Q3 2021 GeoPark Ltd Earnings Call
Good morning, and welcome to the Jazz Cog Limited conference call. Following the results announcement.
Quarter ended September 32021, and 2022.
On the investment.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at this time press star one on your telephone keypad.
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You do not have a copy of the press release, which is available at the Investor support section on the company's corporate website at Www <unk> com.
Wow.
A replay of today's call may be accessed through this webcast in the investor support section of the corporate website.
Before we continue please note 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 developments and risk factors listed from time to time, a company is S. E C reports and public releases.
Lists are intended to identify certain principal factors that could cause actual results to differ materially from nice described in the forward looking statements.
Not intended to represent a complete list of the company's sniffs.
All financial figures included herein were prepared in accordance with the I R. S and are stated in U S dollars unless otherwise noticed.
Reserves figures correspond to <unk> P M S sandwich.
On the call today from J Park is James F Park, Chief Executive Officer, Augusto Zubillaga, Chief operating officer.
On dress Ocampo chief.
Financial Officer.
Maarten, Toronto director of operations, and Stacy Steimel shareholder value.
Director.
And now I'll turn the call over to Mr. James Park. Mr. Pollack, you may begin thank you and welcome everyone.
We are joining you this morning, with our executive team in Colombia, and the U S to report on our achievements and financial results during the third quarter of 2021.
Firstly, we would like to recognize and thank the women and men of GFR for their resilience and commitment as proven again by our performance in this last quarter.
Production was up compared to last quarter as we continued low risk development and the analysts 34 block.
Our growing low breakeven production generated strong free cash flow.
Revenues doubled from a year ago, and adjusted EBITDA was 54% higher with a net profit of $37 million the equivalent of 61 cents per share.
Every one dollar of invested Capex yielded 2.8 dollars in adjusted EBITDA.
We continued to manage and consolidate our project portfolio by divesting, our economically marginal and high carbon assets in Argentina expecting to close by year end.
R. Brasil asset divestment is also underway with expectations that closed during the first half of 'twenty to 'twenty two.
Our relentlessly passionate focus on speed.
Our internal value system, we referred to as ESG plus.
Included a concrete road map with an accountable schedule to reducing greenhouse gas emissions.
Already with a peer leading low carbon intensity, we embarked on immediate actions to further reduce scope, one and two emissions by 35% to 40% in the next three years.
40% to 60% by 2025 to 2030, and net zero by 2050 or sooner.
And of course, we continue to return tangible value to our shareholders through our active dividend and share buyback programs.
New development involved Geo Park shares being included in the S&P Global PMI index and for S&P sub indexes, which represents an expansion of our investor base and opens the opportunity for being included in additional indexes.
During the quarter, we carried out our capital allocation process to develop the work program and budget for 2022.
This represents a healthy opportunity to review every asset in our portfolio and make them compete for investment on rigorous technical economic strategic social and environmental criteria.
Our outcome with a new 2022 investment program of $160 million to $180 million, which targets drilling 40 to 48 wells.
Posed a 25 to 28 development wells to develop our reserves and increase production.
And 15 to 20 exploration wells to test a powerful portfolio of high impact low risk prospects on adjacent acreage, which can generate cash flow quickly if successful.
It also includes a significant pickup in activity on our CPO five block.
As always this is a flexible work program that can be easily adjusted up or down depending on oil prices we.
We are giving guidance of a 5% to 10% production increase after divestments on the producing assets, but this does not include one single barrel from the 15 to 20 exploration wells. We are drilling next year, all with a chance to find and open up new promising fields.
So for 2022.
We will be generating significant free cash flow that will self fund the full enchilada.
This includes tangible shareholder returns.
Balance sheet strengthening including potential deleveraging.
Real emission reduction plan continued efforts to expand scale by acquiring new projects.
A growing high return production base.
And an aggressive low risk baked potential exploration campaign.
We believe that being able to self fund from cash flow and simultaneously achieved these objectives represent the right business model for our industry today and provide geoponic with a comparative advantage in an energy transitioning world.
Thank you and we would be pleased to answer any questions you may have.
Thank you we will now proceed with the Q&A session. Thank you.
You'd like to ask a question you can press star one on your telephone keypad.
Please ensure you Amit locally when asking your question.
Our first question for today comes from Ricardo <unk> from J P. Morgan Ricardo Your line is now open.
Hi, Good morning, Jim address the whole team. Thanks for taking my question a couple of questions on my side related to your 2020 through work program. So dream as it just mentioned.
If things go according to the plan here and really have a very strong free cash flow generation next year and then one of the questions that are heavies would you consider looking at M&A as a potential use of this cash flow or your mostly focusing on developing your core areas and then the second question I think it's more a two a trend dress.
