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spk00: Good morning and welcome to the Geopark Limited conference call following the results announcement for the second quarter ended June 30, 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, please 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 forward-looking statements, rather than historical facts, and are subject to risks and uncertainties that could cause accidental results to differ materially from those described. With this respect to forward-looking statements, the company seeks protections afforded by the private security quotation reform law of 1995. Risks include a variety of factors, including competitive development and risk factor, listed from time to time in the company's SEC reports. Those lists are intended to identify certain principal factors that could cause actual to differ material 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 Andres Ocampo, Chief Executive Officer, Veronica Davila, Chief Financial Officer, Augusto Zubiaga, Chief Technical Officer, Martin Tirado, Officer, and Steve Simel, Shareholder and Value Director. And now, turn the call over to Mr. Andres Ocampo. Mr. Ocampo, you may begin.
spk03: Good morning and thank you everyone for joining the call. We're connecting from Bogota, Colombia with our team to report on our business performance and second quarter results. This quarter can be characterized by a successful high momentum transition, our on the ground full cycle performance with record results and a lot of good work and drilling underway, opening even more opportunities for the rest of the year. we would like to thank the entire Geopark team for their discipline and success in delivering another record quarter by increasing production and cash flow, reducing emissions, as well as paying down debt and accelerating shareholder cash returns. In terms of operations and our base business performance, during the second quarter, we drilled nine wells and increased production to an average of almost 39,000 barrels a day, a 14% increase over the second quarter last year. we remain on track to achieve a recently upwardly revised full-year average production guidance of 38.5 to 40.5 thousand barrels a day. With higher oil prices and production, we were able to maintain our costs in line and increase our cash flow generation significantly. Our adjusted EBITDA jumped by 140% over the same quarter last year to $145 million, which after spending $32 million in CAPEX, allowed our cash flow generation to grow to $113 million. This means that every dollar that we invested delivered 4.5 times in adjusted EBITDA, another proof of the quality of our assets and team. Bottom line, our profits increased to $68 million, more than $1 per share. We have been allocating our cash flows following the same priorities as always. First, invest in our assets and fund our world program, and in the current oil price environment, prioritize and accelerate production. And second, always a combination of debt reduction and returning value to our shareholders. In the year to date, we invested more than $70 million in our assets to drill more than 20 wells. We paid down $103 million of debt, returned $25 million in cash to our shareholders, and ended the quarter with $122 million in cash. In the second half of the year, we're looking to accelerate the investments in our assets by doubling our capex relative to the first half of the year. We expect to also fully repay our 2024 bonds at current oil prices, and our dividends were just increased by 50%. We also will continue executing our accelerated share buyback program. We're also investing in our energy transition efforts, as we just completed the full connection of our main producing fields to the national power grid in Colombia. which is largely hydroelectric power. We're also completing the construction of our solar park, which means that soon our main fields will be consuming electricity that is 70% to 100% generated from renewable sources. This is a big step forward towards our emission reduction targets and has the additional benefit of producing both cost savings and improved operational reliability. On governance, We would like to welcome Brian Maxted and Carlos Machelari to our board, two proven oil finders with extensive experience in our industry and our region who represent a significant contribution to our majority independent board and our company. We also welcome to the board and thank Marcella Vaca for her more than 10 years of incredible contributions to our management team, as well as to our company. Marcela is one of the most experienced oil and gas professionals in Colombia today, and is a great addition as well. We had a great half of the year producing record results, and our team is excited about what is coming. Eleven rigs are currently working in our assets, and three more rigs are on the way. We're executing a multiple catalyst work program that includes, in CP05, further accelerating production with one to two more development wells in the Indigo field. We're also testing the Cante Flamenco exploration well during the upcoming weeks. And then there's a second rig that is currently moving to initiate the exploration campaign in the southeast area of the block. In the Llanos 34 block, a third rig is already in place to continue developing the main fields and continue adding production. In our Llanos exploration acreage, we will be spotting the first well in the Llanos 87 block, the first well since we added the block in the 2019 land graph. Finally, in Ecuador, we will be drilling the first well on our operated Espejo block and are discussing more development drilling with our partner in the Perico block. We look forward to reporting results on these activities in the upcoming quarters, and we thank you, and also now we'll be happy to answer any questions you may have. Thank you.
spk00: If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Alejandro Demichelis with Now Securities. Please go ahead.
