Earnings Call: Q2 2019

Aug 8, 2019

Earnings release

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the Q2 ended June 30, 2019. After the speakers' remarks, there will be a question and answer session. If you do not have a copy of the press release, please call Sard Verbinnen and Company in New York at +-twelve-six eighty seven-eight thousand and eighty 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 dotgeo park.com. A replay of today's call may be accessed through this webcast in the Investor Support section of the GeoPark website. Before we continue, please note that certain statements contained in the results press release on this 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 PRMF standards. On the call today from GeoPark is James F. Park, Chief Executive Officer Augusto Zubillaga, Chief Operating Officer Andres Socampo, Chief Financial Officer 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're here with you this morning with our executive team in Bogota, Colombia to report on our Q2 2019 results with an emphasis on both performance and economics. Firstly, thanks to the GeoPark team for continuing to execute and deliver. Our quarterly metrics continue to climb. Oil and Gas production up 9%. Net backs up 8% with operating costs down 5% and lower commercial discounts EBITDA up 18% to a new record even though oil prices were 9% lower and net income jumped 6 times. These advances all contribute to an impressive first half of the year that put us on target for another full year of operational and financial growth and to extend our relentless 16 year performance track record. In addition to our on the ground day to day operational success in finding and producing oil and gas, it is crucial please to look at the underlying economics resulting from our operational efficiency and the quality of our assets. 1, we are self funded from our own cash flow generation. 2, our low operating costs allow us to weather any oil price volatility and 3, our low capital investment required to maintain and grow our production sets us apart from our peers both in Latin America and in North America. This quarter, every $1 invested in CapEx yielded $3.40 in EBITDA. It only took 4 months of EBITDA this year to cover our full year investment budget. Our return on capital employed in the last 12 months is over 40%. The significant excess cash flow from our projects also enables us to provide more value directly to our shareholders by investing in our own shares. We have bought back over $50,000,000 of our shares in the last 8 months. Importantly, we are also continuing to build out our project inventory with strategic high value low cost acquisitions in targeted core hydrocarbon basins, which give us plenty of running room in the short, medium and long term with a risk balance pool of great assets. Recent key acquisitions include blocks in the Oriente Basin in Ecuador and blocks in the Llanos Basin in Colombia, representing another big acreage add to our over 6,000,000 acre land holdings across the region. In recognition of our capabilities and how we do our job both above and below ground, we were honored to be chosen by the Colombian State Oil Company to partner with and operate for them in the principal basin in Colombia in our successful bid round participation together. This adds to our growing list of alliances with national oil companies across the region, where we are also working with Petrobras in Brazil, ENAP in Chile, YPF in Argentina, Petro Peru in Peru and Petro Amazonas in Ecuador. GeoPark's consistent performance and our strong regional reputation are built on our successful in house ESG program 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 wherever we are operating. Looking ahead to the second half of the year, we're going to have 8 rigs operating with new plays and prospects being tested across our growing portfolio and there are attractive new bidding rounds in multiple countries. So lots more coming. And of course, we're gearing up for our annual capital allocation process starting next month. When we get to hear about and dive into the abundance of new exciting ideas and projects being generated by our teams in each country business unit that drive us onward and upward in 2020 and beyond. Thank you and we'll be pleased to answer any questions. Thank you. Our first question comes from the line of Gavin Wylie of Scotiabank. Hey, guys. Good morning. Just a quick question on the Guacobel. Hopefully, I'm not pronouncing that too poorly. You back in 2017, there was a dry well in that area called Sensante. And I'm just wondering what are your views in terms of the difference between Sensante and Guaco going forward? And what gives you confidence on this well potentially being successful? Or even what sort of a chance of success are you putting on the well? I realize that this is only about a $3,000,000 net cost to GeoPark. So it seems like the opportunity risk reward here is quite good. But I just want to get an understanding on where you're putting the chance of success and what the key risks are on the well? Hi, Gavin. Good morning. Yes, your pronunciation of Guaco is very good. So yes, as you mentioned, we have the wells in Sonte drilled a few years ago. Zinsonti was a structure, was an actual pure structural play and it was a three way deep closure against the fault. According to our technical team, the reasons why Shinzonte was a dry well or wet well was because the fault the ceiling of the fault wasn't strong enough to close the structure. In the case of Waco, it's a completely different play. In fact, one of the information that we got from Vincente is that, that area has reservoir. There's 2 place 2 potential place in Waco. And those are mainly stratigraphic plays. So given that they are stratigraphic, the risk associated to them is generally higher than the general risk that we have seen in the previous prospects that we drilled in Janus 34. I think the chances of success assigned to the prospect are more or less around 20% to 25% adding the 2 potential targets. I will leave Sohvi to clarify more about these two potential targets. Right. As Andres mentioned before, the type of play is around it's between stratigraphic and structural. And in this particular well, we are targeting 2 formation. 