage and assets to further expand our big growth fairway. Managing the risks of our business and protecting downsides. Strengthening and celebrating our powerful culture. Using our record cash flows and revenues to invest more to expand our work program and improve our business, pay down debt, and give back more to our shareholders. With all this activity across the full E&P value chain being self-funded by our own cash flows, as we have for nearly 10 years, and which provides a continuous snowballing of value and scale. Andrés, thank you for stepping up and taking on this job.
Perhaps you can please add some more details on this quarter.
Thank you, Jim. We have a year filled with activity across our company, and our Q1 results show our strong start to the year. First, we have drilled 13 new wells and increased production by 6% over the Q4 of last year. In the CPO-5 block, we're now producing over 20,000 barrels a day gross. That's 2.5 times higher than when we acquired the block almost two years ago. In Ecuador, we discovered two new oil fields currently producing almost 2,000 barrels a day gross. Second, the increased production and oil prices generated record financial results. Our adjusted EBITDA generation in the quarter was up 84% to $123 million, which means more than $350 million for the last twelve months.
This also means a net income of more than $100 million in the same period. Third, we invested $39 million of CapEx in the quarter, which means that we generated more than $3 of adjusted EBITDA for every $1 invested in that period. We also used our cash flow to reduce debt as we repurchased $33 million of our 2024 bonds, and also doubled our dividends to $5 million per quarter. Fourth, we added new acreage in our core play. The CPO-4-1 block is strategically located and covers 120,000 acres adjacent to CPO-5 and other Llanos Basin blocks that we own.
Finally, as we're always striving to be a better and cleaner company, we advanced on connecting to the Colombian national grid, as well as building our solar plant, which has the multiple benefit of reducing our emissions, reducing our costs, and increasing our operational reliability. Our efforts are being recognized with MSCI ESG rating improvement to A, and also we were included in the Bloomberg Gender-Equality Index, covering companies with best-in-class gender-related practices and policies. As is always the case, we design our work programs to be adaptable up or down based on asset performance and oil price volatility. Given the new discoveries and higher oil prices, we have expanded our self-funded 2022 work program by another $40 million to drill an additional eight to nine new wells, plus facility permitting and licensing.
Consequently, we increased our annual production guidance up 8% to a range of 38.5-40.5 thousand barrels of oil equivalent per day to reflect new production from Ecuador, the expanded work program, as well as the production from Manati in Brazil. This revised guidance represents an 11% growth compared to 2021, adjusting for Argentina divestiture, but not including any future exploration success. At $95-$100 Brent, this revised work program is expected to generate more than half a billion dollars in adjusted EBITDA, which would be more than $250 million of free cash flow after CapEx, debt service and taxes, representing almost a 30% free cash flow yield.
We expect to use this extra cash to continue investing in growing our asset base, paying down debt, and giving back more value to shareholders. Our operations and technical teams are busier than ever. We have today eight rigs working full-time across our asset platform in Latin America, and have four more rigs on their way. We're executing an exciting, low cost, low risk and high impact exploration campaign, not only in CPO-5 but also in our other Llanos Basin blocks. We really look forward to reporting on progress and results from these very exciting activities. Thank you, and we will be pleased 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. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. First question comes from the line of Alejandro Demichelis with Nau Securities. Alejandro, you may proceed.
Yes. Good morning, gentlemen. Thank you very much for taking my question. I have three questions, if I may, please. The first one, could you please walk us through the production guidance, the updated production guidance? Because when we take the, say, 2,000 barrels that Manati brings in, it doesn't look like you are adding an awful lot for the extra wells that you're drilling in Llanos 34 and the rest of the program. So trying to see how conservative the guidance is. That's the first question. Second question, could you please tell us where you are on the exploration of CPO-5 and Urraca? What are you seeing so far? When can we expect some kind of results there? And the third question is, maybe you can touch on how you're seeing cost inflation.
We have seen your production costs, excluding royalties, very flat. What to expect for the rest of the year, please?
Good morning, Alejandro. This is Martín Terrado. Appreciate your questions. I'll cover the first two and then let Veronica go over the operating cost. On the production guidance, as you've seen, the incremental is in the order of 3,000 barrels of oil equivalent per day. Manati, we expect decline. The contribution from Manati or Brazil for the remaining of the year, and that guidance is around 1,300. We have 1,700 barrels of oil equivalent per day that are coming from new activity and better asset performance. That better asset performance and new activity includes CPO-5, Llanos production that we have, and it incorporates the discoveries from Ecuador that are already communicated.