Its own.
2024 notes.
Mentioned in the release are those notes became callable in September.
Just a question here would be are you looking more of proteinuria liability management is reducing your mom.
A nominal amount of debt or it's mostly.
The exercise that or could be doing with those thoughts. Thank you.
Hey, good morning, Andres here.
The I.
I mean.
The priorities for our free cash flow generation during 2022.
Are not changed from you know historically, what we do every single year.
Our first priority is to fund the development of all of our reserves.
Take on these odd activity and fund our exploration campaign.
Then third it's always a combination of debt reduction deleveraging and shareholder value return.
We do have M&A as part of our business model on H E is part of what we do and always consider it in the context of always funding our portfolio.
Deleveraging our company I would say probably the priority for 2022, given that last year, we did the liability sorry earlier. This year, we did the liability management transaction.
To organize our debt in a way that can be gradually be repaid probably in 2022 with such a b C.
Drilling campaign.
The priority is going to be for any excess cash to be used for deleveraging and shareholder value returns.
And then to your second point are the fact that the bonds became callable.
In September.
Means that now we can actually exercise the option to repay them in full or in part at any point in time over the next two years until until maturity. So that is a that is what changed when we did the liability management transaction our bonds were not callable so that was the way.
We needed to do it to actually repay a significant part but.
With the with these new structure. It means that we can exercise the call.
At any point in time to pay them down.
Yeah.
Okay.
Thanks, and the rest was very clear thank you.
Thank you.
Thank you Rick Holliday on.
Our next question for today comes from Phil Skolnick from eight capital.
Your line is now open.
Yeah. Thanks, good morning.
My first question is with respect to your exploration program.
15 to 20 wells, Yeah, how do we think about that in terms of the positive impact. It can have on the 2022 program I guess you know how many of those.
Short cycle in nature to allow for it.
Hi, good morning.
Thank you for your question.
As you said I mean, he said it is a significant exploration campaign 15 to 20 wells.
And this is so.
So most of what we're doing is really our bread and butter. This is what we have been doing.
For many years and this is the type of exploration that we've we were doing when we discovered channels 34 or started discovering the fields in general is 34 and in early 2012. So.
We can say that all are really most of these prospects are all really short cycled in the event of a discovery almost all of these prospects, which could become potential potential fields can be brought to production.
Pretty fast after these calvary.
And by pretty policies.
Within a month, probably would be a good assessment any any particular event may delay that perhaps two months, but nothing you know.
Nothing that like the typical offshore exploration that may take a look significantly more so I would clarify 100% of our exploration portfolio in 2022.
Being as being short cycle.
Okay great.
Perfect.
And then in terms of the flexibility around our program.
Yeah, you'd laid out a 50 to $80 Brent pricing.
How do we think about that in the context of your 2022 production guidance.
We've got a $50 what does that mean, if you go to $80 I mean, obviously, the $80 mean upside potential, but the $50 how do we think about that.
I think what highlight from that.
Is that our production is pretty resilient and our reward program is pretty resilient and that means that we announced when we gave our guidance is using 65 70, Brent which as you know.
You know around 15 to 20 bucks below the oil prices today.
But really what all our work program shows is that we can fully execute.
As displayed.
Almost any oil price environment, even as low as 60.
And then maybe below 60.
We could start delaying some of the exploration probably but all of the production in all of the development would continue.
To be maintained so that means that we're using more or less the same production curve for you know a big range from 50 up to 80.
If oil prices are higher and also given that there are so many.
Exploration opportunities there.
Also additional capex that could be added in the event of a new a new field discovery.
So capital for development of potential new field that we could discover could be added in in higher oil prices environment.
Great. Thanks, that's it for me.
Okay.
Thank you.
Thank you. So our next question comes from Stefan <unk> from <unk> Advisors Stuffing. Your line is now open.
Good morning, guys and thanks for taking my questions I've got two really the first one is around the full year 'twenty two production guidance and what are the main component of that in terms of contribution from the animal study for CPO five and putumayo.
And my second question is around the Capex and Opex.
With that we last year, particularly the number of flights to be drilled in 2022 vessels in 'twenty, one and I was wondering whether it would seem there might be a bit of fun.
Inflationary pressure. So for instance, if we just look at Colombia, I E 2021, you're at $95 million to $150 million.
For 30 to 34 wells in 2022, that's $145 million to $165 million for 31.
32% to 41 way. So I was wondering whether it is it inflationary pressure is a different type of win or is it that your crude in the putumayo are well within the <unk> to 2020 two guidance. Thank you.
Good morning, Stefan This is Martin Toronto, and I will take the first call. The first question. So as Jim said, our production guidance for next year.
35.5 to 37 5000 barrels of oil per day average.
