2023-11-23 08:09:52 ET
Summary
- GeoPark Limited's stock price has declined over 30% in the last 12 months, but now offers a 5% yield.
- The company has diversified its operations across multiple regions, with Colombia being the primary contributor to oil production.
- Despite softer oil prices impacting revenues, GeoPark has been returning large amounts to shareholders through dividends and buybacks.
Investment Rundown
The stock price of GeoPark Limited ( GPRK ) has been on a very steady decline for the last 12 months, down over 30% in total. Right now it has declined enough to provide investors with an over 5% yield which might be appealing. The cut guidance that GPRK provided in the recent earnings report has been a key contribution I think as to why the share price continues to decline.
The average production guidance was cut to 36.000 - 37.000 which is due to delays in bringing back shut-in production. The company has made strong strides in reducing its debt position and the valuation is incredibly low I do think most of the risks facing the company are baked in right now in the price. I think selling shares is not the right way to go here, but instead holding on to shares might be preferable. Doing this you get to take advantage of the decent 5% dividend yield and upgrading to a buy I think could be done if GPRK manages to get production levels even higher and give a more optimistic outlook too.
Company Segments
GPRK has effectively diversified its operational footprint, strategically mitigating reliance on a single region for production. While the company maintains a well-spread portfolio of activities, it's noteworthy that the primary contributor to oil production is Colombia. According to the latest report, Colombia alone delivered a substantial 32,945 barrels of oil per day (bopd). Alongside Colombia, GPRK operates in other regions such as Ecuador, Chile, and Brazil, showcasing its commitment to geographic diversity. This diversified approach not only enhances the company's resilience but also positions it to capitalize on opportunities and navigate potential challenges across multiple markets.
Delving into the nuanced landscape of future oil prices, a comprehensive examination unfolds captivating insights. Projections spanning the years from 2023 to 2027 indicate an anticipated average price of approximately $90 per barrel. With these projects, I think we should see a pretty steady climb upwards for oil prices. What has caused significant volatility in the industry is disruption like the war breaking out in Ukraine or geopolitical risks amounting to some areas. Beyond the numerical forecast, this trajectory reflects the market's resilience and resilience, pointing toward a landscape rich with potential. Despite the evolving dynamics within the energy sector, the forecasted price signals a promising environment, offering a canvas for exploration and strategic investment over the coming years.
As for GPRK, I think we will see a pretty steady climb in the revenues should they manage to grow production levels and outputs further.
Earnings Highlights
Looking closer at the last income statement we can see that there have been some impacts of softer oil prices on GPRK results. The revenues dropped from $248 million to $184 million in the last quarter. I don't think this drop was enough to warrant a sell here. It is often the nature of commodity-driven companies that their results are quite volatile. This could be an argument as to why companies like GPRK trade at lower valuations. Right now the FWD p/e for GPRK is under 4. The Q3 FY2022 report also resulted in a gain of $23 million from commodity risk management contracts. The last Q3 report did not include any gains like that but the depreciation instead increased to $29.8 million, up from $21.4 million.
What GPRK has done very well over the last several years is returning large amounts to shareholders. Around 40 - 50% of the total FCF for the company is now being returned to shareholders through both dividends and buybacks. That equates to $40 - 60 million with a capital return yield of 7 - 10%. I think this is enough right now to make for a hold rating at least. My worry is however that the lack of production growth might lead to softer results going forward and no increase to the dividend or buyback budget.
Risks
The primary risk to our thesis revolves around crude oil prices , particularly given GPRK's substantial capital investments aimed at enhancing its business. While we anticipate that the company's low breakeven point positions it favorably during a downturn, a sustained drop in oil prices could pose challenges in maintaining its valuation. GPRK's resilience in the face of such price fluctuations will be crucial for sustaining its growth trajectory and safeguarding investor confidence. Vigilant monitoring of oil market dynamics and prudent risk management strategies will be imperative for GPRK in navigating potential challenges tied to commodity price volatility.
Recent cuts in oil output across certain regions were implemented to maintain elevated oil prices and ensure the profitability of oil companies. However, there's a concern that if these cuts are abruptly terminated, it could lead to a rapid decline in oil prices, potentially causing heightened volatility in GPRK stock prices. Investors seeking less volatile additions to their portfolios might find alternatives more favorable than GPRK under such circumstances. Assessing the company's risk exposure to fluctuations in oil prices becomes crucial for those prioritizing stability in their investment choices.
Financials
Looking at the financials the company is in a pretty strong position. Cash is at $106 million right now, a slight decrease from December of 2022. But with the market cap of GPRK being at just over $500 million it leaves a p/b of 2.58 for the business. Even with so much cash as opposed to the market cap, there is a significant amount of borrowings that might be dragging down the future performance of the business. GPRK has nearly $500 million in borrowings. I said earlier that I think GPRK has made strong progress on paying down debt, which is true seeing as in 2020 the total debts were over $760 million.
Going forward I want to see further reductions in the debt, especially seeing as the interest expense is still at $30 million for the company, weighing quite heavily on the bottom line results.
Final Words
I think that oil will continue to have a very large amount of demand for the coming decades even as more investments pour into renewables in efforts to replace traditional energy sources. Companies like GPRK may face challenges in some areas but oil still makes up a significant portion of all our energy generation around the world. The company has however cut its output guidance which will likely lead to a depressed valuation for the business and won't support a buy case anytime soon unless GPRK can produce stronger output levels and grow the bottom line. The dividend though is something I think is worth taking advantage of and that is a major reason as to why I am still rating GPRK a hold as of now.
For further details see:
GeoPark Limited: Risks Are Baked In And The Dividend Too Good To Pass On