I would add, Andrés here, Alejandro. I would add that, the incremental activity that we added also has, a lot of it is exploration activities which has no incremental, production associated. So as Martín said, the guidance is 1,700 barrels from the guidance are related to better performance and new activities.
Concerning the second question. On the second one on CPO-5 and where we are, like Andrés said, we continues to be really excited about this block. We had the successful results from Indico four and five. They're both performing without a water production, 4,000 barrels of oil equivalent each. That puts this field, Indico, as one of the top 10 fields in Colombia. We are fortunate that out of those 10, we also have Jacana and Tigana. Three of 10 is part of GeoPark, and we're very proud of that. In Urraca, the well is being drilled according to plan, and we're about to reach TD. We should be getting logs and then putting that well on production soon.
We do want to make sure that we remind you that this is one of about four wells that we have in the northwest of the block that are gonna be evaluating, investigating the continuation of the Jacana trend. That rig that is drilling Urraca will complete the well, and then we will continue drilling in the area. Very excited about that. We're working with our partner-
Martín, if I may?
Yeah.
If I may interrupt you.
Yeah.
You said that you're going to put it into production. You already have something there?
No. We're about to reach total depth, so we're still drilling. We will log the well, case the well, and expecting good results. Remember that this is Jacana-Tigana trend, so they're not gonna be flowing naturally, so we'll have to put a pump. Most likely first oil will be by the end of the month.
Alejandro, sorry, just to be clear for everybody, this is an exploration well. We have no indication, today or no information today, whether this is going to be a discovery or not. What Martin is saying is in the event that we have information that confirms that it's a discovery. We haven't reached TD yet, so we're not even in the zone of interest yet. We don't have logging information. So really just to be clear, and I understand the question, and to make sure that everybody has it clear. We haven't reached the zone yet, so there's no information. Once we cross the zone, we will decide based on the information that we get on logging, from the well, we'll decide to complete the well and put it on testing, to see if it is a successful well or not.
All of that is going to take us probably another month. I wouldn't expect news from us on this particular well for at least another month. Is that clear?
That's very clear. Thank you.
Okay. Okay, great.
Good morning, Alejandro. This is Veronica. Thank you for your question. In regards to OpEx, for 2022, we expect our overall OpEx to be in the $8.5-$9 per BOE range. This is between 5% and 10% increase over the 2021 numbers, and is already included in our guidance. This OpEx expectation for 2022 already takes into account the impact of inflation, cost reduction initiatives, including the connection to the national grid in Colombia, and increased production from higher OpEx fields, mainly in Chile and Ecuador.
That's very clear. Thank you, Veronica.
Thank you.
Thank you for your question, Alejandro. Our next question comes from the line of Oriana Covault with Balanz. Oriana, please proceed.
Hi. Thanks for taking my call. This is Oriana with Balanz, and I had three questions. If we may go one by one, that would be great. Just following up on the inflation side, and just thinking about your budget, how much should we think in terms of your drilling costs and completion costs that update in budget is reflecting higher inflation? Or is it only related with additional wells coming in your plan?
Thank you, Oriana. Andrés here. It is new activity. It is all of what is included there is new activity. It's not revising the existing activity to increase it for inflation. We already had factored in our original guidance, some inflation in our costs. In terms of drilling and completion, it's more or less 5%-7% increase that we are seeing across, you know, the materials, the casings, the services. Everything is making our wells more or less 5%-7% more expensive. That was already built in our original guidance, and the new activity already factors this in.
Perfect. That's very clear. Perhaps following up on a different side of the business, just thinking about the Vasconia differential, and could you elaborate more on the local market differential you disclosed for Colombia in your press release? We've been under the impression that this has widened in the past quarter. Just to understand what has been driving that, the difference, and how should we think of this marker going forward?
Thank you, Oriana. Good morning. Vasconia is the grade that we mainly produce in Colombia. We have seen differential of Vasconia in $3.7 per barrel, so that's $3.7 below Brent for the Q1 . Today, that's closer to $4.5 . It's been as wide as you mentioned, at $7 per barrel below Brent during April, and then recently recovered. There's a few factors pushing Vasconia lower versus Brent. On the one side, there's a deep discount for heavy grades, which are faced with strong competition with Russian barrels that are trading at very deep discounts currently in the market, especially into Asia. Also, there's increased volumes of medium sour grades to compete with Vasconia as well, coming out of the U.S. as it releases barrels from its Strategic Petroleum Reserve.
On the other side, factors supporting Vasconia include increasing and strong demand in Colombia that is consuming most of the Vasconia production domestically, and a strong global demand for diesel, which should support crudes such as Vasconia that have a high diesel production once refined. In all, we expect Vasconia pricing to stabilize and be within our $3-$4 per barrel discount to Brent, which is our budget assumption, and it's within our guidance.