And that he'd say, 5% to 10% production growth.
When we exclude production from Argentina, and Brazil, and that does not include any potential production that will come out of our very healthy exploration program.
Now the split of that production is around 70% to 75% coming out of our channels 34 block around 10% to 15% from CPO, five and around 5% to 10% from Putumayo block.
Alright, thank you.
Then.
To the second part of your question good morning to fund.
Really in terms of inflation.
What we're seeing is with the rise in prices of commodities, we are seeing pressure on on on on materials for our campaigns.
Approximately <unk>.
70% of our Capex is nominated in dollars and for those.
For those we are seeing more or less 1% to 2% inflation pressure for next year.
We are in some cases trying to secure long term contracts to try to protect us from from that pressure to heating us.
But the main change I think from your question on the analysis Youre doing I believe is is not really associated to these more associated to the switch in the nature of the west you'll see a bigger weight of exploration wells in this campaign, which which by nature tend to be more expensive.
And also there's a bigger weight of wells in the CPO area.
Each in most places or actually in all places where budget.
Budgeting or the operator is estimating that we will drill with three stage casing as opposed to two state stage casing like we do in most of the development wells in General 34, So I would say probably more most of the change that you see there is really associated to that factor.
The nature of the wells rather than than inflation.
Great. Thank you.
And the $145 million to $155 million for Columbia does that include the three to four wells in putumayo or was it on top of it.
No I think thats included in the in the other activities in Putumayo, one chiller section.
Okay. So that.
That Columbian part does not include Putumayo, even though it in Colombia.
I see thanks.
Thank you Stefan.
Our next question comes from Mikael <unk> at Compass Group.
Asks what are you going to do with the proceeds from the sale of Argentina.
Okay.
Okay. Thank you Miguel.
The proceeds of the sale of Argentina are going to add to the cash inflows and we'll follow the same priorities.
For the rest of the cash inflows of our production base. There is no difference or no specific.
Use for those proceeds other than merge them with the rest of the company seen flows and follow the same same priorities really.
Thank you Mikael.
Our next question comes from Gestalt Osaka.
Scott.
Looking at the what program, we can see that the company should have a very healthy cash flow generation in 2022.
What should be the main uses of this cash generation could we expect an acceleration of the share buyback program, while the focus should be more on developing strictly.
Well, thank you without the <unk>.
The uses of cash as mentioned earlier.
Is really number one.
The development campaign funding the exploration campaign in the event of any potential discovery.
Funds the development capital for any such potential discovery.
And then any excess free cash flow after that.
Going to be used for a combination of debt reduction and shareholder value return, which is our share buyback and our dividend is not slowly solely going to be used for deleveraging, even though that's a priority for us is not our only priority. So.
You could expect following the first quarter.
If the cash flow and even the war program evolves. We are budgeting around these prices you could expect some acceleration of the buyback on top of the ore in parallel to our debt reduction efforts.
A follow up question from desktop.
Also on the work program when looking at the 70 to 80 8-K.
Capex destined for exploration, what kind of returns could we expect and what could be a fair assumption to be made in terms of additional production and training in 2022, what are the prospects were most optimistic on where that is a high level of uncertainty.
Thank you thank.
Thank you so I'll take part of that and then led to undress close on it.
So.
Our exploration program for next year, you'd see something that we're really excited.
Like Jim said.
15 to 20 gross exploration wells in the core areas of where we want to be so we're looking for for the resulting in CPO five channels 87, and the other blocks. When we look at CPO five we're going to have two rigs one of the rigs is going to be.
Drilling in the north west of the area and the other one is going to be in the southeast that's why there's seismic already with the prospects and leads while our teams are looking at the recent seismic that was acquired so.
Yeah.
We're very excited about that the chances of success are similar to the wells that we've been drilling and discovering in E channels in the how kind of anti Ghana for the welfare of the northwest of the block.
So from that perspective.
We will drill these wells, we'll have additional locations that have been agreed with the operator.
We're looking forward to the those wells being drilled in the Shadows area.
And I would say in terms of production and usually we don't.
This is something that we've always done we usually don't attribute any production to our exploration given the risk associated to it.
We don't include in our guidance.
Any production coming from from the exploration also.
The exploration campaign. The main aim of the exploration campaign is not really to bring production for 2022, but actually to bring up production opportunities for the next three to five years.
So the way we look at it in an order of magnitude in terms of the attractiveness that we see in the program is that we are targeting more or less 20% of our exploration portfolio with 2022 campaign. This is more or less something around 150 to 200 million barrels of exploration prospective resources.
This is growth.
I'd working interest would be something like 70 to 80 million barrels of Unreached mineral resources. So it's a pretty significant campaign targeting pretty significant resources and as Martin said it is our expectation that.
