Earnings Call: Q2 2018

Aug 9, 2018

Earnings release

Good morning and welcome to the GeoPark Limited Conference Call following the results If you do not have a copy of the press release, please call Sard Verbinnen and Company in New York at +1268 78,080 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 Web site 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 S. Park, Chief Executive Officer Augusto Zubillaga, Chief Operating Officer Andres Ocampo, 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 to our 2018 Q2 results conference call, where we are participating with our executive team from Bogota, Colombia. GeoPark is delivering up and down and across the board in the subsurface, in the field, in the neighborhood, on the top and bottom lines, on the balance sheet, in the market, and expanding our platform so we can do even more. Some highlights from last quarter. Our active drilling program discovered 2 new oil fields in Colombia, Tiki and Chachalacasur and a healthy chunk of new oil reserves in Tigana Norte in Colombia. In the field, oil and gas production increased 37% to a record 35 1,870 barrels per day, which includes a seamless operational takeover of 3 new producing blocks in Argentina. And our team is keeping its discipline to push down costs with the M34 operating costs under $4 per barrel. In the neighborhood, the United Nations, Colombian Ministry of Energy and the ANH awarded GeoPark for the best social and community practices in Colombia. On the top and bottom lines, we had record revenues $59,000,000 record EBITDA of $83,000,000 and a positive net income. On the balance sheet, we delivered from nearly 5 times 2 years ago to just a comfortable 1.3 times net debt to EBITDA. And after self funding $36,000,000 of CapEx this quarter, we have a good 100 and $5,000,000 cash cushion. In the market, we are trading more shares every day with our daily trading amount climbing from $1,000,000 at the end of last year to over $8,000,000 in June, as well as GeoPark passing the $1,000,000,000 market cap milestone. Expanding to do more, building on our unique regional Latin American platform, we were able to add over 350,000 new high potential underexplored acres in the New Kent Basin in Argentina with our partners YPF at no upfront costs. And what's coming? With our better than expected results, we've stepped up our work program to be moving at full speed with some good catalysts on the way with 5 drilling rigs operating in 3 countries in Colombia, Argentina and Chile and meaning we'll be working harder and investing more in the second half to find and produce more oil and gas, make more money and continue building a better company for our shareholders. Thank you and we'll be pleased to answer any questions. Your first question comes from the line of Ian Macqueen of 8 Capital. Good morning, guys. Just one quick question. With respect to the LGI interest, I believe it was still at 20% in Q2. Can you give us a timeline for the reduction to 16% and ultimately to 12%? Hi, Ian. Good morning. We are let me put it this way. The earnings for us to increase the 4% have been accrued already. The dilution mechanism is triggered their realized cash dividends. So we've paid dividend worth $1 below triggering the threshold. I mean, in parallel with that, we are working with LG to design the implementation. This is going to be the first time that we actually trigger the close. We need to decide how we are going to do that dilution subsidiary up. The timeline is we're working on it right now. We were expecting to have it implemented by this quarter already. There were some delays because of difficulties with some accounting and tax issues in Korea, but we're working with them and we will have it in place very soon. Following that, the cash flows under D and M are showing us that we will go from the initial 84% up to the 92%. That is the maximum that we can increase under this within the next 2 years, 2 to 3 years. Okay. So does that mean is that a Q4 event or is it as soon as possible, but and for modeling purposes, should I assume it's a Q4 event or a Q3 event on the 2016? And right now in my model, I've got Q3 of 2019 for 12%. Okay. On an economic perspective, it shouldn't change your model. The value is the same. The timing of the transfer, it doesn't change given that it's treated by dividends. And we can share with you some of the calculations we make. Is really the economic essence of the item. It doesn't change. What changes is the accounting mechanism. But the reality, the ownership of the value remains the same whether we do it under Q3 or Q4, that doesn't really change. In any case, the timing is definitely before the end of the year, hopefully within the Q3. Let me put it that way. Okay. Okay. Thanks very much guys. Good job. Keep it up. Thank you. Your next question comes from the line of Leonardo Marcondes of Itau. Hi, guys. Just a quick question from my end. Could you give us an update of your current situation at Block 64 in Peru? Thanks. Hi, good morning. Thank you, Leonardo. Yes, currently our team a few weeks ago, our team filed finally the environmental impact study, which is the a few weeks ago. The expectation is for us, we are working with the regulatory entities currently going back and forth making clarifications on the document. Our expectation is to have approval of these environmental impact studies, hopefully before the end of the year. If not, it definitely is Q1 next year. Okay. That's fine. Thanks guys. Your next question comes from the line of Joel Musante of Alliance Global Partners. Hi, good morning. I just had a question. With all the success you've had operationally and with your stock price, you look like you're probably in a really good position to make an acquisition at this point. And I know you've been looking for different properties. So I was hoping you can give us an update on what the acquisition market looks like for you at this point? Hi, good morning, Joel. Thank you for your question. We well, as you know, our 3 basic parameters or strength under which or around which we built our company are to be an explorer operator and consolidator. So really searching and looking for good opportunities is an ongoing process and this is something that we do continuously. It is a big