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GeoPark Ltd (NYSE:GPRK)
Q2 2019 Earnings Call
Aug 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the GeoPark Limited Conference Call following the Results Announcement for the Second Quarter Ended June 30th, 2019. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] If you do not have a copy of the press release, please call Sard Verbinnen & Co. in New York at +1 (212) 687-8080 and we will have one sent to you.

Alternatively, you may obtain a copy of the release at the Investor Support section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this webcast in the Investor Support section of the GeoPark corporate website.

Before we continue, please note that certain statements contained in the results' press release on this 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 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 the US dollars unless otherwise noted. Reserves figures correspond to PRMS standards.

On the call today from GeoPark is James F. Park, Chief and Executive Officer; Augusto Zubillaga, Chief Operating Officer; Andres Ocampo, Chief Financial Officer and Stacy Steimel, Shareholder Value Director. And now, I'll turn the call over to Mr. James Park. Mr. Park you may begin.

James F. Park -- Chief Executive Officer

Thank you. And welcome, everyone. We're here with you this morning with our executive team in Bogota, Colombia, to report on our second quarter 2019 results, with an emphasis on both performance and economics. Firstly, thanks to the GeoPark team for continuing to execute and deliver. Our quarterly metrics continued to decline, oil and gas production up 9%, net backs up 8%, with operating costs down 5% and lower commercial discounts. EBITDA up 18% to a new record, even though oil prices were 9% lower and net income jumped six times. These advances, all contribute to an impressive first half of the year that put us on target for another full year of operational and financial growth and to extend our relentless 16-year performance track record.

In addition to our on-the-ground day-to-day operational success in finding and producing oil and gas, it is crucial place to look at the underlying economics resulting from our operational efficiency and the quality of our assets. One, we are self-funded from our own cash flow generation. Two, our low operating costs allow us to weather any oil price volatility. And three, our low capital investment required to maintain and grow our production set us apart from our peers both in Latin America and in North America.

This quarter, every $1 invested in CapEx, yielded $3.40 in EBITDA. It only took four months of EBITDA this year to cover our full-year investment budget. Our return on capital employed in the last 12 months is over 40%. The significant excess cash flow from our projects also enables us to provide more value directly to our shareholders by investing in our own shares.

We have brought back over $50 million of our shares in the last eight months. Importantly, we are also continuing to build out our project inventory with strategic, high-value, low-cost acquisitions in targeted core hydrocarbon basins, which give us plenty of running room in the short, medium and long-term with a risk-balanced pool of great assets.

Recent key acquisitions include blocks in The Oriente Basin in Ecuador and blocks in the Llanos Basin in Colombia, representing another big acreage add to our over 6 million acre landholdings across the region. In recognition of our capabilities and how we do our job both above and below ground, we were honored to be chosen by the Colombian state oil company to partner with and operate for them in the principal base in Colombia and our successful bid round participation together. This adds to our growing list of alliances with national oil companies across the region, where we are also working with Petrobras in Brazil, ENAP in Chile, YPF in Argentina, Petroperu in Peru and Petroamazonas in Ecuador. GeoPark's consistent performance and our strong regional reputation are built on our successful in-house ESG program, we call SPEED. This program was a founding element of our company and one of our proudest accomplishments, always pushing us to be the employer-of-choice, partner-of-choice and neighbor-of-choice wherever we are operating.

Looking ahead to the second half of the year, we're going to have eight rigs operating with new plays and prospects being tested across our growing portfolio, and there are attractive new bidding rounds in multiple countries. So lots more coming. And of course, we're gearing up for our annual capital allocation process, starting next month.

When we get to hear about and dive into the abundance of new exciting ideas and projects being generated by our teams in each country business units that drive us onward and upward in 2020 and beyond. Thank you. And we'll be pleased to answer any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Gavin Wylie of Scotiabank.

Gavin Wylie -- Scotiabank -- Analyst

Hi, guys, good morning. Just a quick question on the Jauke. Hopefully, I'm not pronouncing that too poorly. You know, -- back in 2017, there was a dry well in that area called Sinsonte. And I'm just wondering, what are your views in terms of the difference between Sinsonte and Jauke going forward and what gives you confidence on this well, potentially being successful, or even what sort of a chance of success are you putting on the well? I realized that this is only about a $3 million net cost to GeoPark. So it seems like the opportunity risk award -- here is quite good. But I just want to get an understanding on where you're putting the chance of success and what the key risks are on the well?

