Earnings Call: Q3 2020

Nov 5, 2020

Earnings release

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the Q3 ended September 30, 2020 and the 2021 Work Program and Investment Guideline. 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 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 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 James F. Park, Chief Executive Officer Andres Ocampo, Chief Financial Officer Martin Tirado, Director of Operations and Stacy Seimel, 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 reunited in Bogota, Colombia to report on our Q3 2020 results, introduce our work and investment program for 2021 and highlight our steps to return more value to shareholders. When we founded GeoPark in 2,002, we set out to build a company for the long term that would be the premier Latin American oil and gas independent and capture the big energy opportunity prize in this region. And we want to always express our gratitude to the women and men at GeoPark, past and present, who have made this company what it is today and created an unparalleled track record, a track record that incredibly despite this monster storm we are fighting is on target for our 18th straight year of growth. We had a great start to this year in the Q1 with the acquisition of Amerisourceur, which significantly advanced our quietly effective Yanos Basin expansion effort, which has now positioned us with 1,400,000 prime acres surrounding Llanos 34. This has made us one of the leading landholders in one of the world's most attractive onshore hydrocarbon basin and secured us with a powerful low risk short, medium and long term growth fairway. During the wild and turbulent second quarter, our team moved decisively and significantly on all fronts. First, to keep our team safe and healthy and then pulling in our horns hard and dropping our capital investment program by 80% and attacking each and every cost line to achieve nearly $300,000,000 of future cost savings. This quickness and agility allowed us to then reengage and get back to work smoothly during a more stable Q3, meaning putting rigs back to work and opening up temporarily shut in production. Our unique low breakeven production base, coupled with our relentless cost cutting efforts, which again resulted in big declines of over 30% in operating costs and 30% in G and A and G and G costs during the Q3 generated a doubling of our 2nd quarter EBITDA to $56,000,000 Our forceful cash preservation efforts maintained a healthy cash balance of $164,000,000 which is even more cash than what we started the year with. Operationally, we resumed drilling on the Yangtze 34 Block and significantly began drilling on the CPO-five block to appraise the Indigo oilfield. We have high expectations of the CPO-five block with its combination of development opportunities and very large multi play exploration prospects and see it as a key component of our continuing Llanos Basin growth story. Taking advantage of the downturn, we worked to transform GeoPark into an even better and stronger company. This included a major portfolio from a country or regional perspective to an asset focused approach, which allowed us to capture large savings through synergies and improved efficiency. As always, the underlying foundation for GeoPark's performance is our in house integrated value ESG plus program we call SPEED. This program was a founding element of our company and one of our proudest accomplishment, always pushing us to be the employer of choice, partner of choice and neighbor of choice. This has been especially evident during the pandemic with our success in keeping our team safe and healthy and assisting our neighboring communities with medical and economic aid. So today, from a position of strength, we are finishing another successful year and have been able to build an attractive work program for 2021 to grow our company and return cash to our shareholders. Turbulence has been an opportunity zone for us throughout our history, and we are heading into 2021 with confidence and optimism. Our projected work program using a base case assumption of $40 to $45 Brent provides for $100,000,000 to $120,000,000 to drill 31 to 34 wells, approximately 65 percent development and 35 percent exploration, with an average annual production of 40,000 to 42,000 barrels per day and generating an operating netback of $210,000,000 to $280,000,000 And as in every program every year, we have built in our flexibility with a fully funded high case at Brent over $50 and a fully funded low case at Brent below $35 focusing on the lowest risk projects that can yield attractive returns. Overall, 90% of our production is cash flow positive between $20 to $30 Brent. 1 year ago, in our November 2019 conference call, we said, We believe that a company that can consistently execute, invest, find oil, grow and return value back to its shareholders, all funded by its own cash flow is the right model for our industry today. In a volatile world, being able to deliver on all these fronts is the true measure of a company's durability and value. We did not know at that time that we're about to face the biggest collapse in our industry's history, But GeoPark's ability to prevail, continue growing, provide cash back to its shareholders and maintain a strong and secure financial position during this time is a powerful test of our resilience and enduring value. Thank you and we would be pleased to answer any questions you may have. Thank you. Our first question comes from the line of Alejandro de Michaelis of NAU Securities. Yes. Good afternoon, gentlemen. Congratulations on the quarter and on the cash returns. A couple of questions, please. The first one is on your production guidance for next year, which is effectively flat from where you are today despite you spending $100,000,000 $120,000,000 in CapEx. So could you please give us some kind of indications of what are the moving parts to keep that kind of production flat? And then the second question, I think in your press release, you indicate that there could be some more kind of cost efficiencies to come. So trying