GeoPark Limited

Good morning and welcome to the Geopark Limited conference call. Following the results announcement for the first quarter ended March 31, 2024, 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 followed by one on your telephone keypad. If you would like to redraw your question, please press star followed by 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.geopark.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 result press release and on this conference call are forward-looking statements rather than historical facts and are subject to risk 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 Security Litigation Reform Act of 1995. This risk includes a variety of factors, including competitive development and risk factors listed from time to time in the company's SEC results, 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 companies' business. All financial figures included here were prepared in accordance with 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, Jamie Cavalero, Chief Financial Officer, August Zubilaga, Chief Technical Officer, Martin Tejado, Chief Operational Officer, James Beckelman, Chief Operational Officer, Rodrigo Della Fiore, New Development and Portfolio Director, and Stacy Tailman, Shareholder Value Director. And now I would like to turn the call over to Mr. Andres Ocampo. Mr. Ocampo, please, you may begin.

Good morning, and thank you for joining our first quarter conference call. Today, we're proud to report progress and very important results on all key elements of our business and strategy. With solid first quarter results coming from our improved base business, new significant share repurchases, a big and very attractive transformational acquisition, and impressive sustainability and decarbonization metrics. The underlying base business performance is continuing to deliver positive results. We had a strong production in both the Janus 34 and the CPO5 blocks. In the Janus 34, our core asset, the combination of our horizontal well program and increased water flooding project took gross production to a range of 56,000 to 57,000 barrels a day in early April, the highest level in the last 12 months. With the addition of the Indigo III development well in April, the CPO5 block production reached over 30,000 barrels a day, a new record. Our first quarter financial results were strong, generating over $111 million in adjusted EBITDA with a margin of 67%. During the quarter, we invested almost $50 million, and every dollar invested in the base business yielded around $2.3 in adjusted EBITDA. The return on capital employed for the last 12 months was 35%. The balance sheet remains strong as we ended the quarter with the highest cash position in the last three years, just over $150 million. Net leverage closed at 0.8 times and remains well below our long-term target of 1 to 1.5 times. We recently added an uptake and prepayment facility with veto that further improves our commercial terms and gives us access to up to $500 million of oil prepayment facility providing immediate access to competitive and flexible financing. In the last four years, Geopark has generated more than $475 million of net free cash flow, almost one time our market cap, which was distributed to our shareholders in buybacks and dividends, as well as to our creditors in debt repayment. A proof of our commitment to maintain our capital discipline strong balance sheet while continuing to return value to our shareholders. This month, we successfully repurchased $43.7 million in Geopark stock during the Dutch tender offer, reducing shares outstanding by approximately 8%, and our board just declared a $7.5 million dividend to be paid on June 14th. We have also recently published our speed sustainability report for 2023, which highlights that we reduced our greenhouse gas emissions intensity by 18% from 2022. At 10.6 kilos of CO2 equivalent per barrel, we're extremely proud to report that we have the lowest carbon intensity among our upstream Latin American oil peers. Our Janus 34 block, which supplies close to 7% of Colombia's total oil production, had remarkably low intensity of 7 kilos of CO2 equivalent per barrel. With respect to our asset portfolio expansion, we announced on Monday a new transformational acquisition in Bacamorta in Argentina, a strategic asset in the world's fastest-growing unconventional play. The transaction includes high-quality assets with a combination of existing and fast-growing production and cash flow with a significant and tangible exploration upside. The Matamoranorte block was producing zero about three years ago and is currently over 12,000 barrels a day from 26 wells in eight paths, and with a ninth path of four wells already drilled and being completed now, expected to be put on production before the end of June. This production base is expected to grow to nearly 40,000 barrels a day within the next four years, an expected CAGR of 35% to 40% during the execution of the multiple remaining drilling locations. Upon closing of this transaction, we expect to add between 5,500 to 6,500 net working interest barrels of oil per day to our daily production, which is about 15 to 20% increase to the first quarter production. 50 million barrels of net 2P reserves of 43% versus our December 23 reserve certification, which include also over 800 millions of after-tax MPV10 at Geopark working interest equivalent to more than four and a half times the purchase price of Matamoramorte. An estimated annual net EBITDA of $90 to $100 million in full year 2024, which could grow by nearly three times to $300 million at Plateau production and at 70 Brent, or more than three and a half times at current oil prices. Approximately 240 million barrels of gross 3C certified contingent exploration resources in nearly 200 additional years drilling locations, which could provide further significant growth even beyond the Matamoranorte Plateau production. A significant part of this exploration upside is imminent, as the first pad has been built and the first exploration well was padded this month. We also have incorporated a new strategic partner, Phoenix Global Resources, which is part of the Mercuria Group, one of the world's leading energy trading companies. The technical and leadership teams at Phoenix have done an impressive job in bringing these assets to their current state, delivering significant production growth at highly competitive drilling, completion, and operating costs, with further improvements being achieved on every new weld. This team, both within Phoenix and at Prior Ventures, has more than a decade of experience in Vaca Muerta, and have also taken part of the de-risking of the entire Vaca Muerta oil and gas play in the earlier days. We're very proud and happy to be partnering with Phoenix and Mercuria in this new initiative. We have started a very busy year and have an exciting 2024 and beyond, with some high impact upcoming catalysts, both with the drilling activity underway in our existing core asset base, as well as the closing and drilling activity in our new Baca Muerta assets. We look forward to reporting our progress to you. We remain committed to consolidating our leading position among Latin American energy companies, producing sustainable hydrocarbons that guarantee energy security, reliability, and affordability in this rapidly changing world. We would now be happy to take any questions that you may have. Thank you.