James F. Park -- Chief Executive Officer

Hi, Gavin, good morning. Your pronunciation of Jauke is very good. So -- yes, as you mentioned, we had the well Sinsonte drilled few years ago. Sinsonte was a structure, was actually a pure structural play and it was a three-way deep closure again this fall. According to our technical team, the reasons why Sinsonte was a dry well or wet well was because the -- sealing of the fall [Phonetic] wasn't strong enough to close the structure.

In the case of Jauke, its a completely different play. In fact, one of the information that we got from Sinsonte is that, that area has reservoir. Those two place -- two potential place in local, and those are mainly stratigraphic plays. So, given that they are stratigraphic, risk associated to them is generally higher than the general risk that we have seen in the previous prospects that was [Indecipherable]. I think the chances of success assigned to the prospect are more or less around 20% to 25% having the two potential targets.

I will leave Zubil to clarify more about these two potential targets.

Augusto Zubillaga -- Chief Operating Officer

Right. As James mentioned before, this type of play is between stratigraphical and structural. And in this particular well we are targeting two formation. One is [Indecipherable]. I mean, we are thinking that they raised the potential resource -- will be between 20 million to 40 million barrels.

Gavin Wylie -- Scotiabank -- Analyst

Excellent detail. Thank you for that. Just one more question on the buyback. I'm just wondering, it was a nice step up in Q2 there. And just wondering, what are your thoughts on the buyback going into the second half of the year? Are you expected to remain active on that just in terms of what your plans are and what do you think is the optimal level to be buying back in the market today?

James F. Park -- Chief Executive Officer

Yes, of course, -- currently, we invested already around $50 million in our buyback. That's around 5% of the capital of the company. We have approval from our Board to grow up to 10%. That means we're halfway through our buyback for this year. So, for now, we're thinking that at least additional 30 million barrels will be allocated to buyback during the second half. We may decide to add some more and complete the full 10%. We'll play it by year. But certainly at least I would assume 30 million barrels for the second half of the year. It's a reasonable amount for us to allocate. So that is at least almost -- complete the approval that we have. And then close that to [Phonetic] end of the year, we will decide, you know, what we would do for next year. That will be part of our capital allocation procedure that is going to get kicked off at the end of August.

Gavin Wylie -- Scotiabank -- Analyst

Excellent. Thank you so much. I appreciate it.

James F. Park -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Jenny Xenos of Canaccord Genuity.

Jenny Xenos -- Canaccord Genuity -- Analyst

Good morning and congratulations on a great quarter. I have a few questions, please. Maybe I'll start with the financial ones. You already covered the share buybacks, as far as other uses of your free cash flow, would you consider debt reduction, buying back some of your own debts, or notes in other words, or are you perfectly comfortable where you are with your debt levels?

James F. Park -- Chief Executive Officer

Hi, Jenny. Good morning. Our debt will be -- we do consider debt reduction as part of the -- uses for excess cash. The debt is composed mainly by two instruments, of both parties, the bond [Phonetic] . And then we have $15 million of debt in Brazil that matures in -- it's an amortizing

number that matures in October next year -- is a dollar denominated loan that is hedged with a synthetic hedged transforming to [Indecipherable]. So, repaying that is expensive because of the unwinding of that hedge and is low cost hedge, so we are probably not going to be prepaying that because it is expensive, is probably cheaper to keep it until maturity, which is not far away. On the point of buying back bonds, currently we are standing at one-time net-debt-to-EBITDA with our cash flow and cash generation growing. So our net-debt-EBITDA is expected to continue going down.

So at this point, even though we do want to raise potentially from time to time buying back bonds, we are locating most of that variety to be buying back shares rather than bonds. That is part of our analysis, but we feel fairly confident or comfortable in the deliveries [Phonetic] that we are today, which is more or less around our long term comfort levels, one-time net-debt-to-EBITDA.

Jenny Xenos -- Canaccord Genuity -- Analyst

Okay, great. Switching gears here. Moving on to Peru. What is the status of your EIA application there and what has been done over the last quarter to advance the project?

James F. Park -- Chief Executive Officer

So in Peru, as you know, the EIA is the key document for us to move forward with investments there. A few weeks ago, we announced that we were doing some works to reinforce the information being added and being completed in the study. This is a highly complex and lengthy document that gathers the input from many different stakeholders in the project and involves working with more than 10 different governmental entities within Peru.

