Earnings Call: Q1 2020

May 14, 2020

Earnings release

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the Q4 Ended December 31, 2019. After the speakers' remarks, there will be a question and answer session. In New York at 1212-687-8080 and we will have one sent to you. Alternatively, you may obtain a copy of the release 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 Augusto Zubillaga, Chief Operating Officer Andreas Ocampo, Chief Financial Officer and Stacy Simold, Shareholder and 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 that our executive team, united as ever in our efforts, are currently physically separated and calling in from our respective homes and locations in Bogota, Santiago and Buenos Aires. At the outset, we would first like to express our profound gratitude and admiration for the GeoPark women and men who are working day and night pushing us through this downturn and continuously making our company perform, protecting our shareholders and positioning us for the new world on the other side. Across 6 countries, our team moved with quickness and agility to protect the health and safety of our employees, contractors and communities and ensure that our hydrocarbons keep flowing to the markets. With creative logistical support, our office staff could be moved to work from home, But our field operations require men and women to be on-site and have their hands on the iron. Our field teams again proved why they are the backbone of our company. Before opening up to questions, let's please look at 4 elements of our business during this Q1. Firstly, our team continued to drive performance with solid results, including record production of 45,700 barrels per day, representing 16% growth compared to last year strong cash generation with an adjusted EBITDA of $78,000,000 and leading capital efficiency with $2.3 generated for every $1 invested. On certain higher cost mature projects within our portfolio, we took noncash accounting impairments of 97,500,000 which made us record a net loss of $89,500,000 for the quarter. Secondly, our team moved lightning fast in the battle mode for the arrival of the global pandemic, the collapse in the world economy and the flooding of the oil markets with unneeded and unwanted barrels. In addition to quickly protecting the health and safety of our teams and contractors, we worked with our neighbors and communities to keep them informed of operations and risks and provide them with safety, medical and food supplies, particularly for the most vulnerable. Following our tested business model and track record, our season 2 simultaneously attacked every component and dimension of our business. So far, more than $280,000,000 of capital and cost savings have been implemented across the board with more coming. This included reducing our self funded work program by 75% to $45,000,000 to $50,000,000 focusing on our most strategic assets like the Llanos 34 and CPO5 blocks in Colombia and other savings such as voluntary salary and bonus cuts by our team and Board. We also temporarily shut in 6,500 to 7,500 barrels per day of higher cost production to preserve cash and shareholder value, resulting in higher cash flow with less CapEx. This also helped us minimize activity and the potential spread of the virus in the field and in our ceramic communities. It is expected that this production can be readily brought back on stream without suffering mechanical delays or reservoir damage. Thirdly, the underlying strength of our assets and key characteristics of our company provide a foundation to protect against and endure through this and other crises. Additional tools at hand include a strong balance sheet with $165,500,000 of cash and safety net funding alternatives such as a $75,000,000 oil prepayment with $50,000,000 committed and $130,000,000 in uncommitted credit lines, providing us with financial flexibility and liquidity if needed. SteelPark's long term debt profile has no principal payments until September 2024, And Standard and Poor's and Fitch both recently reaffirmed our long term corporate credit rating at B plus We are also aggressively protecting our base oil price by effectively using hedges. Approximately 26,000 barrels per day, nearly 70% of our oil production hedged in the 2nd quarter and so far approximately 17,500 barrels per day 11,000 barrels per day in the 3rd and 4th quarters, respectively. Fourthly, as a long term opportunity driven company working in the most attractive hydrocarbon region today, we are looking ahead with excitement to the recovery and taking this opportunity to streamline and improve our overall business and more strongly position GeoPark for continued economic growth and success. As always, we are protecting critical people, tools and capabilities for the short, medium and long term. And our flexible work programs, operational agility and big inventory of organic projects allow us to quickly expand our investment plan as prices begin to recover with the first step up at $35 plus spreads. We got a head start in this recovery effort by already closing on and integrating into GeoPark the Amerisource Resources acquisition during January. This gave us additional important low cost production, reserves and high potential acreage adjacent to and on trend with the Llanos 34 block and a new entry into the Putumaya Basin with production, reserves, a pipeline, attractive exploration acreage and a new partnership with Oxy. In addition, we went to the capital markets in January and raised a $350,000,000 bond, which was Thank you, and we would be pleased to answer any questions you may have. And please be patient as we try to coordinate our question answering with our team located across the continent today. The first question will come from Robin Haworth with Stifel. Please go ahead. Hello there. Thank you very much for taking my question. Just a couple of questions, if I may. Just on the CapEx budget, what I should be interested to know what was the last thing that came out of the capital budget. That is to say, what is the highest returning opportunity in your portfolio that you're not able to do in the current environment? Secondly, on the I guess, from the capital budget implies