If you'd like to ask a question, please press star followed by one on your telephone keypad.

If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. And our first question comes from Alejandro Demichiles from Jefferies.

Yes, good morning. Thank you very much for taking my questions. Three questions, if I may. Maybe the first one, Andres, is now that you're having more capex going to Vaca Muerta, so how should we think about the balance between extra capex, free cash flow, and cash returns to shareholders over the next couple of years? That was the first question. Second question is, could you please provide us an update on the delineation and appraisal program that you have been conducting on CPO5? And then the third question is on the new acreage in Bacamarta where you're doing the exploration. What do you see as the risk of the oil getting much heavier on that side of the basin, please?

Hello, Alejandro. This is Jaime.

I'm going to address your first question, if you will, and it kind of tackles two angles, as I understand it, which is, you know, how does this entry into Acamuerta and its capital profile and production profile affect shareholder returns? So I'm going to first talk a little bit about CAPEX profile and give you a little bit more detail of what we already announced previously. When you look at the base case for Vaca Muerta and Matamora in particular, our goal is to reach 40,000 barrels of production around 2027. And we expect to retain a plateau of possibly two, three years around that time. In order to get there, The capex exposure that we see together is going to be around $1.3 billion over the next 10 years. It's going to gradually escalate. We see this year it's going to imply an incremental capex of about $100 million. Next year, about $160, $170 million, getting to a peak of $280 million around 2026. So that's what it's going to take in order to get there. Now, we obviously need to put that in context, that getting there is going to have a significant EBITDA contribution to the company. This is a clearly value accretive deal where we're seeing an incremental EBITDA for the company of between $360 to $400 million per annum at $70.00. So, in that context, what we are seeing is that over time, this deal is paying off by itself with its own cash generated, and it's going to allow us the cash flexibility to sustain our shareholder return strategy. So, specifically, in the near term, what we're seeing is we are expecting to maintain our existing policy of $30 million in dividend distributions per annum. We just announced the $7.5 million associated to the first Q. And at the current price deck, we don't see any issue in maintaining that over time. At the same time, as you also noted, we performed the Dutch auction earlier in April. That's going to take our total shareholder returns this year to $80 million. about $80 million, which is significantly above what we had last year. Last year we had $61 million, for example. So all in all, what we're seeing with this deal is that it actually expands our capacity to maintain these returns over time. There is going to be a capital intensity associated, but given the returns that the asset provides, it doesn't it doesn't affect our ability to provide an interesting yield to our shareholders. And lastly, I guess the other angle that needs to be covered when you're talking about shareholder returns is that that's probably the cash component, we of course see with this deal that there is another angle associated to the intrinsic value of the company. When you look at our reserves, before this deal, we were talking about a 1P net asset valuation of about $1.1 billion and a 2P net asset valuation of about $1.8 billion. With this deal, the 1P net asset valuation goes to $1.5 billion. That's a 33% increase. And the 2P net asset valuation goes from $1.8 billion to $2.6 billion. That's a 46% improvement. So all in all, you know, we believe that our shareholders are going to be benefiting from both sides, on one end from the direct, you know, cash yield angle, if you will, but also from an intrinsic growth over time. Thank you.