spk06: Yes, good morning. Thank you very much for taking my question. A couple of questions, if I may, please. The first one is how you see the proposal for tax reform that the government in Colombia has put forward, and as a bit of a follow-up from there, in your remarks, Andres, I think you mentioned that you are in the process of the budget for 2023, and you see that as the most powerful tool that management has. So, Should we expect some changes in the direction of that kind of budget for next year, given the proposal of tax of the government? That's the first question. And then the second question, on the exploration side, now that you have this new discovery project, in the block CP05. How are you seeing the rest of the targets through the end of the year, both in the northern part of the field and also in the southeast piece?
spk02: Good morning. Thank you, Alejandro. To address the first portion of your question, we have been, of course, looking in detail at the recently announced tax reform proposal It is still very early days in the process, but this proposal needs to go to Congress to get commented and voted on. But what we are seeing is there's two main provisions that will be affecting our industry overall and our company. Those are the main of those are the inclusion of an export tax on crude and also the removal Of course, we've been analyzing the impact on our business, as I mentioned, and we expect to get further clarity as time goes by to be able to report back to all of you. To give details on those as of now, in terms of royalties, what we would like to highlight is royalties in Colombia are calculated as a percentage of volume. For our company, that's about 8%. And so what the current proposal appears to address is that 8% calculation, which was before deductible from the NCATS calculation, will not be able to be deducted going forward. Keep in mind that this affects income tax bill of 2023. So if the reform goes forward in the same fashion as ones that happened in Colombia in the past, then the expectation would be that the non-deductibility is applied for the 2023 tax bill, which is payable in 2024.
spk03: And the royalty, the 8%, that's 100% of the royalty, so it affects the ones that are that are not in kind. So it's probably 70% of our royalty. So you should assume something like 6% or so, which is the average of what is being sold for in our company.
spk02: Sorry, go ahead. Sure. And then to the export tax, it is really, it will be very dependent on, of course, the final letter of the reform, but also on how each and every company sells their volumes, right? If we look at our composition, we have a portion of direct exports, which is 5% of our overall sales. Then roughly half of those are sold domestically. So none of those of our overall sales are sold domestically, but then are exported by our clients. So technically, you should be able to consider those as exports. And then the remaining 35% to 45% are sold domestically and refined domestically. It is still, again, also dependent on the sales, but it's still unclear how the market will take this overall regulation. In other markets with this type of tax, the overall market tends to go towards export parity pricing, whereby regardless of how the volumes are sold, overall pricing in the market gets affected. But as I mentioned at the beginning, it's very early stages. We expect to get more clarity, and as we do, we will be pleased to share with all of you.
spk04: Yeah, and I'll take the second one on.
spk06: I'm sorry, just to follow up on that. Are these changes, Veronica, enough to change the way you're thinking about capital allocation for next year then?
spk02: Sure. So, as Andres mentioned in his remarks, we are at the beginning of our capital allocation process. This is a thorough process that goes over all of the following weeks and culminates with the approval of our budget in November. As you would expect, of course, all of these items will be considered, but I would like to frame that within our the overall for immigrants as we define our projects, what projects will be going forward. This is going to affect one of the aspects, the economic aspects, so we will continue to look at the technical, the strategic, and of course the environmental and social aspects of each and every one of those projects. We will make them compete, and the Colombian projects may get very affected by this expected tax reform, but we will carry out the process as we have very thoroughly and in detail, and we'll come up with a program by November. Thank you.
spk04: Hi, Alejandro. Thank you. This is Martin Terrado. I'll respond to a question on acceleration for CP05. So, we drove here today two exploration wells in the block and one development well. The two exploration wells, the second one is the Cante Flamenco that Andres mentioned. We have multiple targets vertically on these exploration wells, mainly Huaque, Guadalupe, and Mirador. Preliminary results from the Cante Flamenco show that we have oil pay in the Mirador Formation, so right now we're doing the completion of that well. The next step is to move that rig to the Indico field. We're taking advantage of the oil prices and moving that rig to drill two development wells so that we increase production of the block. We will come back to the north. Again, these wells, the first one, Urraca, was eight kilometers from the Hakana extension. The Guadalupe formation is one that we haven't tested yet, and we need to get closer to the north. We're building the paths on that area. Andres also mentioned that we have a second rig that is finalizing the mobilization in the southeast of the block, so we're going to be spotting our first world targeting the Ubaque formation in the southeast. That one is called Apterix. So September, October, we expect to have... spotting of that well. Overall, when we look at our exploration potential on the block, we keep being really encouraged. We have the seismic that we acquired that the teams are looking at additional prospects. We have some prospects that jointly we have already agreed with our partner to drill closer to the Indico Mariposa area. We got seismic in the north east of the block that late in the year, early next year, we will be acquiring. So that's a little bit of a flavor of where we're on CPO5, Alejandro.