component of our company and we keep ourselves very busy on that front and we're working and screening a lot of opportunities throughout this region. And hopefully, we will be able to close one soon. As you know, we're long term patient conservative buyers. So we really don't rush into acquisitions. We really close them on the ones that we think they really make sense. We just did 2 maybe smaller acquisitions, but we just closed on 2 acquisitions in Argentina this year. The 3 new assets that are the same basin in partnership with YPF. Okay. And then, in the same basin in partnership with YPF. Does your relationship with the Indian National Oil Company give you sort of more bandwidth in terms of size of acquisitions? Or I'm not sure how that relationship works. So if you can speak to that. Yes. It's a acquisition opportunities. And yes, effectively, they are good great oil and gas company, very large oil and gas company that is looking to grow. They partner with us leveraging with our operating skills. And yes, I mean, given the size of ONGC, it really opens up a much bigger number of opportunities and even larger type of opportunities. With this partnership, we are effectively not really limited by size in terms of the opportunities that we look for. Okay, great. That's all I had. I appreciate it. Thanks. Thank you, Joe. Our next question comes from the line of shaheen Amini of Pareto Securities. Hi, good morning gentlemen. Two questions. Minor points on the cost, but I think it's kind of important to get a better feel. On your consolidated OpEx, it steps up from compared to Q1. I think that was mainly on the back of Argentina. I just wondered if you could elaborate further how we should be sort of thinking about that, those costs over the coming quarters? And as you could provide more color on how you see those operations developing in the next year or so. I think your personnel cost also steps up from the previous quarter. Is that sort of now peaking? Or could it continue to rise? And I suppose from the previous caller who had a question about acquisitions, I'm just wondering, scope for you to be perhaps divesting certain assets that are becoming non core to your portfolio? Okay. Good morning, Shahin. How are you? Thank you for your questions. Sorry, I'm writing them down. So your first question about costs, as you pointed out, yes. I mean, the step up that you see is around $1 $1.5 per barrel on a consolidated basis. That's coming mainly from the this is the Q1 that we start consolidating the assets that we acquired with production in Argentina. The cost per barrel on those assets currently is around $26 $27 per barrel, the OpEx. And we expect those to start coming down as we're taking over the assets. We have now our team working on these costs. So we expect them to start coming down as of the Q3 this year and onwards, both on the cost reduction side and also on the hopefully production increases side. We are currently, we are moving a rig there to test a very attractive Tycast opportunity, which is a well that was drilled by the previous operator that tested roughly 100,000 cubic meters a day for a period of 2 months and now it's shut in. This is this was not factored in our reserves or in our calculations, but provide the opportunity to open up a 50 to 60 Bcf type gas field right there in within our blocks. So it's an exciting opportunity and that rig is going to move to do some workovers on older wells to bring them on production and improve the water flooding on the field. So hopefully that is going to be improving the production profile in the field and also absorbing some costs. And then your other question was about oh, yes, the divestiture, sorry. So yes, definitely, as we continue growing and as we continue bringing more assets into our company, we're actively considering working on potential divestitures on assets that are not core or that are not really part of our key strategy or main focus. That's always part of what we do. Very good. It was also, I think, as part of your G and A, the personnel costs have gone up, if I recall correctly, correctly, compared to the previous quarter. I mean, obviously, you are growing your digital audience. Is that something that you can see increasing over the coming quarters? Or is it kind of peaks? No, we don't expect big increases on our structure cost going forward. We added a few more people in some of the countries where we are growing, same as the new added assets in Argentina. But really we're not expecting that to grow. We are as you know, we're investing in our human capital for the long term and we think we look at this particularly the G and G line or the G and A cost line more as an investment really than a cost. But we're not expecting big increases in that area. Thanks, Raimo. Just a very quick follow on from the Argentina question I had. Just what percentage need to actively manage? Or is it just come it's not that you need to actively manage? Or is it just comes it's not a major issue as it currently stands? Yes. The well, we're on the right side in terms of currency exposure in Argentina because the 50% of our cost roughly 50% of our cost is in local currency and 100% of our revenues are dollar denominated. So effectively, the most recent evaluation is going to dilute a portion of our costs locally and it's going to be part of the cost reductions that you should expect to see over the next quarters. Right. But the inflations and I get into that right as well. Cost inflations would be, why it's Steve, I expect? Yes. Inflation cost is also done on I mean, it's also on the local currency. But usually in Argentina, the valuation has been winning to inflation. So the valuation has been higher than inflation for most periods. Okay. Well, thank you very much for your answers and congratulations on your new records. All the best. Thank you. Thanks very much. Thank you. I'll now return the call to mister James Park for any additional or closing remarks. Thank you, to everybody for your interest in GeoPark and your continued support of our company. We encourage you to please visit us at our operations and invite you to please call us at any time for any information. Thank you and good day. Thank you. That does conclude today's conference call. You may now disconnect.