GeoPark Limited

Good morning and welcome to the Geopark Limited conference call following the results announcement for the second quarter ended June 30th, 2023. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question at this time, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, press star two. 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 this webcast in the Invest With Us 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 Reforms 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 US dollars unless otherwise noted. Results figures correspond to PRMS standards. On the call today from Geopark is Andres Ocampo, Chief Executive Officer, Veronica Davila, Chief Financial Officer, Augusto Zubalaga, Chief Technical Officer, Martin Tirado, Chief Operating Officer, and Stacey Stiemel, Shareholder Value Director. And now I'll turn the call over to Mr. Andres Acampo. Mr. Acampo, you may begin.

Good morning, everyone, and welcome to our second quarter results call. We're joining with our team here in Bogota, Colombia. We're advancing on a drilling program which is already delivering results. We drilled ten wells in the second quarter and have a busy schedule ahead of us, with ten rigs now in operation and two more coming this quarter. Our horizontal well drilling campaign in the Mirador Formation in the Janus 34 block is moving ahead full speed, with two wells already completed and on production and the third one already spotted and about 30 days from reaching TD. These are some of the highest capital return projects in our company. The first horizontal well has already been paid off in approximately three and a half months and continues producing over 2,000 barrels of oil per day. Our team is quickly taking advantage of the multiple wells campaign and applying new cost efficiencies to the next ones. The second well was drilled faster with 10% lower drilling costs and 32% longer lateral length. We expect to continue pushing these costs down to improve our payback and capital returns even more. Our exploration team has also delivered a new discovery in the Janos base in Acreage that had been acquired during the 2019 bid round. Saltabor I, our first well of the Janos 123 block, is producing approximately 880 barrels per day with 5% water. In Ecuador, the GENE2 development well in the Perico block has encountered a new phase zone in the USAND formation, in addition to confirming its development potential in the OGENE formation. Therefore, we expect to test this new zone before the end of this month. In the CPO5 block, where our production has been down on the back of two very productive wells being shut in, the operator has advanced and completed most of the works requested by the ANH, and anticipates that it will have the two wells back online before the end of the month. They also expect to spot the Alcon-1 exploration well in September, which could test the potential continuity of the Hakana plate into the CPO5 block. Following Alcon, the operator expects to drill another development well on the Indico field before the end of 2023. Geopark continues to invest in our decarbonization efforts, by installing a new photovoltaic solar power system in the OVA pipeline from our Platanillo block, which will help reduce our emissions and introduce efficiency gains by lowering energy and maintenance costs. We reinforced and extended our sustainability reporting with new submissions to the Carbon Disclosure Project, CDP, in both water and climate. These initiatives assess our ESG management performance and disclosures. Despite production being behind its full potential, Geopark continued to record strong financial results in the quarter with revenues of $182 million and adjusted EBITDA of 104 million, representing an adjusted EBITDA margin of 57% and profits of nearly 34 million or 59 cents per share. We invested $43 million during the quarter and generated $2.4 in adjusted EBITDA for each dollar invested, proof of Geopark's capital discipline and the quality of our assets. Additionally, the return on capital employed over the last 12 months reached 51%. Our financial expenses dropped by almost one-third to $11 million in the quarter following our debt reduction of $275 million during the last two years. After paying $88 million in cash taxes in the second quarter and returning almost $19 million to our shareholders through dividends and buybacks, we ended the period with more than $86 million in cash. Also, we completed a new $80 million unsecured committed credit facility for the next two years. Over the rest of this year, we will continue at full speed on our drilling program, adding more rigs and accelerating our activities. With 20 to 25 gross wells, we are targeting short-cycle exploration and development projects, including new horizontal wells in our core Janos 34 block, exploration drilling in the CP05 block, the continued development of the prolific Indico field, and more exploration drilling in our operated Janos acreage, as well as our oriented basin acreage. In our two eastern Janos blocks adjacent to CP05, we have started preliminary activities to acquire over 650 square kilometers of 3D seismic, one of the largest 3D seismic onshore campaigns in the history of Colombia, and will significantly expand our exploration portfolio and inventory. We look forward to reporting to you the results of these activities. And we will now take any questions you may have. Thank you.

