GeoPark - Q1 2024

Transcript

Operator (participant)

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 withdraw 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 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. This risk includes a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC filings 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 IFRS and are stated in US 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, Martín Terrado, Chief Operational Officer, James Deckelman, Chief Exploration Officer, Rodrigo Dalle Fiore, New Development and Portfolio Director, and Stacy Steimel , Shareholder Value Director. Now I would like to turn the call over to Mr. Andrés Ocampo. Mr. Ocampo, please, you may begin.

Andrés Ocampo (CEO)

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 Llanos 34 and the CPO-5 blocks. In the Llanos 34, our core asset, the combination of our horizontal well program and increased water flooding project, took gross production to a range of 56,000-57,000 barrels a day in early April, the highest level in the last 12 months.

With the addition of the Indico 3 development well in April, the CPO-5 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 0.8x and remains well below our long-term target of 1x-1.5x.

We recently added an offtake and prepayment facility with Vitol 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 1x 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, a 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 Reports for 2023, which highlights that we reduced our greenhouse gas emissions intensity by 18% from 2022. At 10.6 kg 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 Llanos 34 block, which supplies close to 7% of Colombia's total oil production, had remarkably low intensity of 7 kg of CO2 equivalent per barrel.

With respect to our asset portfolio expansion, we announced on Monday a new transformational acquisition in Vaca Muerta 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 Mata Mora Norte block was producing zero about three years ago and is currently over 12,000 barrels a day from 26 wells in 8 pads, and with a 9th pad of 4 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%-40% during the execution of the multiple remaining drilling locations.

Upon closing of this transaction, we expect to add between 5,500-6,500 net working interest barrels of oil per day to our daily production, which is about 15%-20% increase to the first quarter production. 50 million barrels of net 2P reserves of 43% versus our December 2023 reserve certification, which also include over 800 million of after-tax NPV10 at GeoPark working interest, equivalent to more than 4.5x the purchase price of Mata Mora Norte. An estimated annual net EBITDA of $90 million-$100 million in full year 2024, which could grow by nearly 3x to $300 million at plateau production and at $70 Brent, or more than 3.5x at current oil prices.

Approximately 240 million barrels of gross 3C certified contingent exploration resources in nearly 200 additional drilling locations, which could provide further significant growth even beyond the Mata Mora Norte plateau production. A significant part of this exploration upside is imminent, as the first pad has been built and the first exploration well was spudded 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 well.

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 Vaca 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.

Operator (participant)

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. Our first question comes from Alejandro Demichelis from Jefferies.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Yes, good morning. Thank you very much for taking my questions. Three questions, if I may. Maybe the first one, Andrés, 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 kind of couple of years? For 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 CPO-5? And then the third question is on the new acreage in Vaca Muerta, 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?

Jaime Caballero (CFO)

Hello, Alejandro, this is Jaime. I'm gonna address your first question, if you will, and it kind of tackles two angles. It's, as I understand it, which is, you know, how does this entry into Vaca Muerta and its, you know, capital profile and production profile affect shareholder returns? So I'm gonna first talk a little bit about the 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 Mata Mora in particular, our goal is to reach 40,000 barrels of production, around 2027. And we expect to retain a plateau of possibly, you know, two to three years around that time.

In order to get there, the CapEx exposure that we see to get there is gonna be around $1.3 billion over the next 10 years, right? It's gonna gradually escalate. We see this year, it's gonna imply an incremental CapEx of about $100 million. Next year, about $160 million-$170 million, getting to a peak of $280 million around 2026. So that's what it's gonna take in order to get there. Now, we obviously need to put that in context, that getting there is gonna 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 million-$400 million per annum at $70.

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 gonna 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 two, 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 gonna 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, you know, 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 gonna be a capital intensity associated, but given the returns that the asset provides, 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, you know, 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-$2.6 billion.

That's a 46% improvement. So all in all, you know, we believe that our shareholders are gonna be benefiting from both sides. On one end, from the direct, you know, cash yield angle, if you will, but also from a intrinsic growth over time. Thank you.

Andrés Ocampo (CEO)

On CPO-5, Martín? Martín, would you like-

Martín Terrado (COO)

Yes.

Andrés Ocampo (CEO)

-to take CPO-5?

