GeoPark Limited

Good morning and welcome to the GL Park limited conference call following the results announcement for the first quarter ended March 31st, 2022. 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.geopark.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 development 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 statement, 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. Reserved figures correspond to PRMS standards. On the call today from Geopark is James F. Park, Chief Executive Officer, Augusto Zubalaga, Chief Operating Officer, Andres Ocampo, Chief Financial Officer, Martin Tirado, Director of Operations, Veronica Bebula, Commercial Director, and Stacey Stimel, 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 in Bogota, Colombia, to report on our achievements and financial results for the first quarter of of 2022 we want to begin by thanking and recognizing all the hard-working women and men of geopark for delivering one of the most successful quarters in our 20-year history while continuing building value across our complete business we believe we are in the right business in the right place with the right team, the right platform, the right partners and the right approach to succeed and capture an immense value proposition. Our previously announced management transition is proceeding and being received very well, and the Geopark team is responding with energy, enthusiasm, ideas, and optimism. And it is with tremendous gratitude and confidence that I'm moving on from this wonderful job to becoming a full-time shareholder and cheerleader. Before passing the word to Andres, as well as opening for questions, just a word, please, about our full cycle performance and delivery. something which underlies our unique 20-year track record of continuous value growth. Since the very beginning, Geopark has been committed to a big idea and long-term plan, which allowed us to build our company solidly and steadily while keeping our focus on the larger prize. This gave us a rock-hard foundation which allows us to weather any world or industry crises, and we have been through a bunch, and be in a position with all we need to create and win more and more opportunities for the future. So today we are successfully keeping our team safe, healthy, and rewarded, using our G&G and operational excellence to drill, find, and produce more oil and gas, being innovative and staying disciplined to achieve greater capital efficiency and reduce costs. Protecting the environment and reducing emissions. Being a constructive and desired community neighbor. Adding more high potential acreage and assets to further expand our big growth fairway. Managing the risks of our business and protecting downsides. strengthening and celebrating our powerful culture and using our record cash flows and revenues to invest more to expand our work program and improve our business, pay down debt, and give back more to our shareholders. With all this activity across the full E&P value chain, being self funded by our own cash flows, as we have for nearly 10 years. And which provides a continuous snowballing of value and scale. So Andres, thank you for stepping up and taking on this job. Perhaps you can please add some more details on this quarter.

Thank you, Jim. We have a year filled with activity across our company, and our first quarter results show our strong start to the year. First, we have drilled 13 new wells and increased production by 6% over the fourth quarter of last year. In the TPO5 block, we're now producing over 20,000 barrels a day gross. That's two and a half times higher than when we acquired the block almost two years ago. In Ecuador, we discovered two new oil fields currently producing almost 2,000 barrels a day gross. Second, the increased production and oil prices generated record financial results. Our adjusted EBITDA generation in the quarter was up 84% to $123 million, which means more than $350 million for the last 12 months. This also means a net income of more than $100 million in the same period. Third, we invested $39 million of capex in the quarter, which means that we generated more than $3 of adjusted EBITDA for every dollar invested in that period. We also used our cash flow to reduce debt as we repurchased $33 million of our 2024 bonds and also doubled our dividends to $5 million per quarter. Fourth, we added new acreage in our core place. The CPO-4-1 block is strategically located and covers 120,000 acres adjacent to CPO-5 and other Janos Basin blocks that we own. Finally, as we're always striving to be a better and cleaner company, we advanced on connecting to the Colombian national grid, as well as building our solar plant which has the multiple benefit of reducing our emissions, reducing our costs, and increasing our operational reliability. Our efforts are being recognized at MSCI ESG Improval Ratings 2A, and also we were included in the Bloomberg Gender Equality Index, covering companies with best-in-class gender-related practices and policies. As is always the case, we designed our work programs to be adaptable up or down based on asset performance and oil price volatility. So given the new discoveries and higher oil prices, we have expanded our self-funded 2022 work program by another $40 million to drill an additional eight to nine new wells, plus facilities permitting and licensing. Consequently, We increased our annual production guidance up 8% to a range of 38.5 to 40.5 thousand barrels of oil equivalent per day to reflect new production from Ecuador, the expanded war program, as well as the production from Manatee in Brazil. This revised guidance represents an 11% growth compared to 2021, adjusting for Argentina's but not including any future exploration success. A $95 to $100 grant, this revised work program is expected to generate more than half a billion dollars in adjusted EBITDA, which would be more than $250 million of free cash flow after CapEx debt service and taxes, representing almost a 30% free cash flow yield. We expect to use this extra cash to continue investing in growing our asset base, paying down debt, and giving back more value to shareholders. Our operations and technical teams are busier than ever. We have today eight Greeks working full-time across our asset platform in Latin America and have four more Greeks on their way. We're executing an exciting low-cost, low-risk, and high-impact exploration campaign, not only in CPO5, but also in our other genospacing blocks. So we really look forward to reporting on progress and results from these very exciting activities. Thank you, and we will be pleased to answer any questions you may have.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. First question comes from the line of Alejandro Denichelis with Now Security. Alejandro, you may proceed.

