Earnings Call: Q4 2018

Mar 7, 2019

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the 4th Quarter Ended December 31, If you do not have a copy of the press release, please call Sard Verbinnen and Company in New York at plus 1- 212-687-8080 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 dotcom. 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 accordance with the IFRS and are stated in U. S. Dollars unless otherwise noted. Reserve figures correspond to PRMF standards. On the call today from GeoPark is Chief Executive Officer, James F. Park Chief Financial Officer, Andres Acampo Chief Operating Officer, Augusto Zubillaga and Shareholder Value Director, Stacy Simul. And now, I'll turn the call over to James Park. Mr. Park, you may begin. Thank you, and welcome, everyone. We're joining you today with our executive team from London, England. Many thanks and congratulations to the GeoPark Women and Men for our tremendous results in 2018. We broke records with double digit plus increases in every key metric. Oil and Gas production up 31% reserves up 15% with a reserve replacement ratio of 2.85% net asset value per share up 37% to $40 per share EBITDA up 89 percent to $330,000,000 with a CapEx of just $125,000,000 free cash flow of more than $130,000,000 net income of over $100,000,000 with earnings per share of 1.20 dollars And we improved our company across the board by being one of the region's most active explorers drilling 33 wells with a more than 85% hit rate to find more oil and gas. Being the low cost and most efficient operator by continuing to drive down capital and operating costs being the partner and neighbor of choice by continuing to make improvements in safety, environmental, employee and community performance being a value consolidator by acquiring more acreage including LG's interest to expand our asset and opportunity base And our shareholders were richly rewarded by GeoPark being the number one performing E and P stock on the New York Stock Exchange for the 2nd year in a row, as well as by our newly implemented share buyback program. GeoPark has always had a big value proposition, which has allowed us to have a long term approach and the patience to put the right building blocks in place. This rock solid foundation means we manage any volatility coming our way and allows us to just keep picking up steam and getting better and better. Our key building blocks include culture, long term success is defined by the true character and behavior of our company. People. The oil business begins with people and we have purposely built the strongest oil and gas team in Latin America. Track record. Our capabilities and toughness have been demonstrated by a continuous 16 year through thick and thin production and reserve growth record. Value base. From scratch, we have steadily assembled and drilled up an oil and gas asset base certified with a net present value of $2,700,000,000 Upside, we have an existing inventory of low risk, high impact exploration projects backed by our high success rate and a big list of new acquisition projects that will continue to fuel our growth. Self funding. We have been building our company from our own cash flow, meaning we are paying for our drilling, teams, operations and new acreage all out of our own pocket and still getting bigger. Platform. Our biggest hidden value is the base we have built across Latin America with dynamic independent operating teams in 5 countries and which are all delivering results. And we are sailing into 2019 with another self funded 35 plus well drilling program in Colombia, Argentina, Chile and Brazil targeting a 15% production growth plus the start up of our big project in Peru and well positioned to capture the rich new opportunities being offered across the region. So thank you and we'll be pleased to answer any questions. Your first question comes from the line of shaheen Amini of Pareto Securities. Good afternoon and congratulations on another solid year. Looking forward, I was wondering if we could go through Slide 3 of your latest corporate presentation. You are effectively guiding to more than doubling your production by 2022 from existing acreage and new acreage. I was wondering if you could perhaps provide some more detail on the various countries and jurisdictions where you expect to see this growing production from? Hi, good morning, Shahin. I guess you're referring to the bar chart on Page 3 that has a portion of the projections on pink bars and gray bars? Exactly, yes. Correct. So this is our long term expectation for production targets that we have going forward over the next few years. The 2019 bar is basically our production guidance that we issued at the end of last year. From 2020 to 2022, the pink side of those bars is where we expect what we expect to achieve organically within the assets that we own. So that means the assets that are already today in GeoPark's portfolio that includes Colombia, Peru, it includes Chile, Brazil and Argentina. And then the gray bars are an idea to give an indication on how we expect to achieve the remaining production that we are putting as a north or as a target in our long term to reach the 100,000 barrels a day. So that the gray side of the bars is more schematic to try to picture what's our north going forward. But that means it's production that should come from assets that are not yet in the company. So that means additional acreage that we will continue incorporating or assets that we will buy on the in the market. I note that. But just starting with the pink bars, I suppose from 2020 onwards, I was