that you see kind of pretty much all drilling programs from now on, given that you spent a large proportion of the 2020 budget. So when should we start expecting to see underlying declines in the portfolio, ignoring the shut in barrels of risk? And then thirdly and finally, a bit more strategically, in terms of taking advantage of this downturn, you do have a wide footprint. Would you be expecting to use this downturn to add to the footprint? Or would you be expecting to use it to kind of slim down to your core Colombia asset base? Thanks very much, Robin. Thanks for the questions. Can you hear me okay? This is Andreas. I can hear you fine, yes. Thanks, yes. Great. So the first question about our CapEx. Not sure if I got it right, but we are estimating roughly our CapEx now for the year to be more or less $45,000,000 $50,000,000 And as you saw in our release, most of that, as you pointed out, most of that has already been invested. So really, what is remaining is very limited, around $5,000,000 per quarter. Maybe in some quarters, we may go up to $8,000,000 But in this context of high volatility, in some cases, we are not even lifting some wells that go down because of either pump failure or things like that, which are pretty common in day to day business. So I would say our CapEx has been done has been compressed down to below what we would call a maintenance CapEx. We're not we just there's just one well covered rig in Dhanos 34 working today, putting back one well on stream, and we'll release that rig even after that job is done, particularly or mainly because of the high volatility in oil prices. I mean, Brent was probably in the 20, less than 10 days ago. Today, it's at 30. So the trends are pretty significant. So it is uncertain how fast or how well we could achieve any returns on any of those investments. So to when we could be thinking of starting to invest again, Luckily, we don't need metals over 40 or anything like that. We I think Tim mentioned in the introduction, with oil prices firmly above at 35 or higher, we're ready to go back to work. So hopefully, as soon as that happens or there's some clarity in the market that we will be have that will happen and will be sustained, then we're ready to start putting or adding back investments into our portfolio. I don't know if that answers your question about CapEx. Yes, it does. Just, I guess, to clarify, I was also asking about so the difference between your old CapEx guidance of €70,000,000 and now sort of €45, €50,000,000 that £20,000,000 or £25,000,000, what was it that's come out there? And so what's the first thing that you do in the event of a slightly higher oil price? So some of those were some activities that we have like facilities, building facilities, some workovers we have planned. We have around 6 or 7 workovers that we postponed or delayed. There were some seismic works that were still on the budget. We also had some other activity for licensing, things like that. No wells. I mean, the previous budget or the $70,000,000 budget already having no additional wells on it, only maybe 1 or 2 wells in TPO-five. So in this case, we're just having no new wells and also some activities in Putumayo. Those are the type of things. Most of them, with the exception of the workovers, most of them had no immediate production associated to them. With respect to the decline, as you pointed out, I mean, we have shut in production, and we expect that shut in production to counterbalance the impact of potential declines. So really, the production we're seeing in more or less flat throughout the year, but it will depend on oil prices. So if we assume a $30 Brent for the year, the production will remain, with the exception of the 2nd quarter, will remain more or less in the levels of 40,000 barrels a day per quarter. So you shouldn't be seeing declines because the shutting wells would compensate for that. In the Q2, in particular, is what we have today, we have more or less buyers, dollars 6,500 to $7,500 a day shut in. In the guidance we gave in our release, we are estimating that those are put back on in July, at the beginning of July. So that means that those barrels are out for the full quarter. But that is not what we expect. Hopefully, we will be able to bring those growth back on. Actually, at today's prices, it is very economic to put those wells back. And by that, I mean the $30 Brent with a $6 differential on Masconia. That means $24 effective price in Colombia. Most of those barrels that are shut in generate quite some cash flow at those levels. More than almost $10 per barrel could be generated from those. So at this point, we could consider bringing them back. But as you probably know, it's not so easy to put I mean, we cannot be shutting in and shutting down wells every day. We would need some more clarity on how sustainable these prices are. If we feel comfortable that those will remain, be sure that we'll bring those barrels back on production. So if you assume that those barrels are not back on stream until the end of June, then production for the Q2 will be in the levels of 35,000, 36,000 barrels a day. If you assume that they are full back on production at the beginning of June, it would be more closer to 38,000. And then for the rest of the year, it would be around 40,000 barrels a day per quarter, fairly flat. I don't know if that covers your decline point. And then for the strategic aspect, obviously, the most profitable and the most the biggest cash flow generation for the company is even particularly in this market is Colombia. We're concentrating our minimal activity in Colombia, particularly in general mainly in Banco 34 and CPO5, and we expect that to be the case. We are significantly reducing or basically not investing in Peru, as you saw in the environment in this environment. It's not economic. In particular, in Chile and Argentina, we also did some impairments related to the oil assets because of these scenarios. We still believe this is the right time to be looking for opportunity. So we keep our eyes open. We look the market. But obviously, raising capital in this market is very tough as well. So we're probably concentrating more in Colombia at this time, but never