Yes, good morning, gentlemen. Thank you very much for taking my questions. Three questions, if I may, please. The first one, could you please walk us through the production guidance, the updated production guidance? Because when we take the, say, 2,000 barrels that Manatee brings in, it doesn't look like you are adding an awful lot for the extra wealth that you're drilling in General 34 and the rest of the program. So trying to see how conservative the guidance is. That's the first question. Second question, could you please tell us where you are on the exploration of CPO5 and URACA? What are you seeing so far? When can we expect some kind of results there? And the third question is, maybe you can touch on how you're seeing cost inflation. We have seen your production costs, excluding royalties, very flat. So what to expect for the rest of the year, please?

Good morning, Alejandro. This is Martin Terrado. Appreciate your questions. I'll cover the first two and then let Veronica go over the operating costs. So on the production guidance, as you've seen, the incremental is in the order of 3,000 barrels of oil equivalent per day. Manatee, we expect decline. So the contribution from Manatee or Brazil for the remaining of the year, and that guidance is around 1,300. So we have 1,700 barrels of oil equivalent per day that are coming from new activity and better asset performance. That better asset performance and new activity includes CP05, Chano's production that we have, and it incorporates the discoveries from Ecuador that are already communicated.

And also I would add, Andrés here, Alejandro, I would add that the incremental activity that we added also has a lot of it is exploration activities which has no incremental production associated. So as Martin said, the guidance is 1,700 barrels from the guidance related to better performance and new activities.

So concerning the second question, On the second one, on CTO5 and where we are, like Andres said, we continue to be really excited about this block. We had the successful results from Indico 4 and 5. They're both performing without water production, 4,000 barrels of oil equivalent each. So that puts this field, Indico, as one of the top 10 fields in Colombia. And we are fortunate that out of those 10, we also have Hacana and Tijana. So three of 10, it's a part of Geopark and we're very proud of that. In Huracan, the well is being drilled according to plan and we're about to reach TD. So we should be getting logs and then putting that well in production soon. We do want to make sure that we remind you that this is one of about four wells that we have in the northwest of the block that are going to be evaluating, investigating the continuation of the Hakana trend. And that rig that is drilling Urraca will complete the well, and then we will continue drilling in the area. And so very excited about that. We're working with our partner.

If I may interrupt, you said that you're going to put it into production. So you already have something there.

No, no, no, no, no. We're about to reach total depth, so we're still drilling. We would love the well, case the well, and expecting good results. Remember that this is Hakana-Tigana trend, so they're not going to be flowing naturally, so we'll have to put a pump. So most likely, first oil will be by the end of the month.

