GeoPark Limited

Good morning and welcome to the Geopark Limited conference call following the results announcement for the third quarter ended September 30, 2020, and the 2021 Work Program and Investment Guideline. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at this time, press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. If you do not have a copy of the press release, it is available 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, Andres Socampo, Chief Financial Officer, Martin Tirado, Director of Operations, 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 are joining you this morning with our executive team reunited in Bogota, Colombia, to report on our third quarter 2020 results, introduce our work and investment program for 2021, and highlight our steps to return more value to shareholders. When we founded Geopark in 2002, we set out to build a company for the long term that would be the premier Latin American oil and gas independent and capture the big energy opportunity prize in this region. We want to always express our gratitude to the women and men of Geopark, past and present, who have made this company what it is today and created an unparalleled track record, a track record that incredibly, despite this monster storm we are fighting, is on target for our 18th straight year of growth. We had a great start to this year in the first quarter with the acquisition of AmeriStore, which significantly advanced our quietly effective Llanos Basin expansion effort, which has now positioned us with 1.4 million prime acres surrounding Llanos 34. This has made us one of the leading landholders in one of the world's most attractive onshore hydrocarbon basins and secured us with a powerful, low-risk, short-, medium-, and long-term growth fairway. During the wild and turbulent second quarter, our team moved decisively and significantly on all fronts, first to keep our team safe and healthy, and then pulling in our horns hard and dropping our capital investment program by 80% and attacking each and every cost line to achieve nearly $300 million of future cost savings. This quickness and agility allowed us to then re-engage and get back to work smoothly during a more stable third quarter, meaning putting rigs back to work and opening up temporarily shut-in production. Our unique low break-even production base, coupled with our relentless cost-cutting efforts, which again resulted in big declines of over 30% in operating costs, and 30% in GNA and GMG costs during the third quarter generated a doubling of our second quarter EBITDA to $56 million. Our forceful cash preservation efforts maintained a healthy cash balance of $164 million, which is even more cash than what we started the year with. Operationally, we resumed drilling on the YAML 34 block, and significantly began drilling a CPO5 block to appraise the indigo oil field. We have high expectations of the CPO5 block with its combination of development opportunities and very large multi-play exploration prospects and see it as a key component of our continuing Yanospace and growth story. Taking advantage of the downturn, we worked to transform Geopark into an even better and stronger company. This included a major restructuring of our project portfolio from a country or regional perspective to an asset-focused approach, which allowed us to capture large savings through synergies and improved efficiency. As always, The underlying foundation for Geoparks' performance is our in-house integrated value ESG Plus 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. This has been especially evident during the pandemic, with our success in keeping our team safe and healthy and assisting our neighboring communities with medical and economic aid. So today, from a position of strength, we are finishing another successful year and have been able to build an attractive work program for 2021 to grow our company and return cash to our shareholders. Turbulence has been an opportunity zone for us throughout our history, and we are heading into 2021 with confidence and optimism. Our projected work program, using a base case assumption of $40 to $45 Brent, provides for $100 to $120 million to drill 31 to 34 wells, approximately 65% development, and 35% exploration, with an average annual production of 40,000 to 42,000 barrels per day, and generating an operating net back of $210 million to $280 million. And as in every program every year, we have built in our flexibility with a fully funded high case at Brent over $50, and a fully funded low case at Brent below $35, focusing on the lowest risk projects that can yield attractive returns. Overall, 90% of our production is cash flow positive between $20 to $30 Brent. One year ago, in our November 2019 conference call, we said, quote, we believe that a company that can consistently execute, invest, find oil, grow, and return value back to its shareholders, all funded by its own cash flow, is the right model for our industry today. In a volatile world, being able to deliver on all these fronts is the true measure of a company's durability and value." We did not know at that time that we were about to face the biggest collapse in our industry's history. But Geopark's ability to prevail, continue growing, provide cash back to its shareholders, and maintain a strong and secure financial position during this time is a powerful test of our resilience and enduring value. Thank you, and we would be pleased to answer any questions you may have.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. We ask that you please pick up your handset to provide optimal sound quality. Our first question comes from the line of Alejandro de Michaelis of NAU Securities.

Yes, good afternoon, gentlemen. Congratulations on the quarter and on the cash returns. A couple of questions, please. The first one is on your production guidance for next year, which is effectively flat from where you are today, despite you spending $100 million, $120 million in capex. So could you please give us some kind of indications of what are the moving parts to keep that kind of production flat? And then the second question, I think in your press release you indicate that there could be some more kind of cost efficiencies to come. So trying to understand where those cost efficiencies coming from and how large these could be.

Hi, good morning, Alejandro.