1 is Guadalupe and the other one is Gacheta. I mean, we are thinking that the range the potential resource will be between 20,000,000 to 40,000,000 barrels. Excellent detail. Thank you for that. And just one more question on the buyback. I'm just wondering, it was a nice step up in Q2 there. And just wondering, what are your thoughts on the buyback going into the second half of the year? Are you expected to remain active on that just in terms of what your plans are? And what do you think is the optimal level to be buying back in the market today? Yes. Of course, Wix. I mean, currently, we invested already around $50,000,000 in our buyback. That's around 5% of the capital of the company. We have approval from our Board to go up to 10%. That means we're halfway through our buyback for this year. So for now, we're thinking that at least additional $30,000,000 will be allocated to our buyback during the second half. We may decide to add some more and complete the full 10%, but we'll play it by ear. But certainly, at least, I would assume $30,000,000 for the second half of the year is a reasonable amount for us to allocate. So that is at least almost complete the approval that we have. And then closer to the end of the year, we will decide what we would do for next year. That will be part of our capital allocation procedure that is going to get kicked off at the end of August. Excellent. Thank you so much. Appreciate it. Thank you. Your next question comes from the line of Jenny Xenos of Canaccord Genuity. Good morning and congratulations on a great quarter. I have a few questions please. Maybe I'll start with the financial ones. You already covered the share buybacks. As far as other uses of your free cash flow, would you consider debt reduction buying back some of your own debt, so notes in other words, or are you perfectly comfortable where you are with your debt levels? Hi, Jenny. Good morning. Our debt well, the we do consider debt reduction as part of the uses for our excess cash. The debt is composed mainly by 2 instruments. The above part is the bond and then we have $15,000,000 of debt in Brazil that matures in it's an amortizing loan that matures in October next year. It's a dollar denominated loan that is hedged with a synthetic hedged transforming to reais. So prepaying that is expensive because of the unwinding of that hedge and it's low cost debt. So we are probably not going to be prepaying that because it's expensive. It's probably cheaper to keep it until maturity, which is not far away. And then on the point of buying back bonds, currently, we are standing at onetime net debt to EBITDA with our cash flow and cash generation growing. So net debt to EBITDA is expected to continue going down. So at this point, even though we do analyze potentially from time to time buying back bonds, we are allocating most of that probably to be buying back shares rather than bonds. So it's part of our analysis, but we feel fairly confident or comfortable in the within the leverage that we are today, which is more or less around our long term comfort levels, onetime net debt to EBITDA. Okay, great. Switching gears here, moving on to Peru. What is the status of your EIA application there? And what has been done over the last quarter to advance the project? So in Peru, as you know, the EIA is the key document for us to move forward with the investments there. A few weeks ago, we announced that we were doing some works to reinforce the information being added and being completed in the study. This is a highly complex and lengthy document that gathers the input from many different stakeholders in the project and involves working with more than 10 different governmental entities within Peru. So our team felt that we needed to do more work on the EIA. So we are working on designing the different path forwards for us to refile that EIA and the different timings for the project that each one of those alternatives would imply. We're expecting to have those discussions with the team down there during the capital allocation that is going to be done in September. So hopefully, we will have a much more clear view on the timings in our next conference call. Certainly, we are given that we have not got the approval yet as we had expected around June this year. That means that we are not going to be the full amount that we had anticipated for 2019. I think that was the updated amount was like $20,000,000 So right now, that amount for 2019 should be around $10,000,000 for Peru. But we will have a better knowledge on the timings, hopefully, for the next conference call. I guess the question becomes whether the 2020 spend and kind of the project moving forward is still intact because you're going to be entering kind of the next window of the construction season, if I understand it correctly, kind of at the end in November or thereabouts. So ideally, you would start working on the project at that time, but it seems at this point that it's kind of unrealistic to expect that. So is it likely then that the year end 2020 timing for the project start up will become 2021 or later? Yes. I mean, it is as I said, the timings there are going to be different options in terms of timings, and we will see which one we decide. It is correct that it's unlikely that we'll be able to get the first production during 2020, and it's more likely 2021. However, we are waiting to see all the options that are on the table before we actually give a formal guidance on what that timing would be. Okay, understood. Could you also provide us please with some color on the continued reduced demand for natural gas in Brazil? And if possible, kind of your outlook for it for the remainder of the year? And also understand there is some gas regulations being proposed there. What could be the impact of them on GeoPark? Yes, absolutely. I'll start by the last one. All the regulations that are or the deregulations that are being proposed have the aim of lowering the gas prices in the country and also deregulating the generally, the whole hydrocarbon commercialization system. From what we understand and what we have seen so far, most of the measures are aimed for new production coming. It's mostly aimed for the presale large type of projects, not really the projects that are already existing with existing contracts like ours. So in our particular contract, we have a take or pay for 2,300 barrels a day for the year. During the first half of the year, we have been below. There is still time to recover that before the take or pay triggers. So our outlook for the second half is that at least on a cash flow basis, we should be getting our 2,300 BOE per day, but it's difficult to predict. So I would rely on the take or pay, but I can do inform you that today the production is full back on track and we're producing 2,000 600 barrels a day, and