But Alejandro, sorry, just to be clear for everybody, this is an exploration well. We have no indication today or no information today whether this is going to be a discovery or not. What Martin is saying is in the event that we have information that confirms that it's a discovery. We haven't reached TD yet, so we're not even in the zone of interest yet. We don't have login information. So really just to be clear, and I understand the question, and to make sure that everybody has it clear. We haven't reached the zone yet, so there's no information. Once we cross the zone, we will decide, based on the information that we get on logging from the well, we'll decide to complete the well and put it on testing to see if it is a successful well or not. All of that is going to take us probably another month, so I wouldn't expect news from us on this particular well for at least another month. Is that clear?

That's very clear. That's very clear. Thank you.

Okay. Okay. Great.

Good morning, Alejandro. This is Veronica. Thank you for your question. In regards to OPEX, for 2022, we expect our overall OPEX to be in the $8.5 to $9 per VOE range. This is between 5% and 10% increase over the 2021 numbers, and it's already included in our guidance. This OPEX expectation for 2022 already takes into account the impact of inflation, cost reduction initiatives, including the connection to the national grid in Colombia, and increased production from higher OPEX fields, namely in Chile and Ecuador.

That's very clear. Thank you. Thank you.

Thank you for your question, Alejandro. Our next question comes from the line of Oriana Covalt with Valens. Oriana, please proceed.

Hi, thanks for taking my call. This is Soriana with Balance. And I had three questions. If we may go one by one, that would be great. Just following up on the inflation side and just thinking about your budget, how much should we think in terms of your drilling costs and completion costs that update in budget is reflecting higher inflation? Or is it only related with additional wealth coming in your plan?

Thank you, Oriana. Andres here. It is new activity. All of what is included there is new activity. It's not revising the existing activity to increase it for inflation. We already had factored in our original guidance some inflation in our costs. In terms of drilling and completion, it's more or less 5%, 7% increase that we are seeing across the materials, the casings, the services, everything is making our wells more or less 5% to 7% more expensive. That was already built in our original guidance, and the new activity already factors this in.

Perfect. That's very clear. Perhaps following up on a different side of the business, just thinking about the Lasconia differential, and could you elaborate more on the local marker differential you disclosed for Columbia in your press release? We've been under the impression that this has widened in the past quarter. So just to understand what has been driving the difference and how should we think of this marker going forward?

Thank you, Oriana. Good morning. Basconia is the grade that we mainly produce in Colombia. We have seen differential of Basconia in $3.7 per barrel, so that's $3.7 below Brent for the first quarter. Today, that's closer to $4.50, but it's been as wide, as you mentioned, as $7 per barrel below Brent during April, and then recently recovered. There's a few factors pushing Baskonia lower versus Brent. On the one side, there's a deep discount for heavy grades which are faced with strong competition with Russian barrels that are trading at very deep discounts currently in the market, especially into Asia. Also, there's increased volumes of medium sour grapes to compete with Atconia as well, coming out of the US as it releases barrels from its strategic petroleum reserve. On the other side, Factors supporting Vasconia include increasing and strong demand in Colombia that is consuming most of the Vasconia production domestically, and a strong global demand for diesel, which should support crude sets of Vasconia that have a high diesel production once refined. In all, we expect Vasconia pricing to stabilize and be within our $3 to $4 per barrel discount to Brent, which is our budget assumption, and it's within our guidance.

Thanks, Bianca. That was very clear. And maybe just one last one regarding the... The announcement that you made yesterday on tendering about $45 million of the 2024, is this perhaps if you could walk us through the rationale. We understood that you already did some buybacks during the first quarter, so getting a better sense of why choosing to go through the tender instead of perhaps taking advantage of lower prices, local prices, given the political turbulence ahead. Thanks.

Thank you, Oriana. As you well mentioned, we announced yesterday we're going to exercise a call for $45 million of our 2024 bonds. This is in addition to $33 million that we have purchased year-to-date in the open market below the call price. And this is part of our deleveraging strategy. We started on this strategy last year with our liability management executed in April last year, which reduced about $105 million of the 2024 notes. And as we have mentioned in the past, we are continuing to deliver, taking advantage of, you know, a high cash flow generation, and we expect to continue to do that. This is another step in the leveraging process, which will be completed in terms of the call for the 2024's $45 million by the end of May.

