Earnings Call: Q4 2020

Mar 11, 2021

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcements from the Q4 ended December 31, 2020. After the speakers' remarks, there will be a question and answer session. 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 website passed 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 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. Reserve figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer Augusto Suballaga, Chief Operating Officer Andres Ocampo, Chief Financial Officer Martin Terralho, Director of Operations and Stacy Stemel, Shareholder Value Director. And 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 Bogota, Colombia and Buenos Aires, Argentina to report on our Q4 and full year 2020 financial results, present an upgraded work and investment program for 2021 and highlight our steps to continue returning more value to our shareholders. As everyone has personally experienced, 2020 was a historically challenging year, and we must first recognize and express gratitude for the superhuman efforts by the GeoPark women and men that made it possible for us to prevail through the storms of 2020 and successfully continue along our hard fought 18 year growth trajectory. As we have done repeatedly in our history, GeoPark has emerged from this crisis as a better and stronger company today. Our bottom line illustrates our accomplishments. We kept our teams safe and healthy. We operated in the field without interruption for 3 65 days. We grew oil and gas production for the 18th straight year to over 40,000 barrels per day. We found more oil and gas and now have 2P reserves of 175,000,000 barrels with a net present value of $2,500,000,000 We expanded our Colombian exploration resources to over 750,000,000 barrels with increased acreage in the Llanos and Putumaya basins. We beat down each and every cost and achieved savings of over $290,000,000 We funded all our work and obligations with our own cash flow. We invested $75,000,000 and recovered nearly 3 times this amount in EBITDA of $217,000,000 We acquired a new company Amerisor and fully integrated it into our company. We completely restructured our asset portfolio and organization under a revised business model. We strengthened our balance sheet and almost doubled our cash in hand to $200,000,000 We provided important aid and support during the pandemic to our neighboring communities. We moved to reduce our carbon footprint and minimize social and environmental impacts. And even with low oil prices of $40 to $45 we reinstated our shareholder value initiatives with share buybacks and cash dividends. As always, the underlying foundation for GeoPark's performance is our in house integrated value system we call SPEED. This program was a founding element of our company and one of our proudest accomplishments, always pushing us to be the employer of choice, partner of choice and neighbor of choice. Speed stands for our priorities of safety, prosperity, including governance, our employees, the environment and our development of communities where we operate. We consider this ESG plus and we welcome the increased scrutiny from investors about an area where we excel. So 2021 is already well underway with 7 rigs at work. Seismic being run to identify new prospects on our high potential acreage and our team fully engaged in getting every molecule of hydrocarbons safely, cleanly and profitably out of the ground and to market. With higher prices and increased cash generation, we are accelerating our profitable production growth. We have expanded our work program to now invest $130,000,000 to $150,000,000 to drill 37 to 42 wells, focused mainly on the continued development of our prolific Llanos 34 block and some high impact drilling on our surrounding blocks in the Llanos Basin including the CP-five Block. We look forward to executing this exciting fully funded risk balance work program and developing our big growth opportunity in Colombia, while maintaining a strong balance sheet and continuing to return tangible value to our shareholders. Thank you. And we would be pleased to answer any questions you may have. Our first question comes from the line of Stephane Foucault of Aktus Advisors. Hi, guys. Thanks for taking my questions. I've got actually 2. So the new CapEx program activity program for 2021 is based, I think, on $50 to $55 a barrel. We are currently north of $65 a barrel. If oil price were to remain at that level for the remaining part of the year, would you consider either accelerating again the activity program or increased dividends, share buyback, more share buyback or pay down debt? If I give a where your thoughts are, that would be great. And second, I noticed that the Pulte Mayo production, I think, is down on protest at the minute. And I was wondering whether the if the production guidance for 2021 was including anything for Putumayo. And if yes, how much? Thank you. Hi, Stephane. Good morning. Thank you for your questions. To your first question, with respect to our new CapEx guidance, 50 to 55 if oil prices remain at the levels where they are today. I think probably it's going to be a combination of your items. Always the first priority for our excess cash generation is to reinvest and accelerate the development and exploration plans in our existing asset portfolio. And then following that, we always do a combination of shareholder value return and balance sheet management. So I guess it's most likely going to be a combination of all those 3, taking into consideration that of the fact that we have debt and we want to continue on our deleveraging trend. We want to continue also expanding our shareholder value initiatives, but also reinvest to accelerate exploration and development on our existing assets. If oil prices remain at the levels where they are today, we would expect to generate significantly more free cash flow from our assets that will allow us to do all that. And then on your second point about our production in Putumajo, yes, the guidance that we gave factors in this previous brief period of production shut in. As of last night, we were in conversations with our team on the ground down there and the situation has been resolved and the production is actually starting to flow back again as of this morning. So we would expect the production to be back to normal levels of around 2,400 barrels a day over the next 3 to 5 days. So the situation is normalized. And unfortunately, this was an event to which we were not a party. This is simply a protest against the state where we are basically stuck in the middle. But luckily, the good news is that the situation has been resolved