hoping perhaps you could just give some ballpark breakdown into Colombia versus not Colombia. And specifically, how much of that is potentially coming from Peru? And then following on from that with the gray bars, do you think that there is enough running room for you in Colombia and your other countries that you're currently active in? Would you see that from new effectively from new country entry strategies? Okay. The pink bar is largely Colombia. So most of that is going to continue to be Colombia until 2022. There's a portion of that, that is attributed to Peru. It should be somewhere around 5000 to 7000 barrels a day. We are factoring we're putting a 50% factor into that in our projection as a result of either bringing a partner in or risking the production from that project. So roughly 5,000 maybe a little bit more coming from Peru. And the rest you should assume Argentina, Brazil and Chile remaining fairly flat with a small decline on Brazil. So that's the ballpark of what we can give in terms of that guidance. And then on the grade bars, it's hard to explain more precisely where that is going to come from on the jurisdiction. I would say that certainly the countries where we have a platform already are key targets. As we've mentioned in the past, we are looking into Mexico. Things currently are probably slowing down a bit in Mexico. We still remain open and interested looking at opportunities there. And then the new countries that we're starting to work on, on, Ecuador. As you probably know, there's an incoming bid round, the Intracampos bid round, and we qualified for that, and we're excited about the opportunities that are coming out from Ecuador. In one of those cases, which is unusual to see onshore prospects that have not been built that actually have been covered with 3 d seismic. So some of the opportunities that we see there are fairly attractive, and we are looking to participate. Also, the change in the contracts from Ecuador has been very positive for oil companies like us, moving out of service type of agreement, a more concession licensing or production sharing agreements, which are the typical type of contracts that E and P companies like ourselves would look into. So probably those two countries I would add to the list of the ones that we are we have a presence already. Thank you very much, Anders. That is very helpful. If I may just have a follow on and more detailed question. I just want to get a feel for how much reserve growth we could potentially see for 2019. It's really impressive to see your 3P numbers growing quite significantly both in Colombia and Peru. With your capital investment guidance for this year, how much of that could you be potentially be testing, most importantly in Colombia? How much of that T3 effectively could be tested by your current drilling program for this year? Yes. That's a great point. And as you mentioned, particularly in Colombia, our 3P reserves are 50% higher than our 2P. So we hope throughout the drilling of continued drilling program in 2019, we hope we can turn a lot of that into 2Ps and P1s. It is very hard for us to give a guidance on that. And typically, we don't give a guidance on potential reserve growth. So really for looking at the future, you should rely on our track record really more than expecting a guidance from us. And the same thing in Peru, we increased the 3 pits in Peru significantly and hopefully we'll be able to through the years transform a lot of that into the P1 and P2. Okay. Just final question. I promise this is the last one. You have more than doubled your 3P in Peru. What was the technical basis for that growth? Well, our team always believed that the 3P number for that field was around 200,000,000 barrels. The Yes. On a gross yield basis. What they did with D and M at the end of last year is they spent more time looking at the information from the wells and the seismic information to understand and to have a better interpretation of the field itself. And the conclusion is that really most of the extension of the field is located at a zone that is higher than the lowest known noise. So that gave DME sufficient comfort to consider those potential volumes that were considered maybe contingent before. They considered part of the field with a P3 risk to that, which is, as you know, somewhere around 10% to 30%. Right. Well, thank you very much. Thank you, Henry. Your next question comes from the line of James Carmichael of Macquarie. Hi, good morning guys. Just wondering just a couple of just wondering if you could talk a bit around the reasons for the widening Vasconia discount in 2018 and how you see those dynamics playing out in 2019? And then also just if you could remind us of the likely OpEx saving once the ODL flow line is completed and maybe also what's required from your side to fill any increase in export capacity there? Thanks. Thank you, James, and good morning. To your first question about Vasconia, what we're seeing right now with Vasconia is a narrowing on that discount. We saw somewhere around $5 per barrel on the Q4. And at the beginning of the year, that gap has been narrowing as low as $2 per barrel probably over the last month. The outlook for this trend seems to be that it is expected to remain at least for the near future. And the main drivers of those is basically lower production of heavy from Venezuela and Mexico mainly. So those have been more or less the dynamics on the VACONIA differential. And your second question was with respect to the savings related to the flow line. So the flow line connection to the ODL is 98% completed. We