As a reminder, if you'd like to register a question, please press star followed by 1 on your telephone keypad. We have a question from Alejandro Demichelis of Jefferies. Alejandro, the line is yours.

Good morning, guys. Thank you very much for taking my question. Couple of questions, please. First one is, maybe you can walk us through the building blocks of the second half of the year to get to your production guidance, the 38 to 40,000. And then the second question is, how do you see the potential size of your new discovery on block Janos 1, 2, 3, please?

Good morning, Alejandro. This is Martin Terrado.

Thanks for your question. In regards to the building blocks to making the guideline on production, it would largely depend on Indigo Wells getting back on production. We have been working closely with the operator on these two wells. From the last call that we had, all the civil works have been completed. That included building concrete dikes. and work is going on related to the flow lines that need to be welded flow lines. So the operator has communicated to us that they will have that ready to go by the end of this month and the National Hydrocarbon Agency has told them that with that they will allow those two wells to be back on production. Those two wells have a gross production of 8,000 barrels of potential. So that's about 2,400 barrels net to geopark that we're expecting. As we're building, like you said, the blocks on the next quarters, for the quarter number three, we're expecting partial contribution from those two wells because it will not be fully on stream for the whole quarter, but they will be fully on stream for the last quarter. So that's a big contribution that we're expecting. The second one is related to our performance in the channel 34 block. For that block, we expect increased production compared to the first half of the year, and that is mainly due to two things. The first one is our continuous production on horizontal drilling, and the second one is we expect the second half of the year to have better downtime. We had a about 7% downtime the first half of the year and we're expecting around 5%. So those are the two main blocks that we expect to be contributing so that we can make our third quarter average of around 38,500 barrels and the last quarter of 40,800 barrels. And we expect the exit rate to be between 40 and 41,000 barrels of oil production equivalent. This assumes that we don't have big disruptions in our channels 34, and as always, it does not include additional production from exploration wells.

So with that, Alejandro and Andres here, just to add to what Martin said, obviously with these numbers, roughly on the third quarter, close to $38,000, $39,000, and $40,000, $41,000 in the fourth quarter. That would put us closer to the lower end of the range rather than the midpoint or the higher range. But we still believe that if the operator delivers on the putting back those two wells online before the end of this month, that's where we should be. Thank you.

Hola. Hello, Alejandro. You answered about the Yano 1, 2, 3, right? The Saltador, the Saltador discovery. So just to give you more context about the Saltador, the Saltador exploration well is located on a block west to Yano 34. That block was acquired in 2019 A&H bidding round. So talking about more technical things, the main concept was to test the structure of fault, the closure hanging wall, We did find hydrocarbons in Barco Guadalupe formation with 29 feet of oil net pay. Today, the well is testing around 900 barrels of oil per day, 5% water cut. So the testing will provide more information of volumes, reserves, and future developments. But in addition to that, the discovery of Saltador may extend another prospect to the south that is called Visvita. that could add more reserves. It's not decided yet, but clearly there is this prospect that we could build it at the end of this year or early 2024. Okay.

That's great. Thank you.

Our next question comes from Oriana Covalt of BALANS. Oriana, the line is yours.

Hi, this is Serena Colwood with Balance. Thanks for taking my questions. I had a brief follow-up with regards to the triggers for production, the second half, and then I had a couple more if you could go one by one. So just... I wanted to confirm, where are you seeing production? I think you mentioned 8,000 barrels per day of gross production potential for each Indigo 5 and Indigo 6 once they come back online. So just curious how long or how fast are you expecting for production out of these blocks to come back to level seen before the shutdown during the most part of the year, of this year?