Martín Terrado (COO)

Absolutely. Good morning, Alejandro, and thanks for your question. Like, Andrés mentioned in his initial remarks, we're really happy with CPO-5 performance. We keep breaking records. You gotta remember that in November 2018, 2019, when we acquired Amerisur, that block was 8,000 barrels of oil per day, and like Andrés mentioned, we're at 30,000. We have we put on production the well Indico 3, and it's producing good rates, around 3,700 with no water. The rig continues drilling in the. When you look at delineation, like you were asking, you gotta remember, we got two wells that we drilled, delineating the Barco formation. They were Halcon 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, it's not producing as well. And as we continue delineating, we are drilling the well, Cisne. This is part of the Barco 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 Lark. And so that's kind of where we are on the delineation. We expect to have that rig working the full year.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

That's great. Thank you, Martin.

Rodrigo Dalle Fiore (New Development and Portfolio Director)

Hi, Alejandro, this is Rodrigo. I'm going to tackle your question about Confluencia. Technically, what we see there is a continuation, a continuity of Mata Mora 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 API 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 Pan American in Bajada del Palo Este and Aguada 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 DeGolyer and MacNaughton, where they say that we have more than 200 million barrels as resources in the area. But to be honest, we have to de-risk 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 sq km 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 range that we see in Mata Mora.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

Could you please confirm the rates that you see in Mata Mora then? Mata Mora Norte I mean.

Rodrigo Dalle Fiore (New Development and Portfolio Director)

Yes, we can go to Mata Mora Norte. During the evaluation period, we ran a robust analysis. We not only used the 26 wells that we have in Mata Mora, we also see the neighborhoods in, and these, analog fields. And also we have our reserve report from DeGolyer and MacNaughton, and at the end of the day, we see a range, a range between 600,000 barrels per day and 1 million as a most of the wells. But what we're seeing now is a, is a clear, learning curve leading by our operator, and partner, because the, the most recent wells are outperforming. They are producing very, very good. You can see more than 2,000 barrels per day as a, as a productivity.

Another example, a good example that you can take is, in February, the Mata Mora 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 in, with the last result that we are seeing.

Alejandro Demichelis (Managing Director of Latin America Equity Research)

That's great. Thank you very much.

Operator (participant)

Our next question comes from Daniel Guardiola from BTG.

Daniel Guardiola (Executive Director of Equity Research)

Hi, good morning, Andrés 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 CapEx 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 Mata Mora 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 will be additional details on the Mata Mora 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'd be great to see the EUR of the type curve that you're seeing, and the average realized prices at which the Phoenix is basically selling its oil, flowing out from Mata Mora Norte. And the third question and the last question is on future growth opportunities. I mean, my understanding is that after the closing of this transaction, your net leverage is not gonna surpass 1.1x 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, the main feature you will be looking at when doing another acquisition? That will be all.

Jaime Caballero (CFO)

Hello, Daniel. It's Jaime here. I'm gonna try and cover a number of the questions that you made, and I'm gonna then pass it over to Rodrigo, who's gonna give us a little bit more color around Mata Mora Norte to date. So let's start first with your first question, which is essentially around our development plan philosophy. 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 asset, right? Where we want to take the asset.

There is here a joint vision, where we wanna take the Mata Mora development to 40,000 barrels a day. In parallel, we wanna fully explore Confluencia and hopefully add to that. And what we're seeing is four blocks that over time are gonna have massive economies of scale and of development pace, and even commercialization. So that's what we're aiming to do, right? And that vision that you can extract from our release takes us to anywhere between 40,000-60,000 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. You know, there's a de-risking component associated to that. In Mata Mora, it's actually quite firm, and it's what essentially underpins the reserves 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 gonna come in the later part of next year. After that, we're seeing a sustained two-rig drilling program, indefinitely, essentially.

Indefinitely, as more options, you know, 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, you know, 350 wells, given, you know, the well cost, it's gonna take you to that place. Let me cover now the average realized prices. Essentially, what we're seeing and what we are 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 gonna 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 gonna change over time, you know, as the market evolves. This is a basin that is growing very quickly, and of course, the commercial conditions around it, as infrastructure matures and evolves, are gonna change as well. But generally speaking, that's the direction that we're seeing.

