GeoPark Limited

Good morning and welcome to the Geopark Limited Conference Call. Following the results announcement for the third quarter ended September 30th 2022 and the 2023 Work Programme and Investment Guidelines. After the speaker's remarks there will be a question and answer session and 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 please press star 2. If you do not have a copy of the press release, it is available at the Invest with Us section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through the webcast with the Invest with Us section on the 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 statements but are not intended to represent a company's list of the company's business all financial figures included herein were prepared in accordance with the ifrs and are stated in the us dollars unless otherwise noted reserve figures corresponded to prms standards On the call today from Geopark is Andreas Ocampo, Chief Executive Officer Veronica Davila, Chief Financial Officer Augusto Zubigila, Chief Technical Officer Martin Tirado, Chief Operating Officer and Stacey Stiemel, Shareholder Value and Director. And now I'll turn the call over to Mr. Andreas Ocampo. So Mr. Ocampo, you may begin.

Good morning and thank you everyone for joining the call. We're connecting with our management team from Bogota, Colombia to report on our third quarter financial results and provide guidance about our expected 2023 work program and plan. During the third quarter, we invested $43 million to drill 11 wells and increase our oil and gas production by 8% compared to the same quarter last year. with a continued main focus on developing our core Janos 34 block and strong production growth coming from CP05, probably one of the fastest growing and most economic projects in the region. When Geopark purchased CP05, the block was producing just 8,000 barrels a day, and today production just tripled to over 24,000 barrels a day with net bucks of approximately $50 per barrel. We continued accelerating our drilling activity with 13 rigs active across our assets, a new company record. This is about 62% higher than last year. Congratulations to the Geopark team, particularly those in the field, for developing another quarter of record results and maintaining such an intense level of activity while keeping our people safe, our emissions under control, and our operations as low cost and efficient as possible. Our production base generated strong cash flow from operations, over 140 million, which more than doubled the same quarter last year. We generated more than $3 per barrel in adjusted EBITDA for every dollar that we invested, an outstanding capital efficiency. Revenues were up 48%, adjusted EBITDA was up 63%, and we had record net profits of 73 million, which is $1.2 per share during the quarter. As we usually mentioned, following the funding of our investment program, we have allocated significant capital to our balance sheet strengthening and our shareholder value returns initiatives. During the third quarter, we fully redeemed our 2024 notes for 67 million, totaling a gross debt reduction of $170 million since January this year. Geopark ended the quarter with comfortable net leverage of 0.8 times well below our long-term target range of one to one and a half times adjusted EBITDA. Our cash position at the end of the quarter remained at about $93 million. We continued our base dividend program as well as our discretionary share buyback. Geopark paid 13 cents per share in dividends, which analyzed represents nearly a 4% dividend yield and has completed its share buyback for a total of $30 million in the last 12 months, which is over 3% of total shares purchased. And we have also announced that we will do more in 2023. Our teams are busy executing our ambitious and aggressive 2022 work program, which will continue full speed during the next year as well. We currently have six rigs in Janus 34, two rigs in CP05 during the IndyCo7 development well and which will be followed by further development and exploration wells. One rig in Janus 87 currently drilling the first wells there. One rig in Janus 94, one rig in Platanillo, and another one in Oriente Basin in Ecuador. As we announce this phase of activity, we'll continue non-stop over and into 2023 with our self-funded work program. We're planning to drill 50 to 55 wells with approximately 10 to 15 exploration and abrasal wells for a total CAPEX program of 200 to 220 million dollars with 35% of these CAPEX allocated to exploration. As anticipated previously, all of our environmental licenses for 2023 program have been obtained. As always, our work program is flexible and can be adjusted up or down based on drilling results and oil prices, and in this particular year, it will also be depending on final outcome of the tax reform in Colombia that is currently underway. We are estimating an annual average production between 39.5 to 41.5 hundred barrels per day, not including any production from exploration efforts, which would generate over half a billion dollars in adjusted EBITDA at 80 to 90 dollars per After fully funding our base and growth work program, we will continue strengthening our balance sheet as well as returning value to our shareholders. We announced yesterday our intention to deliver approximately 40 to 50% of our free cash flow after taxes back to shareholders through a combination of our base dividends, share buybacks, and all variable or extraordinary dividends. We continue to make progress towards our aggressive emission reduction plan to reduce scope one and two greenhouse gas emissions intensity by 35 to 40% in 2025 or sooner. We expect to have our solar park fully operational before the end of this quarter, which complements the connection to the national electric grid that was fully completed in July. Additional investments were included in our 2023 work program to connect more geopark operated blocks to the national grid improving the reliability of our source of energy, and helping us reduce further our emissions and environmental footprint. We look forward to reporting the results of these activities in the upcoming quarters, and we thank you for your participation. We also please invite you to come down and visit us in our operations, and now also to visit our new and updated website, which was launched in October this year. And now we would be happy to answer any questions. Thank you.