close the door to any opportunities that may show up in such an attractive market for asset prices. So and I don't know if that's the point you were referring to. Yes. That's very clear. Thank you very much. Thanks very much, Robin. Okay. The next question will come from Stephanie Flusen with Octus Advisors. Please go ahead. Hi, guys. Two questions for me. 1 just a clarification. So from what you said is that you say oil price remained at $30 barrel until the end of the year. There won't be really any additional explosion wells in Colombia at CTO-eight. My second question is around I was surprised by the netback, which is basically the operating netback is basically production is lower, but operating netback is basically unchanged or even a bit up. So my question really is where what has changed? The G and A has gone down. It's probably not including the operating impact. So is it that you're forecasting lower OpEx, lower transport costs? Or is it simply because you're seeing better differential? Stefan. Could you please repeat the first question? I have the second clear, but can you repeat the first one? I did not understand. The line is a little noisy. It was just a clarification that at $30 barrel, we should not expect any further explosion drilling, which I think is the question for the meeting, just to make sure I got that clear. No more explosion drilling at 30 hour barrel until the end of the year. Is that correct? Yes. That is correct. We in our $30 case, we're not anticipating any exploration drilling. There may be something in KPI-five, but it's and it wouldn't be a significant amount of capital. For CPO5, we're keeping maybe 1 appraisal well, 1 disposal well to increase production and maybe 1 exploration well. But all those together wouldn't account for more than $3,000,000 net to GeoPark. And still, it's unlikely that we will do it. So I wouldn't consider those, unfortunately, at least until the end of the year. And then to your point, sorry, yes, the netback, you pointed it twice. Basically, even in a scenario where we're selling production or that the production is lower, the netback is higher. And mainly there and also if you take the actual operating cash flow, if you're faster in the CapEx, that is also lower than the actual operating free cash flow, it's also much higher still. The main impact there is OpEx. It's a reduction in OpEx. We're not only our G and A has been cut down by almost 40%. And also, you need to include the fact in that analysis that we also took over a new company with its own G and A. So if you factor in that we are comparing to 2019 numbers where we didn't have that company, then the cap would be much higher. But in any case, in the operating netback, as you pointed out, the G and A is not included. But the main item there is OpEx. So we're cutting down our OpEx significantly. In the new assets we acquired, for example, in Putumayo or in CPL5, consolidated Ameritur was reporting $18 to $20 per barrel OpEx. We're cutting those down to $10 per barrel in those group of assets. In Argentina, in Chile, our OpEx is down 50%. We're targeting around $9.5 per barrel. And last year, I think we were $40 something closer to $20 In Argentina, we're cutting down around 40% of OpEx. And then in Colombia, in the other assets in Colombia, it's down by around 20% to 25%. So all those reductions are generating the better impact of the on the netback. And as a follow on, do you say some of those OpEx reduction has been structural? Or would you see that coming back as soon as the price come back? Some of them are just net pulling jobs and things like that, but most of them are structural changes, either renegotiate contracts or redesigning operations or things that are in that sense. So most of the reactants are permanent, efficiencies that we achieve. Thank you. Thank you, We do have a question from Ian Macqueen with 8 Capital. Please go ahead. Ian, your line is open. Sorry, my last one is on mute. So I'm just wanting to know about shut ins and where they're occurring. I know you have 100% operated production in Chile and Argentina, but you have partners in Brazil and Colombia. Can you give us an idea of the BOEs per day that are going to be shut in in Brazil, Chile, Argentina? And then in Colombia, where there would be shut ins, whether it be LA-thirty four, CPO-five or platinum? Thank you. Absolutely. So the share is more or less the breakdown of those roughly 7,000 or so barrels a day. In Chile, it's around 500 barrels a day related mainly to the oil production. The gas wells are still flowing with some small condensate that comes along with that. In Argentina, it's roughly 200 barrels a day related to also the oil assets. In Brazil, on the oil, it's 150 barrels a day, which is the one oil field that we have there and some small oil that is produced by Manatee. And then in Colombia, it's more or less $1,000 a day or so related to Plata Nijo. That's the pit of major production. And then in January 24, Nexo Geo Parts is something around 5000 to 6000 barrels a day, more or less. And that is related to mainly the smaller fields, the higher work at fields like MASS, Carrotaro and those type of fields. And then the most recent ones, which we did this quarter, were related to Tua and the higher water cut wells in Tijuana and Hakan. So those are mainly the wells that are sharing right now in the report. Those are met to be about around, as I said, dollars 5,000 to $6,000 a day. That's great. Thank you very much, Andres. And to give you an idea of the Inpazione, we are also maybe on a gross basis around 10,000 barrels a day or so. And in water, that represents almost 100,000 barrels a day of water. That's why the impact of these wells on the netback is much better because it's almost an average we shut in for less than the 90% At this time, I would like to turn the conference back over to James Park for any closing comments. Thank you, everybody, for your interest in GeoPark and your continued support of our company. Once the world's borders begin to open again, we encourage you to please visit us at our operations in each country and call us at any time for more information or comments. Thank you, and please stay healthy and strong.