2023-08-10 03:57:36 ET
Summary
- GeoPark Limited plans to return $60-$70 million of free cash flow to shareholders by 2023, representing over 10% of the market cap.
- GPRK is well-diversified and operates in multiple regions, with the largest source of oil production coming from Colombia.
- Despite the rise of renewables, oil and natural gas will continue to play a substantial role in the energy landscape, with projected average oil prices of $90 per barrel from 2023 to 2027.
Investment Summary
Oil and gas have been a hot topic for many investors as they have been viewed as almost insufficient or poor investments as so much capital is going towards ensuring we have more emission-free energy sources. Well, I don’t fully agree with this sentiment and there is still a lot to gain from being invested in companies like GeoPark Limited ( GPRK ). This company has made it very clear it intended to return substantial amounts of earnings to shareholders.
The target for 2023 is to return around $60-70 million of FCF to shareholders which is over 10% of the entire market cap currently. This sort of dedication makes me very confident in investing in the company. Besides that, the p/e sits very low at a p/e of just under 4. This sort of discount seems to come from some of the difficulties the company has had in keeping up production in some regions. However, the management seems confident in returning them where they used to be. All in all, I think GPRK extrudes a solid buy case right now and will be rating it as such.
Staying Reliant On Oil
GeoPark has very well diversified its operations and doesn’t solely rely on one region for production. That being said, the largest source of oil production comes from Colombia which in the last report delivered 32.945 oil bopd . The regions where GPRK is active include Colombia of course, but also Ecuador, Chile, and Brazil.
With GPRK you aren't getting only an oil play, but also an opportunity to get some exposure to natural gas which the company has some reserves of too. Describing what the company does could be that they explore, develop, and also produce both oil and gas reserves in the countries listed. As for any commodity company they are subject to volatility commodity prices and this hasn't been any different for GPRK. Revenues in 2022 came in at over $1 billion which was a first in the company's history. With a strong dedication to returning cash for shareholders, GPRK is looking like a dividend income play here.
The prevailing sentiment might suggest a dim outlook for the oil and gas sector as the ascendancy of renewables gains momentum, potentially relegating "traditional" energy sources to a secondary role. However, the truth of the matter remains steadfast: oil and natural gas will continue to exert a substantial influence over our energy landscape, even in the approaching horizon of 2050, characterized by ambitious emission reduction targets.
Delving deeper into the trajectory of oil prices, a closer examination reveals intriguing insights. Projections spanning from 2023 to 2027 indicate an anticipated average price of around $90 per barrel. This forecasted price trajectory hints at a market that's brimming with possibilities, even amidst the evolving dynamics of the energy sector.
While the advent of renewables is reshaping our energy paradigm, the indispensability of oil and natural gas persists, underpinned by their role as reliable energy sources and crucial raw materials for an array of industries. The intricate web of global energy demands, geopolitical factors, and technological innovations collectively paints a complex picture, demonstrating that the story of oil and gas is far from reaching its final chapter.
Returning FCF To Shareholders
Since its beginnings in 2002, GPRK has made strong progress in returning large amounts of FCF to shareholders without risking not growing sufficiently. The company has focussed on acquiring a strong asset base of projects across several regions and countries. This has resulted in GPRK having an FCF margin of 23% in the last 12 months. As for investing based on historical margins and numbers can be difficult or sometimes even unnecessary I think for GPRK we can. In 2022 the average oil price was just above 100, and with the predictions the company has made, they should be able to return around $60 - $70 million if the price of oil stays within the $80 - $90 range. That seems rather reasonable as the demand I covered above here will certainly help push prices to those levels.
Margins are solid for the business and they have focused on running a low-cost and efficient operation that is less subject to volatility commodity prices. Already having low costs won't dig as hard into earnings and that will let GPRK still distribute a very appealing dividend to investors.
It is also not looking like GPRK is slowing down its advancements and are still dedicating a lot of capital to new explorations. For 2023 the target is to allocate around 35% to exploration activities. That tells me the management is still very positive towards the market climate. As for the coming reports, I think we might see some uptick in the earnings and FCF as the price of oil has been appreciating.
Risks
At the heart of the company's holdings lies its strategic portfolio in Colombia, although this geographic concentration does introduce a measure of geopolitical risk. Holding the mantle of the second largest operator within the country, GeoPark boasts an impressive reserve span of 8.9 years, encompassing 110 million barrels of proven and probable (2P) reserves.
However, it's prudent to acknowledge that the trajectory of crude oil prices wields a pivotal influence on our investment thesis, especially considering GeoPark's significant capital investments aimed at fortifying its operational framework. Undoubtedly, these investments are poised to propel the company's growth trajectory, but the intricate dance of oil prices remains a defining factor.
Valuation & Wrap Up
GPRK has proven itself dedicated to its shareholders as it continues to divert large amounts of FCF for it. I think the coming decade will still let oil and gas companies produce large earnings and distribute that to shareholders. I want to take part in that myself and this is the reason for the buy rating.
As for the valuation of GPRK, it trades at a p/e of just under 4 which limits the downside risk as it's over 50% below the rest of the sector. For me, GPRK is a solid buy at these prices and once they get production back on track in some regions I think we will see an impressive QoQ from the company. Rating GPRK a buy.
For further details see:
GeoPark: Returning FCF To Shareholders Like Never Before