Thank you. If you would like to ask a question, please press Start, then 1 on your telephone keypad now. We have our first question from Daniel Garriera of BTG. Please go ahead when you're ready.

Hi, good morning, Andres. I have a couple of questions for my end. I wanted to know if you can share with us more details on the expected impacts of the recently approved tax reform in both chambers. I know the final text is still in reconciliation process, but the likelihood, you know, that the final tax regarding the taxes on the oil sector, the likelihood that it's going to change is very low. So I wanted to know if you can share with us some high-level numbers. I saw that in your 2023 working program, you included a very significant increase in cash taxes for 2023. So I'm wondering, you know, if you can provide some color on this. So that's my first question. And my second question is also related to the 2023 working program in terms of production. And I wanted to know if you can share with us more details on the guidance, not only by country, which is already, you know, in the filings, but also by field, specifically, you know, between Janus 34 and CP05. As I'm seeing, you know, that most of the growth for 2023 will basically come from Colombia, which is expected to fully offset the declining production coming from Brazil and Chile. So those are my two questions for the time being.

Thank you, Daniel. Good morning. To your first question, and as you well mentioned, the tax reform was recently approved by Congress and is in reconciliation. So there is still significant uncertainties in regards to the exact applicability of the law that will be instrumented by decree and other regulations in the upcoming weeks. We did provide, as you mentioned in our releases yesterday, our estimation in terms of the potential impact of the reform. What is important to highlight there is in the numbers that you see in the release, we are including both the impact of the non-deductibility of royalties portion and the impact of the surcharge, right? The surcharge, of course, is going to be varying in that guidance because it's linked to prices. It goes from 0% in the guidance, going to be 5% at the lower end, and 15% at the higher end. And what we've done, to be fully transparent, is to include that impact fully, the impact of the reform, our estimated impact, fully into that 2023 guidelines irrespective of when it becomes a cash impact, which could be during 2023 or into early 2024. We will continue to follow the process of the reform, and hopefully we'll be getting more information that we can share with all of you as it becomes clearer.

Daniel, this is Martin Terrado. I'll go to your second question around 2023 production and the breakout. So as we already announced, our guideline again is 39,500 barrels, 1,000 barrels of oil equivalent per day to 41,500. In Colombia, it's about a 5% increase. And when you look at the assets in Colombia, CPO5, we're expecting a 10% production increase average year-to-year. In channels 34, we're expecting a 2% to 5% increase, and platanillo, a decline. When we move to Ecuador, between both blocks, Perico and Espejo, we will go from around 800 barrels of oil equivalent average that we're having in 2022 to the order of 1300 to 1500. And in Chile and Brazil, we're going to be expecting a declining of the fields of the order of 20%. All of these numbers do not include any production associated to exploration that 35% of our capex that Andres mentioned.

Thank you, Veronica and Martin. If I may just do a follow-up on... what you just mentioned, Martin, that this guidance is not including, you know, the CAPEX that is expected to be deployed in exploration. Can you share with us, you know, what are you targeting, you know, with these exploratory CAPEX? And what could be the upside scenario in order to these guidance in case you're successful in your exploratory campaign?

