GeoPark Ltd
NYSE:GPRK
Earnings Call Analysis
Q4-2023 Analysis
GeoPark Ltd
In the last quarter of 2023, GeoPark staged a notable comeback, with operational results leading to 10% increased production compared to the previous quarter, averaging 38,400 barrels of oil equivalent per day. This was enabled by the restoration of previously shut-in wells and a successful exploration campaign. Overall, the company invested $200 million in capital expenditures to drill 48 gross wells in 2023, which in turn fueled a reserve replacement ratio of 110%.
For the year 2023, GeoPark saw a decline in its adjusted EBITDA, which decreased by 16% to $452 million in comparison to 2022, due to lower prices and production volumes. However, the company pointed out its financial strength with robust cash reserves and net leverage comfortably below its long-term target range, exhibiting a debt-to-EBITDA ratio of 0.8x against a target of 1 to 1.5x.
The company's continuous pursuit of growth opportunities signals its ambition to boost business performance. In line with this, GeoPark has announced a share repurchase initiative of up to $50 million through a modified Dutch Auction tender, reflecting its view that the current market undervalues the company's intrinsic asset worth.
GeoPark's efforts in sustainability have been recognized with an improved score on the Carbon Disclosure Project (CDP), marking their commitment to transparency and environmental responsibility.
By drilling the initial horizontal well in the Jacana field, GeoPark is advancing its techniques within the Mirador formation. Horizontal drilling accounts for over 20% of the Llanos 34 field's production and has led to a substantial 30% reduction in drilling and completion time and a 40% drop in costs.
Despite confronting operational delays in the Halcon well, which resulted in lower than expected production, GeoPark remains optimistic about its potential oil volume. Additionally, the company has stable and promising wells like Zorzal 1, which produces 660 barrels of oil per day at a low 4% water cut.
GeoPark aims to offset its base production decline of 20-25% through proactive drilling and conversion initiatives, thereby projecting a consistent output level across the Llanos 34 field for the foreseeable future.
The Indico wells are showing favorable and steady production, with new developments projected to yield similar results to past wells, reinforcing confidence in GeoPark's operating capabilities.
GeoPark is evaluating potential asset acquisitions in the Vaca Muerta formation in Argentina, recognizing the opportunity to deepen its Latin American portfolio at one of the continent's most promising oil prospects.
GeoPark's comprehensive capital return strategy anticipates a yield to investors in the range of 13% to 15% for 2024, combining dividends and both regular and extraordinary share buybacks, assuming consistent stock performance.
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Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the fourth quarter ended December 31, 2023. [Operator Instructions] 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 website 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 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 here and were prepared in accordance with the IFRS and stated in the U.S. dollars unless otherwise noted. Reserves figures correspond to PRMS standards.
On the call today from GeoPark is Andrés Ocampo, Chief Executive Officer; Jaime Caballero, Chief Financial Officer; Augusto Zubillaga, Chief Technical Officer; Martin Terrado, Chief Operating Officer; James Deckelman, Chief Exploration Officer; and Stacy Steimel, Shareholder Value Director.
And now I'll turn the call over to Mr. Andrés Ocampo, Mr. Ocampo, you may begin.
Good morning, and thank you for joining our fourth quarter and full year 2023 conference call. We have recently celebrated our 10-year anniversary of listing on the New York Stock Exchange and we're thankful for the more than 2,000 shareholders and bondholders and the many others that have joined us in this journey and look forward to continuing delivering results over the next 10 years.
GeoPark had a strong finish in 2023 where operational results during the fourth quarter allowed us to recover volumes, replenish 2P reserves and build a healthier balance sheet. We invested $200 million in capital expenditures during 2023 to drill 48 gross wells, resulting in a 2P reserve replacement ratio of 110% and average production annually of 36,500 barrels of oil per day equivalent. Thanks to the restoration of production from the Indico-6 and 7 wells in the CPO-5 block in September and boosted by the more than 5,500 new gross barrels added from our successful exploration drilling campaign -- we were able to increase our fourth quarter production to an average of 38,400 barrels of oil equivalent per day, which is 10% higher than the third quarter.
For the full year 2023, GeoPark generated $452 million in adjusted EBITDA, down 16% compared to 2022, following lower prices and production. These results also reflect lower operating and administrative costs and lower hedge losses. Every dollar invested on our assets returned 2.3x adjusted EBITDA proving the quality of our asset base and consistent capital efficiency. We ended the year with a significant cash position of $133 million further illustrating our financial quality.
Our net leverage of 0.8x was well below our long-term target of 1 to 1.5x adjusted EBITDA, and we have no principal maturities due until 2027. We ended 2023 with a net income of $111 million, the equivalent of approximately $2 per share. Our financial performance allowed us to continue returning cash to our shareholders with a 13% capital return yield or a $61 million balance between buybacks and dividends.