are at the final stages, the commissioning of the project. We expect start up of the project around the end of the quarter, around the end of March. Savings are mainly on the transportation cost. You don't see them booked in our OpEx. It's mostly on the transportation cost. And we are expecting for 2019 to be at least $1 to $1.5 per barrel lower transportation cost. There should be improvements also on our OpEx because the reduction of the truck activity will reduce the cost of maintaining the roads. We don't have the exact amount of that, but there should be some upside there on the OpEx side. But the main one is on the transportation. So $1 to $1.5 for 2019 and an extra $1 probably following 2020 onwards. Okay, great. Thank you. Your next question comes from the line of Joel Musante of Alliance Global Partners. Hi, everyone, and congratulations on the impressive results for 2018. I just had a couple of questions. On your just wondering where you stood on your 2019 program. Is it reasonable to assume where prices are that you're going to move forward with the base case? Hi, Joel. Good morning. Sorry, I was waiting. I thought you had more questions. Sorry, I do have a couple of questions. No, that's fine. Yes, 2019. So currently, we remain on our base case program for 2019. As you know, we announced that within a range of $65 to $75 Brent. We are Brent is right now wandering around the lower side of that range. So you may see adjustments here and there, but nothing really significant. And so far, we keep on track with the base case program, targeting 15% production growth with somewhere above $200,000,000 worth of CapEx fully funded within the company's cash flow. Okay. All right. And do you have any update on where you stand on Peru right now? Yes. So well, as you know, Peru is a big component of our 2019 work program. The main activity that we are currently doing in Peru is completing or finalizing the environmental impact study. The place where that stands right now is we presented the study to the Cenace, which the body that works with us on that. In July, we received comments and input from them around 2 weeks ago. This was around 2 to 3 weeks later than we had anticipated. That input includes the comments from all the stakeholders in the project. Most of the comments are related to engineering and construction, but our team is currently working diligently to address all of the questions and comments that were included in that document. And the next step is to present that back to them for their final review and approval. So we expect that to come back sometime. That time is not in our control, but we expect that to come back to us somewhere between April and we have up to until June. Hopefully, it's not going to take that long. Okay, great. And then just one more. Yes, sorry on that. One follow-up comment on that is that in the meantime, our team has been securing the equipment that we need to start the activities. So for us to make sure that we are ready to start working as soon as we get the final approval, That means the pipeline has already been built and is on its way to the Port of Lima. The Port of the Morona camp has the port has been upgraded to receive loads that are coming for the works that are necessary. Okay, great. Great. All right. And just one last question on Argentina. It looked like the costs were a little higher. And I was just wondering how you what you see going forward there, if you see prices coming down? I mean the cost Yes, absolutely. The costs are specifically I mean the increasing cost is specifically related to a pulling campaign that we had. It was started at the end of the quarter and continued for the full 4th quarter and continues today. This is a pulling I mean, we brought in a pulling rig. And given that this is well repairing, a startup of old wells that are putting back on production, this is accounted at OpEx. You could think of it as a CapEx for $2,000,000 $2,500,000 over the Q4. But yes, given that this is an investment to increase production, but it's accounted at OpEx. So that's why it is showing an increase in OpEx on the Q4. Right, right. Okay. So it's like a workover or it is a workover? Over? Right. It's workover that is accounted as pulling us on OpEx basically. All right, great. Thanks for taking my questions. Thank you. Your next question comes from the line of Ian Macqueen of 8 Capital. Good morning, guys. Actually, Joel had raised the issue about Peru and that's you gave a very good overview. So thank you. With respect to your roughly $100,000,000 budget for Peru, how is that going to be spent? Can you break that down? And how will the allocation change depending on the timing of the EIA approval? So far, if the EIA does not arrive on time and say by on time, I mean, if it doesn't come sometime around April, if the final approval doesn't come around April, That means we may need to delay most of the activities that were planned for the year, at least for the first part. The team is developing alternatives to see if there's any other activities that we can anticipate on the second half of the year. So what happens is that you miss the dry season, so most of the activities should be postponed for some time. So if the EIA doesn't come somewhere around April, that means that likely the investments for this year should be somewhere around $20,000,000 to $25,000,000 which is the low case for Peru. And that will delay the start up of production from the Q1 2020 somewhere around the 3rd or the Q4. We're still targeting to put it on production in 2020, but may not be the Q1. But