And the rationale also, Andres here, Oriana, the rationale why we're calling it is we repurchased as much as we could find, basically. You know, the size of the bond is small. It's about $150 million, so it's hard to find. So, year to date, we purchased everything we could find below the cold price, and now we decided to just take a bigger junk.

That sounds great. Thanks again, and congratulations for the good quarter.

Thank you. Thank you for your question, Oriana. Our next question comes from the line of the same with Octus Advisors. Please go ahead with your question.

Hi guys, thanks for taking my question. A quick question as well for me. First one back on this leveraging thing. Once the $45 million announced of further bond redemption, how do you see H2? Assuming your price remains where it is, assuming the sort of free cash flow that you generate, could we expect some further bond redemption uh or buy back in the second part of the year that's my first question my second question is in line in light of the new production guidance how would you see the exit 20 000 to 20 22 exit pollution guidance i noticed that there is that for instance power x has reported a quite big increase for december do you see something similar to that And lastly, could you give a few words on CPO4, I think the block that you recently acquired an interest from Pyrex, and the sort of resources you could see potentially on this block and the upcoming block program? Thank you.

Hi, Stefan. Good morning. Andres here. With respect to your question about the leveraging, as you said, we're calling this $45 million now. We are approaching the date in the next couple of months, the date where it's more economical to wait and continue calling it in September when the cold price drops down again. So most likely, in the second half of the year, If oil prices remain as they are these days, and if our cash flow evolves as we said in our guidance, you know, within the $90 to $100 range, yes, most likely you should expect us that we will call 100% of the 24s sometime after September in the second half. That is our expectation.

Stefan, this is Martin Terrado. Related to the 2022 exit production in Colombia, as we published, our first quarter Colombia production was 33,700 barrels of oil equivalent per day. We see our exit for Colombia around 1,000 barrels above that, and all of that does not include any kind of exploration success.

In regard to the question about CPO4, just let me put you in context. So, in 2019, we awarded six blocks in the 2019 A&H reading round, practically all the blocks surrounding our successful Journal 34. So, so far, we have been working in the environmental permits and in the activities. So this year, we will start drilling two exploration wells in the Janus 87, just in the northwest part of Janus 34. And we will drill also one exploration well in Janus 94, which is called Umea X1. So coming back to CPO4. CPO4 is adjacent to Janus 94 block. Our working interest is 50%. It has 150,000 acres, which is two times bigger than Janus 34. 50% of the area covered with 3D seismic. So far, we identified a strategic place in the in the gacheta formation so uh due to them to the work program the commitment that we have in that blog is to read one exploration well in the first exploration phases so cpo4 is in addition to the 0.6 to 1.6 billion

Hello? Hi, are you still there? Can you hear us? Yes. Yes, I can. Sorry, the main line got disconnected. Sorry, Stefan. We got disconnected on the main line. We're joining on the backup line. So, do we even continue?

So, I don't know when you need to... Is it before? You were talking about the one explosion... So, that's... Okay, just to summarize, so the CPO4 is in addition to the 0.6 to 1.6 billion virus in our restoration resources in all the blocks that we have in Genovese. Okay, thank you.

Thank you, Stefan.

Thank you for your question, Stefan. Our next question comes from our webcast. Our question comes from Daniel Guardiola from BTG Paxual, and he asks, could you share with us what would be your priorities to allocate the expected excess of cash to be generated in 2022? Any thoughts on inorganic growth? Can you remind us how much capital are you planning to allocate in 2022 to shareholders' compensation? With respect to TOR hedging strategy, are you planning to modify it for 2023? And if oil prices remain stable, what would be the expected loss for full year 2022? And can you provide us more color with respect to the exploratory campaign? What are your expectations in terms of incremental production related to this campaign?