Thank you for your questions. On the first question with respect to the production outlook for 2021, I would take into consideration first the fact that we're projecting our budget around a $40 Brent, which is still a little bit lower than the average of 2020. So additionally, we are Actually, we are being able to keep two full-time rigs in our core asset in January 34, and as we also mentioned in the release, we were finally able to resume activities in 2005. So having two full-time rigs in January 34 will probably keep the production there more or less flat to a moderate growth. If you remember in 2019, we had our program for 2020, and we were targeting to grow between 5% to 10%, but having at least three full-time breeding rigs in the area. So I would say with this level of activity, it's reasonable that we are keeping the production within flat to a moderate growth. But on top of that, I would highlight the fact that the cash flow that is going to be generated by the asset is going to be very significant. So if you think, probably in General Study 4, we're allocating something like $50 to $60 million worth of development capex, and at a $40 brand, $40, $45 brand, the asset would be generating something between $200 to $230 million of operating net back. Additionally, on the consolidated budget, or the consolidated CAPEX that you saw, 110 to 120 million, there's a bigger weight on exploration than it was in the last couple of years. So around 35% of these CAPEX is exploration, and there's no production associated in our guidance coming from those, from basically 35% of the CAPEX. So effectively, the CAPEX that is associated to development is roughly 65% of the total. So there's a third of the CAPEX that has no production associated. Half of that exploration is for wells, and the other half is for 3D seismic licensing to get us ready to start a more aggressive exploration campaign in 2022 and on. I don't know, Martín, if I missed anything. Maybe the one last point is On the rest of the assets of the portfolio, you will see that with very little capital being allocated to them, and I'm leaving aside CPO5 for a second, we are being able to keep the production fairly flat with very little investment. And then on CPO5, we are targeting a pretty significant growth in 2021. Our expectation with the level of activity that we are estimating is that we should be able to almost double the production in CPO5 during 2021. We're targeting around a 90% production growth from the 7,000 to 8,000 barrels a day experience in 2020 to something around 15,000 barrels a day next year. And then with respect to your question about cost efficiencies, We went through a big restructuring during 2020. We reshaped the organization completely and the way we organized ourselves. We shut in some offices and we reduced some of the other offices. And we also made some changes in our operations to continue reducing our costs. So as well as on top of that, our transportation costs also have been, we have been able to bring it down. So all of those services are, for us, an ongoing, continuous effort. So our intention is to make every single .

That's very clear. Thank you.

Our next question comes from the line of Stefan Zuccu of Octus.

Yes, morning, guys. Thanks for taking my questions. I've got three. The first one is around the special dividend. So understand the logic of the quarter dividend to return, to show return to shareholders and the buyback. But what was the logic behind, the strategy behind the one-off, the extra cash dividend given specifically this quarter on top of the quarterly? That's my first question. My second question is around the tax in Colombia, the cash tax. Given the repayment and the discussion that you had in Colombia, where would you see now the cash tax or tax repayment for 2020 and where would you see 2021 coming? And my last question is around CPO5. It's back, basically, on the previous question. Could you come back to the production you would expect from CPO5 in the guidance in 2021? I think it's 15,000, which seems to be the working interest. But if it's the case, compared to where we are today, what are the moving parts? 40,000 barrels per day at the moment. If CO5 goes up, then what goes down?

Thank you. Thank you for your questions.

On the dividend question, the basic logic behind it and the one-off and the ordinary dividend, we paid at the beginning of, sorry, maybe I should step back to 2019, we started our dividend In late 2019, we were paying $2.5 million a quarter. That was giving you more or less something like $10 million a year if we were to continue that payment every quarter. That back then would have represented something around 1% dividend yield for the company as a whole. So post-COVID, with oil prices dropped and our market cap dropping in line, today we given that we paid $2.5 million dividend in the first quarter, if you top that up with another $2.5 million dividend on this quarter, that gives $5 million for a year, which more or less respects the same 1% yield or a little bit above that. So, and the reason why we split it is because the ordinary dividend obviously is It's not one of . That would give you more or less $5 million over the course of one year if we were to decide to maintain it. That's more or less the logic on why we decided those amounts. With respect to your question about cash taxes, in 2020 there was a combination of tax reductions, tax deferrals, and tax reimbursements. The net impact on cash of the tax payments in 2020 is going to be around $10 million. Part of that was a referral to 2021. Roughly $20 to $25 million were referred to 2021. So that is going to be part of the 2021 tax deal. And then our 2021 tax estimation, cash tax estimation is somewhere around also $20 to $25 million. So in total, the tax cash payment in 2021 should be something around $40 to $45

$40 to $50 million more or less.

And then your last question was about CPO-5 and the production guidance.

Yes.