that's the full nomination that we got for the full month of August. Predicting beyond that is difficult, but I would assume that it's unlikely that they actually decide to pay the take or settle the take or pay in cash rather than actually taking more gas in the second half of the year to compensate for the lower first half. I don't know if that was clear. It sounded a little bit complicated, but Yes. No, that makes sense. Okay. Thank you. Great. And finally, just wanted to ask about Argentina. Initially, when you were doing your budgeting process at this time last year, you were planning to do quite a bit of gas targeted drilling, including at Chayacobajo, with gas prices declining consistently there as a result of the added Vaca Muerta gas production. What are your plans Argentina for the remainder of the year other than the Agua de Baguales exploration well that you announced in your operational update? Well, I think the Agua Baguales exploration well is one sign of what we're planning to do in Argentina as a result of the pressure on the gas prices. So Agua Abaguales Sur is actually an oil exploration well. It's a $2,000,000 to 6000000 dollars 1,000,000 barrel prospect. So we're trying to switch more towards the oil. We drilled 2 wells in Chachacobajo, as you said. The Chachacobajo 1,001 is still on production and a flat production of 40,000 cubic meters a day. That's choked by the gas transportation capacity within the block. And then the wells that we drilled, they are still under evaluation. We drilled those wells and we fracked them during the Q1 of the year. They are under evaluation, and we expect during the second half of the year to reenter at least one of those wells that may have an apparently has an oil there that may be we may be able to put on production. The other thing that we're doing in Argentina is working on the base production. Our team has done an incredible job in improving the water flooding and redesigning the potters for water injection. So they have been able to stop the decline pretty significantly. If you look at our production in the Q2 last year and the Q2 this year, were in both around 2,400 barrels a day, and that's mainly the result of a very successful pulling campaign done by the team in the water flooding in those oil fields. And then at the end of the year, we are working with YPF, our partner in Los Parlamentos, which is the large acreage position that we acquired in the Northern Newcan Basin in Mendoza. So at the end of the year, we expect to start shooting seismic in that very attractive block. We're currently well, the operator is currently, which is why is currently doing all the auctioning or asking for RFPs for that seismic to be acquired at the end of the year. So your CapEx will remain approximately the same than year as you expected originally, just the focus will shift slightly more from gas to oil? Yes. That's all within the CapEx guidance that we have given. Great. Thanks for taking my questions. Thanks very much, Your next question comes from the line of Miguel Ostina of Compass Group. Hello, Tim. Thank you for the presentation. I have two questions. The first one is, how sustainable is the lower Vasconia differential that you have been posting quarter over quarter in Colombia? And my second question is, I just would like to understand your medium term plans in Chile because I feel that it continues dragging down results? Thank you. Hi, Miguel. Good morning. Thank you for your questions. On the bacconia differential, as you said, we are currently experiencing around $2 or less. Our team believes is not very sustainable, particularly for next year when the IMO 2020 comes into play. That should impact the pricing of the crudes that have sulfur content such as sours. So it is expected that the Avastonia differential should not be sustained for next year. However, it is the impact is a mix is a different mix of things. The reality is that the lower production from Venezuela is generating higher demand for the heavier crews like ours. So some of that will compensate some of these IMO 2020. We are working on trying to see if we can lock in some differentials for next year. However, the proposals or the things that we have analyzed so far seem to be too high. So for now, we haven't decided on any yet, but we are looking to see if there's an opportunity to lock in at least some of these differentials for next year. But again, just to be clear, we do believe that the $2 per barrel we're seeing today is unlike hopefully, it does, but it's unlikely that it's going to sustain for next year. So how much do you think it could widen next year? $1 makes sense or? It could be more. It could be up to $5 probably. That's what people are saying. But as I said, it's very hard to predict. Okay. Well, probably for our budget purposes, we will use something around $5 per barrel. We will disclose what number we finally end up when we disclose our budget for 2020. But that's what today we'll probably see for our forecasting for next year. And then with respect to your question about our midterm plan in Chile, we have a couple of things that we're working on in Chile. We put on production the hauqueriscobre, which is a very, very attractive gas field in the large Dickey structure in our fell block. We drilled the second well there, which is Haoketu. And now we are moving a rig during the Q3 to drill Jauke Oeste. Hopefully, we're going to move it on the Q3 most likely, drill it on the Q4, which is when the winter has already passed. This is a very attractive of how Quellesto is actually an appraisal well that could expand the size of the field. And then also towards the end of the year, we're going to do a frac on an existing well that is targeting to test the productivity potential productivity of the stratocompabrela shale, which is the source rock of the basin. We have a lot of information. We drill through this shale every time we drill a well. We know there's oil in it, there's a significant amount of oil in it. The question is whether could it be with a new technology and the fracking mechanisms, whether it could be put on production at economic levels. So we're going to start testing this opportunity towards the end of this year. Thank you. I will now 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. We encourage you to please visit us at our operations in each country and call us at any time for more information. Thank you. Thank you for participating in the GeoPark Limited Conference Call. You may now disconnect your lines and have a wonderful day.