Hi, Oriana. Thanks for your question. This is Martin Terrado. And current production for the CPO5 block is in the order of 17,500 barrels of oil per day. If we compare to where we were a year ago, a year ago without Indigo 6 and 7, we were probably around 18,500. That decline that you see is mainly in mariposas. The water has encroached in that well. the indigo field is producing flat production. So, on top of the 17,500 gross, we will be getting, again, the 8,000 barrels from both Indigo 6 and Indigo 7 production. These are flowing wells that have been tested, and as soon as we get the green light from the National Hydrocarbon Agency, they will be contributing to the overall block production.

So the expectation from the operator is to have those two back before the end of this month. So the full production of the block should be on a gross basis back to over 25,000, hopefully in September or before the end of this month.

Perfect. Thank you, Martin and Andres. Just keeping up with the CAPEX and the exploration side of the business, just wondering, in terms of the seismic acquisition that you're guiding for second half, and it seems to be a very encouraging project from your end, so what are you targeting? What's the key areas? And what would be the main, how much of your CAPEX budgeted for exploration would this seismic acquisition take up?

Thank you, Oriana.

So I'll go a little bit about the more ops part, and then I'll let Sui go over what we're seeing on prospects. But this is premium acreage. It is east of the CP05. And like Andres mentioned, it's 650 square kilometers that we're going to be acquiring. And we were looking at, OK, historically in Colombia, what that means, it will be the third biggest acquisition. So where we are today, all the permits have been granted. All the socialization has been done. And right now, we're starting all the things that is related to building the camp so that we can start topography. After that is drilling the wells to do the explosives. And acquisition will start in December of this year. It will take about two months to finish the acquisition. Then comes processing. And after that, of course, building the paths and drilling the wells for those locations that the prospects that we expect to have. So that's a little bit on where we are from our operations perspective. From a capital perspective, this seismic, it's already in our budget. And one of the things that we were able to do is we got this seismic cheaper than expected so we're acquiring seismic for even more than what is our commitment so that's a little bit on on the operations perspective that that we have on from a blocks and the commitments on these two blocks we only have one well commitment in each of the wells and so we're sure that we're gonna we're gonna find prospects to drill there and also if you got

Yeah, beyond the commitment that Martin mentioned, we really believe that those blocks that we have there in the premium acreage, like Martin mentioned before, these blocks are located to the east of CPO5, near to important fields, for example, Caracara, and also we have Porto Gaitan inside also the block. So the team also defined several leads that after the seismic, I'm sure that we're going to have new prospects and exploration opportunities.

So the objective of this 3D seismic effectively is to expand our exploration inventory and portfolio. So the idea of acquiring 3D seismic in such a large portion of this part of the basin is to find and identify our technical team to identify more prospectivity. And you asked about how much of the CAPEX was allocated to this seismic. As Martin said, it's already within or CAPEX guidance, and is roughly, at our working interest, roughly $20 million.

Perfect. Thank you very much. That was very clear. And just one final one. Going through your filings, it seems that the VDA guidance using that same $80 to $90 per barrel was revised slightly downwards at the midpoint. So I just wanted to know if you could share perhaps more insights on what are the key drivers for this guidance revision in terms of water discounts, even though we've seen some tightening recently, and or where are you seeing OPEX costs, like total OPEX per barrel through the remainder of the year, and that would be very helpful. Thank you.

Thank you, Oriana. Good morning. Veronica here. As you mentioned, we have revised, adjusted our expected 2023 EBITDA range by about $40 million. Half of that is already realized impact during the first half from lower Brent prices and also wider Vasconia differentials that you mentioned. Going forward in terms of the differentials, We really don't expect further widening. We continue to use $4 to $5 for the remainder of the year. It's now pricing $3.50, but we would expect that to revert to $4 to $5 range, as I mentioned. The other half of the adjustment is related to higher OPEX. We have already been impacted by this in the first half, and that's taken us to expect higher OPEX for the full year, ranging between $10 and $11 per barrel on a consolidated basis. The drivers for this increase in OPEX are twofold. On the one side, we have appreciation of the currency in Colombia, which affects about 70% of our OPEX at its local currency denominated, and also higher energy prices that really come from weather-related effects from the El Nino weather patterns in Colombia with a power grid that is mostly hydroelectric. As you see, these are mainly external factors. Our team will continue to focus on finding cost efficiencies and initiatives going forward.