Yes. So, again, like we said in our guidance, it's about 10 to 15 exploration wells. Our gross unrisked mean resource is in the order of around 150 million barrels that we're expecting to be investigating. The wells are going to be drilled in the blocks that we have in Shannon's exploration that we call, so it's Shannon's 123 block. 124 block and 87. Then we're going to be also drilling in CP05. In Putumacho, we're finishing right now, we're drilling an exploration well, so we'll see how the results turn out in that one. And in Oriente, we will have appraisal wells, and at the same time, also some appraisals in Chanos 34. And Andres here, Daniel,

So we think there's upside, obviously, associated with this exploration in terms of production. But as you know, we usually don't give a guidance associated to that because of the risk associated to it. So it's better not to give numbers for us. We'd rather be a little conservative, we know. But the volume that we're tapping, as Martin said, is pretty significant. It's 150 million of gross and risk-mean resources. So it's an attractive program. And hopefully, we'll provide upside to our production guidance during the year. And if it does, then we may revise it as we get results, hopefully.

Thank you. We now have our next question from Alejandro de Micheles from Now Securities. Please go ahead when you're ready.

Hi, Andres, Veronica, and Tim. Thank you for taking my questions. Two questions, if I may. First one as a follow-up on the production side of things. Can you give us some kind of order of magnitude how much more volumes can you expect from CPO5 with the resources that you already have? And then as a small kind of follow-up from there, when you gave us our five-year plan to 2026, you indicated 10% per annum growth in production, assuming both your existing fields plus exploration. With the guidance that now we have for 2023, are we more reliant on the exploration upside to get to those numbers than we were before?

So Alejandro, hi, Martin here.

I'll touch on the CPO5 question. So we started the year, and on the second quarter, our production was around 20,300 barrels, all equivalent gross. In the third quarter, we had some production going down because of blockages, and we were at around 19,000. Today, we're around 24,000. The production that we have includes the production from the Indigo 6 well that we announced the results. And they are producing right now with a choke more than 4,000 barrels of oil per day, no water. And as we're speaking, we're drilling the Indigo 7 well, the development well. So that's going to increase our production by the end of the year and we expect that to be kind of how we start 2023. For next year in CP05, we have one additional development well and further exploration wells that, again, that production is not accounted because it's exploration.

And then with respect to your comment about the five-year... Sorry. Sorry. No, no. Follow up the question, please.

Yeah, yeah. But with what you have and the development wells that you're planning for... for the next few months. Is Indyco a 30,000 barrel field? Is Indyco a 60,000 barrel field?

Sorry, so there's two more wells, as Martin said.

There's two more development wells coming. One is Indyco 7 that is being drilled right now, and it's going to come on stream early next year. And then another development well planned for next year program And the volumes are in the range of what we have been expecting, so what we've been releasing. So it's not a 60,000 barrels a day field. It's more in the area of 30,000 barrels a day field range. Okay, that's clear. Thank you.

Thank you.

Then with respect to... No, sorry. Sorry, operator. I think Alejandro had a second question about the five-year plan and how it ties in with our 2023 World Program. So, as you mentioned, Alejandro, the five-year plan has a 10% CAGR per year, and that includes all the exploration activity that we're planning to do in that five-year plan, which is going to be quite active. It is an order of magnitude range that we gave to more or less, you know, show what is it that we're shooting for in the medium-term plan. Every year, we announce our work program. On that more specific activity, we usually don't give this guidance on exploration, and we will be releasing the results as they come in. But I can confirm that it's largely in line with what is is expected in that five-year plan. What we're announcing and what we're doing this year is pretty much what we had in mind when we were setting out that five-year plan.

Thank you. Your next question comes from Phil Skolnick of 8 Capital. Please go ahead when you're ready.

Yeah, thanks. Good morning. Just further on to the five-year plan, in light of the Columbia tax reform, you know, making you think a little bit differently about it, you know, with respect to, you know, trying to maybe push capital outside a little bit more of Columbia or maybe even diversify more to transact outside.