On CPO5, Martin? Martin, would you like to take CPO5?

Absolutely. Good morning, Alejandro, and thanks for your question. Like Andres mentioned in his initial remarks, we're really happy with CPO5 performance. We keep breaking records. You've got to remember that in November 2018-19 when we acquired Medisul, that block was 8,000 barrels of oil per day, and like Andres mentioned, we're at 30,000 barrels now. We have put on production the well Indico III, and it's producing good rates, around 3,700 with no water. The rig continues drilling in there. When you look at delineation, like you were asking, you've got to remember we've got two wells that we drilled delineating the barco formation. They were Alcon and Perico. Perico is delivering more than 900 barrels of oil per day with very low water cut. Halcon had completion challenges, so that well is not producing as well. As we continue delineating, we are drilling the well Cisne. This is part of the barcode delineation that we're doing. We expect to be completing that well by late May. And after that, the rig will go and drill another exploration well called LARC. So that's kind of where we are on the lineation. We expect to have that rig working the full year.

That's great. Thank you, Martin.

Hi, Alejandro. This is Rodrigo. I'm going to tackle your question about Confluencia. Technically, what we see there is a continuation of the continuity of Matamora to the east part. Of course, we know that there are certain regional trends, like the heavy, for example, how it's going to affect the IPI and the gravity of the oil. But there are other good things that we can mention here, because during the evaluation period, we saw many good results from, for example, Vista and Panamerica and Embajada del Palo Este and Aguada del Canepa, where they are producing very good wells in the same trends where we are in Confluencia. So that's, from the technical point of view, what we see there, of course. And also we have a robust report from DeGeneres and McNaughton where they say that we have more than 200 million barrels as resources in the area. But to be honest, we have to deal with the block. And what we are doing now, we are drilling three wells. We expect the result before the end of this year. And also we have just finished 234 kilometers, square kilometer of seismic to complement this information. But we are optimistic and we expect a range of productivity in this area in line with the same rates that we see in Matamoros.

And could you please confirm the rates that you see in Matamoranorte?

Yes, we can go to Matamoranorte. During the evaluation period, we ran a robust analysis. We not only used the 26 wells that we have in Matamoranorte, we also see the neighborhoods and these analog fields. And also, we have a reserve report from the Colorado Magnotte And at the end of the day, we see a range, a range between 600,000 barrels per day and 1 million as most of the wells. But what we see now is a clear learning curve, leading by our operator and partner, because the most recent wells are outperforming. They are producing very, very good. You can see more than 2,000 barrels per day as a productivity. And another example, a good example that you can take is in February, the Matamora 2073 was the best producer well in the basin. So that's why we believe that the range is adequate at the moment, but also we are seeing that our partner and operator is doing the things better every day. So that's why maybe this expectation is increasing with the last result that we are seeing.

That's great. Thank you very much.

Our next question comes from Daniel Guardiola from BTG.

Hi.