and production is flowing back again. And yes, this stop was included in our guidance was factored in our guidance for 20 21. Wonderful. Thank you. Thank you. Our next question comes from the line of Riccardo Reza of JPMorgan. Hi. Thanks for taking my question, Jim, Andres, Stacy, hope all is all with you. So a couple of questions on my side. First one, if we think about oil prices remaining where they are now, I'm just wondering if you could by any chance actually accelerate your hedging program and try to lock in those prices above your guidance for the year. And then the second question is on potential new projects for the year or areas where you could be looking at maybe acquiring some blocks or new auctions? If you could comment on that, that would be great. Thank you. Sure. Thank you, Ricardo. On the hedging question, yes. I mean, this is the time where you want to accelerate your hedging strategy because this is the time when hedging becomes available at better costs. Today, we are around 70% hedged for the first half of the year, around 50% hedged for the second half of the year. And starting on the Q1 2022, probably at around 15%, 20%. So we are actively adding more hedges, probably more on the second half and the first on the second half of this year and the first half of next year. And the levels that we are seeing today in the market are more or less floors of 50 with ceilings around 75. If we can capture levels like that for Brent, we will definitely start adding more volumes into the mix. And then with respect to the opportunities and new projects, what you know is a key component of our business. And we are in active participation in the different divestiture initiatives that are going on in mainly probably all of the countries in the region. There are very significant projects being offered for sale in Brazil today both onshore and offshore. There are some attractive acreage being become available in Colombia as well in the Llanos Basin, but also in the Middle Mac. So and there are some other opportunities. And we as we said and we always say, we are actively looking and participating in all of these projects. But also as we always say, in 2019, we did this significant line grab around Janus 34 and we're consolidating and doing anticipating all the works to try to accelerate our exploration campaign within our organic portfolio. So if anything, we have set the bar higher for new projects to come to the company. And we are conservative patient buyers. But if the opportunity comes, we'll definitely take it. Our next question comes from the line of Alejandro Dimochelas of NOW Securities. Yes. Good morning, gentlemen. A few questions, if I may. First one, please, could you indicate how you're seeing the cost evolving now that you're accelerating activity levels? Are we going to retain some of those gains that you executed during last year? Or is part of that kind of coming back? That's the first question. 2nd question on the production side of things. If we look back to, say, 1st quarter of 2020 before COVID, you were producing 45,000, 46,000 barrels a day on average. What would take for you to go back to that level? Do we need more investment than the one that you're guiding towards now? And probably the third question, if I may, is on the exploration program. With the acceleration of the exploration, how much of the prospective resources that you indicated of 750,000,000 barrels you think you can be accessing with the current exploration program? Thank you, Alejandro. Your first question with respect to our cost basis, there's a couple of elements that come to play in our cost base. One is the fact that last year, we reduced a lot of our costs, but also we for a period of time, we shut in some of the production that was at higher cost. So with Brent about $50,000,000 or $55,000,000 and even beyond that, some of that production obviously will come back to produce. And that means that our consolidated OpEx per barrel may show a slight increase compared to last year. Last year, we were in an average of more or less $7.5 per BOE, the lowest was in the second and third quarter at $6 per BOE on a consolidated basis. So for 2021 at these prices, we're estimating it to be more or less around the similar the average are a little bit higher. So $7.5 to $8 per BOE is a good number for full year 2021 at $50 to 55 dollars Brent. Another component of that is also that when oil prices recover, the FX rate in these countries in Latin America tends to appreciate and around 70% of our OpEx base is in local currency. So those 2 go more or less against each other the FX rate and and commodity prices. Okay. Thank you. With respect to your question about production, We think that one thing that is not noted in the guidance we gave, I mean, on an average basis, the increase is roughly 1,000 barrels compared to our previous guidance with the CapEx that we're incorporating and only half of that CapEx is for development. But with this CapEx, as I said, on an average basis, it may not look so significant. But looking at the shape of the curve, before we were looking more flattish with a slight growth curve. And now the curve shows some growth towards the second half of the year. So probably by the end of the year, we should not be that far from the 45,000 44,000, 45,000 that we were before. Additionally, I would mention that our main asset today which is Janus 34, we're allocating most of our capital there. And that asset that has historically been a huge growth engine for our company is now migrating into a new phase of a significant cash machine, which with very little CapEx is spitting out a lot of cash rather than spitting out a lot of growth. So we welcome this new phase of this block, but probably at this point, we're focusing a lot more on generating cash flow and profits rather than showing fancy growth digits. And then your last question, how much of the full prospectivity that we announced in our recent audit? Are we targeting with the 2021 program? I would say it's a small fraction. So it's something around 30,000,000 to 50,000,000 barrels approximately in average of the total unrisking resources of that total pool. So a lot of that is in the CPO-five block. A lot of that is in the remaining Janus acreage. And some of the investments that we are doing this year both acquiring 3 d seismic and advancing on the licensing process is to start getting ready all that acreage for us to be ready to drill some more prospects in 2022 and on. And could you give us I know you have a lot of flexibility in the program, the exploration program, I mean, but could you give us some kind of split of how many wells are going into CPO-five, how many wells are going to the other block? Yes. It's more or less and more or less this is not going to be exact. In CP-five, we have planned more or less around 5 wells and 4 of them are going to be exploration wells and one development well which should be the first well of the campaign that we're hoping will be spud in May or June this year. Then we're targeting 2 wells in Janos 32. 