I think what underpins that assumption, that 70% 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 a flexibility to export volumes. The sort of differentials that we're seeing are in the range of $10-$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, you know, over the near term.

I think what could change that is there's two, two angles that could change that, leverage. I think that, if, if we have a success case in Confluencia, possibly our, our, our capital or possibly, no, our capital intensity will increase, but it will increase for the right reasons, right? It will increase for the right reasons, with a substantial reserves, production, and EBITDA price associated to that. We've modeled that a very, 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 a remaining firepower to engage 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, you know, 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 gonna get it right, and we need to get it right. In that sense, you know, we're setting up a team that is gonna work, you know, with Phoenix to progress this development plan. As we've been discussing, we're gonna be placing second deeds.

We're gonna be securing, you know, the, the provincial approvals that we need to, to get the transaction closed, within the next few months. We're gonna set up management processes that allow us to have, you know, quality conversations with, with our partner and with the market around how this is evolving over time, you know. And in the end, it's ultimately all about how can we efficiently and effectively collaborate with Phoenix to deliver the, the, the value promise that, that, that we're making with this deal. So that's, that's clearly the priority. Having said that, 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 Andrés in the prior call, Daniel, when you asked about this, Andrés was very eloquent about our, you know, pan-regional aspiration. You know, we are strong believers in the quality of Colombia, Brazil, and Argentina, as, you know, 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 it's 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 covered. I think I covered four of your five questions. Over to Rodrigo.

Rodrigo Dalle Fiore (New Development and Portfolio Director)

Thank you, Jaime. Hello, Daniel. This is Rodrigo. We said that range between 600,000 barrels and 1 million as an average in the Mata Mora 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 aspect, but also the way that they are at least landing the wells, because they switch 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 productivity.

So that's part of the learning curve that we are seeing. So that's why, if I had to summarize this, the initial estimation that we see for the area is a well that can produce between 1,000 and 1,500 barrels 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 barrels 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 you, of course.

Another thing that we see with a optimistic eyes is the well cost. They were able to reduce the well cost 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, we, you ask about the plan. We've, 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.

Andrés Ocampo (CEO)

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

Rodrigo Dalle Fiore (New Development and Portfolio Director)

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

Daniel Guardiola (Executive Director of Equity Research)

Thank you guys for the very thorough answer.

Operator (participant)

Our next question comes from Román Rossi from Canaccord.

Román Rossi (VP)

Good morning, guys. Thanks for taking the questions, and congrats on the results on the acquisition announced. So just wanted to get a sense regarding the facility with Vitol. 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 SOFR plus 3.5%, but does it have a, an undrawn fund cost associated? And additionally, what's the cash at current target after the acquisition?

Jaime Caballero (CFO)

Hello, Román. How are you? Let me cover the Vitol question. So I would start saying that the Vitol deal, it starts with being about commercial performance, you know. Financing optionality is a plus, it's an upside, but the underpinning, it's commercial performance. So this deal covers and secures a very competitive commercial discount for our Llanos 34 production. That improved commercial differential is something that we're actually gonna see coming across as better price realizations.

I think we've called it in the statement that this represents a $0.60 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, Vitol 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.

You know, we quoted SOFR plus 375, that's about 9% interest, which compares very favorably even with our own existing bond and, and, and the sort of interest that you would get in longer term financing in the bond market today. It also give us a grace period that extends till 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, you know, 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 gone 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 need 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, you know, the carry component of the Confluencia wells, is gonna go in parallel to this. And what we are estimating is that that's gonna 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 gonna represent, you know, an extra $250 million versus the plan that we had. How are we gonna finance that? It's gonna be likely a combination of the cash surplus that we are accumulating at these prices. We are accumulating a cash, an important cash surplus every month at this price deck, and the remainder, very likely, using the Vitol, 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.

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 gonna 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, Román.

Román Rossi (VP)

Great. Thank you, Jaime. And maybe I'll follow up on the acquisition. You said that you expect to close in Q3, so that will be impacting your fourth quarter financials, right?

Jaime Caballero (CFO)

Yes, Román. 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, it's 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 to provide so that we are 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.