Thank you very much, Veronica, and the rest of the team. That would be all from my side.

Thank you, Adriana. Next up, we've received some text questions. Our first one asks from Stefan Focard of Octus. Good morning to all. One question for me on YIN2, Ecuador. 40 net pay in a new formation looks good. How material is it? What are the implications for production and development of the asset?

Hi, Stefan. Good morning. Yes, we are really happy with the result of this well. The plan was to develop the OGIN formation and investigate the potential upside to the USAND. The OGIN formation resulted with good hydrocarbon saturation and thickness, similar to the Jandaya and Jean Wells, with a 25 feet net pay. The USAND found about 40 feet of net pay, as you mentioned. So according to our team and in line with our partner, we are going to complete the USAND because it has very reservoir conditions. With this initiative, we will understand how the whale behaves and which is the volume found for future development. We have also analogies of near fields that is called , where this sands, the initial production could be between 900 to 1,300 barrels of oil per day. Again, we're really happy with the results, and we will test in this well very soon.

It's important to mention that these are the analogs, and this is information that our team uses to complete the wells and test them. The reality is that we have a good logging indication right now, and we will know a lot better once the well is tested.

Our next question comes from Roman Rossi of Canaccord. Morning, and thanks for taking my questions. I have a couple if I may. First, I would like to understand if the horizontal drilling was part of your original 2023 campaign, and what's the estimated cost for each well? Second, can you give us more color on the derivatives loss, and what's the strategy going forward? And then finally, do you have any FX hedges

Thank you, Roman. This is Martin again.

I'll cover the question around the horizontal well. So when we put together our budget, the horizontal drilling was a pilot with follow-up wells. So with very good results compared to what we were expecting, basically delivering the expectations of the pilot well, we adjusted our program, and we're now going under our third well. I'll share with you a little bit of the numbers on estimated cost and performance. But the first well was drilled at around $11 million. When we went to the second well, we drilled it with a longer length at around 10% cheaper, so at $10 million. And right now, we're drilling our third well. We expect to be drilling that well around $9.5 million. And we're going for about three times the length of the first horizontal well. So in short, we have adjusted our program as we have expected pending pilot results of the first well. And we expect to have about five to six wells by the end of the year. All of these wells are targeting the Mirador Formation, which has an original loading place of around 100 million barrels. And we're looking at other opportunities within the Janos block in other formations, but also outside of the Janos 34 in places like Platanitio. Efficiencies that we continue to work on, again, we're drilling our third well, but our first well, Andres mentioned a little bit, drill the first well at 46 days, the second one at 40 days, and even though we are drilling longer horizontal sections. And of course that we are learning and investigating what else we can do on the completion side. So very excited about the results and we will continue on our journey on horizontal wells.

Good morning, Roman, and this is Veronica, on your questions on derivatives. So we continue to apply our hedging strategy for crude prices, looking to protect the crude downside. We've done this consistently over the past years. There have been no cash impact from the hedges year to date. As you know, the prices have remained between the floors and the ceilings. So no gains or losses from those contracts on the year to date. We did experience some of those losses in last year that maybe you were alluding to. And in terms of the FX hedges, we've executed a few FX hedges looking to protect the income tax payments that happened in the second quarter of the year. Those transactions recorded about $3 million of gain year to date and we'll look at other opportunities to enter in this type of transactions as we see fit going forward.

Our next question comes from Daniel Guardiola of BTG. Daniel, the line is yours.

