Summary
- 2022 has been excellent for the oil industry, including GeoPark.
- GeoPark has had a hard time increasing production in the past few years, but is now rapidly increasing CAPEX.
- Debt levels look manageable.
- The company has been returning value to shareholders in terms of dividends and share buybacks.
- Colombia has somewhat soften its harsh stance on the oil industry, but some risks remain.
After covering one of the promising oil plays in LATAM - Vista Energy ( VIST ), I'm continuing the journey in the same sector and region, but this time in Colombia with GeoPark ( GPRK ). Like the vast majority of the sector, the company is having an excellent 2022 so far. GeoPark has a shareholder return program in place, which includes dividends and share buybacks. In addition, the newly elected government of Colombia has first softened the conditions of the proposed export tax on oil, then dropped it altogether, but the overall anti-oil stance remain. Production growth in the last few years has been nothing, but disappointing. In order to tackle that, the company has planned significant CAPEX increase in the coming years. Overall, the company looks cheap when compared to the industry.
Company overview
GeoPark is an oil and gas company with assets predominantly based in Colombia, where the entity is the second largest independent operator and smaller interests in Chile, Ecuador and Brazil.
The company has simplified ownership structure, consisting of slightly below 59.6M shares as of the end of Q2'22 and no outstanding warrants. Since the beginning of the year, the number of shares have shrunk by approx. 0.7M, as the company has spent US$9.5M in share repurchases. According to data from March 2022, the largest shareholder is the co-founder and former CEO - James F. Park with 14% stake, implying serious skin in the game. The second largest owner is the investment fund - Compass Group (10.2%), followed by the other co-founder - Gerald E. O'Shaughnessy (9.8%).
Strong 2022 so far
GeoPark's Q2'22 results (GeoPark)
The company achieved production of 38.9kBOE/day production rate in Q2'22, up 14% when adjusted for divestment in Argentina. However, it has to be noted that Q2'21 production in Colombia was reduced as the country was going through civil unrest. Combined realized price reached US$90/barrel (+18.7% QoQ; + 77.5% YoY). However, the results of the company were reduced by US$15.5M as the realized price was above the upper band of the zero cost collars, used for hedging. Net profit came at US$67.9M - more than double the bottom line from Q1'22 of US$31M. The good performance since the beginning of the year have led to significant reduction in net debt by more than US$110M to US$462.9M (total debt of US$585.3M and cash of US$122.5M). Meanwhile, a total of US$9.7M were paid as dividends in H1'22 through two quarterly instalments of US$0.082/share each. In light of the strong performance, in September, the company decided to increase that amount by 54.8% to US$0.127/share. Also, a decision was took for the remaining US$67.1M of the 2024 6.5% notes to be fully redeemed.
Going forward, for Q3 I expect the company to continue with the strong results, given their recently published operational update. According to it, production came at 38.4kBOE/day (+8% YoY). While the average realized price may fall a bit, due to the decrease on international markets, the loss from hedging should be much lower, as the upper band is set at US$86.2/barrel. Also, in the Q3'22 operational update management assured that they're on track regarding meeting the production guidance for 2022 of 38.5kBOE-40.5kBOE/day as the current daily production is reported around the 40kBOE mark.
In the next few quarters, if international prices tank for a while, the company would be partially protected as it has hedged some of its production with a floor in the high US$60s in H1'23.
Production growth challenges and expansion plan
GeoPark has been a remarkable growth story, achieving production CAGR of 21.6% in 2010-2019, going from 6.9kBOE/day to around 40kBOE/day. However, since 2019, the company has been stuck with production rates fluctuating around 40kBOE/day. It's interesting to note, that in a rating update from 2018, Fitch projected GeoPark to achieve daily production rate of 50kBOE by 2021. Obviously, that didn't happen.
And while problems with indigenous communities in Peru, did led to GeoPark withdrawing from one project, the decrease in capital spending in 2018-2020 didn't help either. Going forward, the company has an ambitious expansion plan to invest up to US$800M in development and exploration until 2026, which is expected to bring the production organically up to 60kBOE/day. Meanwhile, management guides that on top of that unrisked exploration and M&A activity could add another 40kBOE/day to bring total production around 100kBOE/day. The ramping up of the exploration activities is evident from the Q3'22 operational update, where it's reported that 13 rigs, including 8 drilling rigs, are working on site in October. For reference , ten rigs were employed in July 2022.
GeoPark's expansion plan (GeoPark)
While this plan looks very ambitious, I'd like to see how it further enrolls in the coming few quarters in order to increase its credibility, given absence of growth in the last few years.
Share price and valuation
YtD, despite the strong performance, GeoPark has slightly underperformed the United States Oil ETF ( USO ), which is a proxy for the oil price. However, when we add to the picture the Colombian oil giant - Ecopetrol ( EC ) things start to make sense. The jurisdictional risk, given that the newly elected president has demonstrated tough stance on oil has taken its toll on the share price. When compared to both the median multiples of the industry and its 5-year own average ratios, GeoPark appears cheap.
Multiples comparison (Seeking Alpha)
Furthermore, the company estimates the after-tax NPV of its 2P reserves at US$2.3B, at 10% discount rate assuming long-term oil price per barrel in the range of US$71.9 - US$80. For reference, the current EV is around US$1.3B. The 2022 FCF yield, based on management's guidance from the Q3'22 operational update of FCF in the range of US$250M-US$280M and current stock price, is projected in the range of 29%-33%, which also seems attractive.
I see the potential closure of the valuation gap more as a gradual process, than a catalyst driven event. In high oil price environment, the company will be able to continue and could even expand its shareholders return program, while at the same time reduce debt and invest in exploration and development. If successfully implemented, the expansion program could be another driver of the share price to the upside.
Political risk
Political risk - as mentioned above, political risk is the most probable reason why GeoPark has had inferior performance to the oil price itself. The newly elected president of Colombia - Gustavo Petro has been notorious for his anti-oil rhetoric and supports a ban on fracking. Also, an export tax on oil beyond US$48/barrel was proposed . On top of that, suspension of deductions of royalty payments from taxes was also on the cards. However, following resistance from the oil industry and discussions in parliament, the threshold for the export tax was raised to US$71/barrel and royalty payments are to remain deductible. Shortly after that, the oil export tax was dropped altogether and replaced by an income tax surcharge, which will initially be set at 10% in 2023 and drop by 2.5% in the next two years. Besides the what appears to be an easing of the previous stance of the government, it has to be remembered that most of the time commodity deposits outlive the ruling elites as elections are conducted every few years.
Conclusion
GeoPark offers oil exposure in LATAM, mainly Colombia, at a discount to industry peers. After a few years of absent production growth, the company has put forward a plan to increase CAPEX significantly and return onto the growth trajectory it has been following in 2010-2019. In the meantime, the shareholders return program should continue to reward the owners of the company. While political risk in Colombia has increased following the election, the government has shown that it's able to soften its stance.
For further details see:
GeoPark: A Decent Oil Play