Good morning, Andres and Jaime. I think most of my questions are on Argentina. It would be great if you could share with us additional details on the acquired assets. I'd like to know, I mean, I know Jaime just talked about the expected cap for the upcoming years, but I don't know if Jaime, maybe you could share with us the total size of the development plan agreed with Phoenix for the development of Matamorra Norte and what percentage of the total identified wells or drilling locations is this plan forecasting to cover? That would be my first question. The second one would be additional details on the Matamorra Norte already drilled wells. So it would be great if you could share with us the IRRs so far that the company has seen per well. It would be great to see the EURs of the type curve that you're seeing. And the average realized prices at which Phoenix is basically selling its oil flowing out from Matamora Norte. And the third question and the last question is on on future growth opportunities. I mean, my understanding is that after the closing of this transaction, your net leverage is not going to surpass 1.1 times net debt to EBITDA, which is still very low, very healthy level. So I would like to know your thoughts on additional acquisitions similar to this one. And if you're thinking about it, what will be the main feature you will be looking at when doing another acquisition. That will be all.

Hola, Daniel. It's Jaime here.

I'm going to try and cover a number of the questions that you made, and I'm going to then pass it over to Rodrigo, who's going to give us a little bit more color around Matamoros Norte today. So let's start first with your first question, which is essentially around our development plan philosophy. And I would start with this notion, which is that one of the key reasons why we decided to partner with Phoenix and why Phoenix decided to partner with us, frankly, was that a clear alignment around where we wanted to take the assets. where we want to take the asset. And there is here a joint vision where we want to take the Matamora development to 40,000 barrels a day. In parallel, we want to fully explore Confluencia and hopefully add to that. And what we're seeing is four blocks that over time are going to have massive economies of scale and of development pace and even commercialization. So that's That's what we're aiming to do, right? And that vision that you can extract from our release takes us to anywhere between 40,000 barrels to 60,000 barrels a day within five years. The work program budget that we've agreed with them essentially reflects that. So the numbers that you've seen, we quoted about 150 remaining drilling locations. That's what we've identified with Phoenix. And that's what we want to pursue together with them. Same thing applies for Confluencia in the success case. Obviously, Confluencia is farther behind, if you will, in terms of its maturity. So those are not firm numbers. There's a risking component associated to that. But in Matamoros, it's actually quite firm. And essentially, it's what underpins the research numbers that you see us quoting. And how does that translate to actual activity? Essentially, we've actually committed with Phoenix, jointly we've committed to sustaining a two-rig program over time. That's how we're seeing this develop. Currently, there's one rig. The second rig is going to come in the later part of next year. And after that, we're seeing a sustained two-rig drilling program Indefinitely, essentially. Indefinitely as more options, as we go through this hopper of essentially 350 wells and hopefully other options will arise. That's how we're thinking about it. The CAPEX numbers that I quoted, Daniel, in the previous question are consistent with that. If you essentially do the numbers of 350 wells given the well cost, it's going to take you to that place. Let me cover now the average realized prices. Essentially what we're seeing and what we're expecting, Daniel, is I would say there's two angles here. There's production that goes to international markets and there's production that is sold domestically. Those ratios are going to change over time if you look at the history that's been the case. So we cannot be too deterministic about it. But as a rule of thumb, what I would suggest is that we can sustain at least 30% of sales are domestic and about 70% can go to international markets. That's what we're seeing. I think that's going to change over time as the market evolves. This is a This is a basin that is growing very quickly, and of course the commercial conditions around it as infrastructure matures and evolves are going to change as well. But generally speaking, that's the direction that we're seeing. I think what underpins that assumption that 70 percent of the barrels can be exported is that we are now seeing a surplus whereby the needs of the refining sector in Argentina are very well met. So that allows for flexibility to export volumes. The sort of differentials that we're seeing are in the range of $10 to $12 versus Brent. That's the sort of discount that we are seeing and that we are modeling going forward as we look at this development. In terms of net leverage, you already quoted, Daniel, the number that we're seeing, that kind of 1.1, that's not to exceed over the near term. I think what could change that is there's two angles that could change that leverage. I think that if we have a success case in Confluencia, possibly our capital, or possibly no, our capital intensity will increase, but it will increase for the right reasons. It will increase for the right reasons with our substantial reserves, production, and every price associated to that. We modeled that at a very high level. And even in those scenarios, we are in the 1.2. We actually don't reach 1.3, even in those scenarios, right? Even in those scenarios. So that gives you an idea of kind of like the profile that this development has. What that means is that we do have remaining firepower to engage in... in attractive inorganic opportunities. The way that I would frame this is that in the near term, clearly our focus is on delivering our plan, our existing organic plan, and now a high-quality incorporation of these assets into our portfolio. That is clearly a priority. This is a big investment for Geopark, and we are going to get it right, and we need to get it right, And in that sense, you know, we're setting up a team that is going to work, you know, with Phoenix to progress this development plan as we've been discussing. We're going to be placing second deeds. We're going to be securing, you know, the provincial approvals that we need to get the transaction closed within the next few months. We're going to set up performance management processes that allow us to have quality conversations with our partner and with the market around how this is evolving over time. And in the end, it's ultimately all about how can we efficiently and effectively collaborate with Phoenix to deliver the value promise that we're making with this deal. So that's clearly the priority. Having said that, you know, we... you know, our growth aspirations do not stop here, you know, and we will continue to be looking at options, strategic options that make sense for us. You know, I think Andres, in the prior call, Daniel, when you asked about this, Andres was very eloquent about our, you know, pan-regional aspiration, you know, we have, we are strong believers in the quality of Colombia, Brazil, and Argentina as world-class petroleum basins that we need to be in, and that's unchanged with this transaction. Actually, what I would say is that this transaction shows that, demonstrates that, and is evidence of that, but it's not the end. It's not the end, and we will continue to look at options that make sense for us. So I know that was a long answer, but I think I covered four of your five questions. Over to Rodrigo.