And there are two aspects. You know, we need an approval in Neuquén for Mata Mora, and we need an approval in Río Negro for Confluencia. So we are expecting that to occur, you know, 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 gonna be the first of July. So the economic aspects of this deal are already effective starting on the 1st of July. So we start to look at all the accounting of the deal on that 50/50 basis, you know, the 50% basis. What, how is this gonna translate into accounting?

What we, what we see is that, subject to closing date, and, and, and let's assume that we close by the end of 3Q, what you're gonna see is that in the 4Q financial statements, you're gonna see these fully consolidated on a line-by-line basis, right? As an indication of that, in 4Q, you're gonna see anywhere between, you know, 6,000-7,000 extra barrels a day of performance, of production. You're gonna see a share of cost, you're gonna see, you know, all, all the different lines, what this deal implies. On the EBITDA line, what you should be expecting for 4Q would be an additional EBITDA around $30 million. That's what we are, you know, estimating at this time.

So it's gonna 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 1st of July, regardless of closing date. That's the bottom line.

Román Rossi (VP)

Awesome. And just one last question, on Colombia. So a couple of weeks ago, there was a public hearing at the Constitutional Court regarding the non-deductibility of royalties. So do you have any comments on that front? And, say that they wanna keep the non-deductibility value for 2023, which is one of the alternatives that, the government is trying to get. So will you need to pay more taxes, or how that will work for GeoPark? Thanks.

Jaime Caballero (CFO)

Sure, Román. So let me provide some kind of broader context on this. So really what's in discussion is that as part of the tax reform that was approved last year, the tax reform had two components. It had a surcharge linked to price environment on the corporate tax. That surcharge went from 0-15. That's in place, it's not in discussion. The other component was the non-deductibility of royalties, which was declared unconstitutional by the Constitutional Court at the time. What has happened is that the government presented a recourse whereby they requested a second hearing on that by the Constitutional Court. What the Constitutional Court has communicated is not a final decision on it, but the willingness to perform that review.

Willingness to perform that review. While they do that, the prior decision still stands. So this does not suspend the decision that the Constitutional Court had already made of declaring that unconstitutional. What that means is that we are actually in May, which is tax season, right? So we are in tax season. Companies are gonna make a decision around how they are calculating the deductibility of royalties. What prevails at this time is that decision that is unconstitutional. So, at least for GeoPark, we are gonna act on the basis that that's unconstitutional, right? Now, what could happen later on is, if the Constitutional Court decides to reconsider its previous decision, this will have an effect on next year's declaration, right?

And there could be some form of a recognition of what was not paid in 2024. What we have estimated, the impact associated to that, we have estimated it between $12 million-$15 million. That's the rough estimate that we have associated to that. It is a range because it depends on things like royalties paid on time, fluctuating volumes. You know, there's some moving pieces around that, so we estimated in the $12 million-$15 million range. Importantly, in the guidance that we have provided to you guys around our full year 2024 EBITDA, we actually This actually doesn't have any impact on that, because the way that we provided that guidance, it assumed at the time, remember that this was the plan that we announced back in November.

At the time, we were operating under the existing tax reform. So, for us, this is an upside. You know, if ultimately this is confirmed as unconstitutional, it is an upside to our case, right? And if the government's idea of, you know, contesting this and challenging this goes forward, it's not gonna represent a downside.

Román Rossi (VP)

Okay, awesome. Thank you, Jaime, and congrats again on the acquisition.

Jaime Caballero (CFO)

Thank you. Thank you very much.

Operator (participant)

Our next question comes from Oriana Covault from Balanz.

Oriana Covault (Equity and Credit Research Analyst)

Hi, thanks for taking my question. Many of them have been answered already, but I have a couple of follow-ups on the Vaca Muerta acquisition. First, regarding the development and completion costs that you shared, it's our understanding that your operating costs have been in the $10 million-$11 million per well. So just to understand if this difference between the numbers that you're targeting is because of area specifics, and/or if you could share additional color on what you're seeing on your end. And also related to the Vaca Muerta acquisition, if you could comment on any from the regulatory side of things, right? How are you seeing the landscape in terms of the possibility of repatriating profits of the operations once they are ongoing? And one last one regarding quality discounts.

