Earnings Call: Q1 2018

May 8, 2018

Earnings release

Good morning and welcome to the GeoPark Limited Conference Call following the results announcement for the Q1 ended March 31, 2018. After the speakers' remarks, there will be a question and answer session. 212-687-8080 and we will have one sent to you. Alternatively, you may A replay of today's call may be accessed through this website 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 the U. S. Dollars unless otherwise noted. Reserve figures correspond to the PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer Augusto Zubillaga, Chief Operating Officer Andres Ocampo, Chief Financial Officer and Stacy Simel, 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 joining you today with our executive team from London, England to report on our results from the Q1 2018. We've hit the ground running in this first period with all of our performance metrics up and allowing us to step things up even more for the rest of the year. Oil and gas production climbed 28%. Reserves are expanding with our successful appraisal drilling in Colombia, which is now proving up the northeastern end of the Tigana field to be bigger than we had originally expected. Our Llanos 34 Block operated by GeoPark is now producing over 60,000 barrels per day gross. Our team continues tightening operating costs, which decreased from the previous quarter. Our safety record was extended without incident, and our beneficial community partnerships continue to support our operations. Cash generation is further multiplying with revenues up 86%, EBITDA up 63% and our bottom line net income increasing almost 5 times to over $25,000,000 This has given us $120,000,000 cash in hand, dropped our leverage ratio to 1.5 times and given us another credit rating boost to B plus We closed on an important new multi block project in Argentina that will serve as a platform for future growth with a full complement of production, development and exploration targets and both conventional and unconventional opportunities. And we entered into a new long term acquisition partnership with ONGC, the National Oil Company of India, which gives us a powerful tool in our expansion efforts across Latin America. The market is increasingly recognizing the underlying value in the GeoPark story with our trading volume improving significantly to over $4,000,000 per day. And with our increased on the ground performance and the stronger oil price environment, we have geared up our work program for 2018, meaning more investment, more exploration and development drilling and more production, with the whole program still self funded from our own cash flows and increasing our production growth targets to 25% to 30%, taking us to an exit production of 38,000 to 39,000 barrels per day. Thank you. And we please invite any questions for our And your first question is from Andre Hatcher from Itau. Hi, guys. Good morning. Congratulations on the results. Two quick questions. The first one on the work program. Could you guys give a little bit more detail on how this will impact the drilling schedule for year? And where we should see investments being focused? Should the bulk of this be directed to Columbus? Should we also see some marginal investments increasing in Argentina and Peru? The second question is relative to oil price discounts. We've seen a narrowing of the discount towards heavier oil. How do you see this evolving towards the end of the year or towards the rest of the year? Thank you very much. Thank you, Andre, and good morning. This is Andres here. To your first question about more detail on the work program, so as we announced, this follows pretty much what we had announced in November last year, which is the upper side of our range with higher oil prices. So following these, we have upsized our work program to a range of $140,000,000 to $150,000,000 Most of that, as you pointed out, is going to be allocated to Colombia nearly from the increase around $30,000,000 to $35,000,000 are going to Colombia. So that takes Colombian CapEx to a range of around $120,000,000 Most of that is going to be in Janus 34, but we're also adding some other activities in some other blocks. So for example, we are including in this guidance, Zamuro, which is a prospect that is in Jan of 32. This is a farming agreement that we announced in December. So this is an exploration prospect that we had already announced, but it wasn't included in our work program when we originally announced it. So now we are included in the work program. We are also drilling a well in Jammu block, which is another block in Llanos Basin that today is producing around 300 barrels a day, 100% owned by GeoPark and operated by us. We're drilling a well there. We're also doing some workovers and facilities upgrades, both in Janos 34 and the rest of the assets that we own in Colombia. So in all, that for Colombia is around EUR 120,000,000 to EUR 125,000,000 from the full EUR 140,000,000 to EUR 150,000,000. Then we're adding a well in Chile called Jauke. This well will cost around $3,000,000 and has 3 targets, El Santo formation, Spring