again, this is something today is more speculative really. We need to see when we're getting the EIA before we know that. And then if we do get it on time, then the total $100,000,000 is spent on a quarter by quarter basis. The bulk of it is spent on the 2nd and third quarter. I don't have the exact numbers. That's good. And it's basically to put the wells on, do all the work to put the wells on, really? Correct. Yes. So around 50%, 60% is installing the transportation capacity, basically the flow line to connect the field with the camp. And then around 40%, 50% is related to on-site facilities and putting the wells on production. Okay. So facilities to manage the production and putting the wells on production. Okay. Great. I'll have nothing to discuss for you. Thanks very much, Ian. Your next question comes from the line of Jenny Xenos of Canaccord Genuity. Hello. I have a few questions, if I may, please. I'll start in Colombia. Your marketing agreement expired with Trafigura late last year. Could you tell us a little bit more about how your marketing strategy has changed and how you expect that to impact your costs in 2019? Hi, Jenny. Good morning. As you said, the marketing agreement with Trafigura expired at the end of the year. There's still a remaining tail of around 8,000 barrels that remains in place throughout 2019. And for the remaining, basically, we are what we're doing is we're doing every 6 months. We're nominating and requesting for proposals for probably every potential buyer that exists in Colombia that includes Ecopetrol, Vito, Trafigura, Frontera. A lot of companies are buying food in Colombia. And we are assigning volumes to all of them well, not all of them, sorry, to the best of them. And we split those some of them are sold at the wellhead and some of them delivered through the pipeline. So on a consolidated basis, the savings will come basically from the use of the new logistics, basically using the pipeline. And then on the pricing side, the agreement that we had with Trafigura was 100% transparent market prices. So there may be a few savings on the competition, but it's not going to be significant given that in the past, the existing pipeline. And on a consolidated basis in Colombia, that should be somewhere around $1 to $1.5 per barrel. Okay, understood. Thank you. Staying in Colombia, are you participating in the permanent competitive process? There are 20 blocks available for bid right now, plus you can nominate your own areas. So I'm wondering if some of these areas interest you. If yes, so what basins are you looking at and what sort of criteria you use for choosing your acreage? Because all you have left now in Colombia is essentially Llanos 34 and 32, and yes, you have an excellent team there. So what are your plans for the PCP? Thank you. And yes, we are already qualifying for that round. There's going to be, as you said, a 1st year of 20 blocks, most of those in the Llanos basing, some of the rest in Magdalena and Sinos San Jacinto. And we are very happy to see that finally that acreage is coming out for bid either through the round or the permanent process. That is excellent news for us and for the industry and for the country. We're also very happy to see that apparently they are going to be putting more weight on the activity committed rather than the royalties or things like that, which is also very beneficial for the country and for the developing of the industry in the country. So very happy, very interested in participating. In this particular round, given that most of the blocks are in Dejana, we're going to look at those. We're also going to look at the blocks in the other basins. We like the Magdalena Basin. We like every basin in Colombia or in Latin America, I should say. So as you know, we do have a big operations and great experience in the Zayanes Basin, but that doesn't make us shy with the other basins as well. So we'll participate in everything. Okay. That's great. Thank you. And maybe briefly, if we could talk about Ecuador. As you mentioned, the Intercompass licensing round bids are coming up on March 12. Could you give us a little bit of a sense of the timeline after that? Do we find out who gets the blocks on that day or at some later time? And could you give us a sense of how competitive the round is? And is the government there expecting that you will also bid spending activity in other words rather than royalties? Or give us some sense of what it's going to look like. Yes. I mean the well, the timing is that the bids are due very soon in the next few weeks. I think it's March 12. We qualified for that, and we're looking to participate. Some of the blocks that we looked at are very attractive. As I mentioned at the beginning, there are some onshore prospects on drill that are ready to drill type of prospects. So we're excited about that. In terms of how competitive we expect it to be, I would expect it fairly competitive. There are at least 16 companies qualified for that. I don't know how many of those will bid, but I would assume probably most of them. The terms that are being offered in terms of the contracts are attractive. This it's not service contracts, it's production sharing. But really when you look at it, it looks very much like a royalty scheme, very similar like to the one in Colombia, with the government take going up depending on oil prices. So as oil prices go up, the government take goes up. And as it goes down, it goes down. The range I think goes somewhere between 12% to 40% or something like that. So it's not does not allow for crazy bids, which is