to understand where those cost efficiencies coming from and how large this could be. Hi, good morning, Alejandro. Thank you for your questions. On the first question with respect to the production outlook for 2021, I would take into consideration, first, the fact that we're projecting our budget around $40 Brent, which is a little bit still a little bit lower than the average of 2020. So additionally, we are actually, we are being able to keep 2 full time rigs in our core asset in General 34. And as we also mentioned in the release, we were finally able to resume activities in 2005. So having 2 full time rigs in January 34, we probably keep the production there more or less flat to a moderate growth. If you remember in 2019, we were at our program for 2020, and we were targeting to grow between 5% to 10%, but having at least 3 full time drilling rigs in the area. So I would say with this level of activity, it's reasonable that we are keeping the production between flat to a moderate growth. Additionally sorry, but on top of that, I would highlight the fact that the cash flow that is going to be generated by that is going to be very significant. So if you think probably in January 24, we're allocating something like $50,000,000 to $60,000,000 worth of development CapEx. And at a $40 Brent $40,000,000 $45 Brent, the asset would be generating something between $200,000,000 to $230,000,000 of operating netback. Additionally, on the consolidated CapEx that you saw, dollars 110,000,000 to $120,000,000 there's a bigger weight on exploration than it was in the last couple of years. So around 35% of this CapEx is exploration, and there's no production associated in our guidance coming from those from basically 35% of the CapEx. So effectively, the CapEx that is associated to development is roughly 65% of the total. So there's a third of the CapEx that has no production associated. Half of that exploration is for wells and the other half is for 3 d seismic and licensing to get us ready to start a more aggressive exploration campaign in 2022 and on. I don't know, Martin, if I missed anything. Maybe then one last point is on the rest of the assets of the portfolio, you will see that with very little capital being allocated to them, and I'm leaving aside CPO-five for a second, we are being able to keep the production fairly flat with very little investment. And then on CPO5, we are targeting a pretty significant growth in 2021. Our expectation with the level of activity that we are estimating is that we should be able to almost double the production in CPO-five during 2021. We're targeting around a 90% production growth from the 7,000 to 8000 barrels a day experienced in 2020 to something around 15,000 barrels a day next year. And with respect to your question about cost efficiencies, we went through a big restructuring during 2020. We reshaped the organization completely and the way we organize ourselves. We shut in some offices and we reduced some of the other offices and we also made some changes in our operations to continue reducing our costs. So as well as in Andres, on top of that, our transportation costs also have been we have been able to bring it down. All of those areas are for us an ongoing continuous effort. So our expectation is to make Your next question comes from the line of Stephane Ocou of Octas. Yes, morning guys. Thanks for taking my questions. I've got 3. The first one is around the special dividend. So I understand the logic of the quarter dividend to return to show return to shareholders and the buyback. But what was the logic behind the strategy behind the one off, the extra cash dividend given specifically this quarter on top of the quarterly? That's my first question. My second question is around the tax in Colombia, the cash tax. Given the repayment and And my last question is around CPO5, it's back that's bidding on the previous question. Could you come back to the production you would expect from CPO5 in the guidance in 2021? I think it's 15,000, which seems to be probably working interest. But if it's the case, compared to where we are today, what are the moving parts? So 40,000 barrel per day at the moment, if CO.5 goes up, then what goes down? Thank you. Great. Good morning, Stephane. Thank you for your questions. On the dividend question, The basic logic behind it and the one off and the ordinary dividend. We paid at the beginning of sorry, maybe I should step back to 2019. We started our dividend in late 2019 and we were paying $2,500,000 a quarter. That was giving you more or less something like $10,000,000 a year if we were to continue that payment every quarter. That back then would have represented something around 1% EBITDA yield for the company as a whole. So post COVID, with oil prices dropped and our market starts dropping in line. Today, given that we paid $2,500,000 dividend in the Q1, if we top that up with another $2,500,000 dividend on this quarter, that gives $5,000,000 for the year, which more or less respects the same 1% yield or a little bit above that. So and the reason why we split is because the ordinary dividend, obviously, it's not one of obviously, the quarter as the quarters go forward. So and that would give you more or less $5,000,000 over the course of 1 year if we were to decide to maintain it. So that's more or less the logic on why we decided those amounts. With respect to your question about cash taxes, we in the in 2020, there was a combination of tax reductions, tax deferrals and tax reimbursements. The final net impact on cash of the tax payments in 2020 is going to be around $10,000,000 Part of that was a deferral to 2021, roughly $20,000,000 to $25,000,000 were deferred to 2021. So that is going to be part of the 2021 tax deal. And then our 2021 tax estimation cash tax estimation is somewhere around also $20,000,000 to $25,000,000 So in total, the tax cash payment in 2021 should be something around $40,000,000 to $45,000,000 sorry, dollars 40,000,000 to $50,000,000 more or less. And then your last question was about CPO5 and the production guidance. Yes. So the numbers I gave, the 7,000, 