Thanks, Veronica. That was very clear. Maybe just one last one regarding the announcement that you made yesterday on tendering about $45 million of your 2024. Just perhaps if you could walk us through the rationale. We understood that you already did some buybacks during the Q1 , so why getting a better sense of why choosing to go through the tender instead of perhaps taking advantage of lower prices, local prices, given political triggers ahead. Thanks.
Thank you, Oriana. As you well mentioned, we announced yesterday, we're gonna exercise a call for $45 million of our 2024 bonds. This is in addition to $33 million that we have purchased year to date in the open market below the call price. This is part of our deleveraging strategy. We started on this strategy last year with our liability management executed in April last year, which reduced about $105 million of the 2024 notes. As we have mentioned in the past, we are continuing to delever, taking advantage of, you know, a high cash flow generation, and we expect to continue to do that. This is another step in that deleveraging process, which will be completed in terms of the call for the 2024 $45 million by the end of May.
The rationale also, Andrés here, Oriana. The rationale why we're calling it is we repurchase as much as we could find, basically. You know, the size of the bond is small. It's less, you know, it's about $150 million, so it's hard to find. Year to date, we've purchased everything we could find below the call price, and now we decided to just take a bigger chunk.
That sounds great. Thanks, again, and congratulations for the good quarter.
Thank you.
Thank you for your question, Oriana. Our next question comes from the line of Stephane Foucaud with Auctus Advisors. Please go ahead with your question.
Hi, guys. Thanks for taking my question. A few questions as well for me. First one, back on this deleveraging thing. Once the so $45 million announcement of further bonds redemption, how do you see H2, assuming your price remains where it is, assuming the sort of free cash flow that you generate, could we expect some further bond redemption or buyback in the second part of the year? It's my first question. My second question is, in light of the new production guidance, how would you see the exit 20,000 to 2022 exit production guidance? I noticed that for instance, Parex has reported a quite big increase for December. Do you see something similar to that? Lastly, could you give a few words on CPO-4?
I think the block that you recently acquired an interest from Parex, and the sort of resources you could see potentially on this block and the upcoming block program. Thank you.
Hi, Stéphane. Good morning. Andrés here. With respect to your question about deleveraging, yeah, as you said, we're calling this $45 million now. We are approaching the date, in the next couple of months, the date where it's more economical to wait and call it and continue calling it in September when the call price drops down again. Most likely, in the second half of the year, if oil prices remain as they are these days, and if our cash flow evolves as we said in our guidance, you know, within the $90-$100 range, yes, most likely you should expect us that we will call 100% of the 2024 sometime after September in the second half. That is our expectation.
Stephane, this is Martín Terrado. Related to the 2022 exit production in Colombia, our... As we published, our Q1 Colombia production was 33,700 barrels of oil equivalent per day. We see our exit for Colombia around 1,000 barrels above that, and all of that does not include any kind of exploration success.
Hi, Stephane. This is Augusto. In regard to the question about CPO-4, just let me put you in context. In 2019, we awarded six blocks in the 2019 ANH bidding round. Practically all the blocks surrounding our successful Llanos 34. So far we have been working in the environmental permits and in the pre-drilling activities. This year we will start drilling two exploration wells in the Llanos 87, just in the northwest part of the Llanos 34. We will drill also one exploration well in Llanos 94, which is called Umea X-1. Coming back to CPO-4, CPO-4 is adjacent to Llanos 94 block. Our working interest is 50%. It has 150,000 acres, which is 2 times bigger than Llanos 34.
50% of the area covered with 3D seismic. So far we identified a strategic place in the Gacheta formation. Due to the work around the commitment that we have in that block is to drill one exploration well in the first exploration phases. CPO-4 is in addition to the $0.6-$1.6 billion. Hello?
Hi. Are you still there? Hi, can you hear us?
Yes. Yes, I can.
Yeah, sorry, the main line got disconnected. Okay. Sorry, Stephane. We got disconnected on the main line. We're joining on the backup line. Tui, you can continue.
I don't know when you meet with CPO-4. You were talking about the one exploration well-
That's.
Okay. Just to summarize all the CPO-4 is in addition to the 0.6-1.6 billion barrels in our exploration resources in all the blocks that we have in Llanos Basin.
Okay, thank you.
Thank you, Stephane.