So the numbers I gave, the $7,000, $8,000 this year to $15,000, more or less $15,000 next year, that's obviously gross production. It's not the working interest. So how that breaks down into our production base is more or less CPO5 growing down 34, 30 plus to a small growth, 0 to 5% growth. And then the decline comes from the other assets, mainly platanillo and to a lesser extent some of our Argentinian, Chilean, Brazilian production.

Thank you. Thank you.

Your next question comes from the line of Ricardo Resende of JP Morgan. Ricardo, your line is open. Please state your question.

Can you hear me?

Yes, please go ahead.

Yes, well, thank you. Hi, Andreas. Hi, Jim. Thanks so much for taking my question. A couple questions on my side. The first one is related to your 2021 work program, and more specifically about CPO5, almost like a follow-up on what you just mentioned. Just curious to see how were the discussions with your partner there, given that it's the first year that you've been part of the controlling group of CPO5, and how much of a synergy that you had with Linux 34 and the best practice that you had there if you could already start to deploy that in CPO5 in 2021. And then on the second question is, this morning, PetroRio, which is a partner on Monachi, they announced they're selling their 10% stake on that block in Brazil. I'm just curious to see what are your plans there, given that the three partners on that block have already mentioned their intention to sell their stakes at some point earlier this year.

Thank you, Ricardo, and good morning.

With respect to your question about CPO5, I think so far so good. You know, we have a long relationship with ONGC and have been working with them in the area. We have been working before CPO5 in jointly looking at opportunities in Latin America and particularly in the Llanos Basin. So they are open and welcoming our joining GP05 and have a very good partnership with them. We are very happy that we finally got a rig on site in IndyCo and we are just finishing drilling the IndyCo 2 well and we are expecting to perforate and test these wells in the incoming days. So that's great news. And we are also looking to a good drilling campaign following IndyCo2 that has been agreed between the two partners. So I would say the relationship has been excellent. They welcome all of our input with respect of ideas and considerations. on experience we've had in January of 34. The fact that we are back drilling and hopefully keeping the rig in the area to continue drilling after IndyCo 2, the rig is going to move to an exploration prospect called IDLA. Then after that, it's going to continue drilling, probably coming back to IndyCo for more development wells. Long answer, but really our experience so far has been quite positive and we're very optimistic about this very attractive acreage position. And then with respect to your question about PetroRio and Manatee, we read that announcement and we know of this initiative that is going around Manatee. It is one of the assets. Manatee is a very attractive gas field in Brazil. It does have limited upside, so it would be one of the assets in our portfolio that for us would be a diversity that could be considered. We've analyzed the idea many times, and if anything comes to reality, we will make the appropriate announcements and we will update the market on any advantage on that front. So there's not a lot much that I can say about that, but it is an idea that we're happy to consider.

Great. Thanks, Andres. Thank you, Ricardo.

Our next question comes from the line of Robin Hayworth of Steeple.

Hi, Andreas. Thanks for the question. So just on buybacks, is your buyback capped by free cash flow in 2021? Or would you consider using cash on the balance sheet in excess of free cash flow? I'm just looking at my estimates of free cash flow, and I don't think there's tons given your spending guidance today. So I was just wondering if you would essentially spend balance sheet cash on buying back stock. And then how do you think about buying back stock versus doing more drilling, either LLA34 or CPO5? And then just another follow-up on CPO5 production rates. That 15,000 barrels a day you mentioned, is that an exit rate for 2021? Or I think it would be quite a good effort to make that a 2021 average. If you could clear that up, that would be great.

Thank you. So, Robin, good morning.

This is Martin Terrado. I'll start with the second question related to CPO5 production. That is the exit rate. So, in addition to Mariposa 1 and Indico 1 that we have on production today, we are adding the production from Indico 2 and two additional development wells in 2021. So, we expect to be in the order of 12 to 15 thousand barrels close at the end of the year.

And there's three exploration prospects in the campaign that have no production associated and not included in that guidance.

Correct. Neither those three nor the Aguila that we're about to start drilling in the near future.

So on your question about using our cash for buybacks, Robin, yes, we would use some of our cash. The guidance more or less we gave this morning is more or less cash neutral at the asset, I mean after asset, debt service, taxes and everything. So we know that we have dividends and buybacks and any other non-asset or not inside company related items and for that we could definitely use our cash at these prices. we believe is a great investment as well. We also have to take into consideration our balance sheet management, and keeping the cash also helps us to maintain a strong balance sheet, so we will not get pariah from that part, but given that we believe we have a pretty solid financial position in 2021 and a pretty solid and healthy cash inflow and cash position, yes, we would definitely use some of that cash to invest in buying back some of our shares.

Great. Thank you. So just, I guess, to follow up on that, are you sort of committing to use the full 10% ability to buy back stock, or is it more opportunistic than that?

No, we're not committing to use up the full 10%.