That we really hitting something interesting in some of these activities.
Yeah.
Thank you Gustavo our next question comes from Augusto <unk> from AIG investments.
Your line is now open.
Okay.
Thank you good morning, and thanks for taking my question.
My question has to do with hedging.
Generally the market is bullish on oil prices for 2022.
And I just wanted to get your thoughts about your hedging strategy sticking we'd be.
We've been number of barrels to cover your work program and any thoughts that you can provide us in terms of.
Hedging strategy for 2022, thank you.
Yes, Thank you I will stop.
Yes, as we do every year, we try to secure more or less.
40%, 50% of our production for the following 12 months, we are more or less covered for the first half of the year.
The floor prices.
All around $55 $58 per barrel.
We have lower percentages for the second half with higher.
With higher Florida more in the levels of 16 so.
So our our view is when markets are bullish stake. They are these days is probably the opportunity at a time of opportunity to be layering.
Some of these additional hedges for the next year. So you should expect us over the course of the next three to six months to complete the hedging program for for 2022, obviously always targeting to secure more or less those floor levels with the highest possible savings.
Thank you.
Thank you Augusta.
Our next question comes from Stefan <unk> from <unk> advisors defend your.
Your line is now open.
Thank you I got.
Some follow on questions.
The first one is I think because it was our 19th and my question on the accordion the programs very busy exploring.
And between 22 different risk profiles and I was wondering whether they were Amy could you could at all.
It shouldn't rise that would be really more mature than others.
One that we are going to.
Got it for.
And the second question I would have I was wondering about the buyback the cash on the balance sheet is pretty good.
I think you've got the approval to do a bit more than what has been done.
We're not asking them more buyback.
Thank you.
Thank you Stefan I I'll start with the second question.
<unk>. Your first question is like asking if we asked that question to our technical team is like asking them who their favorite.
Sun So.
But to your second question with respect to the buyback.
We've so this year, we've accelerated as much us.
No.
We did $4 million from the third quarter, we had done half of that in the first six months.
So far in the fourth quarter, we're executing more or less at the same pace as we've been doing it on the third quarter.
Just one thing in our in our buyback, which is the bond indenture.
Do impose some limitations on how much.
Shareholder return activity, we can do so we do.
That is.
A little bit complicated to explain but in simple terms, we have a free basket and then we have builder baskets, the builder basket build on profits and reduce our losses, so because of our impairments.
In 2020, those baskets were reduced so as we resume generating profit like we did this quarter and if the budget again evolves. The world program evolves US we are expecting it to evolve we would expect next year to start building those baskets pretty significantly again.
So our freedom for shareholder value returns will come back probably following the first quarter next year. So until then you should see as more or less executing around the levels. We've been doing so far to not fully consumed the free basket.
And then following the first quarter again subject to things going the way we were expecting you should see us having more freedom to execute and then maybe more aggressive with it.
Thank you.
And to add a little bit again on the exploration part like like we said before <unk>.
We're really excited about the work that our technical team has put together they came from play concepts, where some of these play concepts are.
Originated by our team.
We're bringing those play concepts to other blocks they've logs out of the blocks, where we wanted to be with a very good footprint in the sinus a good footprint into two Marshall on intra campus in oriented so.
They are they are very exciting projects for us.
As I said before a CPO five right next to our Shannon look we will have two rigs one rig E C.
Im going to start drilling early in December.
We will have a second rig following up in January.
So we're excited about all of them and they are on the plan because we think that they have the good chances of success compared to what we've been drilling in the past so.
It's a very exciting year for us.
I'm being non technical Guy I can tell you that the northern part of CPO five and <unk> 87 or include some play ideas that our team have been trying to test for a very.
Very long time.
Okay.
Thank you guys.
Thank you as a reminder, if you would like to ask a question you can press star one on your telephone keypad.
We have a follow up question from Rick Holiday present day from J P. Morgan Ricardo Your line is now open.
Alright. Thanks.
Andreas just a specific question on the Argentine divestments do you expect to pay any taxes on the $16 million or that should be.
It'll catch proceeds for free dual park.
Thank you Ricardo yes they.
There's a small tax is around 500 to $700000 more or less.
Okay. Thank you.
Thank you thank you recalibrate.
We have now found the questions. So I'll hand back to entrees Campo for any closing remarks and address over to you.
Thank you everybody for your interest in Geo Park, and your continued support of our company.
As the awards borders begin to open again, we encourage you to please visit us our operations in each country.
Our shareholder value team has accelerated their interactions and as bto than ever with Webinars video conference on direct cost and is available around the clock as is our management team to answer any questions or listen to your comments. So thank you and please stay healthy and strong.
Thank you for joining today's call you may now disconnect.
Okay.
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