1 exploration well in sorry the 2 wells in Janos 32 those are 2 exploration wells. 1 exploration well in Janos 34 and 1 exploration well in Janos 94. That is all the exploration wells that we're planning for this campaign. Okay. That's very useful. Thank you. No problem. Our next question comes from the line of Daniel Guardiola of BTG. Hi, good morning, Andre and Jean, and thanks for the call. I have a couple of questions. My first question is related to realized prices. I understand you guys are very active hedging future production through different mechanism. And I wanted to know how exposed you are to the upside of oil prices, considering that today oil prices are 68. So I wanted to know if indeed oil prices stay at this level if you're going to benefit of these levels. So that's my first question, okay? So if you want, I mean, you can either answer it or I can go forward and ask the other questions if you would like. Daniel, sure. I can take that one and then you can ask the rest if you want. So we are exposed to the upside in oil prices if they remain at these levels. That upside is limited by some of the hedges that we have in place particularly especially for the first half. So the first half of the year the full upside we will capture it only on roughly 30% of our production. The rest of our oil production, the rest of our oil production 70% is hedged and has an average cap of 52 more or less 52 $3 per barrel. The full detail is included in the release. And then for the second half of the year, we have around 45%, 48% hedged. So it's half of our production will experience full upside and the other half has an average cap that is higher than the first half. Let me check for one second. It's closer to the ceiling is for the second half of the year is around 60 dollars $61 per barrel. So I would say we're more limited on the first half than we are on the second half. For the second half, we get almost the full value. And then for next year, we're fully exposed. Okay. So just to make sure I totally understood your answer. So for the first half of the year, you have a cap at 60? No. For the first half of the year, we have a cap at the Q1 is 52 Brent and the Q2 is 54. And that only applies to 70% of our production. So 30% is has no cap and no flow. And then for the second half of the year, the ceiling is 60% that applies for 48% of the production. So 52% of the production has no cap. So it's fully exposed. Okay, great. Great. Understood. And my second question is yes, sorry. No, no, that's okay. Sorry, go ahead. No, no, I was going to ask you my second question is related to production. And I wanted to know if you could share with us more details on the expected production from the main fields, JANOS-thirty four and CPO5 in 2021 and onwards, considering that you increased your CapEx or your working program for this year? I think it's more or less the breakdown is more or less similar to what we used to have. Probably, there's a little bit more weight in particularly on the second half in Plata Anijo because we are adding 2 wells to be drilled in that field and has an impact because we have 100% working interest. So but more or less, the target is Llanos 34 is between flat to a 5% growth similar to what we have we had before, maybe a little bit higher than that. CPO5, we're targeting to double production compared to last year. Latinxiao, before we were targeting a small decline and now we're targeting a small growth maybe 0% to 5%. The rest of Colombia is relatively flat. Chile is flat. Argentina and Brazil are also flat. So that is more or less the breakdown on where the difference is going to come. Thank you, Andres. And if I may squeeze a follow-up regarding production. I remember that before the pandemic started, you were targeting to reach plateau production in Janus 34, close to 80,000 barrels of oil per day, if I'm not mistaken. Does it make sense to once again reach those levels considering the current environment of our The thing is that the things that you have to remember that after that, we spent 6 months or more with no activity in the block and obviously the oil production declines. And then for some time, we had limited activity in the area. Until now, we are coming back to normal drilling activity with 3 drilling rigs in the area as we had before. So it's probably unlikely that we will reach that plateau following the fact that 6 months with no drilling, we the production declined something like on a gross basis was probably 6,000 to 7,000 barrels a day. So it is I don't think the 80,000 is the plateau now. And I think what is important is what I said before, more than focusing on how much will it grow, I would really focus on how much cash is going to be generating. This year with $60,000,000 $70,000,000 of CapEx, just at $50 Brent is going to generate more than $50,000,000 of operating netback. And that's our main focus right now really than showing fancy shining growth rates with better show profits. Okay. Thank you, Andres. Just a very brief last one. When you look at your cash flow generation or expected cash flow generation for 2021, it's expected to be very healthy, especially considering comparing it against 2020. And I want to ask you, I mean, what are going to be your priorities to use that excess of cash in 2021? I think we can summarize that as the main priority always is to reinvest in our assets. And then the second one is a combination of deleveraging and shareholder value returns. So those are the 3 biggest elements that are going to be taking they're probably going to be taking the cash that we generate in 2021. Okay, great. Thank you. Thank you. And at this time, I'm showing no further questions. I'd like to turn the floor back over to Andres Ocampo for any additional or closing remarks. Thank you everybody for your interest in GeoPark and your continued support of our company. As the world's borders begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their interactions and is busier than ever with webinars, video conference and direct calls and is available around the clock as is our management team to answer any questions or listen to your comments. So thank you and please stay healthy and strong. Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.