Thank you. Good morning, Andreas and Veronica. I joined the call a little bit late, so I don't know if if some of my questions were already answered during the presentation. But first of all, I would like to touch on reserves addition. Basically considering that this area has been one that the company has been struggling at adding reserves or fully replacing reserves in the last couple of years. I wanted to know if you can share with us, for you guys, what are the most promising exploratory projects you are currently working on And what is your expectation in terms of research addition for 2023? So that's my first question. If you want, we can go one by one.

Okay. Hi, Daniel. Good morning. Andres here. So we are, I would say, in the second half of the year, we have accelerated the exploration activity. We've already reported today the result of Saltador, and the encouraging logging information that we have on Gene. And then we also provided a list of all the prospects that we're drilling on the second half of the year. I think there's some interesting prospects that we're going to be testing. We usually don't give guidance on reserves, so it's really too early for us to be saying anything about our potential reserve replacement for this year. It will largely depend on the results on the two wells that we are testing right now and on the six or seven wells that we're going to be drilling from now until the end of the year. So, you know, again, we don't usually give guidance on research because that also largely depends on the Euler and McNaughton's or the certificator's view on the discoveries.

Understood, understood. My second one was regarding the easiness of operating in Colombia. I mean, it's been already a year since Petro was running here in Colombia, and I wanted to know your thoughts. I want to know if you have perceived any material change with respect to the process of environmental licensing and the procurement of getting a social license to operate. I mean, I wanted to know if Is it getting more difficult to operate in Colombia or is business as usual?

Thank you. Andres here again, Daniel. I think it has changed a little bit in different locations. So as Martin mentioned, we experienced some downtime in the Casanare area, for example, in the Llanos Basin, which in the past we hadn't experienced any. And for example, in the Putumayo area, where historically has been a more conflicted place of the country, so far this year we haven't experienced any disruptions or any blockades or things like that. So I think, I wouldn't say it has dramatically changed or it has become a lot more difficult for companies to operate in the country, at least in the areas where we operate. That is not a significant change. There have been some changes, but not really a very significant change. Compared to other countries, we still believe Colombia is one of the best regions in Latin America for oil companies to prosper and to develop and execute their projects. We're obviously investing more time and efforts on making sure that we maximize the relationship with our neighbors. But again, I wouldn't say that this is Colombia-specific. I think these changes are just ongoing, happening in many places at the same time. Recently, as an example, we have a project in the Putumayo area, the PUT8 project, the one that has the Bienparado prospect is one of the best prospects that we have in our portfolio. And we completed a public audience where all the communities participated. That's fully public. It's even listed on YouTube. And you can see the type of relationships and communications that we are developing with all these stakeholders. So I think that is going well. We're pending the final approval by the environmental authority. We're still within the expected timeline. So I also couldn't say that there has been delays or obstacles from any of these regulatory bodies, really.

Thank you, Andres. And just the last one for my end, a very high-level question maybe for you, Andres. In your view, what are the main challenges and opportunities that the company is facing right now?

Well, I can tell you the biggest challenge that we have today is bringing those two wells back online. That's obviously the top priority for the entire company and for myself. I know you're asking a more strategic question, but I wake up every morning just thinking of those two wells. Be sure that the entire team is fully committed to bringing those back online very fast. Then, beyond that, I think bringing the company back on the growth path, I think it's fair to say that we've been producing 40,000 barrels a day roughly over the last two years. That's a comfortable place that we don't feel comfortable at. We're bound to be a much bigger player and a much more relevant player. You know, really delivering results on our exploration campaign and making sure that we bring the company back to its growth trajectory. That's probably the biggest challenge and opportunity that we have today.

Thank you very much, Andres.

Thank you, Daniel.

With that, I'll hand back to CEO Andres Acampo for closing remarks.

Thank you, everybody, for your interest and your support of our company. We're always here to answer any questions you may have, and we encourage you to visit us in our fields and our operations, or call us any time for further information. So thank you, and have a good day.

Thank you. This concludes today's call. Thank you for joining. You may now disconnect your lines.