It will be more opportunistic and will depend really on market conditions generally. So that's the maximum allowance that we have approved, but we will not commit to use up the full amount.

Great. Thank you very much.

Once again, if you'd like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Joanna Castro of ETAL.

Hi, thank you for taking my question. I had one strategic question on the rationale on how you see the beginning of next quarter because I think that you probably are one of the companies that have give more guidance quarter over quarter about what is your capex every time the oil changes. So it is good that you give that insight, but I was thinking, I was actually willing to understand what is your rationale on the market and your negotiations with Traffic Buddha in the first quarter of 2021. If you can disclose a little bit on how you're looking at that overview of the market in Colombia, that is the most relevant for you. And the second question is more on an accounting issue for the end of this year. If the results continue to be similar this fourth quarter to the third quarter, you will run into negative equity. Are you planning to avoid that scenario just for the matter of results presentation, or it doesn't really matter to you?

Hi, good morning, Joanna.

Could you please repeat the first question? I'm not sure I understood your question, please.

Is that you have used several times in the past some anticipated... Yeah, commercial figures with Rafigura in order to anticipate some sales and... as I have understood that fever works in case of the need of liquidity. But I don't know if you are in that scenario for the first quarter of 2021, if you are using that kind of a strategy in order to anticipate some sales of the production. I was just wondering if that is the scenario for the first quarter of 2021.

Okay, so basically what happened this year is we negotiated an agreement with Trust Ibura to implement an oil prepaid facility. And in exchange of that, have an off-take contract with them. So they will be off-taking part of our production during next year and the following year. So that agreement is still in place. And we have the commitment from Trafigura to disburse, if we would require, we have $50 million of available liquidity committed to us that has to be expanded to $75 million. I confirm that none of these amounts have been withdrawn, so the line is unused. And we expect to keep that in place also for the next year. And then, as a result of that, you will see part of our volumes being sold to Toa Figura in 2021 and on. I don't know if that is to the point that addresses the question that you're making.

Yes, perfect.

Well, great. Thank you. And then your next point about the... Yes?

Yes. To your point, we'll see what results in the fourth quarter. But if it happens, as you said, there is a chance that our equity becomes negative during the fourth quarter. We don't really see that as a concern. That's purely an accounting rule matter. And the main explanation for that is that you can see that a very important and big asset like Janus 34th, is booked in our balance sheet at a book value of $200 million, and that follows simply the accounting rules that we need to follow, which is booking our EMP assets, taking into consideration only the past investment minus the depreciation following production. So the book value of the equity as a result of those accounting rules really do not reflect fairly what we believe is the real underlying value of the asset. I mean, Janus 34 is going to generate that much in the next 12 months. So for that reason, we don't see this as a concern. We have a very solid cash position. We have just announced a pretty firm and robust work program and budget that is going to generate a lot of cash flow for our company. So we don't really think this is an issue. And also, there have been a lot of companies, this is not an unusual event. I mean, there's many companies, not only on the EMP sector, but on other sectors that experience negative S&P with no real issue. So this is not for us an issue that reflects anything with respect to our business.

Okay. Thank you. Thank you for the clarification.

Great. Thank you.

Our next question is a follow-up from Alejandro de Michaelis of NAU Securities.

Yes, guys, just to follow up on something that Martin said on CP05, can you confirm that you are taking Indigo 2 into production? Because on your press release, I can see no comment on questions. any kind of early kind of indications on Indico II. So maybe you can tell us how you're seeing the progress there, maybe already in the reservoir.

Yes. How are you doing, Alejandro?

So we're very excited. Like Andres said, we've got a rig operating there. We're aligned with our partner. The Indico II well was spotted in September. Targeting the UNE formation. It's the same formation that has been producing in both Mariposa and Indico 1. And as we speak, the operator, ONGC, is completing the well. We're excited, and shortly we will be communicating those results. Following that Indico 2 completion, the rig is moving to the Aguila. and that is also targeting the UNE formation. So we expect to have results to share with you shortly.

But surely if you're completing a well, it's because you have a discovery, yeah?

So we are casing the well, and the results, they look... But they look good. Again, we will share once we have the well with more information.

Yes, Alejandro, and just remember, Indico 2 is not an exploration well, just for clarity. It's an abrasal well inside the Indico field. So it wouldn't qualify as a discovery. It's a development well or development slash abrasal well. And hopefully we will be starting to test the well in the coming weeks. So looking forward to that.

That's very clear. Thank you.

Thank you. That was our final question for today. I would now like to 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. As the world's borders begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their actions and is busier than ever with webinars, video conferences, and direct calls, and is available around the clock, as is our management team, to answer any questions or listen to your comments. Thank you, and please stay healthy.

Thank you. That does conclude the Geopark third quarter 2020 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.