8,000 last this year to 15,000 more or less 15,000 next year, That obviously gross production is at the working interest. So how that breaks down into our production base is more or less CPO5 growing, down 34, fairly flat to a small growth, 0% to 5% growth. And then the decline comes from the other assets, mainly Latanillo and to a lesser extent, some of our Argentinian, Chilean, Brazilian production. Thank you. Thank you. Your next question comes from the line of Riccardo Rezende of JPMorgan. Ricardo, your line is open. Please state your question. Can you hear me? Yes, please go ahead. Yes, we can hear you, Carlos. Hi, Andres. Hi, Jim. Thanks so much for taking my question. A couple of questions on my side. The first one is related to your 2021 work program and more specifically about CPO5, almost like a follow-up on what you just mentioned. Just curious to see how were the discussions with your partner there, given that's the 1st year that you've been part of the controlling group of CPL5 and how much of a synergy that you had with Llanos 34 and the best practice that you had there, if you could already start to deploy that in CPO5 in 2021? And then on the second question is, this morning, Petroville, which is a partner on Guanati, they announced they're selling their 10% stake on that block in Brazil. I'm just curious to see what are your plans there given that the 3 partners on that block have already mentioned their intention to sell their stakes at some point earlier this year. Thank you, Ricardo, and good morning. With respect to your questions your question about CPO5, I think so far so good. We have a long relationship with ONGC and have been working with them in the area. We have been working before CPO-five in jointly looking at opportunities in that in America and particularly in the Janos Basin. So they are open and welcoming our joining CPO5 and have a very good partnership with them. We are very happy that we finally got a rig on-site in Indico, and we are just finishing we're just finishing drilling the Indico 2 well. We are expecting to perforate and test these wells in the incoming days. So that's great news. And we are also looking to a good drilling campaign following Indigo 2 that has been agreed between the 2 partners. So I would say the relationship has been excellent. They welcome all of our input with respect of ideas and considerations on experience we've had Janus 34. And the fact that we are back drilling and hopefully keeping the rig in the area to continue drilling. After Indigo II, the rig is going to move to an exploration prospect called Anilab. And then after that, it's going to continue drilling, probably coming back to Indico for more development wells. So long answer, but really our experience so far has been quite positive and we're very optimistic about this very attractive acreage position. And then with respect to your question about Petrario and Manatee, we read that announcement and we know of this initiative that is going around Manatee. It is one of the assets it is Manatee is a very attractive gas field in Brazil. It is it does have limited upside, so it would be part of the one of the assets in our portfolio that for us would be a divestiture could be considered. And we've analyzed the idea many times. And if anything comes to reality, we will make the appropriate announcements and we will update the market on any advances on that front. So there's not a lot much that I can say about that, but it is an idea that we're happy to continue. Great. Thanks, Andre. Thank you, Ricardo. Your next question comes from the line of Robin Haworth of Stifel. Hi, Andreas. Thanks for the question. So just on buybacks, is your buyback capped by free cash flow in 2021? Or would you consider using cash on the balance sheet in excess of free cash flow? I'm just looking at the my estimates of free cash flow. I don't think there's tons given your spending guidance today. So I was just wondering if you would essentially spend balance sheet cash on buying back stock here. And then how do you think about buying back stock versus doing more drilling, either LLA34 or CPO5? And then just another follow-up on CPO5 production rates. That 15,000 barrels a day you mentioned, is that an exit rate for 2021? Or I think it'd be quite a good effort to make that a 2021 average. If you could clear that up, that'd be great. Thank you. Robin, good morning. This is Martin Terrado. I'll start with the second question related to CPO5 production. That is the exit rate. So in addition to Mariposa 1 and Indico 1 that we have on production today, we are adding the production from Indico 2 and 2 additional development wells in 2021. And so we expect to be in the order of 12,000 to 15 1,000 barrels cost at the end of the year. And those 3 exploration prospects in the campaign that have no production associated and not included in that guidance? Correct. Neither those 3 nor the Aguila that we're about to start drilling in the future, near future. So on your question about using our cash for buybacks, Robin, yes, we would use some of our cash. The guidance more or less we gave this morning is more or less cash neutral at the asset I mean, after asset service, taxes and everything. So below that, we have dividends and buybacks and any other non asset or not inside company related items. And for that, we could definitely use our cash. At these prices, we believe is a great investment as well. We also have to take into consideration our balance sheet management and keeping the cash also help us to maintain a strong balance sheet. So we will not get our eye from that part. But given that, we believe we have a pretty solid financial position in 2021 and a pretty solid and healthy cash inflow and cash position, yes, we will definitely use some of our cash to invest in buying back so much of our shares. Great. Thank you. So just I guess to follow-up on that. Are you sort of committing to use the full 10% ability to buy back stock? Or is it more opportunistic than that? No. We're not committing to use up the full 10%. Be more opportunistic and will depend really on