spk00: Thank you for your questions, Alejandro. Our next question comes from Phil Skolnick with 8 Capital. Please proceed.
spk07: Yeah, thanks. Good morning. Just want to go back onto that question around 2023. You know, things do start to slow down in Colombia. Now, what does your permitting situation there look like today with respect to what you would need to carry out a program in next year?
spk04: Hey, Phil. This is Martin again. So, we have different buckets. The bucket of the things that were fully licensed, some of those include basically channel 34 and 32, which is mainly development, but some appraisal. Then we move to the fully licensed that is mainly exploration, and that's where CP05 is, Shanos 87, that we will be drilling our first wells soon in the next couple of months, and Shanos 94, all fully licensed. The next bucket, if you want to call it, is the almost complete license, and that's Shanos 124 and Shanos 123. And by almost complete, basically we have turned in all the documentation and in some cases we already got we're close to in the next months to get those approvals so that we can start drilling wells again channels 124 and 123 and finally we got the packet of the things that are later in time and on those there could be some delays we'll see and that's where we have Putumayo and some of the Shanos blocks that are on the west, 104 and 86, but that's kind of where we are on licensing of Shanos.
spk03: Technically, the core areas, the really core central areas are 100% fully licensed, and the next ones in line are almost fully licensed. So we're in very, very good shape.
spk07: Okay, perfect. Thank you.
spk00: Thank you for your questions. We now have a text question from Stefan Foucault from Anctus Advisors. How much net pay was encountered in the Conte Flamenco well?
spk04: Hey, Stefan. Preliminary logging results show that we have around 40 foot of pay in the Mirador Formation for Conte Flamenco.
spk00: Thank you. Stefan's second question. Since the official appointment of the new president of Columbia, have you seen any important announcements that would impact the business?
spk03: Yes, I think that was answered by Vero, and the biggest one is the tax reform that was announced yesterday. That is, in our view, the main measure that was taken that will definitely impact our business.
spk00: Thank you. And last question from Stefan. What is the current overall production?
spk04: Right now, our current production net geopark is between 39,000 and 40,000 barrels of oil equivalent per day.
spk00: Thank you. Our next question comes from Oriana Cobalt with Ballons. Please go ahead.
spk01: Hi, good morning. Thanks for taking my questions. I had three. If we could go one by one, that would be great. And the first one with regards to lifting costs, we observed a rise during the quarter compared with the previous one. Just curious on how much of that increased should be attributed to increased activities, and what are you seeing from inflationary dynamics, mitigating factors or alternatives that Geopark could take to prevent margins erosion?
spk04: Yeah. Hi, Oriana. This is Martin again. So overall, we're seeing about 5% to 10% increase on materials and services. where we see the highest increases on artificial leaves, so basically our pumps, between 15 to 20 percent. Overall, we're seeing about 10 percent. That was included in our budget, so we're within budget. When you look at the details, you might have seen in the report some increases, for example, in Chile where our OPEX went up for the quarter because we had pooling activities. to increase oil production. That is going to be gone by the next quarter. We have a successful campaign, and the pooling is not there anymore. In Ecuador, again, a brand-new block where the OPEX was not the main objective initially, but now that we have three wells from production with close to 3,000 barrels of oil equivalent per day, we're working really close with our partner to bring down those OPEX We have things that we have identified, and I'll give you a couple of examples. As we are contracting for our blocks, we're seeing that we were able to adjust better the contracts and get better prices. For example, on transporting of liquids in and out of the platforms, we're also looking into opportunities such as connecting to existing pipelines. This was intracampus, so there's a lot of infrastructure around and in channels who are on track on our production OPEX.
spk01: Perfect. That's very clear. Perhaps my second one more directly to the excess cash uses and given the recent dividend increase that you announced, maybe like where should we expect to see dividends heading in more broader terms or possible changes or perhaps a defined dividend policy? How should we think of this?