Congratulations on the commercial agreement with Vitol. But just to understand, should you be expecting any potential. What are you seeing from the entry into operation for the Dos Bocas Refinery and can it lower exports of crude oil? Could this potentially benefit you in terms of quality discounts? That would be an helpful color to have. Thank you.

Andrés Ocampo (CEO)

Hi, Oriana, this is Andrés. Your line sounds a little bit noisy. Let me repeat to see if we understood your questions correctly. Your first question is respecting the drilling and completion cost of the wells that we're estimating for these assets?

Oriana Covault (Equity and Credit Research Analyst)

Yes. It has to do with the drilling and completion cost, compared to what local peers have been reporting in the same area. Our understanding is that it is closer to perhaps $11 million per well. So just to understand whether the difference is something area specific, but or if you could share additional color on what you're seeing, and also on the Vaca Muerta transaction, the additional follow-up had to do with the regulatory challenges that you may see, to the potential of taking profit from the operation. The last one had to do with quality discounts, and where do you see them going through the remainder of the year? Thank you.

Andrés Ocampo (CEO)

So the second one is related to capital controls in Argentina, and the last one to quality discounts on the crude sales, correct?

Oriana Covault (Equity and Credit Research Analyst)

Yes. Sorry for the trouble with the line.

Andrés Ocampo (CEO)

No, no, that's okay. That's okay. So, Rodrigo?

Rodrigo Dalle Fiore (New Development and Portfolio Director)

Hello, good morning. This is Rodrigo here. It's important to remark that the drilling costs two years ago was close to $16 million per well. Now, the end of 2023, with a $14.3 million per well. So that is a tremendous improvement. Of course, this is because they learn, but also they introduce technology and the services prices getting down. So that's the trend that we see for the future. In the model we use for the next two years, $14.3 million per well, but after 2026, with an extra drilling rig in the area, we are talking about $13.6 million per well. So that's the base case that we have.

But to be honest, what we see is a trend not only here in Argentina, but at the same time, you can see the same trend in Permian. The trend in the efficiency in terms of drilling wells is continually improving. So that's why we expect better performance in the future and lower costs. But that's the cost that we use for the model.

Jaime Caballero (CFO)

Oriana, I guess in terms of your angle around benchmarking, I think there's several considerations here, but I think the most important thing is to look at the trend, right? Regardless of who is the operator, what we're seeing in Vaca Muerta is a consistent trend, where your cost per well is improving over time. I think, as you would expect, there are differences from operator to operator. That's always the case. It depends on the standards that they use, it depends on a specific requirement of the locations and geographies where they are operating that allow synergies or not.

The $10 million-$11 million cost per well that you're mentioning, we believe that is in the very low end. We prefer to use a more conservative assumption that ensures that we can maintain the robust well designs that have characterized Phoenix so far. That's something that actually attracted us to this deal, and it has to do with this alignment, you know, of ways of operating and everything. And Phoenix is of the view that you need to ensure certain, you know, integrity standards and quality standards on the well, and we're comfortable with that. I think anything that can be delivered on top of the $13.6 million is gonna be upside, and that is, of course, great news.

With regards to your other questions, Oriana, you know, the regulatory challenges in Argentina, I'd say, you know, the way that we've structured the transaction is that the transaction needs to fly under the existing regulatory environment, right? So we are not banking on any type of positive development in the regulatory environment, even though there are clear winds of change that could suggest that those upsides are possible. In the near term, the biggest consideration that we've looked into is capital controls, you know, and particularly those associated to the influx of money going into Argentina and coming out of Argentina, and what is the impact of that in the economics?

I would say that our biggest consideration is that when you look at the profile of this program and the goals that we talked about this program, where we wanna grow the asset quickly over the next five years, what we're seeing is that it is not a big issue, the capital controls, because we actually expect that all the revenues, you know, and all the EBITDA that this deal generates to stay in country to underpin that growth, you know, in the near term. I'm sure that over the medium and long term, options will come up, you know, if that is needed.

But the priority at this time is to make sure that we can fully fund the growth of that, of that asset, and we're confident that we can do that under the existing regulation. And lastly, with regards to the quality, you know, to the evolution of discounts over time, I think it's gonna be very fluid. And as I mentioned before, Oriana, on a prior question, the important thing is the trend. And the trend that we're seeing is that as Vaca Muerta grows, the surplus production relative to the requirements of domestic refining is just gonna grow and grow and grow and grow, right? Surely, there's gonna be a discussion between, you know, with the regulator and between operators about how do you distribute and how do you allocate exports capacities.