Thank you, Jaime. Hello, Daniel. This is Rodrigo. We said that range between $600,000 and $1 million as an average in the Matamoros North area. But let me put this in a frame, in a time frame, because what we see is a clear learning curve here. Most of the first wells in the area looks poorer than the recent wells that we are seeing. So that means that the operator is doing a great job in order to improve not only the operational aspects but also the way that they are at least landing the wells. Because they switched from a C2, what we call, it's a very technical definition, but they started to drill new wells in other landing zones in the area where we have or we see better . So that's part of the learning curve that we are seeing. So that's why, if I had to summary this, the initial estimation that we we see for the area, it's a well that can produce between 1,000 and 1,500 bars a day as a peak, at least in the first two months. Now we are seeing most of the wells producing more than 2,000 bars per day. So that's a great news for us. It's recent because we are talking about wells that are producing for the last three months. But definitely we see this trend in most of the activities that they are carrying out in the field. So that's a great news for us and for a deal, of course. Another thing that we see with optimistic eyes is the well cost. They were able to reduce the cost of the well more than 15 million at the beginning. Now they are drilling between 14.3 and we expect to finish the year close to $13 million per well. So that's what we expect. That's the intention of the operator and, of course, our intention, too. So that's what we are seeing in terms of productivity, well cost, and, of course, you asked about the plan. As Jaime mentioned, we expect to develop the 150 wells in the area, and that's the plan that we have as a minimum plan with them.

I think the IRRs, he also asked about the IRRs expected from the world.

The IRR is a range, of course, but we are seeing between 30% and 70%. Thank you for reminding me.

Thank you, guys, for the very thorough answer.

Our next question comes from Roman Rossi from Canaccord.

Good morning, guys. Thanks for taking the questions and congrats on the results and the acquisition announced. So just wanting to get a sense regarding the facility we've been told, I would like to understand how much are we expecting to use for the acquisition and what are the terms beyond, you know, you mentioned it's software plus 335%, but does it have an undrawn fund cost associated? And additionally, what's the cash at hand target? after the acquisition.

Hello, Roman. How are you?