market conditions generally. But so that's the maximum allowance that we have approved, but we will not commit to use at the full amount. Your next question comes from the line of Joanna Castro of Itau. Hi, thank you for taking my question. I had one strategic question on the rationale on how you see the beginning of next quarter because I think that you probably are one of the companies that have give more guidance quarter over quarter about what is your CapEx every time the oil changes. So it is good that you give that insight, but I was thinking I was actually willing to understand what is your rationale on the market and your negotiation with Rafibura in the first quarter of 2021. If you can disclose a little bit on how you're looking at that overview of the market in Colombia that is the Mondrian for you? And the second question is more on an accounting issue for the end of this year. If the result continues to be similar this Q4 to the Q3, you will run into negative equity. Are you planning to avoid that scenario just for the matter of results presentation? Or it doesn't really matter to you? Hi, good morning, Joanna. Could you please repeat the first question? I'm not sure I understood your question, please. Is that you have used several times in the past and some anticipated legacy yes, commercial figures with Trafigura in order to anticipate some sales. And as I have understood that it will work in case of the need of liquidity. But I don't know if you are in that scenario for the Q1 of 2021. If you are using that kind of a strategy in order to anticipate some sales of the production. I was just wondering if that is the scenario for the Q1 2021. Okay. So basically what happened this year is we negotiated an agreement with Trafigura to implement an oil prepaid facility. And in exchange of that, have an offtake contract with them. So they will be offtaking part of our production during next year and the following year. So that agreement is still in place and we have the commitment from Trafigura to defer if we would require we have $50,000,000 of available liquidity committed to us that has to be expanded to $75,000,000 I confirm that none of these amounts have been withdrawn. So the line is unused and we expect to keep that in place also for the next year. And then as a result of that, you will see part of our volumes being sold to Tafigura in 2021 and all. I don't know if that is the point that addresses the question that you're making. Yes, perfect. That's great. Thank you. And then your next point about the regulatory yes. To your point, we'll see which results in the Q4, but if it happens as you said, there is a chance that our equity becomes negative during the Q4. We don't really see that as a concern. That's purely an accounting rule matter. The main explanation for that is that you can see that a very important and big asset like Janus 34 is booked in our balance sheet at a book value of $200,000,000 and that follows simply accounting rules that we need to follow which is booking our E and P assets taking into consideration only the past investment minus the depreciation following production. So the book value of the equity as a result of those accounting rules really do not reflect fairly what we believe is the real underlying value of the asset. I mean, Janus 34 is going to generate that much in the next 12 months. So for that reason, we don't see this as a concern. We have a very solid cash position. We have just announced a pretty firm and robust work program on budget that is going to generate a lot of cash flow for our company. So we don't really think this is an issue. And also there has been a lot of companies, this is not an unusual event. I mean, there's many companies, not only on the E and P sector, but on other sectors that experienced negative equity with no real issue. So this is not for us an issue that reflects anything with respect to our Okay. Thank you. Thank you for the clarification. Your next question is a follow-up from Alejandro De Mikaelis of NAU Securities. Yes, guys. Just to follow-up on something that Martin said on CPO5. Can you confirm that you are taking INDiCO2 into production? And because on your press release, I can see no comment on any kind of early kind of indications on IMNICA 2. So maybe you can tell us how you're seeing the progress there maybe already in the reservoir. Yes. How are you doing, Alejandro? So we're very excited, like Andres said, that we got a rig operating there. We're aligned with our partner. The Indico-two well was started in September, targeting the UNE formation. It's the same formation that is being producing in both Mariposa and Indico-one. And as we speak, the operator ONGC is completing the well. We're excited and shortly we will be communicating those results. Following that Indigo 2 completion, the rig is moving to the Aguila, and that is also targeting the But surely, if you're completing a well, it's because you have a discovery, yes? So we are casing the well. And the results, they look good. We will again, we will share once we have the well with more information. Yes, Alejandro. And just remember, Indigo 2 is not an exploration well, just for clarity. It's an appraisal well inside the Indigo field. So it wouldn't qualify as a discovery, it's a development well or developmentabrasal well. And hopefully, we will be starting to test the well in the coming weeks. So looking forward to that. Okay. That's very clear. Thank you. Thank you. That was our final question for today. I would now like to return the call to Mr. James Park for any additional or closing comments. Thank you everybody for your interest in GeoPark and your continued support of our company. As the world's quarters begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their actions and is busier than ever with webinars, video conferences and direct calls and is available around the clock as is our management team to answer any questions or listen to your comments. Thank you and please stay healthy. Thank you. That does conclude the GeoPark Q3 2020 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.