So our team felt that we needed to do more work on the EIA. So we are currently working on improving it and the team in Peru is working on designing the different factors [Phonetic] for us to refile that EIA under different timings for the project that each one of those alternatives would imply. We're expecting to have those discussions with the team down there during the capital allocation that is going to be done in September. So, hopefully, we will have a much more clear view on the timings in our next conference call.

Certainly, we are given that -- we have not got the approval yet as we had expected around June this year. That means that we are not going to be investing the full amount that we had anticipated for 2019. I think that was -- the updated amount was like $20 million. So right now, that amount for 2019 should be around $10 million for Peru. But we will have a better knowledge on the timings, hopefully for the next conference call.

Jenny Xenos -- Canaccord Genuity -- Analyst

I guess the question becomes whether the 2020 spend -- kind of the project moving forward is still intact? Because you're going to be answering kind of the next window of the construction season, if I understand it correctly, kind of -- in November or thereabouts. So ideally you would start working on the projects of that time, but it seems at this point that it's kind of unrealistic to expect that. So has likely been that the year-end 2020 timing for the project start-up will become 2021 or later?

James F. Park -- Chief Executive Officer

Yes. I mean, it is -- as I said, the timing's -- there are going to be different options in terms of timings and we'll see which one we decide. It is correct, that it's unlikely. I will be able to get the first production during 2020 and it's more likely 2021. However, we are waiting to see all of the options that are on the table before we actually give a formal guidance on what that timing would be.

Jenny Xenos -- Canaccord Genuity -- Analyst

Okay. Understood. Could you also provide us please with some color on that continued reduced demand for natural gas in Brazil. And if possible, kind of your outlook for the remainder of the year. And I also understand there is some gas regulations being proposed there, what could be the impact of them on GeoPark?

James F. Park -- Chief Executive Officer

Yes, absolutely. I'll start by the last one. Although the regulations that are -- the de-regulations that are being proposed have the aim of lowering the gas prices in the country and also deregulating the -- generally the whole hydrocarbon commercialization system. From what we understand and what we have seen so far, most of the measures are aimed for new productions coming, that is mostly aimed for the pre-stock large type of projects and not, not really -- the projects that are already existing with existing contracts like -- like ours. So in our particular contract, we have a take or pay for 2,300 barrels a day for the year.

During the first half of the year, we have been below. There is still time to recover that before the take or pay triggers. So our outlook for the second half is that at least on our cash flow basis, we should be getting our 2,300 BOE per day. But it is difficult to predict. So I would rely on the take or pay. But I can do inform you that the rate of production is full back on track and we're producing 2,600 barrels a day and that's the full nomination that we got for the full month of August. Predicting beyond that is difficult, but I would -- I would assume that it's unlikely that they actually decide to pay the -- settle the take or pay in cash rather than actually taking more gas in the second half of the year to compensate for the lower first half. I don't know, if that was clear. It sounded little bit complicated, but.

Jenny Xenos -- Canaccord Genuity -- Analyst

Yes, -- no. That makes sense.

James F. Park -- Chief Executive Officer

Okay.

Jenny Xenos -- Canaccord Genuity -- Analyst

Thank you. And finally, just want to ask about Argentina. You were -- initially, when you were doing your budgeting process at this time last year, you were planning to do quite a bit of gas-targeted drilling, including [Indecipherable] with gas prices declining consistently there as a result of -- gas production. What are your plans in Argentina for the remainder of the year other than the [Indecipherable] well that you announced in your operational update?

James F. Park -- Chief Executive Officer

The well is -- explorational well is one sign of what we're planning to do in Argentina as a result of the pressure on the gas prices. So [Indecipherable] is actually an oil exploration well. It's a 200 million barrel prospect. So we're trying to switch more toward the oil. We drilled two wells in Challaco as you said. The Challaco 1001 is still on production and on flat production of 40,000 cubic meters a day, that's choked by the gas transportation capacity within the block. And then the wells that we've drilled, they are still under evaluation. We drilled those wells and we frac them during the first quarter of the year. They're under evaluation. And we expect during the second half of the year to reenter at least one of those wells that may have an -- apparently has an oil -- that may be -- we may be able to put on production.