Thank you for your question, Stephane. Our next question comes from our webcast. Our question comes from Daniel Guardiola from BTG Pactual, and he asks. Could you share with us what would be your priorities to allocate the expected excess of cash to be generated in 2022? Any thoughts on inorganic growth? Can you remind us how much capital are you planning to allocate in 2022 to shareholders compensation? With respect to your hedging strategy, are you planning to modify it for 2023? If oil prices remain stable, what would be the expected loss for full year 2022? Can you provide us more color with respect to the exploratory campaign? What are your expectations in terms of incremental production related to this campaign?
Thank you, Daniel Guardiola. Good morning. I'll go first in terms of the question on priorities in allocating our cash flow. Our priorities continue to remain the same. As Jim mentioned in his opening remarks, we're gonna prioritize funding our asset base and followed by a combination of debt reduction, which we already touched upon a little bit on the call, and shareholder returns. In terms of our assets, we have already been discussing today the expansion of our work program for ten exploratory wells, and we're ready to deploy additional capital to our assets should we be successful within that exploration. On the debt reduction, we already touched upon it, but we have launched the call for the 2024 for $45 million.
We have already purchased $33 million year to date, and as Andrés mentioned, we would expect to continue the leveraging in the second half of the year. In terms of shareholder returns, we have doubled our dividends, and we expect to continue to pay out $5 million per quarter in terms of dividends. We have the discussion of share buyback in place, which is also part of our initiative in terms of shareholder returns.
Daniel Guardiola, this is Martín Terrado. Related to our exploration work program, like we already mentioned, it's about 14-18 additional wells, on top of the two wells that were drilled and discovered in Ecuador. In high level, we're targeting between 180 and 350 million barrels of unrisked mean resources or P10. That's the range that we have. At our working interest, that is around 70 million to 140 million resources that we're targeting, with chances of success that go from 25%-40%. Now, how does that look like in the year for us? Again.
Excuse me, call. It seems that we have lost our speaker line. Please allow me one moment to reconnect them.
Hello.
You sound loud and clear.
We were answering Mr. Guardiola's question. Are we back online? Apologize for that. We're having some technical problems with the line. Martin, you can continue.
Yeah. Sorry about that, everybody. Like I was saying, the order of magnitude of the resources that we're after, gross is about 170-350 million barrels. With our working interest, it ends up being around 70-140 million barrels. The chances of success are between 25% and 40%. As we go through the different quarters, we're gonna be drilling anywhere between four and six exploration wells per quarter. Most of those are gonna be drilled in Colombia. In Colombia, most of those are gonna be drilled in Llanos. We have around five to six wells that could be drilled in CPO-5, about two wells that are gonna be drilled in Llanos 34, and the same amount in Llanos 94 and Llanos 87.
What's outside of Colombia or Llanos is one exploratory well in Platanillo and two wells in Ecuador. One will be a follow-up to our success in the Espejo-Perico block, and the other one will be our first exploration well operated by GeoPark in the Espejo block. Again, Daniel Guardiola, apologies for the cut, but let us know if there's further questions or clarifications.
There was a point in question on hedging also. If we're moving on to the hedging question.
We continue executing on our hedging strategy. We believe hedging is sound risk management tool to protect ourselves from the cyclicality in our business, which is very volatile. In terms of the hedge cost, which you mentioned, we have recorded $30 million of hedge costs in the Q1 , and we have provisioned an additional $50 million in unrealized hedge costs for the remainder of the year. Those numbers align with our expectation of hedge costs for the remainder of the year, should prices remain at the current market conditions, and those have already been included in our guidance. I don't know, Daniel, if that covers the question or if you had something further.
We do have a follow-up question from Daniel. He asks, "Do you foresee any risk to your operations related to the upcoming presidential elections in Colombia?
Hi, thank you, Daniel. The Colombian elections are the primary round expected before the end of the month. Then it seems that most likely there's going to be a second round in mid-June. It sounds like it's going to be a tight call, really. But again, as we said in the prior calls, we are very confident and we trust Colombians' long-term political and economic stability. This country has solid institutions and has proven to have one of the highest respect for contracts and rule of law in the region. We are optimistic with respect to the future in the country. Again, we expect the balances of.
I mean, that the institutions will provide the balances that are required for the country to continue its historical stability.
Perfect. There are no more questions waiting at this time, so I will now pass the call back to our management team for closing remarks.
Thank you, everybody, for your interest in GeoPark and your continued support of our company. Our shareholder value team is available around the clock, as is our management team, to answer any questions or listen to your comments. We look forward to hearing from and seeing you soon. Thank you.
That concludes the GeoPark Q1 2022 results conference call. Thank you for your participation. You may now disconnect your line.