excellent. So we look forward to that. And my understanding is that we should know who got awarded blocks pretty much on the same day or the day after, I think, but it's pretty fast. Okay, great. Switching gears a little bit, could you give us an update on your drilling, your exploration and appraisal drilling, specifically Tigu in Colombia, Praia del Castellanos in Brazil and Cheah Cobain in Argentina? Absolutely. In Colombia, we have Tigi2. It's already started testing and it's already on production. And so that's very encouraging. It's somewhere around 1,000 barrels a day with no water. So great news, very exciting news from TVQ. Prajado Castellanos in Brazil, we finished drilling. Log in information indicates we have 10 meters oil pay in the our Grande formation and we're moving a rig to test that well before the end of March. I think it's in a week from now. And then Cesar Coveajo 1000 and 1, which is an old well that was opened up by us is producing 30,000 cubic meters a day. This is choked by basically the commercialization of the gas. We are using a virtual gas system that is basically trucks that pick the gas at the well head and sell it through LNG trucks. So this is choked by that capacity. The productivity of the well is around 100,000 cubic meters a day. We finished drilling Challaco Bajo 2002 and it's currently under completion. And the logging information shows so far so good as expected. And we started drilling Challaco Bajo 2,005. All these wells are to potentially unlock a gas play that could have 60 to 80 Bcf. So hopefully, we'll have some exciting news out of there during the year. Okay. Just to complement, Jenny, it's Uvi. How are you? Completion process. So there's a tight gas, it's a Moje formation. So we need to hydraulic frac that well. And maybe in 2 to 3 days, we will testing that well. And in the same time, we are drilling the Challachacobajo 2,005. That's going to have And afterwards, we will test that well as well. And regarding Chile Yes, go ahead. Sorry. No, see. Yes, Jenny. Do you expect to provide an update in your next operational update or when will we hear some concrete results of these? Yes. We think that we're going to update in the next operational. Okay, great. And in Chile, we are drilling in the Jauke structure, the Jauke 2. So we expect to finish that drilling in the next week, and we expect to complete the well in the 2 weeks after the drilling process. And afterwards, we will drill the Jauke Sul, which is an exploration well in the same structure in Chile. That's a great update. Thank you. And a final question, if I may. You announced at the end of December a large share buyback. Have you actually been out there buying stock? If you have, how much how many shares have you purchased since December 21? Thank you. Sure. Thank you. Yes, we put in place a share buyback, and that's up to 10% of the capital of the company. So far, we have invested around $12,000,000 onto that buyback and bought back somewhere around 800,000 shares. We participate from time to time on the market. And we always basically what we did is we added one more item to our portfolio of investment opportunities. So obviously, we are probably not executing on it very aggressively, but we participate from time to time and we also preserve cash to be able to invest in our very exciting 2019 program that is going to generate a lot of value for our shareholders as well. So it's basically balancing the 2 of them the way we're executing on the program. Great. Thank you so much. Thank you, Jenny. Your next question comes from the line of Gavin Wylie of Scotiabank. Just a quick follow-up on the normal course issuer bid. Just how active I guess when you look at your capital plans, it's fairly heavily weighted towards the sort of Q3, Q4 timeline or at least it appears to be including Peru. How active can you be second half of the year? I mean really if you're not active in March April, it doesn't really look like you'll be able to repurchase a massive amount of shares. So just what's the intent to be right on top of that for the next couple of months? And just as a second question and a follow-up on the exploration side, you've on the maps, you've put in a couple of large stratigraphic traps on Block 34. And I'm just wondering what the timing of those wells in particular might be? Thanks. Hi, Gavin. Good morning. So to your first point on the buyback, really, the first half of the year is the most active one. I mean most of the CapEx are particularly in Argentina, Chile and Colombia are burdening most of them on the first and second quarter. Peru are mostly on the second and third quarter. So we will continue probably executing on the buyback the same way we have been so far, selectively and from different times. And then in the particular question with respect to the stratigraphic plays Colombia in Gernas 34, we agree with you. Those are very exciting structures. The first one that we're going to drill is Waco. If you look at the map, it is the one that is southwest of Chachalaca field. We are currently conducting the civil works, building the paths, the well path on that prospect. And the drilling is expected to start in August once we move the rig to that place. And probably the other prospects are also targeted for the second half of the year. Somewhere in the second half of the year, we don't have a specific time yet or date. That's great. Thank you for the clarity on the CapEx. My apologies on that. Sure. Thank you, Gary. 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 please 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.