Thank you, Ranyel. Good morning. and go first in terms of the question on priorities in allocating our cash flow. So our priorities continue to remain the same. As Jim mentioned in his opening remarks, we're going to prioritize funding our asset base and follow by a combination of debt reduction, which we already testified a little bit on the call, and shareholder return. In terms of our assets, we have already been discussing today the expansion of our work program, 14 exploratory wells, and we're ready to deploy additional capital to our assets should we be successful within that exploration. On the debt reduction, we already touched upon it, but we have launched the call for the Treasury report for $45 million. We have already purchased 33 million year-to-date, and as Andrés mentioned, we would expect to continue the leveraging in the second half of the year. And in terms of shareholder returns, we have doubled our dividends. We expect to continue to pay out $5 million per quarter in terms of dividends. We already have this question of share buyback in place, which is also part of our initiative in terms of shareholder returns.

Daniel, this is Martin Terrado. Related to our exploration work program, Like we already mentioned, it's about 14 to 18 additional wells on top of the two wells that were drilled and discovered in Ecuador. So high level, we're targeting between 180 and 350 million barrels of unrisked mean resources, or P10. That's the range that we have. Our working interest, That is around 70 million to 140 million resources that we're targeting, with chances of success that go from 25% to 40%. Now, how does that look like in the year for us? Again.

Excuse me, Paul. It seems that we have lost our speaker line. Please allow me one moment to reconnect them.

Thank you.

Hello?

You sound loud and clear.

And we were answering Mr. Guardiola's question. Are we back online? Apologize for that. We're having some technical problems with the line.

So Martin, you can continue. Yeah. So sorry about that, everybody. So like I was saying, the order of magnitude of the resources that were after Gross is about 170 to about 350 million barrels. With our working interest, it ends up being around 70 million to 140 million barrels. And the chances of success are between 25 percent and 40 percent. As we go through the different quarters, we're going to be drilling anywhere between four and six exploration wells per quarter. and most of those are going to be drilled in Colombia. In Colombia, most of those are going to be drilled in Llanos. We have around five to six wells that could be drilled in CP05, about two wells that are going to be drilled in Llanos 34, and the same amount in Llanos 94 and Llanos 87. What's outside of Colombia or Llanos is one well, exploratory well in Platanillo, and two wells in Ecuador. One will be a follow-up to our success in the Espejo and Perico block, and the other one will be our first exploration well operated by Geopark in the Espejo block. So again, Daniel, apologies for the cut, but let us know if there's further questions or clarification.

And there was a point in the question of hedging also.

We're moving on to the hedging question. We continue executing on our hedging strategy. We believe hedging is a sound risk management tool to protect ourselves from the cyclicality in our business, which is very volatile. In terms of the hedge costs, which you mentioned, we have recorded $30 million of hedge costs in the first quarter. and we have provisioned an additional $50 million in unrealized hedge costs for the remainder of the year. Those numbers align with our expectation of hedge costs for the remainder of the year should prices remain at the current market conditions, and those have already been included in our guidance. I don't know, Daniel, if that covers the question or if you had something further. Daniel?

We do have a follow-up question from Daniel. He asks, do you foresee any risks to your operations related to the upcoming presidential elections in Colombia?

Thank you, Daniel. The Colombian elections are the primary round expected before the end of the month, and then it seems that most likely there's going to be a second round in mid-June. It sounds like it's going to be a tight call, really. But again, as we said in the prior calls, we are very confident and we trust Colombians' long-term political and economic stability. This country has solid institutions and has proven to have one of the highest respect for contracts and rule of law in the region. So we are optimistic with respect to the future in the country. And again, we expect the balances of, I mean, that the institutions will provide the balances that are required for the country to continue its historical stability.

perfect there are no more questions waiting at this time so i will now pass the call back to our management team for closing remarks thank you everybody for your interest in geopark and your continued support of our company our shareholder value team is available around the clock as is our management team to answer any questions or listen to your comments we look forward to hearing from and seeing you soon. Thank you.

That concludes the Geopark first quarter 2022 results conference call. Thank you for your participation. You may now disconnect your line.