Hill formation and Tovifera formation. So it's a very nice prospect that our team in Chile has proposed for us to move forward and we decided to allocate capital to that. And then the rest is some more minor activities in some of the other countries. There's a small amount allocated to the recently acquired Argentina assets, some pulling on work covers and well repairs to try to quickly increase some production there. And hopefully, closer to the end of the year, we can move a rig and start drilling in those properties. And then to your second question, yes, we've seen the discount to Brent. As you know, we sell most of our oil in Colombia is Vasconia. And Vasconia has been trading at a discount through Brent and at a premium to WTI. And the numbers we're using for the year are around the $4 per barrel discount on the Do you have any preliminary estimate on the size of the extension of Tucano IX well? How much that should impact your 2P reserves to P and 3P reserves? Or are those 20 years still not have any kind of estimates? Well, we usually wait given that we do full year campaigns, we're going to be drilling a lot of wells in January 34 this year. We're going to have our certification in December announced in February as we usually do. What we can say is that this is a well that was drilled outside the 3P boundary. So that's why as Jim mentioned in the introduction, it is expected to impact our reserves. Giving an estimation there is not something that we should be doing. Okay, great. Thank you very much and congratulations on good results and successful campaign. Thank you. Your next question is from Brian Sorensen with 8 Capital. Congrats on another strong quarter. Just a few quick questions from me. On the January 10th press release, Q1 capital expenditures were forecasted at $30,000,000 to $35,000,000 while coming in at $21,000,000 Were there any efficiencies found? Or were you behind on the drilling program at all? And the other question is, what is the Argentina acquisition currently producing, just the acquisition itself? And what do you expect Argentina as a whole to produce for the year with no CapEx? Hi, Brian. Good morning. Thank you for your questions. To your first question, this is, as you pointed out, lower CapEx than expected. It's mainly under execution. So you that's probably more an accounting issue rather than really any cuts on our expectations. So CapEx throughout the year should be in line with the guidance that we gave. And then with respect to your question about Argentina, the assets are today producing around 2 1,200 barrels a day, 2,200 barrels, 2,300 barrels a day. And we expect them to remain within those levels by the end of the year. We think with some of the pulling activities and workovers that we will do, we will be able to maintain that production fairly flat from now until the end of the year. Hopefully, if we are able to move a rig before the end of the year, we'll expect to start drilling and then start growing that production base to bigger levels. Perfect. That's it for me. Thank you. Your next question is from Asuru Fin with Radient. Good morning, team. Congrats again. Quick question on the production profile. What's your current corporate decline rate including the Argentina acquisition? Hi, Suru. Good morning. Thank you for your question. Our decline rate obviously on a corporate basis is a combination of multiple different assets in multiple different basins and at different stages of maturity. So we are combining there our biggest production base today, which is coming from GENOS 34, which is a fast growing production asset. And as Jim mentioned at the beginning today, it has already crossed the 60,000 barrels a day mark. And then we're combining that with assets in Chile and the ones we acquired in Argentina, which are probably in more mature stable phases. And the same case is Manatee, which is more on a flat mature plateau phase. So all in all, factoring all these together, probably we're estimating our corporate decline rates to be at around 15% to 20% on an annual basis. And then in the capital that you're spending, what kind of efficiency do you expect both on the exploration side and the development side? We are allocating so I'm not sure if I understood the question, but from that CapEx program probably around 30% is going to be exploration and around 70% is dedicated to appraisal and development of fields. But I'm not sure if I understood your question. We increment if you spend $145,000,000 on average, what kind of production additions do you expect with that both on the exploration side and on the development side? Well, all of our production guidance is associated to development and appraisal. We are our guidance has no production associated to any of the exploration activities. And then from what is related to development and appraisal drilling, our production growth is expected to be 25% to 30% compared to last year. And the exit production is around 38,000 to 39,000 barrels a day and we started the year around 30. So with this CapEx program, we're effectively adding around 8000 to 9000 barrels a day to