Hi, Phil. Thanks very much. That's a very good question. We try to include as much detail as we can in the release with respect to the imminent impact of this tax reform, which, as you can see, is quite significant. And probably the numbers may be a little conservative, but we'd rather be that way and not the other way. How it impacts the five-year plan is still to be seen. We're still working on filtering through this new tax reform, our entire portfolio. But again, we're going to see over the course of the years and according to the results whether we need to adjust our investments depending on the final impact. As you know also, the impact of the reform is largely dependent on oil prices. So what oil prices that in the range of $60 is much less significant than it is at current prices. So it's hard to predict today how much is going to impact our five-year plan. But with respect to your point about diversification, that is something that we've always been in the DNA of the company and that is something that we've always strived for, which is to have a diversified asset base in different basins and in different countries. So that is something that we continue to explore and it's something that we obviously continue to have in the center of our business model, to continue building a diversified portfolio of assets throughout different basins and countries in the regions.

Okay, thanks. Just one follow-up question. With respect to your exploration program, on the upside that it could provide to your guidance, how soon could something like that possibly happen?

Right now, we're actively drilling four or five exploration wells at this time, and that will continue. In most places, it's almost back-to-back. So, I don't know, Martin, if you want to give the details on which ones they are, but...

So Phil, this is Martin. Out of the eight rigs that we have drilling, we're drilling about half of those are drilling exploration wells. In Shannon's exploration asset that we call it, we have block Shannon's 87. We're drilling right now the well Todoroi, our first exploration well on that block. And we expect by the last part of November to reach total depth. All of the exploration wells that we drill, we have set up contracts and we're ready to complete and put the wells on early production testing. So that production, if the wells are successful, will be coming in by December. When we move to Platanillo, in Platanillo, in Putumayo Basin, we're drilling right now the Libellula well. So about 30 more days to get to TV and complete that well. When we moved to Oriente in Ecuador, in the Espejo block, we're testing right now and completing, doing completion tests on the Pachuri well that we announced that we reached TV. And they were at the same time, the rate is drilling the Caracara well. That one in the order of around 30 to 40 more days. And the non-operated were testing the Umea well in channels 94. So you can see that plenty of activity and exploration as we speak. And we're keeping all of these rigs as we move into the first half of next year. And the mix is probably going to be similar, okay? half of the wells we'll be drilling in the first half of the year would be, from a rig perspective, would be exploration wells. They take longer, so it doesn't mean half of the wells, but the rigs would be drilling exploration wells. Great, thank you.

Thank you. We now have a question from Roman Rossi of Canaccord. Please go ahead when you're ready.

Good morning and thanks for taking my questions. So the first question is regarding CapEx for 2022. So right now you have an accumulated $115 million. So in order to reach the lower end of your guidance for the year, you would need to deploy $85 million in the fourth quarter. This seems a bit aggressive compared to historical standards. So, can you please give us a call on how you're expecting to deploy this cash?

Hi, Roman.

This is Martin again. And so, the guideline that we have, like you said, is from 200 million to 220 net. Then the first nine months was 115 million in October. a month that we're already finished. We have spent $25 million, and this is mainly due to the more activity. If we look back a year ago, we had only eight rigs running. We have 13 now. So we expect to be on the lower range of that $200 to $220, but we're confident that we're going to be around $200 to $220 on the low range. Perfect. Thank you.

And so this is probably for you, Martin, again. We saw some impacts regarding blockage in Colombia during the third quarter, and you also mentioned some blockage during October. So can you give some color on in which blocks and what were the causes of this blockage?

Yeah, absolutely, Roman. So I want to start by saying that as we speak, we have no blockages in any of our operations. and all the production is normalized. Now we are seeing a change in the context. If we look back in 2016 is when national-wide there was the least amount of blockages, around 270. And we look at the full year that finished in 2021, there were like 770. So the number of blockages have been increasing in Colombia for the past years. We in channels we had not suffered any for several years and the first one that we suffered as Geopark were in 2020 in the Putumayo blockages that we have most of them were related to illegal crops and but lately we have seen some uprising requests okay so in the third quarter of this year, we had about 38 days of platanitio production down, 10 days of production down in CPO5. So that on production, it means around 1,100 to 1,200 barrels of oil per day average that we had shot in. In the fourth quarter, we had production shot in in channels 34, about 200 to 250 barrels of oil per day, average for for the quarter that we're running right now. That's what we're expecting. And again, we continue having very constructive dialogue with the neighbors, with the national and the regional authorities in Casanare for the channels request. Many of these requests come considering that we have three of the top 10 fields in Colombia, Hacana, Tigana, And Indico, sometimes when they're general national requests, they go to the big assets. So they're not things that are related directly to our company.