We continue to invest as 1 of our top priorities in our ESG+ that we call SPEED initiatives and efforts with great results and recognition, mainly on carbon intensity as well as in governance. We were upgraded by MSCI to a AA rating, placing us in the ESG leader bracket for the first time. That is also a significant improvement over our initial single B rating back in 2018. We have also recently embarked on that journey with the Carbon Disclosure Project, CDP, Climate Change participating for the second year in a row and achieving an upgrade to B from C.
Internally, we completed a double materiality exercise to fine-tune our sustainability strategy and a thorough human rights risk impact assessment for our operations in Colombia. The action plans resulting from this proactive exercise will continue to make us a better company and a better partner for employees, neighbors, authorities and investors.
Looking ahead, at the end of last year and the beginning of this year, we had encouraging results in our CPO-5 block with the Halcon 1 well and the Perico 1 well both which tested oil, proving our team thesis of a potential continuation of the Tigana, Jacana oil play into the northern part of the CPO-5 block. These were long-awaited results, and we're excited and encouraged by these wells so far. We expect to continue operating and derisking this new play going forward.
We are also having encouraging results in Ecuador with oil production being tested at Perico Norte-5 well, which means 4 out of 4 successful wells in this new U-sand play developed by our team. Same in the Llanos exploration acreage where more wells and more production are expected to come from the 4 new discoveries of last year. In the core Llanos 34 block, we continue with the horizontal drilling campaign as well as expanding our water flooding project with more injectable wells being added.
As part of our disciplined capital allocation process, our own shares are currently offering a unique opportunity for repurchase, which is why we announced our intention to commence a modified Dutch Auction tender to buy up to $50 million of GeoPark shares following our view that the current market value of GeoPark does not properly reflect the intrinsic net value of our assets. We also believe that the current market environment and financial health of the company provides ample headroom to execute this great investment while continuing to achieve our long-term goals.
We continue to assess other opportunities to grow and improve our underlying business performance. Our goal is very simple: deliver more energy, more value and more shared prosperity. We're ready for and excited about our next 10 years on the New York Stock Exchange, and thank you for your support and trust during this journey. We look forward to reporting on our progress throughout the year, and we'll be happy now to answer any of your questions.
[Operator Instructions] And our first question goes to Stephane Foucaud of Auctus Advisors.
I've got a few. First, I think you touched based around operation. I was wondering whether you could provide maybe some more color. We're expecting a few things in terms of news flow in Q1. I'm thinking about well test results at Halcon 1, Zorzal Este 2 and some [indiscernible] So I was wondering in Ecuador whether there's been any update or something worthwhile to share on those.
Then on the horizontal well at Llanos 34, how are things at the moment? Is it tracking performance better than expected, it'd be also curious to have a view of you given it's quite important for production. And then 2 perhaps simple accounting question. I saw in the account that there was an impairment I think, of $13 million, $13 million. I wonder what is that, maybe Chile, maybe not.
And there was also a write-off of $8 million for exploration. Also, I don't think there was any exploration negative results in Q4. So I was wondering what that was about.
Stephane, this is Terrado. So I'm going to take the horizontal wells question. So far, we have already drilled 7 horizontals in Llanos 34 in the Mirador formation in the Tigana field. So horizontal wells represents more than 20% of the production of Llanos 34. So it's around 10,500 barrels of oil per day.
Currently, we are drilling the first horizontal well in the Jacana field in the Mirador formation. So looking forward, we will continue with the horizontal well drilling campaign mainly in the Mirador formation, and we also have a well planned in the Guadalupe formation. So 1 line, we will be drilling between 5 to 7 more wells this year. And in parallel, we'll continue looking for ways to optimize drilling and completion costs.
Since the first well, we improved drilling and completion time by 30% and cost by 40%.
Stephane, this is Martin Terrado, and I'll take the question on Halcon or Zorzal Este 2 and then let Jaime go over the impairment question. So for Halcon, basically, you're talking about CPO-5. So we have 2 wells, Halcon 1 and Perico 1. Halcon is right now producing about 120 barrels of oil per day with about 40% water cut. This well compared to Perico has lower production, and I'll share a little bit what we're seeing.
In contrary, Perico is a much better well, producing 630 barrels of oil per day with less than 10% water cut. And when you look at the logs, Halcon has around 25 to 30 feet of net pay versus Perico 10 feet. What has happened in Halcon is that the well was drilled and completed, but the operator had about 30 days of delay to put the well on production. So completion fluid was in the hole for about 30 days and through builders, we confirm that the well is damaged.
So although the production of the well is not what we wanted and what we expected compared to the logs, we know the oil is there, and we're really encouraged. Furthermore, the rig that is drilling right now Indico-3 probably has about 25 to 30 more days to go, and it will go back to this extension of Jacana and Tigana to drill the well seismic. So we're very excited about those results, and Halcon has an operational setback that we're discussing with the operator.
Concerning Zorzal, in Zorzal, the Zorzal 1 continues to be stable, about 660 barrels of oil per day, 4% water cut, beautiful API gravity of 33. So that 1 is doing good. When we drill Zorzal 2, we did hit a spot and they were evaluating because the productivity of that well is coming with high water cut. So we're looking at that well in particular.