Let me cover the VTOL question. So I would start saying that the VTOL deal, it starts with being about commercial performance. Financing optionality is a plus, it's an upside, but the underpinning is commercial performance, So this deal covers and secures a very competitive commercial discount for Janus 34 production. That improved commercial differential is something that we're actually going to see coming across as better price realizations. I think we've quoted in the statement that this represents a 60 cent improvement over what we were seeing two, three years ago. And that's a prime motivator for engaging in this type of deal. The nice thing is that, you know, beyond the commercial, you know, performance that this delivers, it does provide significant financing optionality. So the key terms are we have, you know, Bitol has committed $300 million, you know, that we can draw at any time in the near term. It is unsecured. It has a very competitive interest. We quoted SOFR plus 375. That's about 9% interest, which compares very favorably even with our own existing bond and the sort of interest that you would get in longer-term financing in the bond market today. It also gives us a grace period that extends to the end of this year without making any payments if we draw on the line, and it can be repaid at any time. So it actually keeps our longer-term financing options fully available for us if we believe that's the convenient thing to do and if the market conditions adjust to that. So that's kind of like the general framework. In terms of our plans with that line, I think, you know, the way that we think about it is, let me stand back and talk more broadly about how we are actually approaching this deal, you know, the Vaca Muerta deal. So basically, when you look at the deal, at signing, we already paid $50 million of the numbers that we quoted there, you know, in the statement. That's already been paid, and we paid that with our own cash, like with existing cash that we had, no financing whatsoever, and actually let me tell you, the remaining balance after paying those $50 million was $110 million. So currently we have $110 million in the bank and that's already going through the upfront consideration of this deal. The next big milestone in the deal is the balance that we need to pay at closing, and that balance is essentially $150 million that needs to be paid at closing. With that, we covered the entire upfront consideration of the deal. The other thing that we need to consider when we look at our CAPEX is that the carry component, the carry component of the Confluencia wealth is going to go in parallel two weeks, and what we are estimating is that that's going to represent this year about $100 million. That's the estimate that we are expecting this year. So what that means is that in the remainder of this year, the deal is going to represent an extra $250 million versus the plan that we had. How are we going to finance that? It's going to be likely a combination of The cash surplus that we are accumulating at these prices, we are accumulating an important cash surplus every month at this price deck. And the remainder, very likely, using that in total a financing facility. If I would give you an indication, and with the caveat that this is flexible because we have total flexibility around this, I would give you an indication that we could use about $150 million of the VITOL facility this year to underpin this effort. And it represents no interest this year, as it's covered by the grace period. If we do that, payments will start in January of next year. And you're going to see monthly amortizations for that figure of about $7 million a month. That's the way to think about it. from a modeling standpoint.

Thank you, Roman. Great. Thank you, Jaime.

And maybe a follow-up on the acquisition. You said that you expect to close in Q3, so that will be impacting your fourth quarter financials, right?

Yes, Ronan. So basically on this, I think there's two key milestones that you need to consider.

I think there is the effective date and then there is the closing date. So regardless of closing, let me define closing. So for the purposes of this deal, the private deal between Phoenix and Geopark are fully complete. So that deal is complete. irrevocable we have an agreement between us now when we talk about closing we're really talking about the regulatory approval that the provinces in Argentina need need to provide so that we are a if you will the equivalent of a leaseholder right you know so that we come through in the public deeds as a leaseholder that's what we refer to closing on this a and there are two aspects you know we need an approval in no can for format Amora and we need our approval in Rio Negro for confluencing. So we are expecting that to occur within the next few months. When that occurs, that triggers the payments that I mentioned previously of $150 million to Phoenix. So that's what closing refers to. Despite that, or having said that, the effective date is going to be the first of July. So the economic aspects of this deal are already effective starting on the first of July. So we start to look at all the accounting of the deal on that 50-50 basis, the 50% basis. How is this going to translate into accounting? What we see is that subject to closing date, and let's assume that we close by the end of the 3Q, what you're going to see is that in the 4Q financial statements, you're going to see these fully consolidated on a line-by-line basis. As an indication of that, in 4Q, you're going to see anywhere between 6,000, 7,000 extra barrels a day of production. You're going to see a share of cost. You're going to see all the different lines, what this deal implies. On the EBITDA line, what you should be expecting for 4Q would be an additional EBITDA of around $30 million. That's what we are estimating at this time. So it's going to be fluid from here to there, you know, but if I would have to give you a message is that consolidation starts post-closing, but economic effects start the first of July regardless of closing date. That's the bottom line.