exit 2018. Not sure if that covers the question. Yes. It helps. Yes. And one final question, Vincent, before I get off here. Given the much higher oil prices than even the even what's expected in the current budget, what would you do with the extra cash? Do you want to do organic growth or acquisitions? Or would you consider paying a dividend or buying back stock? Well, I just saw from this morning's release, our first place to allocate capital is our own asset base. And we did our 1st round with these higher oil prices and we used $60 We usually use conservative prices to run our CapEx programs and we use $60 We recognize it's below what market what Brent is today. But also nobody can guarantee that it's going to stay as high as 70% or 75% for that long. So for now, our number one priority for allocating capital is our existing organic asset base. As you know, the consolidator part is a big component of our business model. We're explorers, operators and consolidators. And we've been proving over the last years that we've been building conservatively portfolio of assets in Latin America and that we've been patient buyers. But acquisition is part of the things that we consider when allocating capital. We throw in that mix ideas like dividends and buybacks. That's always something that we consider. We've never paid dividends. We did we have done some stock buybacks years ago. But currently, I think we're focusing more on our organic assets and also wide portfolio of opportunities that are out there in the region. Your next question comes from Arthur Burns with Zeltic. Two quick questions, Andres. One of them is, could you explain a little bit how this joint venture with the Indian Oil Company is meant to work and what the parameters are in terms of size and what it could mean to the 35,000,000 or 38,000,000 1,000 barrels a day production over time? A. And B, could you tell me what the blended interest rate is on your 400 $1,000,000 in debt? Hi, Arthur. This is Jim. And just with respect to your first question, so as Andres just mentioned, the consolidator piece is a key part of our business. It's one of the components of our business. And for the last 10 years, we've been building an inventory of Indian Oil National Oil Company, which India, which is the fastest growing consumer of oil in the world today, is interested in expanding its presence in Latin America. And so this is a great partner for us, in our new acquisitions. There's not a specific joint venture on a specific deal. It's to work together on acquiring new assets. So we see them as good long term partners that are focused on the right things in valuing oil and gas assets and bring a lot of strength to our overall business plan and acquisition efforts. Have you started doing something with them in terms of analyzing? Or is that is the thing going? Or is it just still on the shelf? No, it's running full blast. We've been working together continuously sharing information on opportunities they have and opportunities we have. Jim, listen, you've come a long way. I congratulate you. Well, thanks for your support. 2nd question is on the interest rate, yes. Yes. Andres here. Good morning, Arthur. So 100% of that debt is the $425,000,000 bond. It's a 7 year bullet and carries a coupon of 6.5 percent fixed. Okay. Very good. Thank you very much, gentlemen. Thank you, Arthur. Thank you. Your next question is from Jenny Xenos with Canaccord. Good morning and congratulations on another fantastic quarter. I'm wondering if you could give us an update on your progress in Mexico. Thank you. Well, in Mexico, as you know, we are interested in setting a position there. And we have been participating in different onshore bidding rounds, both done by Pemex or the CNH. I also looked at some of the migration contract migration opportunities that are out there. We haven't been able to secure an asset yet. Some of those bidding rounds have been very competitive. And we always use our organic portfolio to be our secret weapon to really become a patient buyer. So we're patiently studying Mexico and working, developing relationships with potential partners. And there's an incoming bidding round now round 3.2. We are expecting to evaluate assets that are going to be offered there and hopefully make reasonable bids. And at some point, we will be able to make our entry to the country. So far, we don't have much progress to report other than that we continue really working on it and hopefully trying to get assets at right prices not crazy ones. Are there Yes. Yes. Mostly onshore basins in the south area of Mexico, Southeast. The reason why I asked is Pemex put up recently a number of packages for farming opportunities. I think it was something like 40,000 barrels a day of production and reserves, plus some exploration opportunities there as well in the Sueza Basin. I'm wondering if it's something that you've looked at at all if it interests you. Yes. That's exactly what we're working on looking right now. There are no further questions. I would now like to turn the floor back over to Jim 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.