Surely that's gonna develop over time. What we're seeing is that this even in a stress scenario, where you have to fundamentally alter that balance between exports and domestic sales, the quality of this asset is such that it allows you a good return. So even in those scenarios, that is not a concern. So, obviously, to the extent that you can fully, you know, if the market in Argentina develops in a way that you have, if you will, a free market, you know, with perfect conditions, that's only gonna represent upside to this deal. Thank you.

Oriana Covault (Equity and Credit Research Analyst)

Okay, thanks. Yeah, thanks for your question. Just one follow-up, because maybe I wasn't fully clear, but I was referring more on the Colombian side of quality discounts. Just to understand, how are you seeing the evolution of potentially fewer exports out of Pemex because of the entry into operation of the Dos Bocas Refinery, having a potential upside into your heavy crude commercialization? That was more of the angle on this. Thank you.

Jaime Caballero (CFO)

Yeah, sure. Thanks for clarifying, Oriana. So, I guess in Colombia, I'd say, I'll start with a simpler view and then from kind of a more broader kind of market, that in our case, you know, the bulk of our production, which is Llanos 34, we've already secured commercial conditions for those through the Vitol deal. That covers, you know, about 20,000 barrels of production, give or take. And then, what you're talking about is really the remainder, which is a combination of CPO-5, Llanos 34 exploration, and Putumayo. The fundamentals for all of them are going in a positive direction. CPO-5 is a super high-quality crude that is extremely attractive to the local refineries in Colombia.

We believe that we can maintain the existing differentials that we're seeing, the existing commercial differentials that we're seeing for that, which are actually a premium. We're actually getting a premium on Brent of about $5 a barrel on that. So we are very- we're very optimistic about the, about the commercial differentials that we can get for CPO-5. On the Putumayo front, you know, and Oriente front, what we're seeing is an interesting development, you know, where a number of players are actually quite interested in getting those volumes because they're able to export them through the Pacific or to make blends, you know, special blends, as I stated to that.

So overall, you know, what I would tell you, Oriana, is that the sort of differentials that you saw in 1Q, we believe we can sustain them, over the medium term.

Oriana Covault (Equity and Credit Research Analyst)

Perfect. That's very clear. Thank you very much, guys.

Operator (participant)

Thank you. And our next question comes from Alejandra Andrade, from JPMorgan.

Alejandra Andrade (Latam Corporates Research)

Hi, thanks so much for taking my question. Mine is a quick one. I know you said you already have some existing infrastructure for transportation in Argentina, but just wondering, because you said that there was a pipeline still that needed to be built in order to have all the proper infrastructure for exports and transportation. So just wondering if you could comment a little bit more on that. Thank you.

Jaime Caballero (CFO)

Hi, Alejandra. This is Jaime. So yes, effectively, as part of this transaction, we secured the access to the mixing capacity that we need, you know, to make the deal work. Essentially, we've secured an entry into the Duplicar pipeline that provides us with an exit with a capacity of about 19,000 barrels per day. Of that, about 5,000 barrels a day are already in place, and the pipeline is under construction, and it's expected to be fully delivered by April 2026. So by that time, which is when we are starting to, you know, we're gonna get near to the plateau production, we are expecting to have that capability fully in place.

There's also open market access, you know, there's to a redundant capacity in that pipeline, where there's the ability to access that, and there are other projects in place to construct additional capacity in Argentina. But with respect to this deal, in particular, what we have secured is that 19,000 barrels a day that I mentioned. That covers essentially 50% of the plateau, right? So the way to think about it is that we have secured transport rights to export ports for about 50% of the production already, and there's optionality for other infrastructure that's gonna come about over the next couple of years.

Alejandra Andrade (Latam Corporates Research)

Thank you so much.

Jaime Caballero (CFO)

Thank you.

Operator (participant)

We currently have no further questions, so I'll hand back over to Andrés Ocampo to conclude.

Andrés Ocampo (CEO)

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

Operator (participant)

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