That said, again, on the Zorzal discovery, we're looking at further appraisals later in the year.
And potentially maybe even more color on the well.
Yes.
Stephane, this is Jaime. Thanks for the question. I'm going to cover the 2 angles. The $13.3 million impairment that you saw effectively is associated with Chile, as you rightly hypothesized. And it's basically the difference between the transaction that we did and what we had in the books at the time. The write-offs that you're seeing in the fourth quarter is $8 million is associated to our well in Llanos 87 that Tororoi well. Those are the 2 points.
Great.
But that was the well from last year. It was well from last year that flow noncommercial volumes. And so we took time to analyze and evaluate and then ended up deciding to plug and abandon the well. That's why you see the write-off now and not before.
The next question goes to Roman Rossi of Canaccord.
Congrats on this great quarter. So the first question is regarding crude oil differentials. You reported a lower local market discount this quarter. So I just wanted to understand what you're expecting for 2024 in that regard.
Roman, this is Jaime. What we're seeing in terms of our differentials, they're actually pretty much stabilizing, I would say, around the 10-year averages. Vasconia has been gravitating in the $4 to $6 range. I think we closed the quarter at $4.9 at discount. Oriente is at $8.6 per barrel, also kind of close to the $7.8 per barrel kind of average over the last 10 years. So pretty stable.
Overall, what I would say in terms of the market is it's been a positive market. Year-to-date, headline Brent price, it's around $81 a barrel. When you look at kind of general trends and directions what we're seeing is that -- the supply and demand are both growing at pace. So it provides for a good margin environment for what's occurring now. That's generally what we're seeing. Thank you, Roman.
Great. And the second question is regarding the Dutch offer you just announced. Are you expecting to initiate and complete in first quarter of 2024? Or are you assuming that you will have some of this during the second quarter of the year?
Yes. Thank you. Thank you, Roman, on that. The Dutch auction in -- I think the overall context was provided by Andreas in his opening remarks. In terms of the execution, what we are seeing is that this should likely occur. We're going to initiate it in the next few weeks. I think there's some time dependencies around that. We need to have that open for a 20-day -- business day period. So that probably means that the execution of the Dutch auction is going to be completed around mid-April, mid- to late April. That's what we would expect. So that's the time frame that we're operating with at the time.
We have a question from the webcast from Daniel Guardiola at BTG Pactual. 2 questions from my end. Can you share with us what is the declining rate of LLA-24. And how do you foresee CPO-5 evolving?
Daniel, this is Martin Terrado again. If we talk about Llanos 34 and the decline for 2024, we basically see flat production on that field. The base production decline is around 20% to 25%. But with the activity that we got going on with 2 rigs drilling horizontal wells, injector wells and some vertical wells plus some conversions on water injection. Our view is that we're going to stay flat throughout the year for Llanos 34. Talking about CPO-5, we're excited about the well that is coming Indico-3. It's a well that is a development well, the last development well of the Indico. Indico continues to be very flat and good production. All the wells are flowing naturally, around 23,000 barrels of gross -- so in this well, we expect order of magnitude something similar to the previous wells. So that's the short term that we got.
The rig will continue throughout the year. So as we mentioned on the previous question from the well Indico-3 we're going to go back to the Halcon, Perico area and drill seismic -- and then after that, we will drill an exploration well called [indiscernible] followed by some additional appraisals in Cante Flamenco and then based on the results that we continue to have some additional drilling in the continuation of Jacana, Tigana.
We have a couple of more questions from Daniel. Are you actively looking at the assets that Exxon is disposing in Vaca Muerta in Argentina? The next question, can you confirm what is the expected capital return yield for 2024 combining dividends, regular buyback and the extraordinary buyback of USD 50 million.
Thank you, Daniel. Yes, I mean, as you know, we have an active portfolio of opportunities that we're looking at throughout Latin America Vaca Muerta is probably the most -- or 1 of the most attractive onshore oil plays in the region, 1 of the most underdeveloped ones. So obviously, looking at opportunities in a place like that is important for us, and we're effectively looking at ideas there. And yes, that's 1 of them. And -- so it sounds like an interesting opportunity for a company like us.
Daniel, with regards to yield, currently, given our dividend -- our expected dividend distribution, we're talking about a yield that's around 7%. When you consider the continuity of that through the course of the year and buybacks, the Dutch auction that we recently announced and obviously subject to stock performance throughout the year, what we would be anticipating is a yield that may end up being in the 13% to 15% type range. That's what we would expect. Obviously, contingent on stock price performance throughout the year and how these buybacks perform.
[Operator Instructions] It appears we have no further questions. I'll now hand back to Andreas for any closing comments.
Thank you, everybody, for your interest in GeoPark and your support. We're always here to answer any questions you may have. So please feel free to reach out, and we encourage you to visiting our field and our operations or call us any time for further information. Thank you, and have a good day.
Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.