Yes, this last point is important. This is something that we've seen generalized. I mean, when we had blockades more recently, we've also seen most companies also being stopped for quite some time.

Perfect, thank you. And maybe the last question is regarding production costs. So we saw that production costs were almost 15% down quarter over quarter. So just wanted to understand if this is related to current depreciation and what do we expect going forward?

Thank you, Roman. Good morning. So for 2022, In terms of operating costs, we expect to be as well in the lower edge of that range. We were targeting $8 to $8.50 per BOE. I think that's a result of the strong effort of our team in terms of cost efficiency in a high inflation context and also some impact of the local currency devaluations. What you see particularly in the third quarter, it's transitory, right? It relates to the impact of lower sales in platanillo, which are a combination of, as Martin mentioned, but as well, platanillo, remember, platanillo sales will vary according to the loading programs out of the Ecuadorian port, right? We sell platanillo barrels through Ecuador. And those are seaborne. So you will see that from time to time you get inventory accumulation and then the sales. And given that's a higher OPEX for BOE assets, that can change, give you some fluctuation in the overall. Looking into 2023, we will continue our efforts in terms of keeping our costs down and our efficiencies. And we expect to have a year of between $8 and $9 per VOE for 2023. That's included in our guidance.

Perfect. Thank you very much.

Thank you. We now have a text question from Stefan Frucard from Octus Advisors saying, good morning, all. There is a lot of drilling and appraisal activities in Ecuador in 2023. In a success case, where would you see the asset base in Ecuador at YE23 and what production and how much reserves?

Hi, Stefana. This is Suby. So in Ecuador, we had great results in 2022. So we started the year with no production. And so far we had three discoveries in the Perico block and a gross production now around 3,000 barrels of oil per day. So in the other block, the Espejo block, as Martin mentioned before, we are in the completion process of the Pachuri well, and now the well is under testing. So going to your question, which is the plan an activity for 2023. In the Perico block, we plan to drill three appraisal wells. With those wells, we will define volume, size, and structures of the discovery of 2022. In the Espejo block, after Paschuri well, we will drill, as Manti mentioned also, the second exploration well, which is the Karakara well. So then, subject to the results of those wells, We will decide with the partner if we will drill more appraisal of recreational wells in the block this year.

Yeah, and just to follow up on Suvi, we keep learning from these wells. We're very encouraged on how things are turning in Ecuador. Now we're working on optimizing the costs, and there's a big round coming up called Intracampus 2 that we will be participating as well.

Thank you.

We now have the next text question from Miguel Ospina from Compass Group asking, could you give us some details on what you plan to do with the excess cash you are not planning to distribute as dividends, buybacks? Thanks.

Thank you, Miguel. Good morning. Thank you for your question. As we mentioned in a release yesterday, we will be continuing to increase our allocation to shareholder returns by allocating between 40% and 50% of our free cash flows over the next year. To your particular point, the excess, after we've done, of course, what we need to do is fund our assets, and then what we'll announce in terms of shareholder returns will allow for a combination of cash build And also opportunistic further leverage. Andres mentioned already, you know, we're very comfortable leverage in terms of net debt to a bit of 0.8, but we could consider further leverage in 2023.

I would like to hand it back to our CEO, Mr. Andres Ocupano, for some closing remarks.

Thank you, everybody, for your continued interest and support of Geopark. We're always available to answer any questions that you may have, so please call us anytime for more information. Thank you and have a good day.

Thank you for joining today's call. You may now disconnect your lines and have a lovely day.