spk02: Thank you, Oriana. Good morning. We will continue to allocate our cash flows within a well-established set of priorities. Andres alluded to this. First and foremost, funder assets, and then this combination of deliverance and shareholder returns. To your specific point on dividends, as you may recall, We doubled our dividend last quarter, and we have now increased it by an additional 50% to be paying out $7.5 million per quarter. That accounts to on and about a 4% dividend yield. We see this as the base dividend, something that is sustainable, even in low oil price scenarios, but also that is scalable as our company continues to grow. So we will be looking at our dividend payments within our full shareholder return strategy and continue to keep improving our shareholder returns that we have had over the last few quarters.
spk01: Got it. And just one final one from me. Just picking up on the possibility of the flexibility and capital allocation due to perhaps a potential slowdown in the regulatory environment in Colombia, just curious, like, what other avenues you might be considering, given your presence in Ecuador, or maybe looking at new jurisdictions to start exploring?
spk02: Thank you, Arianna. As Martin described, right, we... The core of our assets, especially with Angina Basin, is either full licensed or about to be licensed to be able to, you know, for us to keep up with our activities in the remainder of the year, in the following year. But irrespective of how, you know, the different measures take place, the final forms, and how, you know, ups and downs in Colombia, but we're used to this, right, in every Latin American country. Conditions are very fluid and they change. We have always had a fund regional approach as we look at our portfolio. It is a key aspect of our business strategy and it will continue to be.
spk03: So we're always looking at diversification. As I think we've said many times, we probably became less regional than intended. So one of the challenges that we have is also to continue diversifying expanding that footprint outside Colombia. We have assets in our portfolio that we can accelerate, like refills in Ecuador and refills in Chile, but obviously that diversification now obviously becomes more relevant.
spk01: Perfect. Thanks again for taking my questions and congratulations for the quarter.
spk05: Thank you. Thank you.
spk00: Thank you for your questions. Our next question comes from Roman Rossi with Canaccord Genuity. Please proceed.
spk05: Good morning, and thanks for taking my question. So, I will ask them sequentially, if I may. The first one is following one of Oriana's questions. So, regarding the – you just amended the invention of the 27 notes, right? the restricted payment bucket. I want to understand what would be the maximum buyback we could expect from Geopark given these changes to the inventory.
spk02: Thank you, Roman. Good morning. Complementing the question that Johanna asked as well, we spoke about dividends and moving on to the buyback. We have had for some time a program to repurchase up to 10% of outstanding shares. We have been executing on that buyback. We paid out roughly $15 million this year, and five of those in July alone. So we expect to be able to sustain this pace at current market conditions and, of course, keep working, as I mentioned, on our overall shareholder return strategy, as we do always.
spk03: So we've accelerated the trend, and you should expect us to continue that acceleration, no?
spk05: Correct. Perfect. Thank you very much. And this one's probably for Martin. As you are finishing the transition in electricity generation status 34, I wanted to ask you how much OPEX is related to electricity generation, and if we should expect any significant reduction in operating expenses there.
spk04: Yeah, Ramon, no problem. About 40% of our OPEX in channels comes from a generation of electricity. So this is something that is big for us and is good. We expect around 10% of OPEX reduction due to the connection to Pell. And it could fluctuate depending on the price of electricity going forward. but it's about 10% what we expect. Perfect.
spk05: Thank you very much for that. And the last one has something to do with royalties. I wanted to understand, I know that high price costs will really depend on all the prices, but I wanted to understand how should we think about the X factor price part of these royalties going forward.
spk03: Sorry, Román, did you ask about the export tax? No, the ex-factor royalties. Sorry.
spk05: Yeah. Thank you, Román. You have three different... Oh, sorry, we have... Go ahead, please.
spk02: Sure. Thank you, Román. So in terms of royalties, and I think you're linking back to tax reform, the cash royalties are the 8%, right? There are other components of government take, such as the X factor that you mentioned, and those are different from block to block, right? Each EMP contract will have a different X factor. That's the way it has been in Colombia always, and those Contracts are fully executed and they're ongoing, and we don't expect any changes on the X factors on those contracts.
spk05: Okay. Thank you very much. Thank you and congratulations on the quarter. Thank you.
spk00: Thank you for your questions. There are currently no questions registered, so as a reminder, It is star 1 if you'd like to ask a question. There are no questions waiting at this time, so I'll pass the conference back over to Mr. Ocampo for any further remarks.
spk03: Thank you, everybody, for your interest and support of Geopark. We're always available to answer any questions that you may have. Please, we encourage you to visit us and our operations or call us anytime for more information you may need. Thank you and have a good day.
spk00: That concludes the call. Thank you for your participation. You may now disconnect your lines.
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