The other thing that we're doing in Argentina is working on the base production. Our team has done an incredible job in improving the water flooding and really signing the fighters for water injection. So they have been able to stop the decline pretty significantly. If you look at our production in the second quarter last year and the second quarter of this year, we're were involved around 2,400 barrels a day. And that's mainly the result of a very successful pooling campaign found by the team in improving the water flooding in those oil fields.

And then at the end of the year, we are working with YPF, our partner in Los Alamitos, which is a large acreage position that we are acquiring in the northern new convention in Mendoza. So at the end of the year, we expect to start shooting seismic in that very attractive block where currently -- where the operator is currently -- which is YPF, is currently doing all the functioning or asking for our fees for that seismic to research -- acquired at the end of the year.

Jenny Xenos -- Canaccord Genuity -- Analyst

So your CapEx will remain approximately the same then this year as you expected originally just the focus will shift slightly more from gas to oil?

James F. Park -- Chief Executive Officer

Yes. That's all within the CapEx guidance that we have to give.

Jenny Xenos -- Canaccord Genuity -- Analyst

Great. Thanks for taking my questions.

Unidentified Speaker

Okay. Thanks very much, Jenny.

Operator

[Operator Instructions] Your next question comes from the line of Miguel Athena of Compass Group.

Miguel Athena -- Compass Group -- Analyst

Hello, Tim. Thank you for the presentation. I have two questions. The first one is how sustainable is the lower Vasconia differential that you have been posting quarter-over-quarter in Colombia? And my second question is, I just would like to understand your medium term plans in Chile, because I feel that it continues dragging down results. Thank you.

James F. Park -- Chief Executive Officer

Hi, Miguel, good morning. Thank you for your questions. On the Vasconia differential, as you said, we are currently experiencing around $2 or less. Our team believes this is not very sustainable, particularly for next year when the IMO 2020 comes into play. That should impact the pricing of the crudes that have sold for content such as -- such as ours. So it is expected that the Vasconia differential should not be sustained for next year. However, it is -- the impact is a mix, it's a different mix of things. The reality is that the lower production from Venezuela is generating higher demand for the heavier crudes like ours. So some of that will compensate some of these IMO 2020. We are working on trying to see if we can lock in some differentials for next year.

However, the proposals, or the things that we have analyzed so far seem to be too high. So for now, we haven't -- we haven't decided on any yet. But we are looking to see if there's an opportunity to lock in at least some of these differentials for next year. But again, just to be clear, we do believe that the $2 per barrel we're seeing today is -- hopefully it does and likely is going to sustain for next year.

Miguel Athena -- Compass Group -- Analyst

So how much do you think it could widen next year? $1, it makes sense or?

James F. Park -- Chief Executive Officer

It could be more. It could be $2, $5 per hourly. That's what people are saying. But as I said, it's very hard to predict.

Miguel Athena -- Compass Group -- Analyst

Okay.

James F. Park -- Chief Executive Officer

Well, probably for our budget purposes, we will use something around $5 per barrel. We will disclose what number we finally end up using when we disclose our budget for 2020. But that's what today we probably see -- forecasting for next year. And then with respect to your question about our mid-term plan in Chile, we have a couple of things that we're working on in Chile, we put on production of the Jauke discovery, which is a very, very attractive gas field in the large digging structure look [ Phonetic]. We drilled the second well there and now we are moving a rig during the third quarter to drill Jauke. Hopefully, we're going to move it on the third quarter most likely drilling on this -- on the fourth quarter, which is when the winter has already passed. This is a very attractive Jauke [Phonetic] is actually an appraisal well that could expand the size of the field. And then also toward the end of the year, we're going to do a frac on existing well that is targeting to test the [Indecipherable]. of the basin.

We have a lot of information. We drilled through this shale. Every time we drill a well, we know there is oil in it. There's a significant amount of oil in it. The question is whether could it be with a new technology under fracking mechanisms, whether it could be put on production at an economic level? So we're going to start testing these opportunities toward the end of this year.

Operator

Thank you. I'll now turn the call to Mr. James Park for any additional or closing comments.

James F. Park -- Chief Executive Officer

Thank you, everybody for your interest in GeoPark and your continued support of our company. We encourage you to please visit us at our operations in each country and call us at any time for more information. Thank you.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

James F. Park -- Chief Executive Officer

Augusto Zubillaga -- Chief Operating Officer

Unidentified Speaker

Gavin Wylie -- Scotiabank -- Analyst

Jenny Xenos -- Canaccord Genuity -- Analyst

Miguel Athena -- Compass Group -- Analyst

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